CA-Final

New Syllabus
May-2021
Onwards
{Module 1 &2}

The Handwritten Notes

Key Benefits of Handwritten
Notes:-
1) To Complete the
Financial Reporting in a
comprehensive Manner
with short duration
2) At the time of watching
lecture focus only on
Concept
&
3) Multiple Charts and
summary prepared for
better linkage of the
provision and to facilitate
its proper understanding
4) Boost the confidence to
crack the CA-Final Exam.
.

CA. PARVEEN JINDAL

As Per ICAI
Syllabus
Applicable
From May 2021
Exam Onwards
 Module 1 & 2
Index
Chapter
Particulars Page Range
No.
1 CHAPTER 1 BASIC KNOWLEDGE ON IND AS 1-3
2 CHAPTER 2 INVESTMENT PROPERTY IND AS 40 4-23
Part -1 4-5
Part -2 6-7
Part -3 8-10
Part -4 11-14
Part -5 15-17
Part -6 18-20
Part -7 21-22
Part -8 22-23
3 CHAPTER 3 BORROWING COST IND AS 23 24-51
Part -1 24-26
Part -2 27-28
Part -3 29-33
Part -4 34-37
Part -5 38-41
Part -6 42-45
Part -7 46
Part -8 47
Part -9 47-51
Part -10 51
4 CHAPTER 4 LEASE ACCOUNTING IND AS 116 52-96
Part -1 52-54
Part -2 55-57
Part -3 58-60
Part -4 61-62
Part -5 63-67
Part -6 67-73
Part -7 73-78
Part -8 78-82
Part -9 82-86
Part -10 86-91
 Part -11 91-93
Part -12 93-96
Part -13 96
5 CHAPTER 5 GOVT GRANTS IND AS 20 97-109
Part -1 97-100
Part -2 100-106
Part -3 107-108
Part -4 109-114
Part -5 114-116
6 CHAPTER 6 CORPORATE SOCIAL RESPONSIBILITY 117-124
Part -1 117-119
Part -2 120-123
Part -3 123
7 CHAPTER 7 AGRICULTURAL ACTIVITIES IND AS 41 125-140
Part -1 125-128
Part -2 129-132
Part -3 133-138
Part -4 138-140
8 CHAPTER 8 INVENTORIES (VALUATION) IND AS 2 141-155
Part -1 141-144
Part -2 145-149
Part -3 149-151
Part -4 152-155
Part -5 155
9 CHAPTER 9 PPE IND AS 16 156-177
Part -1 156-159
Part -2 160-162
Part -3 163-167
Part -4 168-172
Part -5 173-175
Part -6 176-177
Part -7 177
10 CHAPTER 10 IMPAIRMENT OF ASSETS IND AS 36 178-206
Part -1 178-184
Part -2 185-187
Part -3 188-194
 Part -4 195-198
Part -5 199-203
Part -6 204-206
Part -7 206
11 CHAPTER 11 INTANGIBLE ASSETS IND AS 38 207-220
Part -1 207-208
Part -2 209-214
Part -3 215-218
Part -4 219-220
12 CHAPTER 12 NON CURRENT ASSETS IND AS 105 221-238
Part -1 221-224
Part -2 225-228
Part -3 229-232
Part -4 233-235
Part -5 236-238
13 CHAPTER 13 INTEGRATED REPORTING 239-240
Part -1 239-240
14 CHAPTER 14 OPERATING SEGMENT IND AS 108 241-252
Part -1 241-243
Part -2 244-249
Part -3 250
Part -4 250-252
15 CHAPTER 15 RELATED PARTY DISCLOSURES IND AS 24 253-267
Part -1 253-256
Part -2 257-260
Part -3 261-263
Part -4 264-265
Part -5 265-266
Part -6 266-267
16 CHAPTER 16 EARNING PER SHARE IND AS 33 268-303
Part -1 268-269
Part -2 270-272
Part -3 273-275
Part -4 276-280
Part -5 281-287
Part -6 288-292
 Part -7 293-301
Part -8 302-303
17 CHAPTER 17 SCHEDULE III 304-325
Part -1 304-310
Part -2 311-318
Part -3 319-325

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

Join us on
https://www.caparveenjindal.com/
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CA Parveen Jindal Classes
CA-Final Financial Reporting CA Parveen Jindal Classes

CHAPTER 1 BASIC KNOWLEDGE ON IND AS

*Part 1*

Basic knowledge on Ind –AS Application in India

Application of Ind-AS

Application on Application on Application on Application on

Companies NBFC’ on Banking co. Insurance co.
(unit I) (unit II) (unit III) (unit IV)

Unit I: Application on companies

(Ind AS Rules 2015)

Phase I : Application w.e.f. 1.4.2015 (with comparatives)

Voluntary Application was permitted from above date

Phase II : Mandatory Application w.e.f. 1.4.2016 (with comparatives)

Section 2 Clause 57
A. Listed companies having Net worth of Rs.500 crores or more
B. Unlisted companies having Net worth of Rs.500 Crores or more
C. Holding, Subsidiary, Associates, Joint ventures of above companies mentioned
in A & B

Phase III : Mandatory Application w.e.f. 1.4.2017 (with comparatives)

A. All Listed companies having Net worth below 500 Crores

B. Unlisted companies having Net worth below 500 crores but upto 250 crores
(Note : All unlisted companies having Net worth below 250 crores shall apply
Companies AS Rules 2006)
C. Holding, Subsidiary, Associates, Joint ventures of above companies as
specified in A & B

Additional points to be considered :-

1. If any Entity is listed on a small & medium Exchange then it will not be
Considered as a Listed company for the compliance of Ind AS.
(Note : If an Entity is listed on SME, but having Net worth of 250 Crores or
more, than It will follow Application of Ind AS)

2. As per the rules, No entity can discontinue the application of Ind AS in any
way after starting of application of Ind AS. It can be said that company can
not choose Application of Simple Accounting Standards if It has started
Applying Ind AS. (Application of Ind AS will be made on Irrevocable basis)

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3. As per the rules, consolidated financial statements shall also be prepared

on the basis of Ind AS if separate financial statements are prepared on the
Basis of Ind AS.

4. If any Domestic Entity, which is applying Ind AS Rules 2015, is having a

Foreign Subsidiary then Separate financial statements of foreign company
Shall be prepared according to the Local standards which are applicable in that
Nation, But consolidated financial statements shall be prepared according to
Ind AS.

5. If an Entity is a subsidiary of foreign parent company then consolidation

Will be made according to rules Applicable in that Nation in which foreign
Company is operating its business.
Its Separate statements shall be prepared according to Indian Rules

6. Section 2 clause 57 of companies act 2013 :-

Calculation of Net Worth

Paid up capital XXXX
Securities premium A/c XXXX
Reserves created out of profits XXXX
( i.e., General Reserve, P&L, CRR etc.)
(Revaluation Res is not allowed)
Accumulated Losses (XXXX)
Misc.Expenditure/ Deferred Revenue Expenditures (XXXX)
Net Worth XXXX

Explanation

On the basis of above Explanation, It is also clear that Application of Ind AS will not
be made on Partnership firms, Individuals, Charitable Trust, co-operative Societies
& unlisted company having Net worth Less than 250 Crores. All these Entities shall
Continue with co. AS Rules 2006.

Unit II : Application of Ind AS on NBFC’

Phase I : Mandatory Application w.e.f. 1.4.2018 (with comparatives )

A. All listed & unlisted companies having Net worth of 500 Crores or More
B. Holding, Subsidiary, Associate or Joint Venture of above companies

Phase II : Mandatory Application w.e.f. 1.4.2019 (with comparatives)

A. All Listed companies having Net worth Less than 500 crores
B. All unlisted companies having net worth Less than 500 crores but upto 250
Crores
C. Holding, Subsidiary, Associate, Joint venture of above companies

❖ Voluntary adoption is not allowed to NBFC

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CA-Final Financial Reporting CA Parveen Jindal Classes

❖ All other concepts are same as discussed in Unit I

Unit III : Banking companies

(Scheduled commercial banks excluding RRB)

As per Initial Notifications, Ind AS were Applicable on Banks w.e.f. 1.4.2018, but Later
On Application was deferred till 1.4.2019.At Present, Ind AS are not yet Applicable on
Banks. We have to wait till further Notification

Unit IV : Insurance Companies

As per the Initial Roadmap issued by MCA, Insurance companies had to Apply Ind AS
w.e.f. 1.4.2020, but Later on, Application was deferred. We have to wait for further
notifications.

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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CA-Final Financial Reporting CA Parveen Jindal Classes

Chapter-2 Ind-AS 40: Investment Property

*Part 1*

Concept 1 : Meaning of Investment Property

As per the provisions of Ind AS 40, An Investment property means Land, Building or
both which is held for Rental purpose or for Long term Appreciation.
(* Rental Income can be earned from Residential Property, commercial Property or
Industrial property. It means that Nature of property does not matter.)

The following Land & Buildings can not be considered as on Investment property
Under the scope of Ind AS 40 :-

i. If any Land & Building is used by an entity in production or supply of Goods/

Services during Normal course of business then such property will be
Considered under the heading of “ Ind AS 16 : PPE”. Such type of property is a
Also called as “Owner occupied Property”

ii. If any property is held for short Term Appreciation then It will be covered
Under Ind AS-2 as Inventory

iii. If any property is developed by Real Estate company for its sale in future
During normal course of Business then it will also be covered under Ind As-2
(Inventories)

Note : If any property is Developed by Building or Real Estate company with the
Objective of Rental Income/ Letting it out then Such property will be covered
Under Ind AS 40.

iv. If any property, which was used by an Entity in its business, but is held for
Sale now then It will be covered under Ind AS 105 : Non current Assets Held for
Sale

v. If any Property is held under Construction Contract by a Contractor then It

Will be discussed under Ind AS 115 (Revenue from customer)

vi. If any Land or Building is used in Agricultural Activities then It will be covered
Under Ind AS 41

vii. If any Land is used for extraction of mineral oils or ores then It will be
Covered under Ind AS 106

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Concept 2 : Relation of Ind AS 40 with Ind AS 116 (v.v.v.Imp *)

Lease

As per the Provisions, Rental Income can be Earned as per the terms & conditions in
a Lease Agreement which is Entered into by the Parties. A Lease Agreement can be
Classified under 2 headings as follows (Ind-AS 116) :-
i. Operating Lease
ii. Finance Lease

A. Operating Lease

Operating Lease

Lessor (owner) Lessee (Tenant)

For Accounting For Accounting No Property will Lease

Of Investment of Lease be Recognised Rentals
Property Rentals under OL

Ind AS 40 Ind AS 116 X Ind AS 116

Note : Under operating Lease, Lessor will keep the ownership of I.P due to which
Application of Ind AS 40 will be made on Lessor.

B. Finance Lease

Finance Lease

Lessor (owner) Lessee (Tenant)

Lessor will For Lease Assumed owner Lease

De-recognise the Rentals, we will of I.P. Rentals
I.P under Finance Study 116
Lease due to which 116
No property will Exist If Lessee will use If Lessee will
in its books the I.P. in business Sub-Lease the I.P.

Lessee a/c Dr xxxx Ind AS : 16

To IP xxxx Finance Operating
Lease Lease
Ignore Application
Of 40 Ask New Lessee for Ind AS 40
Nature of use of IP

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CA-Final Financial Reporting CA Parveen Jindal Classes

Note : Under Finance Lease, Lessee is Assumed as an owner due to which property will
be Recognised in its books. It means that Application of Relevant Ind AS will
Be made according Lessee based on Intention of use of Such property.

*Part 2*

Concept 3 : Various Issues

A. Mixed Property *Imp

If any property is used for Dual purpose means It is partly used in

Business and partly let out then Application of Relevant Ind- AS will depend on
following cases :-

Case I : If mixed Property is Separable

In case Property is Separable then Ind AS 16 will be applied on the portion

Which is used in Business, but Let out portion will be covered by Ind AS 40. As per the
Provisions, An Investment property can be considered as Separable only if
A portion can be sold or given on Finance Lease without selling the other portion.

Case II : If property is not Separable

If portion of a property cannot be sold or Given on Finance Lease without

Selling the other portion then It will be considered as a case of “Inseparable
Property”. In the given case, the following flow chart can be considered : -

Inseparable Property

If insignificant portion If Significant portion

is used in Business is used in Business

Apply Ind AS 40 Apply Ind AS 16

On whole Property on whole property

❖ Significant = 20% or more

❖ Insignificant = Less than 20%

Solution of Q.1 & Q.2 (Discussed in Class)

B. If Property is Let out to Employees of company on Rent

As per the provisions of Ind AS 40, A property, which is Let out by a company
to its Employees, shall be considered as an “ owner occupied Property” Under Ind AS 16
: PPE whether Rent is charged at market Rate or Not.

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CA-Final Financial Reporting CA Parveen Jindal Classes

C. Ancillary Services :- *Imp

As per the Provisions, It may be possible that Lessor provides some

Ancillary Services in the form of maintenance or security service to its Tenant. In
the Given case, It will not have any Effect on classification of Investment property.
It can also be said that we will Keep applying Ind AS 40 on Let out properties even if
ancillary Services are provided by Lessor to Lessee.

Exception : - In Hotel Industry, Hotels also provide these services to their Guests/
Customers, but It is their Business. So, we will Apply Ind AS 16 on Hotels

Solution of Q.4, Q.5, Q.3 (* Imp). Discussed in Class

D. Land with Undetermined Use : -

If an Entity holds ownership on Land which is acquired with Undetermined

use then we will Apply Ind AS 40 on such Land. It means that Land with Undetermined
use is considered as an Investment Property.

E. Transactions of Lease in consolidated financial statements or Lease

Transactions within the Group. :- (*V.V.Imp)

If Lease Transactions are undertaken within the group then these

transactions shall get Eliminated in consolidated financial Statements. These
Transactions shall be dealt in CFS on the basis of following flow chart :-

I.P in CFS

OL/FL OL/FL
If Property is Let out If Property is Let out
& used within the group within the Group & Again
Let out to 3rd Party
We will Apply Ind AS 16 on
such Property in “CFS”
If 3rd Party If 3rd Party
Owner Occupied Lease is an “OL” Lease is an “FL”
Property
Apply Ind AS 40 Assumed owner is
On CFS is 3rd party, we
Cannot Apply 40
or 16 on CFS

Solution of Q.16

1. In SFS of S, we will Apply Ind AS 40 because It has Let out its Property to S2 on
Operating Lease.
2. In CFS, we will Apply Ind AS 16 because Property is Let out and still in use within
the group due to which It will be assumed as owner occupied property.

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CA-Final Financial Reporting CA Parveen Jindal Classes

Solution of Q.17

In the Given case, there will be similar Application in SFS & CFS. We will Apply Ind AS-40
on Let out portion which is given to 3rd Party and Ind AS 16 on used portion

*Part 3*

Concept 4: Initial Recognition of Invest. Property (*Imp)

Initial Recognition

In the Books of In the books of

Actual Owner Assumed Owner

I.P Acquired on
Purchase Purchase Self Exchange Finance Lease
By Cash on DeFerred Construction of Assets
Credit

A. Purchase by cash

If an Investment Property by cash then cost of property shall be computed

as follows :-

Statement Showing calculation of Cost of I.P

Purchase Price xxxx

Stamp Duty/ Transfer cost xxxx
Brokerage/ Commissions xxxx
Any other Exp. which is directly
related with Acquisition of I.p xxxx
Total Cost xxxx

❖ Items /Expenses not to be included in the cost of I.P., but to be written off in
P&L as an Expense :-

i. Marketing & Promotional Expenses

(i.e., If any Expense is incurred on Advertisement for Letting out the property
then It will be transferred to P&L)
ii. Start Up cost
(i.e., If any expense is incurred on Inauguration ceremony then such an expense
shall also be written off in P&L a/c)
iii. Operating Expenses/ Losses incurred for vacant property
(i.e., If any Expense is incurred for day to day maintenance of vacant property
then such an expense shall also be written off in P&L)

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CA-Final Financial Reporting CA Parveen Jindal Classes

Other Points to be Noted in Relation to Acquisition of Property :-

i. As per the provisions, Refundable duties or taxes shall not be included while
Computing cost of I.P. It can also be said that cost of I.P shall include Non
Refundable Taxes & duties only.
ii. If any capital Expenditure on Renovation is made then such Expenditure shall be
included in the cost of I.P.
(i.e., Renovation may include expense on flooring walls, Ceiling etc.)

Journal Entry

Investment property a/c Dr xxxx Refer explanation as in above

To Cash/Bank xxxx
(Being I.P Acquired)

B. Self construction of I.P.

If any Investment property is self constructed then the following statement shall
Be prepared to find out the cost of I.P. :-

Purchase Price of Land xxxx

Stamp Duty xxxx
Brokerage/ commission xxxx
Expenditure on Development xxxx
(Material + Labour + Overhead
Which are incurred for construction)
Total Cost xxxx

Solution of Q.15 (*v.v.Imp)

I. Calculation of Total cost

Purchase Price ₹ 180,00,000

Stamp Duty ₹ 20,00,000
Legal Cost ₹ 5,00,0000
Total Cost ₹ 205,o0,000

Note : As per the provisions of Ind AS-40, we cannot capitalise Advertisement

Expenses ceremony expenses & day to day servicing expenses because these
Expenses do not relate with Acquisition of Property. These Expenses shall be
Written off in P&L A/c.

II. Initial Recognition

Property, Plant & Equip. a/c Dr 3416667 (1/6)
Investment Property a/c Dr 17083333 (5/6)
To Bank 20500000
( Being Assets acquired)

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CA-Final Financial Reporting CA Parveen Jindal Classes

❖ We have capitalised cost of one house as PPE because this house has been provided
By company to its staff due to which It will be considered as an owner occupied
Property

C. Acquisition on Deferred Credit

If an entity acquires an Investment property on Deferred credit then cost

of such property shall not be considered equal to Gross payment, but the following
Steps shall be applied in this case for Accounting :-

Step I : Initial Recognition

Calculate Present value of all future payments at market Rate & Recognise it as cost
Of acquired Asset as follows :-

Journal : Investment Property a/c Dr xxxx

To payables xxxx
(Being I.P Acquired)
( Present value of all future Payments)

Step II : Subsequent Recognition

At the time of Installment becomes due, the following entry shall be recorded :-
i. Interest a/c Dr xxxx
To Payables xxxx
(Being Int. made due)
ii. Payables a/c Dr xxxx
To bank xxxx
(Being Payment made)

It will be written off in P&L A/c

Note : On the basis of given explanation as in above, It can be said that we cannot
consider Time value of money in the cost of I.P.

Example :
i. Purchase price of I.P. : ₹ 10,00,000
ii. Payment to be made after 1 year from date of purchase
iii. Market Rate : 10%
Apply Ind AS-40 for Recognition of I.P. & subsequent Recognition for Payables.

Solution :
i. Present value of payment to be made = ₹ 10,00,000 x .909
= ₹ 9,09,000
ii. Journal :
a) Investment Property a/c Dr 909000
To payables 909000
(Being property acquired on credit)

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b) Interest a/c Dr 91000 (909000 x 10%)

To Payables 91000
(Being Interest made due on payables)

c) Payables a/c Dr 1000000

To Bank 1000000
(Being payment made)

Solution of Q.18

Calculation of cost of property

(Discounting Rate : 5.5 % for 6 months)

Down Payment = 50,00,000 x 1 = 50,00,000

First Payment = 1,20,00,000 x .948 = 1,13,76,000
Second Payment = 5,00,00,000 x .898 = 4,49,00,000
P.V of all payments 612,76,000

Initial Recognition = Investment property a/c Dr 61276000

To Payables 61276000
(Being property acquired on deferred credit)

Subsequent Recognition

Payables A/c

To bank (DP) 50,00,000 By Investment Property 6,12,76,000

To Bank 1,20,00,000 By Interest 30,95,180 (6m)
TO balance c/d (Bal fig.) 4,73,71,180 (61276000 – 5000000 @ 5.5%)

To Bank 500,00,000 By balance b/d 4,73,71,180

By Interest @ 5.5% (Bal 26,28,820
Fig) 6M

Interest will be written off in P&L A/c

*Part 4*

D. Exchange of Assets

Example :-
i. Fair value of Assets Purchased : ₹ 20,00,000
ii. Fair value of given up Assets : ₹ 18,00,000
iii. WDV of Given up Assets : ₹ 15,00,000
Pass Journal Entries assuming there is a commercial substance in the transaction.

Solution :

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CA-Final Financial Reporting CA Parveen Jindal Classes

i. Cash Settlement = Fair value of taken - Fair value of given up

Up Assets Assets
= 20,00,000 – 18,00,000
= 200,000 Payment
ii. Gain/Loss on Exchange = Fair value of given up - WDV of Given up Assets
= 18,00,000 – 15,00,000
= 300,000 (Profit)

Journal : New Asset a/c Dr 20,00,000 ( Taken up)

To Old Asset 15,00,000 (Given up)
To Gain on Exchange 300,000 (18-15)
To Cash (Bal fig.) 200,000
(Being Assets Exchanged)

Example :
i. Fair value of Taken up Assets : ₹ 40,00,0000
ii. Fair value of Given up Assets : ₹ 70,00,0000
iii. WDV of Given up Assets : ₹ 90,00,000
Pass Journal Entry for Exchange of Assets if there is commercial substance in the
transaction

Solution :
i. Cash Settlement = fair value of Assets – Fair value of Assets
Taken up Given up
= 40,00,000 – 70,00,000
= 30,00,000 (to be Received)
ii. Loss/Gain on Exchange = Fair value of given up – WDV of Given up
= 70,00,000 – 90,00,000
= 20,00,000 (Loss)

Journal : New Asset a/c Dr 40,00,000

Cash a/c Dr 30,00,000
Loss on Exchange a/c Dr 20,00,000
To old Asset 90,00,000
(Being Assets Exchanged)

Example 3: (Lack of commercial Substance)

Fair Value of Assets Taken up : ₹ 500,000

WDV of Given up Assets : ₹ 400,000
Fair value of given up Assets : ?

Solution :
New Asset a/c Dr 500,000 (fair value)
To old Asset 400,000 (WDV)
To Gain on Exchange 100,000 (Bal. Fig)
(Being Assets Exchanged)

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Example 4 :
Fair value of Assets taken up : ?
Fair value of Given up Asset : ₹ 200,000
WDV of Assets Given up : ₹ 300,000
Pass Journal Entry for Exchange in Given case of Lack of commercial Substance.

Solution :

New Asset a/c Dr 200,000 ( Fair value)

Loss on Exchange a/c Dr 100,000 (Bal Fig)
To old Asset 300,000
(Being Assets Exchanged)

Notes on Concept :-

Exchange of Assets

If Exchange is undertaken under If Exchange is undertaken under

“Commercial Substance” “No commercial substance”
``
Both fair values are Given Only one fair value is available either
(Taken up & Given up Assets) for taken up or given up

Case I : Commercial Substance

Step I : Calculate Diff. in fair value for cash Settlement

Cash = Fair value of Asset taken up – fair value of Asset Given up

= Diff. will be Paid/Received
(Refer Examples 1 & 2)

Step II : Calculate Gain/Loss on Exchange of Assets as follows :-

Gain/Loss = Fair value of Given up Assets – WDV of Given up Assets

Step III : Journal

Loss a/c Dr xxxx (Step II)

New Asset a/c Dr xxxx ( FV :Taken)
Cash a/c Dr xxxx (Step I)
To Old Asset xxxx (WDV)
To Cash xxxx (Step I)
To Gain xxxx (Step II)
(Being Assets Exchanged)

Case II : No Commercial Substance

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Step I : There will be no cash settlement as Both fair values for Assets taken up &
Given up are not available.

Step II : Calculate Gain/Loss on Exchange of Assets as follows :-

i. Fair value of taken up Asset is given but fair value of given up Asset is not
given
New Assets a/c Dr xxxx (F.V)
Los on Exchange a/c Dr xxxx (Bal Fig)
To Old Asset xxxx (WDV)
To Gain on Exchange xxxx (Bal Fig)
(Being Assets Exchanged)

ii. Fair Value of Assets taken up is not Given, but fair value of given up is Known

New Asset a/c Dr xxxx (FV of Given up)

Loss a/c Dr xxxx (Bal )
To old Asset xxxx (WDV)
To Gain xxxx (Bal fig)
(Being Assets Exchanged)

Exceptional Case : Both fair values are not Given

Example :
Fair Value of Assets taken up : ?
Fair value of Assets Given up : ?
WDV of Given up Assets : 200,000

Solution :
Assets a/c Dr 200,000 (New) WDV of old Asset
To Assets 200,000 (Old)
Note : In the Given case, WDV of old Assets shall be taken as cost for New Assets
because we do not know fair value of either Asset.

Example : [ Wrongly framed by ICAI ]

Example : Fair value of taken up Asset : ₹ 200,000

Fair Value of given up Asset : ₹ 150,000
Cash Payment : ₹ 40,000
WDV of Assets Given up : ₹ 190,000
Pass Journal Entry in above case

Solution: The given transaction should not be assumed in commercial substance

Because cash Payment does not match with the diff. in fair value of Taken up
Asser & Given up Asset. It means that fair value of Taken up Asset is not
Available even if it is mentioned in the question.

Journal:

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Loss on Exchange a/c Dr 40,000 (190000 – 150000)

New Asset a/c Dr 190,000 (Given up value) (150,000 + 40,000)
To cash 40,000 (FV + Cash)
To old Asset 190000 (WDV)
(Being Assets Exchanged in Lack of commercial substance)

Solution of Q.8 Discussed in Class

E. Initial Recognition in the books of Assumed owner

(In the books of Lessee under finance Lease/ Non Exempted Lease)
116
In the Given, Lessee shall recognise the Asset/IP, which is acquired under
Non Exempted Lease, at present value of Lease Liability as follows : -

ROU : Investment Property a/c Dr xxxx P.V of all future payments

To Lease Liability xxxx
(Being I.P recognised in the books of Lessee under Non Exempted Lease)

Solution of Q.11 Discussed in Class

*Part 5*

Concept 5 : Subsequent Recognition

Subsequent Expenditure on I.P

After Initial Recognition

Case I : Repairs & Maintenance Case II : Replacements & Additions

Case I : If any Expense is incurred in the form of Repair & maintenance (i.e., Day to
Day servicing) on Investment property then such an expense will be written
Off in P&L A/c in the same year in which it is incurred. Such an Expense can
Not be capitalised to the cost of property because It does not contribute
To the appreciation in value of I.P, but these are incurred to maintain Normal
Performance of an Asset.
(i.e., Lift maintenance, Property Tax, Repairs of walls, Repairs of floors, paint
etc.)

Case II : If any expenditure is incurred on replacement or additions of Assets then

Such an Expenditure can be capitalised to the cost of In=vestment property
because It is considered as a capital Expenditure. Such Expenditure is made
to increase the value of property (i.e., Expenditure on New Lift, Interiors,
Replacement of walls, Replacement of floor etc.)

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Calculation of Revised carrying Amount of I.P after Replacement/ Addition

Existing carrying Amount of I.P xxxx

Add : Expenditure on New Assets xxxx
Less : Scrap Realised from old Assets xxxx
Revised Carrying Amount xxxx

❖ Further Depreciation will be computed on Revised carrying Amount on the basis of

Remaining useful life of Assets.

Important Point to be considered :- (*Imp)

If any component is replaced of an Investment property then the following

Steps should be Applied :-

Step I : De-Recognition of old component

First of all, Existing carrying Amount for Replaced component should

Be de-recognised as follows :-

Bank a/c Dr xxxx (Scrap)

P&L a/c Dr xxxx (Loss)
To old Asset xxxx (B/s value)
(Being old Assets De- recognised)

Step II : Recognition of Expenditure on New Assets

Journal : New Assets a/c Dr xxxx

To Bank xxxx
(Being New Assets Recognised)

Solution of Q.19

I. Statement Showing carrying Amount of Assets at the end of 10th year

Building Interiors Total

O.cost 38.80 crores 1.20 crores 40 crores
Depreciation ( 7.76 crores) (.8 crores) (8.56 crores)
(38.80 x 10 y) ( 1.2 crores x 10y)
50Y 15 Y
Carrying Amount 31.04 Crores .4 crores 31.44 Crores

Journal :

i. P&L a/c Dr 0.4 crores

To old Interiors 0.4 crores
( Being old Assets De-recognised)
ii. New Interiors a/c Dr 1.5 crores
To Bank 1.5 crores
(Being New Expenditure capitalised)

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Statement Showing Depreciation for 11th year

Building New Interior Total

Opening Balance 31.04 crores 1.5 crores 32.54 crores
Depreciation (.776 crores) ( .1 crore) ( .876 Crore)
(31.04 crores) ( 1.5 crores)
40 Y 15 Y
Carrying Amount 30.264 crores 1.4 crores 31.664

Solution of Q .7 Discussed in class

Concept 6 : Measurement of I.P

At Balance sheet date, Investment property can be reported under “cost model”
Only. It means that Revaluation model cannot be applied. The following statement may
Be presented under cost model :-
Original cost xxxx
Accumulated Depreciation (xxxx)
*Impairment Loss (xxxx)
Carrying Amount xxxx

❖ If fair value of I.P becomes Less than WDV then decline in value can be recognised
in Books as Impairment Loss.

i. Impairment Loss a/c Dr xxxx

To Investment property xxxx
ii. P&L a/c Dr xxxx
To Impairment Loss xxxx

Important Notes :-

a. If fair value of I.P at B/S date becomes higher than WDV then It cannot be
Recognised in Books. It means that upward Revaluation is not allowed.
b. As per Ind AS 40, fair value can be reported in notes to A/cs. It will be choice of
Entity, but fair value disclosures are always encouraged by ICAI.
c. If an Entity wants to report fair value then It has to follow Ind AS 113 fair value
Measurement Rules which are as follows : -
i. Fair valuation should be done by independent value
ii. It should be reported as a complete package inclusive of all integral Assets
i.e., Lift , A.C etc.
Value of other Assets cannot be considered
additionally

Solution of Q.13 Discussed in Class

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Solution of Q.20

Statement showing fair value of Investment property.

i. Fair value of Air conditioning Plant ( 1m x 70%) * 0.7 million

ii. Fair value of Lifts (1.2 million x 50%) * 0.6 million
iii. Fair value of I.P (Bal fig.) 30.7 million
Total Fair value 32 million

❖ We have assumed that Depreciation has been charged by Entity on SLM Basis

Note : The above statement can be disclosed in Note to A/c only.

*Part 6*

Concept 7 : Transfers *Imp

As per the Provisions of Ind AS 40, Transfer of I.P can be made from one Ind AS to
Other on the basis of its use. The following Transfer can be made :-

Earlier After
I. Ind AS : 16 (PPE) Ind AS 40 : IP
(Held for use) (Held for Rental or Appreciation)
II. Ind AS : 40 (IP) Ind AS : 16 (PPE)
(Held for Rental) Put into sale ( Held for use in Business)
III. Ind AS :2 (Inventory) Ind AS : 40 (IP)
(It was held as stocks) (Held for Rentals)
IV. Ind AS : 40 (IP) Ind AS : 2 (Inventory)
(Held for Rentals) (Put into Sale)

Notes :
1. There will be no Journal Entry in the books for such Transfer, but Disclosures shall
Be updated only according to Appropriate heading.
2. The Transfer from one Ind AS to other will be made at “Carrying Amount” only. It
Means that there will be no measurement under previous Ind AS before making
Transfer of Assets.
3. After completing Transfer Process, measurement of property will be made as per
New Ind AS.

Solution of Q.12 (*Imp)

Statement Showing calculation of carrying Amount of factory as at 1.4.x5

Original cost (1.4.x1) 10 millions

Depreciation (4 years) (4 millions)
Carrying Amount 6 millions

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Notes :
1. We will Transfer the Given factory from Ind AS 16 to Ind AS 40 at 6 millions which
Is the carrying Amount of property on such date.
2. We cannot incorporate fair value of 8 millions in the books of A/Cs because Ind AS
40 does not allow upward Revaluations.
3. The Disclosures of fair value of 8 millions can be made in Notes to A/cs as per
Measurement Rules.

Solution of Q.14

1. At 31.3.x1, the Given Investment Property will be transferred from Ind AS 40 to

Ind AS 16 at ₹ 15,00,000 which is its carrying Amount on such date.
2. After such Transfer, we should write off ₹ 5 Lacs as Impairment Loss under Ind AS
16 cost model. The Revised carrying of such PPE will be considered at ₹ 10 Lacs & It
Will be depreciated over remaining useful Life.

Solution of Q.21 (*Imp)

1. The Given office Building will be transferred from Ind AS 16 (PPE) to Ind AS 40
(IP) at ₹ 10 crores which is carrying Amount on Such date.
2. In the Given case, Property B will be transferred from Ind AS 40 (IP) to Ind AS 2
(Inventory) at ₹ 30 crores which is carrying Amount of such property on that date.

Concept 8 : Disposal of I.P

Sale of Investment Property

Transfer of ownership Transfer under finance Lease

If Selling Price If Selling price

Is collected in Lump is collected in
sum Installments
(Deferred Sale)

Case I : If S.P is collected in Lump Sum

If I.P is sold for Lump Sum consideration then we will calculate Loss or Profit
On sale of Assets by the difference in Net selling Price & carrying Amount of such I.P.

(Selling Price – Selling Exp.)

Note : the Amount of Loss/Profit will be transferred to P&L A/c.

Journal : Bank a/c Dr xxxx (N.s. Price)

Loss on Sale a/c Dr xxxx (Bal fig)
To I.P xxxx (carrying Amt)
To Profit on Sale xxxx (Bal fig)
(Being Investment property Sold)

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Example :
i. Carrying Amount : ₹ 10,00,000
ii. Sale consideration : ₹ 15,00,000
iii. Brokerage @ 1 % on S.P

Solution :
i. Bank a/c Dr 1485000 (15 L – 1%)
To I.P 10,00,000
To Profit on sale 485000 (Bal Fig)
(Being Investment property sold)
ii. Profit on sale a/c Dr 485000
To P&L 485000
(Being Profit Recognised)

Case II : If Selling price is collected in Installments

Step I : Calculate Present value of all cash Inflows which are Expected from Sale of I.P.
Step II : Loss/Profit on Sale = P.V of Inflows (Step I) – Carrying Amount
Step III : Calculate Interest Income on Receivables & Transfer it P&L over the Period
On Accrual basis.

Example :
a) Carrying Amount : ₹ 15,00,000
b) Sale consideration : ₹ 500,000 (Now)
₹ 15,00,000 (1Y)
₹ 500,000 (2Y)
c) Market Rate : 10%
Pass Journal Entries for 2 years in case of Given Transaction.

Solution :

Step I : Calculation of P.V of Cash Inflows

Period Cash inflow P.V factors @ 10% Present value

0 500,000 1 5,00,000
1 15,00,000 .909 13,63,500
2 500,000 .826 413,000
P.V of Cash Inflow 22,76,500

Step II : Calculation of P/L on sale of I.P

Bank a/c Dr 5,00,000

Debtors a/c Dr 17,76,500 (22,76,500 – 5,00,000)
To I.P 15,00,000
To Profit on Sale 7,76,500 (Bal Fig)
(Being I.P sold on Credit)

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Step III : Accounting for interest & Collection

Ist Year (At the End )

a) Debtors a/c Dr 177,650 (1776500 x 10%)

To Interest 177,650
(Being Interest made due on receivables)

b) Bank a/c Dr 15,00,000

To Debtors 15,00,000
(Being collection made)

IInd Year (At the End)

a) Debtors a/c Dr 45,850 (454150 x 10%)

To Interest 45,850 (Rounded off)
(Being Interest made due)

b) Bank a/c Dr 500,000

To Debtors 500,000
(Being collection made)

*Part 7*

Case III : If I.P is sold on Finance Lease

If an Investment property is sold on finance Lease then Lesser/Seller will

de-recognise the Asset at fair value as follows :-

Lease Receivables a/c Dr xxxx Fair Value

Profit & Loss a/c Dr xxxx (Loss)
To Asset on Lease xxxx Carrying Amount
To Profit & Loss xxxx (Profit)
(Being Asset transferred on Finance Lease)

(Note : Accounting for Lease Rentals shall be discussed in Ind AS 116 )

Concept 9 : Disclosures
(Notes to A/Cs )

As per the provisions of Ind AS 40, the following disclosures are required
To be made in notes to A/Cs regarding an I.P. : -

1. The Entity has to disclose Accounting policy which has been adopted while preparing
B/S and Notes.
➢ Cost Model for B/S
➢ Fair value for Notes
2. The Method of depreciation should also be reported which has been applied by the
Entity while computing Depreciation i.e., SLM/WDV.

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3. The Entity should also Disclose the amount of Expenditure that has been incurred
On Replacement/ Repairs during the year.
4. The Entity should also disclose Rental Income & operating Expense related with I.P
Net Income/Loss = Rental Income – Dep – operating Expense

Day to Day servicing

5. If any Disposal has been made during the year then profit/Loss on Disposal should
Also be reported.
6. Statement showing Reconciliation of I.P (cost)

Opening Bal. Additions Replacements Disposal Closing Bal.

I.P. xxxx xxxx xxxx xxxx xxxx

7. Statement Showing Reconciliation of Dep. (Accumulated Dep)

Opening Balance Depreciation in C.Y Disposal (Reversal) Closing Balance

xxxx xxxx xxxx xxxx

*Part 8*

New Question

Solution of Q.1

As per the Provisions of Ind AS 40, cost of an Investment property shall

include its Purchase Price & related Expenses which are directly related with Acquisition
Of such Property.
In the Given case, company has Purchase the Specified Property for 5 crores,
but it has also Paid a membership fees which is related with acquisition of such
Property.
So, the company should capitalise such fees while computing cost of property
Instead of being transferring it to P&L A/c

Cost of property = 5 crores + 6.25 Lacs = ₹ 50625000

If the Given office would have acquired for adm. Work of company then we would have
Considered it PPE under Ind AS 16. The Answer would have remained same because
Calculation of cost of PPE would have been made in same manner.

Solution of Q.2 *Imp

I. Treatment of I.P (1.4.x5 – 30.9.x5)

For the first 6 months of financial year x5-x6, we will classify the property as an
Investment property because It has been given for Rental purpose. The entity will
Receive 10 lacs as Rentals for these 6 months (20L x 6/12).

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II. Accounting at the time of transfers (1.10.x5)

On the specified date, I.P has been reclassified from Investment property to
Inventories. It means that we will Apply Ind AS-2 from the date of such
Re-classification.
As per the provisions of Ind AS 40, Transfer is made from one Ind AS to
Another at carrying Amount. The given fair values are not relevant because we apply
Cost model on Investment property. So, carrying Amount will be considered at the
Time of such transfer is 2 crores which is the cost of property. It will be considered
as cost of Inventory under Ind AS 2.

III. Valuation of Inventory (31.3.x6)

A. Cost of Stock B. NRV of Inventory

Carrying Amount of Land ₹ 200,00,000 Selling Price ₹ 500,00,000

Add : conversion cost ₹ 60,00,000 Expected Cost (₹ 40,00,000)
T. Cost ₹ 260,00,000 NRV ₹ 460,00,000

Cost or NRV whichever is Lower = ₹ 260,00,000

(valuation of stock as per Ind AS 2)

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter-3 Ind AS : 23
Accounting for Borrowing Cost

*Part 1*
Concept 1 : Important Definitions

a) Meaning of Borrowing cost

b) Meaning of Qualifying Assets
Loans
I. Meaning of Borrowing Cost
As per the provisions of Ind AS-23, Borrowing cost is the “Interest & other
Cost” which is directly incurred for arrangement of funds.
Ke Kp
Note : Ind AS 23 does not include cost of E.S. Capital or Cost of P.S. Capital in the
Meaning of borrowing cost.

Interest & other Cost

Components

(a) + (b) + (c)

*V.V.I
Interest Cost Finance Charges Exchange
as under Finance Differences
Per Effective rate Lease as per para 6E
Of Interest method

a) Interest Cost : Effective Rate of Interest method

As per the Provisions of Ind AS 23, Interest on borrowed funds should be calculated
by Effective Interest method. There may be some Expenses at the time of issue or
Redemption of borrowings like Discount on issue of Debentures, Premium on
Redemption or other Expenses in the form of under writing comm., stamp duty etc.
Then there Expenses shall have adverse impact on arrangement of funds. It can also
Be said that Net proceeds from arrangement of funds shall get declined due to
Which effective Rate of interest should be higher than Actual Rate of Interest.

Important Note
If there is are no Expenses as Specified in above then Actual Rate of Interest would
be effective rate of Interest.

➢ The Calculation of Effective Rate of Interest will be made as Specified in Ind AS

109 on Financial Instrument.

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Example :

i. No. of Deb. Issued : 10,000 @ 98 of 100 each

ii. Interest Rate : 10%
iii. Redeemable after 5 years at premium of 5 %
iv. Underwriting Comm. @ 2.5 % on face value of Deb.
Calculate Effective Rate of
Interest
Solution :
Calculation of Net Proceeds

Face Value of debentures 10,00,000

Discount on issue @ 2% (20,000)
U.commision @ 2.5% on F.V. (25,000)
NP 955,000

Calculation of IRR (Alternative I)

Period Cash flow PVF @ 10% PVF @ 15% P.V @ 10% P.V @ 15%

1. 100000 (10Lx10%) .909 .870 316900 285600

2. 100000 .826 3.169 .756 2.856
3. 100000 .751 .658
4. 100000 .683 .572
5. 100000 .621 .497 714150 571550
(1L + 10L + .5L)
PV of Cash outflow 1031050 857150
PV of cash Inflows 955000 955000
NPV 76050 (97850)

IRR = Lower Rate + LRNPV x Diff. in Rates

LRNPV - HRNPV
= 10 % + 76050 x5
76050 – (97850)
= 10 % + 76050 x5
173900
= 12.19 % Ind AS 23

Alternative II : Interpolating Method

IRR = 10% + 1031050 – 955000 x 5%

1031050 - 857150
= 12.19 % Ind AS- 23

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Debentures A/c (Loan A/c)

Particulars Amount Particulars Amount

Ist Year
To Bank 100,000 By Bank (NP) 955,000
(10L x 10%) B/s : NCL
To Balance c/d 971414 By Interest (due) 116414
(Bal Fig) (955,000 x 12.19%) Ind As 23
`
B.cost
IInd Year `
To Bank 100,000 BY Balance b/d 971414
To Balance c/d 989829 NCL
By Interest (12.19%) 118415
23
IIIrd Year
To Bank 100,000 By Balance b/d 989,829
To Balance c/d 1010489 By Interest (12.19%) 120,660

IVth Year
To Bank 100,000 By Balance b/d 1010489
To Balance c/d 10,33,668 By Interest @ 12.19% 123179

Vth Year
To Bank 11,50,000 By Balance b/d 1033668
By Interest @ 12.19% 116332
(Bal fig.)

Interest will be accounted under Ind AS : 23

116414, 118415, 120660, 123179, 116332

= 595,000 Int – 1L x 5y
Disc. – 20,000
Comm. – 25,000
Prem. – 50,000
595,000

b) Finance Charges under finance Lease

“we will Discuus it under Ind AS 116”

c) Exchange Differences under Para 6E

Refer Last Concept of this Topic

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*Part 2*

II. Meaning of Qualifying Assets

As per the provisions of Ind AS-23, Qualifying Asset is an Asset that Takes
Substantial Period of time to get ready for its use or sale.

T.F.A I.A I.P Inventories

The Following Assets may take time for their Production, construction &
Acquisition :-
i. Buildings
ii. Investment Properties
iii. Inventories *
iv. Power Generation Plants
v. Manufacturing Plants
vi. Intangibles under Development Phase Trial Phase

Note : The meaning of substantial Period of time is not clearly mentioned in Ind AS-
23. It is clearly based on judgement & circumstances.
However, AS-16 clearly defines a period of 12 months as substantial Time.

Important Points to be considered

1.Inventories :- As per the provisions of Ind AS-23, Inventories which are

Produced in a shorter period of time should not be considered as Qualifying
Assets.
➢ If any Inventory that takes substantial period of time but It is produced in
Large volume and on regular basis then It should not be considered as a
Qualifying Asset even though It is taking substantial Time.
(i.e., wines, Liquors)

It can be said that Inventory can be considered as a Qualifying Asset only if the
Following 2 conditions are satisfied :-

i. It should take substantial time

ii. It should not be produced in larger Qty on regular basis.

2. Biological Assets : These Assets mean a living plant or Living Animal. These are
out of scope of Ind AS 23 These Assets shall be discussed under Ind AS 41.
But Bearer Plants (fruits Trees i.e., Apple, mango, coconut etc) are not covered
Under the definition of Biological Assets. So, there Plants can be covered under
Ind AS 23 as per the meaning of Q.Assets.

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Qualifying Assets

Living Animal Living Plant Bearer Plant

X X

Ind AS 41 Ind AS 16 & 23

Concept 2 : Recognition Rules

As per the provisions of Ind AS-23, Borrowing cost, which is incurred for const./
Acquisition/ Production of Q.Assets, should be capitalised to the cost Q.Assets, but
Borrowing cost which is not incurred for const./Acquisition/ Production of Q.Assets.
Should be Expensed in P&L Statement in Same Year.

B.Cost for Qualifying Assets B.Cost for Business W.Cap

i. B. Cost a/c Dr xxxx i. B. Cost a/c Dr xxxx

To Loans xxxx To Loans xxxx
(Being Interest made due by (Being Interest made due by
Effective Rate if Int.) Effective)
ii. Q.Assets a/c Dr xxxx ii. P&L a/c Dr xxxx
To B. Cost xxxx To B. Cost xxxx
(Being B. Cost Capitalised) (Being B. Cost written off)
iii. Loan a/c Dr xxxx iii. Loan a/c Dr xxxx
To Bank xxxx To Bank xxxx
(Being Actual Interest paid) (Being Actual Int. paid)

Concept 3 : Stages of Application of Ind AS 23

Stages

Stage one : Stage two : Stage three :

Commencement of Suspension of Cessation of
Capitalisation Capitalisation Capitalisation

Stage I : Commencement of Capitalisation

As per the provisions of Ind AS-23, the following conditions should be satisfied to
Commence the capitalisation of B. Cost :-

Condition I : Expenditure Should be incurred out of Borrowed funds.

(Note : It can also be said that B. Cost which is incurred on unutilised
Funds should be written off in P&L A/c.)
+

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Condition II : Interest Cost should be Actual Cost.

(Note : It means that Notional Interest cannot be capitalised. In
Case, Expenditure on Q. Assets becomes more than Borrowed funds
then we cannot capitalise B. Cost on Excess Expenditure made out of
Shareholders funds.)

Shortcut for max. Capitalisation = B. Cost on borrowed funds or Expenditure

Whichever is Lower.
+
Conditions III : Necessary Activities that are required for completion of Q. Asset
Should remain in continuation. These Activity may be physical or
Administrative.

*Part 3*

Example :
i. Funds Borrowed (10%) : ₹ 10,00,000 (1.4.2017)
ii. Expenditure on Q.A : ₹ 600,000
Show the treatment of B. Cost.

Solution :

Journal Entries

i. Interest Exp. a/c Dr 100,000 (10L x 10%)

To Bank 100,000
(Being Interest paid)
ii. *Q. Assets a/c Dr 60,000 (6L x 10%)
P&L a/c Dr 40,000 (4L x 10%)
To Interest Exp. 100,000
(Being Interest Exp capitalised & written off)

❖ As per the provisions of Ind AS -23, Expenditure should be incurred out of

Borrowed funds. In the Given case, Expenditure on Q.Asset is only 600,000 where
Borrowings are of 10,00,000. So, Capitalisation has been made upto Expenditure
Only.

Example :
i. Fund Borrowed : ₹ 10,00,000 (10%)
ii. Exp. On Q. Assets : ₹ 25,00,000
Show the treatment of B.Cost.

Solution :
i. Interest Exp. a/c Dr 100,000
To Bank 100,000
(Being Interest paid)

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ii. Qualifying Assets * a/c Dr 100,000

To Interest Exp. 100,000
(Being Interest Capitalised)

❖ AS per the provisions of Ind AS 23, Interest cost Should be Actual Cost. It means
that we cannot capitalise Interest on Expenditure which is made out of own
Pocket i.e., Shareholder funds. So, we have ignored Interest on ₹ 15,00,000 which
is not related with Borrowed funds.

Example :
i. Borrowed funds (10%) : 10,00,000 (1.4.2017)
ii. Expenditure on Q. Assets : 800,000
iii. Project Started w.e.f 1.7.2017 (Activities commenced)
Show the Treatment of B. Cost.

Solution :

Statement Showing Treatment of B. Cost

Total B .cost (10L x 10%) 100,000

Interest to be Capitalised (60,000)
(800,000 x 10% x 9/12)
Balance to be written off 40,000

i. We have capitalised Interest on Actual Expenditure because it is Lower than

Borrowed funds.
ii. We have capitalised Interest for 9 months, because Activities have remained in
Continuation for 9 months only.

Journal Entries

a) Interest a/c Dr 100,000

To Bank 100,000
(Being Interest Paid)
b) Q. Assets a/c Dr 60,000
P&L a/c Dr 40,000
To Interest 100,000

Example :
i. Borrowed funds (10%) : 100,000 (1.4.2017)
ii. Expenditure on Q. Assets :-
a) ₹ 150,000 (1.4.2017)
b) ₹ 200,000 (1.7.2017)
c) ₹ 400,000 (1.9.2017)
Show the accounting treatment of B. cost for the F.y 2017-18 as per Ind AS 23

Solution :

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Statement Showing Treatment of B. Cost

Total B. Cost ( 10L x 10%) 100,000

B. Cost to be capitalised :-
i. First Exp . [150,000 x 10% x 12/12] (15,000)
ii. Second Exp [ 200,000 x 10% x 9/12] (15,000)
iii. Third Exp [ 400,000 x 10% x 7/12] (23,333)
Balance to be written off in SOPL 46,667

Journal :
1. Interest a/c Dr 100,000
To Bank 100,000
(Being Interest Paid)
2. Q. Assets a/c Dr 53,333
P&L a/c Dr 46,667
To Interest 100,000
(Being Interest cap. & written off)

Important Points to be considered for commencement of Capitalisation

*V.V.Imp

a. Treatment of Grants/ Progress Payment :-

As per the provisions of Ind AS -23 we should capitalise Interest on Actual

Expenditure, but It should be net Expenditure. If any incurred Amount is received
Back in the form of Grants or Progress Payment then we should reduce the amount
Of Expenditure by such an amount.

Net Expenditure = Total Exp. Till date – Grant/ Progress Payment

Ind AS -23

Example :
i. Borrowed funds : 10,00,000 (1.4.2017)
ii. Expenditure : 700,000 (1.5.2017) 4m
iii. Grant Received : 200,000 (1.9.2017)
iv. Rate of Interest : 10%
Apply Ind AS -23

Solution :

Statement Showing Treatment of B. Cost

Total B. Cost (10,00,000 x 10%) 100,000

To be Capitalised : -
(1.5.17 – 31.8.17) (700,000 x 10% x 4/12) (23,333)
(1.9.17 – 31.3.18) (500,000 x 10% x 7/12) (29,167)
Reduced by Grant P&L (Bal) 47,500
Note : We have reduced Expenditure by ₹ 200,000 w.e.f. 1.9.17 because the enterprise

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has received its money back in the form of Grant. So, Capitalisation will be
Allowed on Net Expenditure only.

b. Treatment of Pre-Payment Premium :-

As per the Provisions of Ind AS-23, Pre-payment Premium/ Penalties should

Not be considered as Borrowings Cost, because It is not incurred for arrangement
Of funds, but it is incurred to switch over the financer to save its B. Cost by
Terminating Loan Agreement before its maturity.
➢ The amount of Pre-Payment Premium should be considered as an Exp. And It is
To be written off in P&L A/c.

c. Transfer of Assets : - *Imp

If an Existing Asset (Scrap from old Assets) is used in Construction or

Production of Q. Asset the It will be treated as an Expenditure, and Interest can be
Capitalised on Such Expenditure.
Note : Scrap Should be valued at fair value.

➢ At the time of transfer of Assets, Diff. between fair value & WDV of Used

Assets should be transferred

to P&L A/c.

Example :
i. Borrowed funds : 10,00,000 (10%)
ii. Expenditure : -
a. Cash Payment = 200,000
b. Transfer of Assets (fair Value) = 300,000
c. B. value for Transferred Assets = 500,000
Apply Ind AS-23.

Solution :
Statement Showing Treatment of B. Cost

Total B. Cost (10,00,000 x 10%) 100,000

Interest to be Capitalised :-
Expenditure ( 200,000 + 300,000) 10% (50,000)
To be written off (Bal) 50,000

Note : There is a Loss of ₹ 200,000 on Transfer of Assets because BV is of ₹ 500,000,

But MV is of ₹ 300,000. It Should be written off in P&L A/c.

Journal
1) Q. Assets a/c Dr 200,000
To Bank 200,000
(Being cash Payment made)

2) Q. Assets a/c Dr 300,000

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Loss on transfer a/c Dr 200,000 (Bal)

To Assets 500,000
(Being Assets transferred)
3) Interest a/c Dr 100,000
To Bank 100,000
(Being Interest Paid )
4) Q. Assets a/c Dr 50,000
P&L a/c Dr 50,000
To Interest 100,000
(Being Interest Capitalised & written off)

4. Income on Investments made out of Borrowed funds (Temporary) :-

In the Given case, we will reduce our Total Borrowing cost by income on
Temporary Invest. Before making any capitalisation. The following statement may be
Relevant:-
Total B. Cost xxxx
Temporary Income (xxxx)
Net B. cost xxxx

B. Cost to be B. Cost to be
Capitalised as per written off in P&L
Actual Expenditure ( Bal fig)

Stage II : Suspension of capitalisation

As per the Provisions of Ind AS-23, Capitalisation of B. Cost will be suspended

If Activities remain discontinued. The Period of Such discontinuation should be
Recognised as period of Suspension. The discontinuation of Activities may be due to
Shortage of material, strikes or other unexpected reasons. The following other
Points should also be noted :-

a) If any Suspension in work is of temporary in nature then It should be ignored.

It can also be said that Temporary Suspension of work will not Affect
Capitalisation in any way (i.e., Stoppage of work during rains, changes in water
Level in rivers while const. bridges etc.)
b) If Suspension is not temporary then we should capitalise B. Cost during such
Period & It will be written off in P&L.

*Part 4*

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Stage III : Cessation of Capitalisation

As per the Provisions of Ind AS – 23, Cessation means completion of Work.

As per the Provision of this Statement, Borrowing Cost cannot be capitalised after
the date of cessation of Activities. It can also be said that Borrowing cost can be
Capitalised upto the date at which Q. Asset becomes ready for use or Sale.
(Note : No Interest can be Capitalised after cessation of Work.)

Cessation in Parts

Independant Dependant

If any Q. Asset is completed in Parts then It may be possible that any part of
Q. Assets becomes ready for use without completing other parts. In this case, B. cost
Which is related with such completed part of Asset should be treated in the following
2 Situations :-
a) If Completed Part is independent in nature then B. Cost should not be capitalised
but It should be written off in P&L Statement. It will be considered independent
if It can be used without completing other Parts.
b) If completed Part is dependent in nature then It will be considered that this
Part is still a Q. Asset and B. Cost should be capitalised. It will be considered as
Dependant if it cannot be used without completing others.

Solution of Q. 14 Discussed in Class

Concept 4 : Types of Borrowings * V.V.Imp

Types

Specific Borrowings General borrowings

I. Specific Borrowings

If Direct relationship between Q. Assets & Borrowed funds can be established

then It will be considered as a case of Specific Borrowings. In this case, we will
Capitalise the total borrowing Cost to the related Asset.

II. General Borrowings

In case there is no direct relationship between Q. Asset & Borrowed funds

then It will be considered as a case of General Borrowings. There may be multiple
Borrowings and multiple Q. Assets. Under this situations, borrowings are not under-
taken Specifically for an Asset, but these are undertaken for a Project as a whole.

Step I : calculate Weighted Average Capital Rate (WACR) as follows :-

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WACR = Total Borrowings x 100

Total borrowed or Total
Funds Expenditure
On Q. Assets

Higher

Step II : Allocate Borrowing cost over the Q. Assets on the basis of WACR.

Example :
i. 10 % Bank Loan = ₹ 50,00,000
ii. 8 % Debentures = ₹ 40,00,000
iii. Q. Assets/ Expenditure made out of above funds : -
Apply Ind AS-23 to show the treatment of Interest.

Solution :

Calculation of WACR

WACR = (50,00,000 x 10%) + (40,00,000 x 8%) x 100

90,00,000
= 500,000 + 320,000 x 100
90,00,000
= 9.11 %

Statement Showing Allocation of Interest

Items Expenditure WACR Interest Treatment

Plant 45,00,000 9.11% 409,950 Q.A

Shed 10,00,000 9.11% 91,100 Q.A
Roads 15,00,000 9.11% 136,650 Q.A
637,700

Interest to be written off on = 820,000 - 637,700 = 182,300

Unutilised funds (T.B.Cost) (Q.A)

Example :

i. General Borrowings : -
a) 10 % Bank Loan : 20,00,000
b) 15% NBFC Loan : 50,00,000
ii. Expenditure on Q. Assets out of above funds : -
a) Building = 50,00,000
b) P&M = 40,00,000
Show the Treatment of Interest.

Solution :

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WACR = (20,00,000 x 10%) + (50,00,000 x 15%) x 100

90,00,000 *
❖ Expenditure is more than Borrowed funds
= 10.56%

Allocation of Interest

Total B. Cost 950,000

i. Building (50 L x 10.56%) 528,000
ii. P&M (40L x 10.56% ) 422,000

Solution of Q.8

Treatment of Specific B. Cost

In the Given Case, It is Clearly specified that 16% secured Loan is taken
For const. of Building. So, we will Capitalise B. Cost of ₹ 16 Lacs to the cost of Building
Directly. The following Entries may be recorded : -

i. Interest a/c Dr 16L

To Bank 16L
(Being Interest Paid)
ii. Building a/c Dr 16L
To Interest 16L
(Being Interest capitalised)

Treatment of G.B Cost

a) W.A.C Rate = Total Interest x 100

T.B. Funds
= (28 + 36) x 100
(200 + 300)
= 12.8%
b) Treatment :-

Total B. cost (28 + 36) 64L

To be Capitalised : -
i. Plant 1 (200 x 12.8%) (25.60 L)
ii. Roads (100 x 12.8 %) (12.80 L)
iii. Plant 2 (100 x 12.8%) (12.80 L)
Balance to be written off 12.80 L

Journal :
i. Interest a/c Dr 64
To bank 64
(Being Interest paid)

ii. Plant 1 a/c Dr 25.60

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Roads a/c Dr 12.80

Plant 2 a/c Dr 12.80
P&L a/c Dr 12.80
To Interest 64
(Being Interest capitalised & written off)

Solution of Q. 2 * Imp

Assumptions :
1) Phase I is independent in nature
2) It was completed in the beginning of year

Statement Showing Treatment of B. Cost

a) W.A.C. Rate = Total B. Cost

Borrowed or Expenditure
Funds

Higher
= 22 L x 12 % =264,000 x 100
27,00,000
= 9.78 %

b) Treatment of G.B. Cost : -

Total B. cost 264,000

Phase I : To be written off in PL Statement (97,800)
(10,00,000 x 9.78%)
166,200
Phase II : To be Capitalised 88,020
(900,000 x 9.78%)
Phase III : To be capitalised 78,180 (Bal fig.)
(800,000 x 9.78%)

Journal

1) Interest a/c Dr 264,000

To Bank 264,000
(Being Interest Paid)
2) P&L a/c Dr 97,800
Phase II a/c Dr 88,020
Phase III a/c Dr 78,180
To Interest 264,000
(Being Interest capitalised & written off)

Solution of Q 1

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Calculation of Expenditure incurred till 31.3.01 (In Lacs)

Opening Balance in Q. Assets (1.4.2000) 474

(450 + 24)
Add : Expenditure during 2000-01
i. Transfer of Assets 100
ii. Cash Payment 78
Less : Progress Payment Received 300
Expenditure till 31.3.2001 352

Comments : In the given Case, Total Borrowings are 400 Lacs, but Expenditure on
Q.Asset is ₹ 352 Lacs only. So, we cannot Capitalise full Interest to the

200 L 200L
Old New
Cost of Q. Asset. The following calculation may be considered : -
Total B. Cost (400 L x 12 %) 48 Lacs
B. Cost to be capitalised (352 L x 12%) (42.24 Lacs)
B. Cost to be written off in P&L A/c (Bal fig.) 5.76 Lacs

*Part 5*

Solution of Q.6

As per the Provisions of Ind AS-23, B. Cost can be capitalised to the Cost
Of Q. Assets only. A Q. Asset is an Asset that takes Substantial period of time to get
ready for its intended use or Sale. These Assets may be in the form of L&B, P&M, I.P,
Power Generation Plants or Inventories etc.

In the given Situation, R ltd has acquired shares in A Ltd with the amount
Of Borrowed funds, But investment in Shares cannot be considered as Q. Assets,
Because the acquisition of shares does not take substantial Period of time.

Comments : On the basis of given Explanation in as above, R Ltd should not capitalise
Interest of ₹ 3 Crore to the Cost of Acquisition of Investments. So,
The company should write off it in P&L A/c.

Solution of Q. 10

As per the Provisions of Ind AS-23, Biological Assets Except Plants are
Not covered under the Scope of this Statement. These Assets will be covered under
the Guidance of Ind AS-41.
(i.e., Biological Assets mean a Living Animal or Plant)

In the Given Case, Company has issued Debentures for Plantation of Teak

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Trees. We cannot consider Teak trees as Q. Assets because these are Biological Assets

Comments : The Treatment of company regarding B. Cost is not correct. It should

Not include B. cost to the Cost of Inventory, But It should be written
Off in P&L A/c.

Solution of Q. 13 (6-8 Marks) * Imp

I. Calculation of WACR

A,C Rate = Total B. Cost x 100

Total Borrowed Funds

= (1000 x 18% x 12/12) + (2000 x 14% x 6/12) + ( 3000 x 16% x 9/12) x 100
1000 + 1000 + 2250
(1000 x 12/12) (2000 x 6/12) (3000 x 9/12)
= 680 x 100
4250
= 16%

Note : While Computing WACR, Period of Interest Calculation should be considered,

Because calculation of used funds also depends upon it. The following formula is
relevant if funds are not used for full year : -

WACR = Actual B. Cost during the year x 100

Actual used funds during the year

Borrowed funds x Period of O/S

II. Statement Showing Treatment of G.B. Cost

Total B. Cost 680 Lacs

B. Cost to be Capitalised : -
Factory Shed (2500 x 16% x 12/12) (400 Lacs)
Plant 1 (1500 x 16% x 9/12 ) (180 Lacs)
Plant 2 (1000 x 16% x 7/12) (93.33 Lacs)
Balance to be written off (Bal fig.) 6.67

Note : As per the Provisions of Ind AS-23, Activities should remain in contuation
Which are required to complete the work if an enterprise wants to capitalise
the interest. So, we have capitalised interest according to Actual time as
Given in question.

Solution of Q.12 (4 Marks)

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Statement Showing Calculation of Estimated Cost of Asset at the end of 5th

Year

Period O. Balance in Expenditure during Interest C. Balance in

Assets A/c The year (Ind AS 23) Asset A/c
(I) (II) (III) (IV) V =(II+III+IV)

1. NIL 100 7.2 (60 x 12%) 107.20

2. 107.20 100 14.40 (120 x 12%) 221.60
3. 221.60 80 19.20 (160 x 12%) 320.80
4. 320.80 60 24 (200 x 12%) 404.80
5. 404.80 50 27.60 (230 x 12%) 482.40
Ans

Solution of Q.4

Calculation of W.A.C. Rate/ Interest Rate

WACR/Interest Rate = 58.50 L x 100 = 9%

650 L

Statement Showing Treatment of B. Cost

Asset Expenditure Rate Interest Treatment

Building 120 9% 10.80 Note 1

P&M 350 9% 31.50
Advance for P&M 70 9% 6.30 Note 2
Working Cap. 110 9% 9.90 Note 3
650

Note :
1) In the Given question, It is Clearly specified that completion of Building &
Installation of P&M have been made at the end of year. So, we should capitalise
B. Cost of ₹ 10.80 L & ₹ 31.50 L to cost of building & Plant respectively.
2) If we assume that Advances have been made for Q. Asset then we can also
Capitalise Interest of ₹ 6.30 Lacs to the Cost of Assets. Until the Assets are
Installed, we can keep this Interest in Interest Suspense A/c.
( Vice versa case : write off this Interest in P&L A/c)
3) As per the provisions, Working Capital is not a Q. Asset. So, Interest incurred
For the arrangement of Working capital should be written off P&L A/c.

Solution of Q. 7 * Imp (10 Marks)

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Statement Showing Calculation & Treatment of B. Cost

Months O. Balance in New Exp. Interest to be C. Balance in

Assets A/c Capitalised Assets A/c

April Nil 200,000 2000 202,000

(200,000 x 1%)
May 202,000 300,000 5020 507,020
(502,000 x 1%)
June 507,020 - - 507,020
(Notes)
July 50,7020 - 5070 512,090
(507,020 x 1%)
August 512,090 100,000 NIL 612,090
(Notes)
September 612,090 700,000 13,121 13,25,211
(13,12,090 x 1%)
(Notes)

Notes :
1) In April & May, we have applied 1% Interest Rate on Expenditure because
Expenditure is Less than Borrowed funds. So, we cannot Capitalise Interest on
Unutilised funds.
2) In June, there was strike due to which No work was done in this month. So, we
Have considered it as Suspension of work due to which we have not capitalised the
Interest which is incurred on overdraft in June.
3) In August, we have surplus cash due to which Borrowings do not Exist in August.
4) In September, the enterprise has Borrowed funds in excess of 10 Lacs. So, we
Have assumed that the entire expenditure is financed by B.OD.

*Part 6*

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Solution of Q 5 *Imp (10 marks)

Treatment of Specific B. Cost

Specific B. Cost incurred during 2001-02 385,00,000

(30 crores x 14 % x 11/12)
1.5.01 – 31.3.2002
To be Capitalised :
Project A (24 crores x 14 % x 7/12) (196,00,000)
Project B ( 6 Crores x 14 % x 6/12) (42,00,000)
To be written off in P&L A/c (SOPL) 147,00,000

Treatment of G.B. Cost

i. Calculation of G.B.cost

Particulars Utilised funds B. Cost

i. Debentures : -
1.4.2001 – 30.6.2001 20 Crores x 3/12 = 5 Crores .55 Crores
(5 x 11%)
1.7.2001 – 31.3.2002 15 crores x 9/12 = 11.25 Crores 1.2375 Crores
(11.25 x 11%)
ii. Working Capital Loan :-
1.4.01 – 31.12.01 15 Crores x 9/12 = 11.25 crores 1.575 Crores
(11.25 x 14%)
1.1.02 – 31.3.02 10 Crores x 3/12 = 2.5 Crores .35 Crores
iii. Foreign Currency Loan :- (2.5 x 14%)
1.6.01 – 31.3.02 22.5 Crores 1.8 crores
( USD 60 Lacs x 45 x 10/12) (22.5 x 8%)
Note
Total 52.5 Crores 5.5125 Crores

WACR = Interest during the Year x 100 = 5.5125 x 100 = 10.5%

Loss during the Year 52.5

ii. Treatment of G.B. Cost

Total B. Cost 5,51,25,000

To be Capitalised :-
Project A (10 Crores x 7/12 x 10.5%) (61,25,000)
Project B (14 Crores x 6/12 x 10.5%) (73,50,000)
Project C (4 Crores x 10/12 x 10.5%) (35,00,000)
Project D (4 Crores x 9/12 x 10.5%) (31,50,000)
Project E (8 Crores x 10/12 x 10.5%) (70,00,000)
Balance to be written off in SOPL 2,80,00,000

Note : While Computing WACR under Ind AS-23, F.C.Loans should always be converted
At Average Rate, because Interest is also calculated at Average Rate.

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If we are converting F.C Loans for B/S purpose then we should always apply
closing rate for True & Fair Presentation.

Solution of Q 3

As per the Provisions of Ind AS -23, B. Cost cannot be capitalised from the date
at which Q. Asset becomes ready for use or sale. This Situation is also known as
cessation of Capitalisation.
In the Given Situation, Power Plant is already used in commercial production
Which indicates that power plant is ready for use.

Comments : On the basis of Given Explanation as in above, the argument of

Management is not correct. The Borrowing cost should not be capitalised
As power Plant is already in use for production. So, Interest cost should
Be written off in SOPL.

Solution of Q.9 *Imp

As per the provisions of Ind AS-23, B. Cost can be capitalised to the cost
Of Q. Asset only. A Q. Asset is an Asset that takes substantial period of time to get
ready for its intended use or Sales, but other than Biological Assets and inventories
Produced in Large Volume.
In the Given case, Time is not taken by company to produce the inventory,
But time is taken to sell the inventory. A Limited stock can be realised in market
For sale.

Comments : On the basis of Given Explanation as in above, It can be said that sugar is
not a Q. Asset because It is not taking time in its production. So, interest
Interest cannot be capitalised.

Solution of Q.11

As per the provisions of Ind AS-23, B. Cost cannot be capitalised from the date
at which Q. Asset becomes ready for use or Sale.
In the Given Case, It is clearly specified that Building was put to use in Jan 2005
which indicates that all the necessary Activities were completed in Jan 2005.

Comments : So, the enterprise can capitalise Interest of ₹ 18 Lacs which was
incurred. Upto Jan 2005, but the remaining Interest of ₹ 7 Lacs should
be written off.

Concept 5 : Application of “Para 6E”

(Exchange Diff subject to Interest Adjust.)

If any Enterprise has Borrowed funds in foreign currency for the acquisition,
Production or construction of Q. Assets then Exchange Loss at B/s date on Such
Loan can also be capitalised as B. Cost. The following Steps should be applied under

Para 6E :-

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Step I : Calculation of Notional Savings in Interest

Assumed Interest at Local Interest Rate assuming funds are xxxx

Borrowed in India ( It will be given in question)
Actual Interest on F.C. Loans in Indian currency xxxx
[F.C. Loans x % x Exchange Rate]
Notional Savings xxxx

Step II : Calculation of Exchange Loss

F.C. Loans in Indian currency at B/s date xxxx

F.C. Loans in Indian currency at Actual Rate (xxxx)
Exchange Loss xxxx

Step III : 6E
As per the provisions, Exchange Loss can be capitalised to the cost of Q. Assets
But upto the amount of Notional savings.

Shortcut = Notional Saving or Exchange Loss

Whichever is Lower can be capitalised

Important Point

Para 6E is not applicable if there are Exchange Gains on reduction in F.C. loans due to
Decline in exchange Rate. Such Gain will be transferred to P&L A/c only.

Example:-
i. F.C. Loans : USD 10,000
ii. Exchange Rate : 1.4.2017 = 58
31.3.2018 = 59
iii. Interest Rate : Local Rate 11%
Actual Rate 5%
iv. Interest is paid at the end of year
v. Loan was taken at 1.4.2017
Apply 6E

Solution :

Calculation of Exchange Loss

F.C. Loan at B/s date (10,000 x 59) ₹ 590,000

F.C. Loans at Actual Rate (10,000 x 58) (₹ 580,000)
Exchange Loss ₹ 10,000

Calculation of Notional Savings

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Assumed Interest (580,000 x 11%) 63,800

Actual Interest (10,000 x 5% = 500 x 59) (29,500)
Savings 34,300

Comments: In the given case. We can capitalise the Entire Exchange Loss to the
cost of Q. Asset because It is not Exceeding the Limit of Indian Interest.

Journal : -
a) Exchange Loss a/c Dr 10,000
To F.C Loans 10,000
(Being Loss debited due to increase in F.C Loans )
b) Q. Asset a/c Dr 10,000
To Exchange Loss 10,000
(Being Exchange Loss capitalised as per Para 6E)

Example : with the help of previous/ Cost Example, apply 6E if closing Rate is 64 per
USD.

Solution :
a) Exchange Loss = (10,000 x 64) – (10,000 x 58) = 60,000
`` Closing Actual Loss
Rate Rate
b) Notional Savings = (580,000 x 11%) - (10,000 x 5% x 64) = 31800
Assumed Actual Savings
Indian Interest
Interest
c) 6E : 60,000 or 31,800 whichever is Lower = 31,800

Journal :
a) Exchange Loss a/c Dr 60,000
To F.C. Loan 60,000
(Being Exchange Loss capitalised)
b) Q. Asset a/c Dr 31,800 (6E)
SOPL a/c Dr 28,200 (Bal fig.)
To Exchange Loss 60,000
(Being Exchange Loss Capitalised & Written off)

Example: With the help of Previous case, Apply 6E if closing Rate is 56 per USD.

Solution :
There is no Exchange Loss, because Exchange Rate at B/s date is lower than
Actual rate due to which there will be exchange Gain of ₹ 20,000. So, Para 6E will not
Be applied in this case. The Amount of Exchange Gain will be transferred to SOPL.

*Part 7*

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Concept 6 : Subsequent Recognition under “Para 6E”

As per the Provisions of Ind AS -23 (Para 6E), Exchange Gain can be reduced from
Cost of Q. Asset if the company had capitalised Exchange Losses under 6E in Previous
Years. The amount of Exchange Gain that can be reverses should not Exceed the
Amount of Exchange Loss which was Previously capitalised.

Journal :
1) F. C .Loans a/c Dr xxxx
To Exchange Gain xxxx
(Being Liability reduced)
2) Exchange Gain a/c Dr xxxx
To Q. Assets xxxx
(Being Cost reduced)

Example :

Y1 (2016) Y2 (2017) Y3 (2018)

i. Notional in Interest 20,000 16,000 18,000
ii. Exchange fluctuation in 48,000 11,000 19,000
FCL (Loss) (Gain) (Gain)
Apply 6e with Journal Entries in Each Year.

Solution :
2016
1) Exchange Loss a/c Dr 48,000
To F. C Loans 48,000
(Being Liab. Increased)
2) Q. Assets a/c Dr 20,000 (6E)
P&L a/c Dr 28,000 (Bal)
To Exchange Loss 48,000
(Being Exchange Loss capitalised & written off)

2017
1) F. C Loans a/c Dr 11,000
To Exchange Gains 11,000
(Being Liab Reduced)
2) Exchange Gain a/c Dr 11,000
To Q. Assets 11,000
(Being Exchange Loss reversed which was capitalised in P.Y)

2018
1) F.C Loans a/c Dr 19,000
To Exchange Gain 19,000
(Being Liab. reduced)

2) Exchange Gain a/c Dr 19,000

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To Q. Asset 9000
To P&L 10,000
(Being Exchange gain recognised)
2016 20,000
2017 (11,000)
9000

Concept 7 : Disclosures (Notes to A/c’s)

1) The Entity Should report “ W.A.C. Rate “ which has been used in Books for
Capitalisation of B. Cost.
2) The Accounting policy should also be reported

*Part 8*

Solution of Q. 32 Discussed in Class

*Part 9*

New Questions

Solution of Q.1

As per the Provisions of Ind AS-23, Borrowing cost can be capitalised to the
Cost of Inventory only if It is not Produced in large Quantity and as a routine
stock on Repetetive basis.
In the Given case, It is clearly specified that cheese takes substantial time
to get ready which indicates that It is not produced on Repetetive basis.
So, the Entity can capitalise the Interest to the cost of cheese because It
Can be considered as a Qualifying Asset.

Solution of Q.2

i. As per the Provisions of Ind AS-23, Q. Asset is an Asset that takes substantial
Period of time to get ready for its intented use or sale. In the Given case, It is
Clearly mentioned that software will take substantial time in its development. so,
It can be considered as a Q. Asset for the purpose of capitalisation of Interest.
ii. The intention of management is very important while assessment of an Asset
Whether It is Qualifying or not under Ind AS 23. Sometimes Activities in relation
to an Asset got completed but, its use depend on completion of other Assets. So,
We can Assess whether an Asset is qualifying or not, only with the help of
Management.

Solution of Q.3

As per the Provisions of Ind AS 23, Interest can be capitalised if funds

Have been Borrowed for Acquisition, Production or construction of Q. Assets. As per
the rules, Q. Asset is an Asset that takes substantial time to get ready for its

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Intented use or sale.

In the Given case, 3G licence has been acquired for development of network
Which is a time taking Activity. We should not consider 3G Licence as a separate
Asset, but It should be taken as a part of Network Development.
So, the Entity should capitalise Borrowing cost which has been incurred for
Acquisition of 3G Licence till completion of Network Development.

Solution of Q.4

As per the Provisions of Ind AS 23, B. Cost can be capitalised only if It is

Incurred for Q. Asset which takes time to get ready for use or sale.
In the given case, Permit has been acquired specifically for a building which is
Not ready for use. So, we can capitalise B. Cost to the cost of Building which has been
incurred for acquisition of permit. But Equipment can be used in many Buildings which
Indicates that It is not dependent on a particular Asset and It is considered as a
Complete Asset. So, we should not capitalise Interest which is incurred for
acquisition of Equipments.

“New Concept on Specific Borrowing”

If Specific Borrowing has been taken by an Entity for a Q. Asset and that Asset has
Become ready for use, but Specific Borrowing is still Repayable and It is o/s in B/s
then such Specific Borrowing will be considered as General Borrowing and It will be
Considered while computing “WACR” with other Business.

Solution of Q.5

As per the Provisions of Ind AS 23, Specific Borrowing will become General
Borrowing if It is not repaid even after completion of related Asset.
In the Given case, Loan was taken for Building A which is ready for use, but
Company has not repaid its Borrowed funds of ₹50 Lacs. It has started using these
Funds in construction of Building B. So, It should treat such Borrowing as General
borrowing. The company will consider this Loan while computing WACR as follows :-

WACR = (25,00,000 x 9%) + (15,00,000 x 7%) + (50,00,000 x 8%) x 100

25,00,000 + 15,00,000 + 50,00,000
= 225,000 + 105,000 + 450,000 x 100
90,00,000
= 8.11%

Solution of Q.6 *Imp

Calculation of G.B. Cost (Sep to Dec)

i. Interest on Deb. (20,00,000 x 10% x 4/12) 66667

ii. Interest on B.OD: Sep. 500,000 x 15%x 1/12 6250
Oct. 500,000 x 16%x 1/12 6667
Nov. 500,000 x 16%x 1/12 6667
Dec. 750,000 x 16%x 1/12 10000

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G.B. Cost 96251

Calculation of O/s funds during the period

i. Debentures (20,00,000 x 4/12) 666667

ii. B.od : (500,000 x 3/12) 125000
(750,000 x 1/12) 62500
854167

WACR = 96251 x 100 = 11.27%

854167

Explanation on Specific Borrowing Cost Actual

As per study material at student level, Specific B. Cost will be capitalised directly to
the related Asset irrespective of Time Period & Amount of Expenditure on Q. Asset.

Solution of Q.7

I. Calculation of Specific B. Cost (1.4.x1 – 31.1.x2)

Interest on Specific Borrowing (200,000 x 9% x 10/12) 15000

II. Calculation of G.B. Cost (1.4.x1 – 31.1.x2)

A. WACR = (700,000 x 12%) + (900,000 x 11%) x 100

16,00,000
= 11.4375%
B. G.B. Cost : 1.8 – 31.1 (150,000 x 11.4375% x 6/12) = 8578
1.10 – 31.1 (350,000 x 11.4375% x 4/12) = 13344
1.1 -31.1 (100,000 x 11.4375% x 1/12) = 953
22875

Total capitalisation = 15000 + 22875 = 37875

Journal

I. Building a/c Dr 800,000

To Bank 800,000
(Being Expenditure made on Building)

II. Building a/c Dr 37875

To Interest payable 37875
(Being Int. capitalised)
III. Interest a/c Dr 37875
To Bank 37875
(Being Int. Paid)

Solution of Q.8

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Treatment of S.B. Cost

(10% 4 years Note)

Interest on Specific Borrowing 65,000

Interest Income (20,000)
Net B. Cost 45,000

*S.B. Cost of ₹45,000 will be capitalised directly

Treatment of G.B. Cost

A. WACR = (10,00,000 x 12.5%) + (15,00,000 x 10%) x 100

10,00,000 + 15,00,000
= 125000 + 150000 x 100
25,00,000
= 11%

B. G.B. Cost : 30.6 -31.3 = 100,000 x 11% x 9/12 = 8250

31.12 – 31.3 = 12,00,000 x 11% x 3/12 = 33,000
31.3 – 31.3 = 200,000 x 11% x 0 = 0
41250
Total capitalisation = 45000 + 41250 = 86250

New concept on Capitalisation in Group statement

If one Entity in the Group takes Loan, but other Entity in the Group buys Q. Asset
From such fund then capitalisation will be allowed in consolidated financial statements
On such Borrowed funds, because we will see both the Entities as Single Entity. It will
be assumed that A Single Entity has Borrowed & Invested.

Solution of Q.9 *Imp

P Company

A B C
(Real Estate) (Const.) (finance Co.)

Loan 10,00,000 @7% IP 15,40,000 B. Funds 20L @ 7%

Q.A 15,40,000 (including 10% Profit) but no Q.A
+
QA 10,00,000
B Funds NIL

Comments on SFS of Companies :-

I. Company A : It can capitalise 70,000 (10L x 7%) to the cost of Asset because

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It has incurred 1540,000 on Q. Asset.

II. Company B : There is no Borrowing in this company due to no Interest is
Incurred.
III. Company C = It has no Q. Asset due to which No capitalisation can be made.

Comments on CFS :-
Total Borrowed funds in CFS = 10,00,000 + 20,00,000 = 30L @ 7%
Total Q. Assets = 1540,000 x 100 + 10,00,000
110
= 24,00,000

Capitalisation on Q. Asset in CFS = 2400,000 x 7%

*Part 10*

Solution of Q.4, Q.19, Q.21, Q.5, Q.6, Q.7, Q.12, Q.22, Q26, Q.33

Discussed in Class

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter-4 Ind AS : 116

Leasing Accounting
{*V.V.Imp}
*Part 1*

Concept 1 : Applicability & Objective of Ind AS 116

As per the Provisions, Ind AS 116 is mandatory for all Parties (Lessor & Lessee)
W.e.f. 1.4.2019 but Ind AS 17 stands withdrawn from the respective date. There is no
Significant change in the books of Lessor under Ind AS 116, but there are some
Changes in relation to Accounting & Presentation in the books of Lessee under this
Revised Statement.

“The main objective of this statement is to set principles regarding Accounting &
Presentation for Lease contracts in the books of Respective Parties”

Concept 2 : Assets out of Scope of Ind AS 116

As per the provisions of Ind AS 116, the following Assets are not under the scope of
this Statement : -

Assets Covered

A. Mineral oils, ores, Natural Gases or other Non Regenerative Ind AS 106
Resources
B. Patents & Copyrights, contracts for motion Pictures, Manu Ind AS 38
Scripts, video etc.
C. Biological Assets Ind AS 41
D. Service Concession Arrangements Ind AS 115
E. If contracts are made for Granting Licences of Intellectual Ind AS 115
Property Rights

Concept 3 : Exemptions from Application of Ind AS 116 *V.V.Imp

As per the Provisions of Ind AS 116, Lessee can avail Exemption from application of
Ind AS 116 Rules for Lease if any one condition out of following 2 conditions is
Satisfied :-

Condition I : It should be a “Short Term Lease”

OR
Condition II : It should be a “ Low Value Lease”

A. Short Term Lease

If any Lease contract is made for 12 months or Less than 12 months then
Lessee can avail Exemption from application of Ind AS 116 Rules.

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Important Points

➢ If any contract was Classified as Long Term Lease on Commencement date of

Contract, but Subsequently, It is reclassified into short term Lease then there
Will be “ No Exemption” for such type of short Term Lease.
Note : It means that Exemption is available fro original Short term Lease only.

➢ If Lease Contracts have been entered into for similar Assets then such Asset
Will be considered separately for short Term or Long Term Lease
Note : It means that Exemption cannot be availed for Group of Similar Assets. we
Can Group similar Assets only if Same contract has been made for all Assets.

Solution of Q.1 Discussed in Class

B. Low value Lease contracts *Imp

As per the provisions of Ind AS 116, Lessee can avail Exemption from this Statement
if It has Entered into a Lease contract for “Low value Asset”. There is no clear
Explanation on these Assets from the Point of view of value of Assets. The
Following 2 conditions if satisfied then An Asset can be Classified under Low value
Asset : -

Condition I : It should not be dependent or highly inter-related on/with other

Assets from the point of View of its use
Example :
i. Mobile/ Laptop/Tablet : All are not Dependent on other Assets fro use
ii. Tyres of a Car : Tyres are dependent on use of Car
+
Condition II : Lessee can take Benefit from Low value Asset on its own without
Merging it with other sources

Important points

i. An Entity should consider value of New Asset while Assessing Low value Asset
While Assessing Low value Asset under 116 regardless the age of Asset under Lease
ii. If Lease covers multiple Assets of Similar nature then Each Asset will be
Considered as Separate for such Assessment.
Example : If Lease has been made for 200 Laptops then It will be considered as
Low value Lease even if overall amount is very high because Each Laptop
is a Separate Asset and qualify the Specified conditions. It means that
We will not focus on volume of transaction
iii. The Size of business of Lessee or Nature of Business shall not impact such
Assessment.
iv. Ind AS 116 provides some Examples for understanding of Low value Assets :-
Mobiles, Laptops, Tablets, Office furniture etc.

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Concept 4 : Accounting in the books of Lessee if Exemptions are availed

As per the Rules, lessee will write off Lease Rentals during the Lease Period on SLM
Basis or any other Systematic basis in P&L A/c.

Not yet Defined in Ind AS 116

Note : Difference between Actual Payment and SLM Rentals shall be considered as
Prepaid or outstanding Rent.

Example :

LR1 = 20,000 Pass Entries in the books of Lessee assuming

LR2 = 18,000 Lessee has availed Exemptions.
LR3 = 22,000

Solution :
SLM Rent = 20,000 + 18,000 + 22,000 = 20,000
3

Journal Entries :

Ist year
i. Lease Rental a/c Dr 20,000
To Bank 20,000
(Being Rental Paid)
ii. P&L a/c Dr 20,000
To Lease Rental 20,000
(Being Rental written off on SLM Basis)

IInd Year
i. Lease rental a/c Dr 18,000
To Bank 18,000
ii. P&L a/c Dr 20,000
To Lease Rental 18,000
To O/s Rent 2000

IIIrd year
i. Lease rental a/c Dr 22,000
To Bank 22,000
ii. P&L a/c Dr 20,000
O/S a/c Dr 2000
To Lease rental 22,000

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*Part 2*

Concept 5 : Identification of Lease in a contract *V.V.Imp

If all the conditions are satisfied in a contract as Specified in below then we will
Assume that contract contains a Lease Agreement : -

Condition I : There should be an Identified Asset in the contract

+
Condition II : The Customer will obtain Substantially all of the Economic Benefits
From the Asset throughout the Lease Period
+
Condition III : The customer will have right to Direct “How and for what purpose”
The Asset will be used throughout the Lease Period.
OR
Condition IV : If how & for what Purpose is Pre-determined in a contract then
Customer will operate or design the Asset

“If we find ‘yes’ for all above Conditions then we would “ say that contract contains
Lease

Condition I : Identified Asset

As per the Provisions of Ind AS 116, there should be an Identified Asset in the
contract to classify it as a Lease contract. Such an Asset may be Specified in the
Contract “ Explicitily or Implicitily “

Clearly Specified Impression/ Presumption on the basis of facts

(i.e., Asset is Specially customised as per customer
Requirement)

Note : The Specified Asset may be ready on contract date or It will be made available
to customer on a future date, does not affect the concept of identified Asset.

Solution of Q.2 , Q.3 Discussed in Class

Factors to be considered while identification of Asset : -

Factor I : Substantive Substitution Rights with Supplier

If supplier has “SSR” then It will be considered as there is no Identified Asset.

In case the following 2 conditions are satisfied then It will be proved that supplier
has “SSR”

I. If Supplier can Substitute the Leased Asset with other Assets or Alternative
Assets at any time throughout the Lease Period.
Note : It can also be said that customer cannot Prevent supplier from
Replacement of Asset throughout the use of Asset

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+
II. The Supplier has Economic Benefits from the Substitution of Assets

Benefit from substitution Exceed cost of substitution

Note : If any Substitution is required to be made due to warranty provisions then It
Will not be covered under SSR

Exceptions to above Rules :-

1) In case SSR shall become in power on occurrence of some future Events or after
a Specified period, but these rights do not Prevail on Contract date then It will
Be assumed that there are no SSR on Contract date.
Note : These rights should Prevail on contract date

Examples of Future Events

➢ High Rentals from a future Customer

➢ Introduction of New technology in future
➢ Performance of Asset if does not meet as Expected in future etc.

Solution of Q.4 Discussed in Class

Factor II : Identified Asset should be a distinct Asset *Imp

Distinct Asset

Physically distinct Not physically Distinct

It may be Entire Asset or It may be in the form of use of Capacity,

Portion of Asset but It should be “ Substantial all” in the
Period of use
❖ Substantial All is not defined in Ind AS
116 Approx. 100% .

Solution of Q.5, Q.6 Discussed in Class

Condition II : All Economic Benefits

As per the Provisions of Ind AS 116, Customer shall obtain Substantially all Economic
Benefits from the use of Asset throughout the Period. The Benefit may include the
Following cash inflows :
i. Primary output from the use of Asset
ii. By Products
iii. Commercial Substance (i.e., Rental from Sub-Leasing)

The following factor do not prevent customer from taking Economic Benefits :-

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➢ Supplier Protective Rights : If Supplier imposes any Restriction to avoid damages

To Asset or over consumption of Asset then It does not mean that It will
Affect Economic Benefit Concept.
No. of units to be Produced per day/
Movement of Asset in Risky Areas
➢ Supplier Benefit due to Ownership : If Supplier Gains some Tax Benefits or other
Resources due to ownership and these are not related with use of Asset then It
Will be assumed that Customer still have all Economic Benefits.

Solution of Q.8 Discussed in Class

Condition III : Right to Direct *V.V.Imp

“How & for what purpose”

As per the Provisions, Customer should have right to direct “How & for What Purpose”
the Asset will be used throughout the Period. It can be said that decision making
Rights in relation to Asset should be Excercised by customer. The decision making
Rights may include the following :-

Customer will Decide

When to Produce Where the How the Output whether the

the output output will be will be produced output will be
Produced Produced or Not

Notes :
1) “ How & for what Purpose” should be read as a Single Concept.
2) To Prove the right to direct, It does not require that Asset will be operated by
Customer itself. An Asset can be operated by Personnel of Supplier on customer
Direction.
OR
Condition IV : Operation/ Design of Asset

If “ How & for what Purpose” is Pre-determined in the contract then operation/
Design of Asset should be Excercised by customer Otherwise we will assume that there
is no lease contract.

Solution of Q.9, Q.10 Discussed in Class

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*Part 3*

Concept 6 : Meaning of Lease

As per the Provisions of Ind AS 116, Lease is a contract whereby “ Supplier conveys to
the customer right to control the use of an identified Asset for agreed Period of
time in Exchange of consideration” There are many Issues which are to be
Understood with identification of Lease Contract which are as follows :-

Issue I : Identification of Each Lease component

Issue II : Identification of Non Lease component
Issue III : Combination of contracts
Issue IV : Portfolio Approach
Issue V : Inception Date of Lease
Issue VI : Commencement Date of Lease
Issue VII : Lease Term
Issue VIII : Re-Assessment of Lease Term

Issue I : Separate Lease component

If any Lease contract has been entered into for multiple Assets then
Each Asset will be taken as Separate Lease component if the following conditions are
Satisfied : -

1. Each Asset has its own Benefit

+
2. Each Asset is an Independent Asset (i.e., It is not inter-related with other
Assets)

Note 1 : If conditions for Separate Lease component are satisfied then we will
Account for Each Asset Separately.
Note 2 : If conditions are not satisfied then we will Account for all Asset as a Single
Lease Component.

Issue II : Non Lease Components *V.V.Imp

As per the Provisions of Ind AS 116, It may be possible that there are some
Non Lease components in the contract in the form of maintenance charges, Adm.
Charges etc. for Leased Assets. We should Separate Non Lease components from
Lease components because both have different Accounting Treatments in the books
Of Parties.

Note : We will discuss Accounting for Non Lease components Later.

Allocation of Lease Payment :

As per the Rules, Allocation of Lease Payment over Lease component and Non
Lease component should be made in the Ratio of “ Stand Alone Prices” which would have
been paid if Both components are acquired Separately. In case stand Alone Prices are

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Not available then Estimated maximised values should be used.

Optional Exemption for Lessee

As per the Rules under Ind AS 116, an optional Exemption has been Given to Lessee as
a Practical Expedient as an Accounting Relief that Lessee can Account for Lease &
Non Lease components as a It can also be said that Lessee does not require
Separation of Lease & Non Lease component in a contract.
❖ Lessor cannot avail this Exemption

Important Note :- As per the Ind AS 116, Property Tax, Insurance or any other fixed
Cost which is Associated with Leased Asset should not be
Considered as Non Lease component. It can also be said that
Variable cost can only be considered as a Non Lease component.

Solution of Q.12, Q.13, Q14, Q.15 Discussed in Class

Issue III : Combination of contracts

If there are multi – contracts with the same party then we can combine all the
Assets under multiple contracts as a “Single Lease component” if following
Conditions are satisfied :-

I. All Assets are Given as a Package +

II. Rent of one Asset is dependent on other Asset +
III. All Assets are Inter- related.

Issue IV : Portfolio Approach

(Accounting Relief )

We can combine Leased Assets even if these Assets are not inter – related with each
Other and Individual Asset has its own Benefits only if these Assets are Similar
Assets.

Issue V : Inception of Lease

As per the Provisions of Ind AS 116, Inception of Lease is relevant for

Identification of a Lease in a contract. It will be as follows : -
a) The date of contract between the parties
Or
b) Mutual consent to Principal terms of contract
Whichever is Earlier

Issue VI : Commencement Date

As per the Provisions of Ind AS 116, Accounting for Lease will be commenced
In the books of Parties from commencement date of Lease.

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It is the date when right to Control the use of Asset is transferred to Lessee.

❖ Note :
1. It may include Rent free Period also sometimes Possession of Asset is Given to
Lessee before agreed date to make ready the Leased Asset without any Rent.
In the Given case, Actual Possession date is commencement date even if Rent is
Not payable during such Period.
2. It can also be said that Payment date does not affect commencement date.

Issue VII : Lease term *Imp

(Lease Term means Lease Period = Accounting Period)

Calculation of Lease Term *

Non Cancellable Period xxxx

Add : If there is an option for Extension of Non cancellable
Period & Extension is certain from Lessee point of View xxxx
Add : Termination Period if It is certain that Lessee will
Not Exercise it xxxx
xxxx

❖ Lease term shall not include cancellable Period

Any contract can be considered as cancellable if :-

i. Lessor or Lessee can cancel the contract any time without other Party
Permission
+
ii. Penalty is Nominal

Solution of Q.16 Discussed in Class

Issue VIII : Re-Assessment of Lease Term

As per the Provisions, Lessee should Assess Lease term at the end of each year.
The following factor may affect Lease Term :-

I. If Lessee has made major improvements in Leasehold Property

II. If Lessee has carried major modifications in the Asset
III. If Lessee has taken a business of related Assets
IV. If Lessee has sub –Leased the Leased Asset for beyond its non cancellable
Period
❖ Lessor will change its Lease term according to Lessee

Solution of Q.17, Q.18 Discussed in Class

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*Part 4*

Issue IX : Lease Payments *Imp

Lease Payment

Part I : For Lessee Part II : For Lessor

It is Calculated for Lessee to It is calculated for Lessor to

Record Asset & Liability record Investments in Lease

ROU Lessor

Part I : Lease Payment for Lessee

Lease payment : - As per the Provisions, Lease Payment is the Amount which is paid
Or Expected to be Paid by Lessee to Lessor during the Lease Period
For use of underlying Asset. It should include : -

I. Fixed Rental (including in Substance fixed Amount) Less Lease Incentive

II. Variable Rental which depends on CPI/ Rate
III. Payment for option of Purchase
IV. Termination Penalties
V. Residual Lease Guarantee

A. Fixed Rentals + Substance fixed – Incentive

a) Fixed Rental :-

It is the fixed Payment which is made by Lessee to Lessor as per contract.

It may remain fixed during the agreed Period or can Increase over the time by fixed
Amount.

b) In Substance it is fixed :-

If increase in rental is mentioned on the basis of variable factors, but in

Substance it is fixed then such increase shall also be considered in fixed rentals.
➢ If there are multiple variables in the contract then we should go for that
Variable which seems to be real.
➢ If there are more than one Realastic variable then we should go for the variable
With minimum Increase.

c) Incentives : -

If any Expense/ Cost to Lessee (i.e., transportation charges, transit Insurance

etc.) is reimbursed by Lessor to Lessee then It should be deducted while computing
Lease Payments on Commencement date.

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Non Lease Components : If Lessee does not avail optional Exemption on Practical
Expedient on Not to Separate Non Lease Components then
“fixed Rentals should not include Payment for Non Lease
Components”.

Solution of Q.19 , Q.20, Q.21 , Q.22

B. Variable Lease Payments

If Lease Payments are based on consumer Price Index/ Market Rental Rate/ Rate of
Interest then the following Points should be considered :

1. On commencement date, Lease Payments should be computed on Prevailing Rates

2. If related factors changes in future then Lease payments shall be re-measured
in relevant Period.

Important Exception

If Lease Payment increases in future due to other factors (i.e., % Share in sales, %
in Profits, Qty Produced etc.) then Such change will be Transferred to P&L A/c in the
Same Period and It will not Affect Lease Payment.

Solution of Q.23, Q25

C. Purchase Option

If it is Certain that Lessee will Purchase the Asset at the end of Lease Period at
Given Price under Purchase option then It will be included in Lease payment on
Commencement date.

D. Termination Penalties

If it is certain that Lessee will pay penalties due to Termination of Lease then It
Will also be included in Lease Payment.

E. Residual Lease Guarantees *Imp

Residual Lease Guarantee is an Expected Amount which is payable by Lessee at the end
Of Lease Period to Lessor due to decrease in value of Asset. It should also be
Considered as Lease Payment on commencement date as follows :-

RLG = Guaranteed value at the end of – Estimated value of Leased Asset at the end
Lease period of Lease period

If Estimated value is more than Guaranteed value then there is no RLG

And It will not be considered in Lease Payment

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*Part 5*

Solution of Q.26 Discussed in Class

Part II : Lease Payment in the books of Lessor

There is only single difference in the books of Lessor in compare to Lessee Books
While computing Lease Payment Which is in relation to residual Lease Guarantee.

Lessor will consider Guaranteed residual Value at full Amount which is Given
By Lessee to Lessor at commencement of Lease.
❖ Lessee consider RLG to the extent of Estimated payment to be made in Cash.

Explanation on Un-Guaranteed Residual Value

It is Relevant for Lessor only

(It should not be included in Lease Payment)

UGRV = If Lessor Estimates Residual value of Leased Asset at higher Amount than
Amount Guaranteed by Lessee then Diff. will be additional inflow for the
Lessor as “UGRV”. It Prevails only if Lessor Estimation becomes higher than
GRV, but in vice versa situation , Lessor will consider only GRV.

UGRV = Lessor Estimated Residual value – Lessee Guarantees Residual Value

Diff. should be UGRV if it becomes ‘+’

Concept 7 : Discount Rate

As per Ind AS 116, Discount Rate should be identified for identifying

Financing component in the Lease contract. The following Points should be considered
While computing Discount Rate : -

1. It should be computed from Lessor point of View.

2. It should be IRR (Internal / Implicit Rate of Return)
3. It should be computed on the basis of same formula as we use in SFM.

Example :
Compute IRR
Lease Period = 4 Y
Lease Rentals = 5L p.a Lease Payment = 21 L
GRV = 1 L
Lessor Estimated RV = 3L UGRV = 3 L – 1 L = 2 L

Solution :
a) NPV at 10%
Lease Rentals ( 5L x 3.17) 15,85,000
GRV (1L x .683) 68,300

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UGRV (2L x .683) 136600

PV of Inflow 17,89,900
PV of Outflow (16,00,000)
NPV 189,900

b) NPV at 15%
Lease Rental ( 5 L x 2.855) 14,27,500
GRV (1 L x .572) 57,200
UGRV (2 L x .572) 114,400
15,99,100
(16,00,000)
(900)

IRR = Lower rate + LRNPV x Diff

LRNPV – HRNPV
= 10% + 189900 x5
189900 – (-900)
= 14.98%

Meaning of IRR : It is the rate at which present value of Inflow will be equal to
Present value of Outflow.

At IRR = Lease Payment + UGRV = Fair value of Asset on commencement date

Lessor Inflow Lessor outflow

“ Lessee Incremental Borrowing Rate “

If IRR does not provide real position for Interest in books then we replace IRR with
Lessee Incremental Borrowing Rate. It is the rate at which Loan is available to
Lessee in open market for same Period.

Concept 8 : Accounting in the books of Lessee

Step I : Initial Recognition

As per the provisions, Lessee will recognise An Asset & a Liability at the time of
Initial Recognition of Lease in its books on commencement date. The following
Journal Entry will be passed : -

ROU Asset a/c Dr xxxx Unit I

To Lessor a/c xxxx Unit II
(Being initial Recognition made)

❖ The Recognition of Asset & Liab is Exempted to Lessee for Low value Assets &
Short term Leases.

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Step II : Recognition of Liab. to Lessor

Recognition of Liab to Lessor = Present value of Lease Payments at IRR/IBR

Unit I : Recognition of ROU Asset

As per the Provisions of Ind AS 116, ROU Asset should include the following Amounts : -

Statement Showing Calculation of cost of ROU Asset

i. Present Value of Lease Payment xxxx

+
ii. Initial Direct cost if incurred by Lessee xxxx
(i.e., Commission, Legal fees, Stamp duty etc.)
+
iii. Lease Rentals if paid by Lessee to Lessor before xxxx
Commencement date
(i.e., Rentals during the period in which Asset was
Getting Ready )
+
iv. Provision for Dismantling/ Restoration/ xxxx
Decommissioning Cost
(Refer Ind AS 16)
ROU xxxx

Correct Entry : ROU Asset a/c Dr xxxx (i + ii + iii + iv)

To Lessor A/c xxxx (i)
To Bank A/c xxxx (ii + iii)
To Provision xxxx (iv)
(Being initial Recognition made)

Solution of Q.27

Statement Showing Calculation of Lease Liab.

Year Rental PVF @ 5% Present Value

1. (Advance) 100,000 1 100,000
2. (Advance) 102,000 .952 97104
3. (Advance) 104,040 .907 94364
4. (Advance) 106,121 .864 91689
5. (Advance) 108,243 .823 89084
6. (Advance) 110,408 .784 86560
7. (Advance) 112,616 .746 84012
8. (Advance) 114,869 .711 81672
9. (Advance) 117,166 .677 79321
10. (Advance) 119509 .645 77083
880889

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Entry : ROU Asset a/c Dr 880889

To Liab. 880889
(Being initial recognition made)

Solution of Q. 28

Calculation of ROU Asset

Present Value of Lease Payment 8,50,000

Initial Direct Cost 1000
Rentals before commencement date 10,000
Incentives (50,000)
ROU Asset 811,000

Entry : Bank a/c Dr 50,000

ROU Asset a/c Dr 811,000
To Bank 11,000
To Lessor 850,000
(Being initial Recognition made)

Step II : Subsequent Recognition

Part I : ROU Asset

After initial Recognition, ROU Asset will be Carried in Books under Cost model or
Revaluation model as defined in Ind AS 16. The following Additional points should be
Considered : -

1. The Lessee shall calculate Depreciation on Leased Asset at the end of each year.
2. The Depreciation will be based on full life of Asset or Useful Life during Lease
Period.
Note 1 : If it is certain that Lessee will buy Asset at the end of Lease period then
Full Life should be considered for Dep. Otherwise Lease Period is best option.
Note 2 : If question remains silent then Lease period shall be used.
3. IF method of Depreciation is not Specified then we will prefer “SLM”.

Part II : Liab. To Lessor

As per Ind AS 116, Liab to Lessor will be dealt as a Normal Liability. We will Accrue
Interest and will record Payment as follows : -

Statement Showing Liab. To Lessor (After Initial Recog.)

Year Opening Balance Interest Payment Closing Balance

In Liab.
(I) (II) (III) (IV) (V)
(III = II x IRR) (II + III –IV)

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Entries :

a) Interest a/c Dr xxxx

To Lessor A/c xxxx
(Being Interest Accrued)
b) Lessor a/c Dr xxxx
To Bank xxxx
(Being Payment made as per contract)
c) Dep. a/c Dr xxxx
To ROU xxxx
(Being Dep Charged)
d) P&L a/c Dr xxxx
To Interest xxxx
To Dep xxxx
(Being Expense written off)

*Part 6*

Solution of Q.30

Step I : Initial Recognition

Calculation of P.V of Lease Payments :-

Y1 20000 .893 17860
Y2 30000 .797 23910
Y3 50000 .712 35600
77370
Entry : ROU Asset a/c Dr 77370
To Lessor Liab. A/c 77370
(Being initial Recognition made)

Step II : Subsequent Recognition

a) Accounting for ROU :

Year Opening Balance Deprn (SLM) Closing Balance

1 77370 25790 51580
2 51580 25790 25790
3 25790 25790 -

b) Accounting for Lessor Liab. : -

12%
Years Opening Interest Payments Closing
Balance Balance
(I) (II) (III) (IV) (V)
(II + III – IV)
1 77370 9284 (20000) 66654
2 66654 7998 (30000) 44652

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3 44652 5348 (50000) -

(Bal fig)

Journal Entries : Ist Year

1) ROU Asset a/c Dr 77370

To Lessor 77370
(Being Initial Recognition made)
2) Interest a/c Dr 9284
To Lessor A/c 9284
(Being Interest Accrued)
3) Lessor a/c Dr 20000
To Bank 20000
(Being Lease payment made)
4) Depreciation on ROU Asset a/c Dr 25790
To ROU Asset 25790
(Being Depreciation Charged)
5) P&L a/c Dr 35074
To Interest 9284
To Depreciation 25790
(Being Exp. written off)

Notes to A/c’s

a) ROU Asset Initial I II III

At the end of year 77370 51580 25790 -
b) Liability
At the end of Year 77370 66654 44652 -
c) Expenses for each year
Dep. - 25790 - -
Int. - 9284 - -
35074

Solution of Q.31 *Imp

Step I : Initial Recognition

Calculation of P.V of Lease Payments : -

Years Lease Payments PVF @ 90.4% Present Value

1. 500000 1 500000
2. 315000 * .917 288855
3. 530450 .841 446108
4. 546364 .771 421247
5. 562754 .707 397867
6. 579637 .649 376184
7. 597026 .595 355230
8. 614937 .546 335756
9. 633385 .500 316693

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10. 652387 .459 299446

(I) 3737386
Add : PV of option (II) Purchase price at the end
Of 1oth Year (30,00,000 x .421) 1263000
PV of LP 5000386
Or 50,00,000 (Round off)
[*(500000 + 3%) – 200000]

Step II : Subsequent Recognition

I. Accounting for ROU Asset :

We will calculate Dep. On the basis of Economic Life (40Y) which is full Life for
Leased Asset because It is certain that Lessee will purchase the Asset at the end of
Lease Period.

Year Opening Balance Dep. (40Y) Closing Balance

1. 5000000 125000 4875000
2. 4875000 125000 4750000
3. 4750000 125000 4625000
4.
5.
6.
7. H.W
8.
9.
10.

II. Accounting for Lease Liab : -

Year Opening Int @ 9.04% Payment Closing Balance

Balance
1. 50,00,000 - 500000 45,00,000
2. 45,00,000 406800 315000 45,91,800
3. 45,91,800 415099 530450 44.76,449
4. Beginning 44.76,449 404671 546364 43,34,756
5. 43,34,756 391862 562754 41,63,864
6. 41,63864 376413 579637 39,60,640
7. 39,60,640 358042 597026 37,21,656
8. 37,21,656 336438 614937 34,43,157
9. 34,43,157 311261 633385 31,21,033
10. 31,21,033 282141 652387 27,50,787
10th End 27,50,787 249213 30,00,000 NIL
(Bal Fig)

Step III : Re- measurement of Lease Liab. *V.V.Imp

As per the provisions of Ind AS 116, Re-measurement of Lease Liab. May take place

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Due to change in terms of Lease Payment. The following points may be considered in
Relation to Re-measurement of Lease Liability : -

1. There may be four main reasons for change in Lease Liab. Which are as follows : -
➢ Change in Lease term
(It may be extended due to Renewal option or It may be due to Early termination)
➢ Change in Decision of Purchase option
➢ Change in Guarantee Residual value
➢ Change in Rentals due to CPI/IR

2. If re-measurement takes place due to change in Lease Term or Purchase option

Then these Reasons shall have “Significant impact” on Lease Payments due to
Which Discount Rate will be revised on Such date.

3. If Re-measurement in Liab takes place due to change in GRV or CPI then these
Changes shall not have significant Impact on Lease Payments due to which we can
Use original Discount rate without any Change.

4. Re-measurement :-

Present value of Lease Payments as per New terms on re-measurement date xxxx
Carrying amount of Lease Liab in the books as per original Terms on
Re-measurement Date (xxxx)
B/S value Difference + xxxx

It will be transferred to ROU Asset

1) If Liab. Increases : ROU Asset a/c Dr xxxx

To Lessor xxxx
2) If Liab. Decreases : Lessor a/c Dr xxxx
To ROU Asset xxxx

Solution of Q.32

Step I : Initial recognition

P.V of Lease Payments without Renewal option :

Years Rentals PVF @ 5% Present value
1. 100000 1 100000
2. 100000 .952 95200
3. 100000 .907 90700
4. 100000 .864 86400
5. 100000 .823 82300
PV of LP 454600

Entry : ROU Asset a/c Dr 454600

To Lessor 454600
(Being initial Recognition made)

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Step II : Subsequent Recognition

a) ROU Asset :

Years Opening Balance Dep. 5y Closing Balance

1. 454600 90920 363680
2. 363680 90920 272760
3. 272760 90920 181840

b) Liab to Lessor :

Year Opening Balance Interest 5% Payment Closing Balance

1. 454600 - (100000) 354600
2. 354600 17730 (100000) 272330
3. 272330 13617 (100000) 185947

Step III : Re-Measurement

A. Present Value of New Lease payment on Re-measurement date : -

Year L.P PVF @ 6% Present Value

Y1 *104000 1 104000
Y2 104000 .943 98072
Y3 114400 .890 101816
Y4 114400 .840 96096
Y5 114400 .792 90605
490589
*100000 + 4% = 104000
*110000 + 4% = 114400

B. Diff. between Revised Liab & Original Liab :-

Revised Liab. 490589

Original Carrying Amount (185947)
Increase * 304642

❖ It will be capitalised to ROU as follows :

ROU Asset a/c Dr 304642
To Lessor Liab 304642
(Being Re-measurement of Liab made)

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Step IV : Modifications in the Contract

Modifications

Unit I : Unit II :
It Should be treated as a It should be treated as modification
Separate contract. To existing Contract

Re-Measurement Vs Modifications

If Changes in Lease Liability take place due to Pre-existing conditions in the

Contract then It will be considered as re-Measurement but changes in Lease Liability
Due to New Terms which were not Earlier in the contract then It will be considered
as modification.

As per Ind AS 116, Lease Modification may be due to following Reasons : -

1. Change in Consideration
2. Change in Scope of Lease Area +
Area -
3. Change in Lease period Extension
Termination

Unit I : Modifications as a Separate Contract * Imp

We can consider modification as a Separate contract only if the following 2

Conditions are satisfied : -

1) Modification should be in relation to increase in Scope of Lease contract

+
2) Lease Payment for such increase should be at its stand Alone Price

In the Given case, we will not change Lease Liab. Of original Existing contract but we
Will recognise such increase in scope of Lease as a new contract.

Solution of Q.33 Discussed in Class

Unit II : If modification is considered as a change in Existing contract

Cases

I II
If Increase in Scope of Lease has If Scope of Lease is Decreased in
Been made for Lease Term/Area the form of Lease Term/Area
OR
Changes in consideration

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Case I : If Scope of Lease is increased or consideration is changed

Step I : Calculate Present value of Lease Liab. As per modified terms on modification
Date
Step II : Calculate book value of Lease Liab. Under Original contract on modification
Date
Step III : Step I –Step II = It will be transferred to ROU Asset
(+-)

❖ Under modified Terms, Discount factor will always be revised.

New rate on Modification date

*Part 7*

Solution of Q.34

Step I : Calculation of Lease Liab as per Revised Terms on modification Date

Period Lease Payment Annuity factor @7% P.V of Revised Lease

for 8 months Liab.
7-14 Y 100,000 P.a. 5.971 597100

Step II : Calculation of Carrying Amount of Lease Liability as per Original

contract On modification date

A. Initial Recognition :
1-10Y 100000 P.a 7.360 736,000

Journal : ROU Asset a/c Dr 736000

To Lease Liab. 736000
(Being Asset recognised)

B. Subsequent Recognition :-

a) Lease Liab :

Period Opening Balance Interest (6%) Payment Closing Balance

1 736000 44160 (100000) 680160
2 680160 40810 (100000) 620970
3 620970 37258 (100000) 558228
4 558228 33494 (100000) 491722
5 491722 29503 (100000) 421225
6 421225 25274 (100000) 346499
7 346499

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b) ROU Asset :
Initial Recognition 736000
Dep. For 6 years (736000/10 x 6) (441600)
Book Value (7th OB) 294400

Step III : Modification Impact on Lease Liab.

Modified Liab as per Revised Terms 597100

Carrying Amount as per original Terms (346499)
Increase in Liab 250601

Entry : ROU Asset a/c Dr 250601

To Lease Liab 250601
(Being Lease Liab. Revised)

Revised ROU Asset = 294400 + 250601 = 545001

It will be depreciated over 8 years during

Revised Lease period

Solution of Q.36

Step I : Calculation of modified Lease Liab.

Period Lease Payment Annuity @7% for 5 years Present val. of Lease Liab

6-10 95000 P.a. 4.100 389500

Step II : Calculation of Carrying Amount of Lease Liab

(In the beginning of 6th Year)

A. Initial Recognition

1-10Y 100000 P.a. 7.36 @ 6% for 10 year 736000

B. Carrying Amount :

Period Opening Balance Interest Payment Closing Balance

1 736000 ✓ ✓ ✓
2
3 H.W
4
5
6 412225

Step III : Modification Impact on values

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Modified Lease Liab 389500

Carrying Amount of Liab (421225)
Reduction in Lease Liab. (31725)

Entry : Lease Liab a/c Dr 31725

To ROU Asset 31725
(Being Liab. Reduced)

Case II : Accounting for decrease in scope of Lease *Imp

Step I : Calculate carrying Amount of Original Contract on Modification Date

Liab & ROU

Step II : Calculate Profit/Loss on Proportionate Surrendered/ Reduced Portion
Under decrease in scope of Contract
Step III : Calculate Increase/ Decrease in Lease Liability due to change in Terms of
Continuing Portion of Lease Contract

Note : In case, Increase & Decrease are given in a contract together then we will
Adjust decrease in Scope first then we will consider Increase in Scope.

Solution of Q.35

Step I : Calculation of carrying Amount of Lease Liab. & ROU Asset

( In the beginning of 6th Y)

A. Initial Recognition :

1 – 10Y 50,000 P.a. 7.36 @ 6% For 10 years 368000

B. Subsequent Recognition :
Liab.
Period Opening Balance Interest (6%) Payment Closing Balance
1 368000 22080 (50000) 340080
2 340080 20405 (50000) 310485
3 310485 18629 (50000) 279114
4 279114 16747 (50000) 245861
5 245861 14752 (50000) 210613
6 210613

Asset 368000 – (36800/10 x5) = 184000

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Step II : Accounting for Decrease in Scope of Lease

Lease Liab ROU Asset

Carrying Amount 210613 Carrying Amount 184000

Surrendered Portion (105306) Surrendered Portion (92000)
(210613/5000 x 2500) (184000/5000 x 2500)
Continuing Portion of Lease 105307 Continuing Portion 92000

Entry : Lease Liab a/c Dr 105306

To Asset 92000
To P&L (Bal) 13307
(Being Cancellation of contract made for 2500 aq. Meters)

Step III : Modification impact on Lease Liab

Modified Lease Liab. (30,000 x 4.329) 129870

Carrying Amount for Cont. Portion (105307)
Increased in Liab. 24563

ROU Asset a/c Dr 24563

To Lease Liab. 24563
(Being ROU & Liab Increased due modification for continuing Portion)

Solution of Q.37 V.V.Imp

I. Initial Recognition
(Original Lease)

P>V of Lease Liability (100000 x 7.36) @ 6% for 10 years 736000

Journal : ROU Asset a/c Dr 736000

To Lease Liab. 736000
(Being initial Recognition made)

II. Statement Showing Balance in Lease Liability

Period Opening Balance Interest @ 6% Payment Closing Balance

1 736000 44160 (100000) 680160
2 680160 40810 (100000) 620970
3 620970 37258 (100000) 558228
4 558228 33494 (100000) 491722
5 491722 29503 (100000) 421225
6 421225*

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III. Calculation of Balance in ROU Asset in the beginning of 6th Year

Initial Recognition 736000

Depreciation (736000/10y x 5y) (368000)
Book Value in the beginning of 6th year 368000

IV. Modification in Original Contract

a) Decrease in Leased Period (from 10Years to 8 Years)

i. P.V of Lease Liab for Original Contract

6th 100000 .943 94300

7th 100000 .890 89000
8th 100000 .840 84000
267300
Kept
ii. Changes/ Decrease in Original Liab. = 421225 – 267300
= 153925
To be Cancelled

iii. ROU to be cancelled = 368000 – (368000/5 x 3)

= 368000 – 220800
= 147200 To be cancelled

Entry : Lease Liab. a/c Dr 153925

To ROU Asset 147200
To Gain (Bal) 6725
(Being Scope of Lease reduced from 10y to 8y)

V. Re-Measurement of Original remaining contract

P.V of Lease Liab @ 7% for 3 years 262400

100000 x (.935 + .873 + .816)
Present Lease Liab @ 6% (267300)
Reversal of Liab 4900

Lease Liab a/c Dr 4900

To ROU Assets 4900

Revised Liab = 267300 – 4900 = 262400

ROU Revised = 220800 – 4900 = 215900

VI. Additional Liab for 1500 Sq. mtr

7%
P.V of Additional Liab = 50000 x 2.624 = 131200
ROU A/c Dr 131200
To Lease Liab. 131200
( Being Additional Liab booked)

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Revised ROU = 215900 + 131200 = 347100

Revised Liab = 262400 + 131200 = 393600

Concept 9 : Accounting in the books of Lessor

As per the Provisions of Ind AS 116, Lessor shall classify the Lease contract
Into one of following contracts before making any Recognition in the books : -
A. Operating Lease (Rental Model)
B. Finance Lease (Interest Model)

Meaning of Operating Lease : If any Lease cannot be Specified as a Finance Lease

then It should be Classified as an Operating Lease.

Meaning of Finance Lease : As per the rules, Finance Lease is a contract whereby
Lessor Transfer all risks & rewards to Lessee incidental to Ownership. The following
Indications can be considered (At Least one Indication) to Classify an Agreement
Under Finance Lease :-
More than 50%
I. If Lease Period covers major part of Useful Life of Leased Asset
OR
II. If there is an option with Lessee to Purchase the Leased Asset at the end of
Leased Period
OR
III. If Lessee is bound to acquire the Leased Asset at the end of Lease Perio
OR
IV. If Present value of Lease Payment becomes equal to or higher than fair
Value of asset
OR
V. If Nature of Asset is relevant for Lessee only

Additional Inicators those may lead to Finance Lease : -

➢ If Lease is Non- cancellable

(Note : Lessee will bear all Loses due to Cancellation of Lease)
➢ If Lessee can Extend the Lease Period at Lower Rates
➢ If Lessee has option to Purchase below the market Rates

*Part 8*

Unit I : Accounting for Finance Lease

Step I : Initial Recognition

As per the Provisions of Ind AS 116, Lessor will Derecognise “Asset” which is Given on
Lease, but will recognise “Lease Receivables” on Commencement date.

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Journal Entry

Lease Receivables a/c Dr xxxx

To Asset xxxx
(Being initial Recognition made) Carrying Amount
Net Investments

❖ Diff. in Carrying Amount & N.I. will be considered as Profit or Loss on Transfer
Of Asset & It will be transferred to P&L A/c.

❖ Meaning of N.I. Present value of *Gross Investment at IRR

❖ Meaning of G.I “Lease Payment + UGRV”

Gross Inflow

❖ Note : If we discount G.I at IRR then N.I will be equal to fair Value of Asset

Step II : Subsequent Recognition

After Initial Recognition, the following Entries shall be recorded each year :-
a) Lease Receivables a/c Dr xxxx
To Interest Income xxxx
(Being Int. made due0
b) Bank a/c Dr xxxx
To Lease Receivables xxxx
(Being Collection made)
c) Interest Income a/c Dr xxxx
To P&L xxxx
(Being Interest transferred to P&L as an Income)

Solution of Q.38

Step I : Initial Recognition

Calculation of Net Investment

Lease P.V of Lease Rentals (15,000 x 6.124) 91860

Payment P.V of GRV (30000 x .383) 11490
+
UGRV P.V of UGRV (20000 x .383) 7660
G.I. N.I 111010
N.I
Journal : Lease Receivables a/c Dr 111,000 (Round off)
To Asset 100,000 Carrying Amount
To Gain on transfer 11,000
(Being initial Recognition made)

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Step II : Subsequent Recognition

a) Table Showing Finance Income

Period Opening Balance Interest Collection Closing Balance

(10.078%)
1 111000 11187 (15000) 107187
2 107187 10802 (15000) 102989
3 102989 10379 (15000) 98368
4 98368 9914 (15000) 93282
5 93282 9401 (15000) 87683
6 87683 8837 (15000) 81520
7 81520 8216 (15000) 74736
8 74736 7532 (15000) 67268
9 67268 6779 (15000) 59047
10 59047 5951 (15000) 49998

GRV + UGRV

At the end of Lease Term

If Lessee returns the Asset If Lessee retains the Asset

Asset a/c Dr 49998 Cash/Bank a/c Dr 49998

To Receivable 49998 To Receivable 49998

Step III : Modifications

As per Ind AS 116, Lessor Recognises Net Investments as Lease Receivables for Lease
Contracts under Finance Lease. In case any modification takes Place in Lease
Contract then It will be treated as modification in financial Asset and It will be
Accounted as per Ind AS 109.

Step IV : If Lessor is a manufacturer or Dealer

If Lessor is a manufacturer or dealer then Lessor will calculate Total Profit from
the Transaction under 2 headings as follows :-

Normal Profit = fair value of Inventory - Cost of Inventory

Ind AS 115 N.I /P.V of GI

Outright Revenue

Interest Income = Gross Invest. – N. Investment

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Example :

a) Cost per car : 150000

b) Normal Selling Price : 180000
c) Lease Rentals : 37500 P.a
d) GRV : 22500
e) IRR : 16%
Calculate Profit & Finance Income

Solution :

Step I : Calculation of Normal Profit

Normal Profit = NSP – Cost

= 180000 – 150000 Receivable a/c Dr 180,000
= 30000 To Sales 180,000

Step II : Calculation of F.I

Period Opening Balance Interest (16%) Collection Closing Balance

1 180000 0 37500 142500
2 142500 22800 37500 127800
3 127800 20448 37500 110748
So on

Unit II : Accounting for Operating Lease

Under Operating Lease, Lessor recognises collections from Lessee as

Rental Income in P&L A/c on SLM Basis. If Actual Collection differs from SLM Rent
then Diff. will be recognised as Advance Income/ Outstanding Income.

Example :
Lease Period = 3Y
Lease Rentals = 1y = 60000
2y = 40000
3y = 20000
Pass Journal Entries assuming it as an OL

Solution :

SLM Rent = 60000 + 40000 + 20000 = 40000

3

Ist Year :
i. Bank a/c Dr 60000
To Lease rental 60000
(Being Rental received)

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ii. Lease Rental a/c Dr 60000

To PL 40000
To A. Rent 20000
(Being Income Recog.)

IInd Year
i. Bank a/c Dr 40000
To Lease Rental 40000
ii. Lease Rental a/c Dr 40000
To PL 40000

IIIrd Year
i. Bank a/c Dr 20000
To Lease Rental 20000
ii. Lease Rental a/c Dr 60000
A. Rent a/c Dr 20000
To PL 40000

Modification in OL

If modification is made in OL contract then It will be considered as a new contract

From such date & SLM Rent will be Revised from such date.

*Part 9*

Concept 10 : Sub-Lease Transactions

C Sub-Lessee
A B
A

Lessor Lessee

Sub Lease
Lease Sub-Leases
Head Contract Leased Asset
Lease
Intermediate Lessor/ Sub-Lessor

As per the Provisions of Ind AS 116, Accounting for Sub- Lease contracts
Will be based on Nature of Head Lease. The following 2 cases shall be considered for the
Accounting of Sub-Lease contracts in the books of Original Lessee/ Intermediate
Lessor :-
Cases

If Head Lease is an If Head Lease is Long Term

Exempted Lease/ Operating Lease Lease/ finance Lease

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Treatment in Case I

If Head Lease is an Operating Lease then sub Lease shall also be considered as an
Operating Lease. It means that Rental Income from sub Lease shall be recognised
on SLM Basis over the Lease Period. The original Lessee will pay Rentals in original
Contract, but will collect rentals in Sub Lease contract. We cannot offset the Lease
Rentals under original & Sub Lease contract in Intermediate Lessor bools because
Both the contracts are Separate contracts.

Treatment in Case II

If Head Lease ia a finance Lease then original Lessee/ intermediate Lessor shall
Consider the following points :-

1) First of all, Sub lease contract will be Classified under FL/OL based on facts in
Sub Lease contract.
2) If Sub- Lease contract is classified as an operating Lease then Intermediate
Lessor shall follow “Rentals on SLM” model without derecognising any ROU Asset.
3) If Sub Lease contract is classified as a finance Lease then we will de-recognise
The ROU Asset and will recognise the Net Investments as Follows :

N. Investments /receivable a/c Dr xxxx P&L

To ROU Asset xxxx
(Being Initial Recog. Made)

Solution of Q.9 ,Q.40, Q.41

Concept 11 : Sale & Lease Back Transaction *Imp

Lessee Lessor
Lease Back same Asset to
Mr. A Mr. B

Seller Buyer
Sells an Asset

Under Sale & Lease Back Transactions, we have to Understand Accounting Aspects
in the books of Lessor & Lessee Separately as Follows : -

Unit I : In the books of Lessee

In the books of Seller/ Lessee, the following steps shall be applied while making
Accounting Adjustments for sale & Lease back transactions : -

Step I : First of all, Profit or Loss on Sale of Asset will be computed by seller as
Follow : -
Seller P/L = Selling Price – Carrying Amount

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Step II : Calculate Present Value of Lease Liability as per Lease contract

Lessee

Step III : Calculate carrying Amount which is retained by Lessee in Lease contract in
The form of ROU as follows :

Carrying Amount x P.V of Lease Liab. = C. Amt to be retained

Selling Price

Step IV : Carrying Amount to = Carrying Amount - Step III

be Transferred

Step V : Profit/Loss to be Recognised = Total Profit/Loss x Step IV

Carrying Amount

Example :
i. Carrying Amount = 10,00,000
ii. Selling Price = 15,00,000
iii. P.V of Liab. = 850,000
Calculate Profit to be Recognised on Sale & Lease back Transaction.

Solution :

Step I : Calculation of Profit on Sale of Asset

Profit = 15,00,000 – 10,00,000 = 500,000

(SP) (CA)

Step II : Calculation of P.V of Liab.

Given in Question

Step III : Carrying Amount of Asset to be Retained

Carrying Amount to be Retained = 10,00,000 x 850,000 = 566,667

15,00,000
Step IV
Carrying Amount to be Transferred = 10,00,000 – 566,667 = 433,333

Step V : Profit to be Recognised

Profit = Total Profit x C. Amount transferred

Carrying Amount
= 500,000 x 433,333 = 216,667
10,00,000

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Journal

Bank a/c Dr 15,00,000 (SP) 2066667

ROU Asset a/c Dr 566,667 (CA. Retained)
To Asset 10,00,000 (C. A)
To Lease Liab. 850,000 (P.V) 2066667
To Profit 216,667 (Transferred)

Note : It means that ROU will be recognised at Original Carrying Amount instead of
P.V of Lease Liab under sale & Lease Back Transaction

Exceptional Cases

Case I : If Selling Price Exceeds fair Value

Case II : If selling Price becomes Lower than fair value

Case I : If selling Price Exceeds fair value

Step I : In the Given Case, Selling Price will be Reduced to fair value of Asset &
Calculation of Profit/Loss on Sale of Asset will be computed as follows :

Profit/Loss = fair value of Asset – Carrying Amount of Asset

(Note : Difference in SP & FV will be recognised as a Separate Liab.)

Step II : Calculate P.V of Lease Liab. As per Lease contract and Split it in 2 Parts
as follows :

P.V of Lease Liab

Additional Obligation (Step I) Normal Lease Payments

Additional Obligation x Lease Normal Lease Payment x Lease

P.V of Lease Liab Rental P.V of Liab Rental

Step III : Calculate carrying Amount of Asset which is to be retained & transferred
as follows : -
i. Retained = Carrying Amount x P.V of Normal Lease Payments
Fair value
ii. Returned = Total Carrying Amount – Retained Carrying Amount

Step IV : Profit to be Recognised = Profit/Loss x Returned C. Amount

Carrying Amount

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Solution of Q.42

Step I : Profit/Loss on sale of Asset

Profit = Fair Value of Sold Asset - Carrying Amount

= 27,00,000 - 15,00,000
= 12,00,000
( Note : Advance Liab will be recognised at 300000 for diff. in selling Price & fair value)

Step II : Calculation of P.V of Lease Liab.

P.V of Liab = 200,000 x 7.469 = 14,94,000

(Round off)

Advance Liab. ROU Asset

300,000 11,94,000

Step III : Carrying Amount to be transferred or Retained

i. Retained = 1500000 x 1194000 = 663333

2700000
ii. Transferred = 1500000 – 663333 = 836667
iii. Profit to be Recog. = 1200000 x 836667
1500000
= 669334

Journal :

Bank a/c Dr 30,00,000 36,63,333

ROU a/c Dr 663,333
To Adv. Liab 300,000
To Lease Liab. 11,94,000 36,63,333
To Asset 15,00,000
To P&L 669,333

*Part 10*

Case II : If Selling Price becomes Less than fair value

Step I : Calculate Profit/Loss on sale of Asset as follows : -

Profit/Loss = * fair value of sold Asset – carrying Amount of sold Asset

We have increased selling Price

❖ Diff. between fair value & selling price will be considered as Pre-payment of Lease
Liab.

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Step II : Calculate P.V of Lease Liability and increase it by adding prepayment of

Lease liability.

Step III : Asset Retained = Carrying Amount x P.V of Liab

Fair value
Asset transferred = C. Amount – Asset retained

Step IV :Profit/Loss to be Recognised = P/L x Asset transferred

C Amount

Solution of Q.42

Assumption : If S.P. is 25L

Step I : Profit/Loss on sale

P/L = Fair value – carrying Amount Prepaid Balance

= 2700000 – 1500000 = 27L - 25L = 2L
= 12,00,000

Step II : P.V of Lease Liab.

P.V of Lease Liab. (Refer Previous solution) 14,94,000

Prepayments 200,000
16,94,000

Step III : Asset Retained & Transferred

i. Asset Retained = 1500000 x 1694000 = 941111

2700000
ii. Asset Transferred = 1500000 – 941111 = 558889

Profit to be recognised = 1200000 x 558889 = 447111

1500000

Journal

Bank a/c Dr 25,00,000

ROU Asset a/c Dr 941,111 36,41,111
Prepayments a/c Dr 200,000
To Asset 15,00,000
To L. Liab 16,94,000 36,41,111
To PL (profit) 447,111
(Being Initial Recog. Made for Sale & Lease Back Transaction)

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Unit II : In the books of Lessor

Step I : In the books of Buyer/Lessor, Initial Recognition for Purchase of Asset will
be made as per Ind AS 16 : PPE at fair value.
(Diff. between fair value & Payment will be Adjusted o/s or Advance)

Step II : After Initial Recognition, Lease transaction will be recognised as per Ind
AS 116

Q.42 : SP =30L Q.42 : SP = 25L

Asset a/c Dr 27 Asset a/c Dr 27

Advances a/c Dr 3 (Bal fig) To Bank 25
To Bank 30 To o/s 2
(Being Initial recognition) (Being Initial Recognition made)

Concept 12 : Transitional Provisions *V.V.Imp

If Lessor & lessee already have a Lease contract in their books under Ind AS 17 on
the date of Application of Ind AS 116 then we have to adjust the balances from
Ind AS 17 to Ind AS 116 under transitional Provisions.

Unit I : Transition in the books of Lessee

Under Ind AS 17, there may be 2 type of Leases with the Lessee as follows :
i. Operating Lease
ii. Finance Lease

Part A : Operating Lease

Transition

Lessee has an operating Lease under

Ind AS 17

If Such Lease is an Exempted If Such Lease is not an Exempted

Lease under Ind AS 116 Lease under Ind AS 116

No transition is required Transition is Required

Full Retrospective Modified Retrospective

Approach Approach

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Concept A : Full Retrospective Approach *V.V.Imp

Under this Approach, we Calculate ROU & Liability at the beginning of Preceding year
Assuming it Ind AS 116 had been applying Since from the very beginning of contract.
It means that we adjust position of Lease contract in B/S in Current year
as well as in comparative statements as per Ind AS 116.

Solution of Q.43

a) Initial & Subsequent Recognition if 116 is Applied under full Retro. Approach

i. P.V of Lease Liab : 200,000 x 2.402 = 480400

ii. Lease Liab : Subsequent Recognition
Period Opening Balance Interest Payment Closing Balance
2017-18 480400 57648 (200000) 338048
2018-19 338048 40566 (200000) 178614
2019-20 178614 21386 (200000) NIL
(Bal)

iii. ROU : Subsequent recognition

Period Opening Balance Dep (3Y) Closing Balance
2017-18 480400 160133 320267
2018-19 320267 160133 160134
2019-20 160134 160134 -

Journal :

1.4.2018 : ROU a/c Dr 320267

Retained Earning a/c Dr 17781 (Bal)
To Liab. 338048
(Being Transition made from Ind AS 17 to Ind AS 116)

31.3.2019 : Interest a/c Dr 40566

To Liability 40566
(Being Interest made due on Lease Liab.)
Depreciation a/c Dr 160133
To ROU Asset 160133
(Being dep. Charged)
Liab. a/c Dr 200,000
To Bank 200,000
(Being Lease Payment made)

31.3.20 : Interest a/c Dr 21386

To Liab. 21386
Dep a/c Dr 160134
To ROU 160134
Liab. a/c Dr 200000
To Bank 200000

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Concept B Modified Approach

Alternative I : Under this Approach, we will not adjust comparative Statements,

but we will discount the Lease Liability which is Payable after
1.4.2019 only. The Lessee will recognise ROU & Lease liability at
Discounted value as Specified in above.

Solution of Q.43

a) Calculation of P.V of Liab. As on 1.4.2019

P.V of Lease Payment after (200000 x .909) = 181800

1.4.2019 : ROU a/c Dr 181800

To Lease Liab 181800
(Being initial Recog. Made)

31.3.20 : Interest a/c Dr 18180 (181800 x 10%)

To Liab 18180
Dep. a/c Dr 181800
To ROU 181800
Liab. a/c Dr 200000
To Bank 200000

Alternative II : under this Approach, the following Points should be considered for
Transaction from Ind AS 17 to Ind AS 116 : -

1) The Calculation of Lease Liab. Will be made as in Alternative I for Payments after
1.4.2019.
2) The Calculation of ROU on transaction date can be made by discounting Rate on
Transition date assuming that It would have been there in Normal situation.

i. P.V of Lease Liab. = 200000 x .909 = 181800

ii. ROU = (200000 x 2.487) = 497400 – (497400/3 x 2)
= 165800
10%

1.4.19 : ROU Asset a/c Dr 165800

R.E a/c Dr 16000 (bal)
To Lease Liab. 181800
(Being Transition made)
31.3.20 : Interest a/c Dr 18180
To Lease Liab 18180
Lease Liab. a/c Dr 200000
To Bank 200000
Dep. a/c Dr 165800
To ROU 165800

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Part B : If Lessee has finance Lease under Ind AS 17

There will be no transition for finance Lease. It means that carrying amount
Of Leased Asset and Liab. To Lessor shall be continued from Ind AS 17 to Ind AS 116.

Unit II : Transition in the books of Lessor

All the concepts are same under Ind AS 17 & Ind AS 116 for the books of
Lessor due to which there will be no transition in this case.

*Part 11*

Solution of Q.1 ,Q.2, Q.3, Q.4, Q.5 Discussed in Class

Concept 13 : Presentation & Disclosures in financial Statements

Disclosures

I. Quantative II. Qualtitative

Relevant for students for Relevant Practically for

Exam Purpose Annual Reports

Unit I : Disclosures for Lessee

Part A : Disclosures for Non Exempted Leases

A. Balance sheet :
i. ROU Asset should be disclosed Separately from other Assets
ii. Lease Liab. Should also be Presented as a Separate Liab. From other Liabilities.

B. P & L Statement :
i. Depreciation on ROU Asset should be included in Dep & Amortisation Exp.
ii. Interest Exp. on Lease Liab. Should also be included in finance Cost
iii. Income from Sub- Leasing should be Included in other Income

OL : SLM Rent FL : Int

iv. Profit/ Loss on Sale & Lease back Transactions.

Other Income Other Exp.

v. Variable Lease Payments should also be included in Expense
Do not related with CPI

C. Cash Flow Statements :

i. Payment for Lease Liability including Int. will be shown under financing
Activities.

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ii. Variable Lease Payments should be disclosed in operating Activities

iii. Payment for Non Lease Components Should also be disclosed under operating
Activities.

D. Notes to A/cs :
i. Maturity Analysis of Lease Liability
ii. ROU Asset should be disclosed in Notes with OB, Addition, Dep & CB.

Part B : Disclosures for Exempted Lease

A. B/S B. P&L C. CFS D. Notes

Prepaid/ outstanding a) Short Term Payment of Rent Details of Exempted
Rentals due to Diff. Lease Rent Under Operating Lease Rentals with
in Actual Payment Expensed Activities Maturity Analysis
and SLM Rent b) Low value
Lease rent
Expensed

Unit II : Disclosures for Lessor

Part A . Disclosures for Finance Lease

A. Balance sheet :-
Net Investment should be reported Separately from other Investments
In Lease
B. P&L :
i. Finance Income should be included in other Income
ii. Income from variable Lease payments should also be considered under other
Incomes.

Notes to A/c’s : Maturity Analysis of Net Investments

CFS :
i. Collection From Lessee in the form of Lease payments will be Disclosed
under “Investing Activities”
ii. Variable Lease rentals should be disclosed under Operating Activities

Part B. Operating Lease

B/S : Assets Given on OL should be disclosed separately from other Assets

PL : Rental Income on SLM Basis
CFS : Rental under operating Activities
Notes : i) Description of Assets which are Given on OL
ii) Maturity Analysis of OL rentals : Actual & SLM

Concept 13 : Lease Classification of “ Land & Building” for Lessors

If Land & Building has been Given on Lease by a Lessor then the following Points

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Should be considered :-

1) The Lessor should deal with Land & Building separately and these 2 Elements
Shall be tested individually from the Point of View of Operating Lease & finance
Lease
2) Lease Payments should also be divided between Land & Building in the ratio of
Their fair value

Exemptions

1) If Cost of Land is immaterial then we can consider it as a Single unit and

Classification of Lease shall be made according to Building.
2) If it is not Possible to Separate each other then we will deal Land according to
Classification of Building.

Concept 14 : Initial Direct Cost if paid by Lessor

IOC

Finance Lease Operating Lease

It will be adjusted while It will be written off on SLM

Computing IRR Basis over the Lease Period
LP + UDRV = FV + IDC

*Part 12*

Impact on Accounting for Lease contracts due to Rent concessions Given by

Lesser to Lessee During Covid-19 Pandemic
(Amendments made by MCA dated 24.7.2020)

Explanation

Unit I : Books of Lessee Unit II : Books of Lessor

Unit I : In the Books of Lessee

As per the Amendments made by MCA dated 24.7.20 in Ind AS 116, Lessee can take
Exemption from Accounting of Modification in Lease contracts due to change in Lease
Consideration on Rent concessions/ waivers or Deferrals during the period of covid-19
Pandemic made by Lessor only if All the Specified conditions as below are satisfied :-

Condition I : The concessions/ Waivers/ Deferrals should be due to a consequence of

Covid-19 Pandemic

Note : It means that Benefits in Payment of Rentals due to other reason cannot be
Considered under this Practical Expedient. In other cases, Lessee will consider it as

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Modification in Lease contract.

+
Condition II : The Revised consideration under New Terms should be equal to/ Less than
Original consideration which was as per Original Terms.
Note : If Revised consideration Exceeds Original consideration then It will be treated as
Modification
+
Condition III : The concession/ Deferrals/ waivers in Rent should be for the Period
Before 30.6.2021
Note : If any Benefit is Given for Rentals Payable beyond 30.6.21 then It will be
Considered as modification.
+
Condition IV : The other Terms & condition shall remain same as these were in Original
Contract.
Note : There should not be any *Substantive change in Original Terms
*It’s a matter of Judgement

Accounting Impact
As per Practical Expedient, Lessee will credit income statement at the time of
Reduction in Payment :-

Lease Liab. a/c Dr xxxx (Normal)

To Bank xxxx (Reduced)
To SOPL xxxx (Benefit)
“Reduction in Rental”
OR
Lease Liab. a/c Dr xxxx
To SOPL xxxx
“If whole Rent is waived off”
(Being Payment of Lease Liab. Recorded)

*In Future, if Any Rental is payable in Excess than Normal Payment due to deferment of
Rent then Excess Payment will be debited in P&L A/c.
Lease Liab. A/c Dr xxxx (Normal)
P&L a/c Dr xxxx (Excess)
To Bank xxxx (Increased)
(Being Payment of Rentals Recorded)

Solution of Q.4

In the Given case, Lessee Q can apply Practical Expedient Given by MCA while making
Accounting Entries for Payment of Lease Liability because It has satisfied all required
Conditions. It can record deferment of Rental through P&L A/c instead of recording it as
Modifications
In the Given case, the following observations have been made :-

1. The Rent has been Deferred due to covid-19 Pandemic

2. The concession has been made for Rentals which are payable before 30.6.2021

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3. There is no increase in original Lease consideration because Deferment is asked by

Lessee.
4. There is no change in other Terms & conditions.

Solution of Q.5
Same Answer can be Referred as Given in Q.4

Solution of Q.6

In the Given case, Lessee T should not apply Practical Expedient because
Concession in rental is for Period which is beyond 30.6.2021. The other conditions are
Satisfied, but Practical Expedient can be applied only if All conditions are satisfied. So,
Lessee Y should Treat this concession as modification in contract.

Solution of Q.7

In the given case, Lessee can apply Practical Expedient because All conditions are
Satisfied. There is an Extension of 3 months in original Lease Period which cannot be
Considered as Substantive change in original Terms.

Solution of Q.8

In the Given case, Lessee 2 will recognise this concession in P&L statement as a
Income. The following Entity may be passed :-

Journal : Lease Liab. a/c Dr 100,000

To P&L (Income) 100,000
(Being Rental waived off by Lessor & Practical Expedient has been Applied)

Unit II : In the books of Lessor

As per the Provisions of Amendments made by MCA dated 24.7.2020 there is no

Practical Expedient for Lessor under Rent concessions/ Waivers/ Deferrals. It means
that Lessor has to follow modification Rules in the Given case.

Lessor

Operating Lease Finance Lease

Allocate Revised consideration over Revise the Lease Receivables due to

Remaining Lease Period modifications as we learn in normal
Modifications

Solution of Q.1

In the Given case, there will be no change in Rental Income because overall Lease
Rental are same during the period due to which SLM Rentals shall also remain same.

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Solution of Q.2

As per the rules, the Lessor will compute Revised Income on SLM Basis over the remaining
Lease Period as follows :-

Rentals Per Annum (Normal) 180,000 (15000 P.m. x 12m)

Remaining Lease Period 5Y
Total Lease Rentals over the Lease Period 900,000
Concessions in Rental (15000 x 3) (45,000)
Revised Rentals 855,000

The Remaining Lease incentive of ₹ 300,000 will also be allocated over remaining 5 years
On SLM
Lease Incentive = 300,000 = 10000 = 5000 P.m.
5Y 12m
Net income = 14250 – 5000 = 9250

Solution of Q.3

1. In June 20, Termination of contract will be considered as major modification. Lessor

Will derecognise Lease Receivables & will Recognise Asset assuming Termination on same.
2. For the Period from June to Dec, It will be Accounted for as an Operating Lease.

*Part 13*

Solution of Q.10, Q.13, Q.14, Q.28, Q.32 , Q.38, Q.39 Discussed in Class

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter 5: Government Grant (Ind-AS-20)

*Part 1*

Concept 1: Important Definitions

Definitions

 
Meaning of Govt Meaning of Grant

Meaning of Government: As per the Provisions of Ind-AS-20, Government means

state Govt, Central Govt, Local Govt or an International; Govt (Foreign Govt) etc.

 Meaning of Grants: As per the Provisions of Ind-AS-20, Grant means financial

assistance which is provided by government to an entities which is provided by
govt to entities on compliance of certain condition attached to it.

Note: As per the provisions grant is s type of subsidy. It can also be said that
subsidy is a wider concept which also includes grants.

Concept 2: Covergare of Ind-As 20

Coverage

Unit I : Monetary Grants Unit II: Non-Monetary Grants

(Paid by govt in cash) ( Paid by govt in other forms,
but not in cash)

A B C D E
Grants for Grants for Grants for Grants for Forgivable
Assets Expenses New Set-up Assets Loans

Depreciable Non-Depreciable
Assets Assets

Out of Coverage
As per the provisions of Ind-As 20 the following Grants shall not be covered under
the scope of Ind-AS 20
I. Agricultural Grants (Ind-AS 41)

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II. Govt. Participation in ownership of an entity

III. Tax benefits provided by Govt in the form of Tax Holiday period, deductions
From taxable income or other Rebates.

Concept 3: Discussion on Approach for Accounting

As per the Provisions, Accounting approach for govt Grants is a very Debatable
issue. These are two different Approaches for the Accounting of Grants as follows.
1. Capital Approach
2. Revenue/ Income Approach

Capital Approach vs Income Approach

Under capital Approach, it is Under Income Approach it is said that
Said that grants should not be grants should be treated as an income
Credited in P&L A/c, but these are in the credit side of” P&L A/c under
to be transferred to “capital the heading of other Incomes.”
Reserves” directly. The following The following facts have been mentioned
Points are given by professional in the favour of Revenue Approach:-
In the favour of capital Approach:-

I. The Govt Grants are not earned I. The Grants are earned on compliance
Like incomes during normal course of certain conditions Attached to it.
of business
II. A Grants is a financial device II. The Grants are not provided by
Which is provided by Govt like a shareholders due to which it should not
source of fund. be Considered as a sources of fund.

Conclusion provided by Ind-AS 20 on above debate:-

As per the provisions of Ind-AS 20 Govt Grants should be accounted for as per
Income approach. It can be said that grants shall be routed through P&L A/c.

May be OR May be
Immediately Over the periods

According to Nature
of Grants

Concept 4: Recognition of Grants

As per the Provisions of Ind-AS-20, Initial recognition of Grant can be made on
accrual basis if the following 2 conditions are satisfied:-
Condition I: It should be certain that entity will comply with all conditions which are
attached to it.
(+)
Condition II: It should also be certain that the entity will receive money from such
Grant.

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Journal: Receivables A/c ……………Dr XXXX

To Govt Grant XXXX
(Being Grants recognized on accrual Basis)

Exception: In the absence of reasonable certainty of compliance with conditions or

Collection of Grant then recognition of Grant shall be made on cash
basis as follows:-

Journal : Bank A/c…………………Dr XXXX

To G. Grants XXXX
(Being Grants Received)

Concept 5: Accounting Rules for Grants

Unit I: Accounting for Monetary Grants

A. Grants for Assets

Part I: Depreciable Assets
Part II: Non-Depreciable Assets

Part I: Depreciable Assets

Accounting Methods : 1) Assets Reduction Method
2) Amortisation Method

Notes:
1) Both methods are equally prominent and any method can be selected for
Accounting based on choice of entity.
2) In the absence of specific requirement in questions, student may apply any
method, but Assets Reduction Method is easy to understand.

Method I: Asset Reduction Method *Imp

Step I : At the time of receipt of Grant

a) Bank A/c………………………..Dr XXXX

To G. Grant XXXX
(Being Grant Received)

b) G. Grant A/c…………………Dr XXXX

To Assets A/c XXXX
(Being carrying Amt of Assets reduced by receipt of Grants)

Note:
As per the provisions of Ind-AS 20, it is clearly indicated in above entries that grant
Will be adjusted against cost of Assets or it can also be said that cost of Assets will
be reduced due to such Grants.

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Step II: At Balance sheet date

At each B/s date, we will calculate depreciation on reduced cost of Asset after
Adjusting Amt of Grant. “ We should compute depreciation on the basis of remaining
useful life.”

Note:
If Amt of Grant becomes higher than carrying Amt of Assets then excess of such
Amt of Assets then excess of such Grant over carrying Amt will be transferred to
P&L.

Step III: If Refund takes place

If Grant is to be Refunded to Govt due to Non-compliance then the following

entry will be passed:
Fixed Assets……..Dr xxxx
To Bank xxxx
(Being Refund of Grant Made)

Note: After Refund of Grant, Depreciation will be increased in future.

*Part 2*
Example:
i) Cost of P&M : Rs.10,00,000
ii) Useful life : 10 years
iii) Grant received after 2 years of
Acquisition of Asset : Rs.4,00,000
iv) Grant to be refunded due to Non
Compliance of conditions after 2 years
From the date of its collection
Calculate Revised Dep after Refund of Grant & Also prepare P&M A/c.

Solution:
Statement showing calculation Revised Depreciation
(After refund of Grant)
PT Rs.
Original Cost 10,00,000
Depreciation for 2 years (10,00,000 x 2)/10 (2,00,000)
Carrying amt of Asset after 2 years 8,00,000
Grant Received after 2 years of acquisition of Assets (4,00,000)
Revised carrying amt after Grant 4,00,000
Depreciation for 2 years after receipt of Grant (4,00,000 x 2)/8 (1,00,000)
Carrying amt of asset after 4 years of acquisition of Assets 3,00,000
Add: Grant Refunded to be added back 4,00,000
Revised Carrying Amount after refund of Grant 7,00,000

Revised Depreciation after refund = 7,00,000/ 6years= Rs.1,16,667p.a

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P&M A/c
Particulars Amount Particulars Amount
1st Year
To Bank 10,00,000 By Depreciation (1/10) 1,00,000
By Bal C/d 9,00,000

10,00,000 10,00,000
nd
2 Year
To Bal b/d 9,00,000 By Depreciation (1/10) 1,00,000
By Bal C/d 8,00,000

9,00,000 9,00,000
Beginning
3rd Year
To Bal b/d 8,00,000 By Govt Grant 4,00,000
By Depreciation 50,000
By Bal C/d 3,50,000

8,00,000 8,00,000

4th Year
To Bal b/d 3,50,000 By Depreciation 50,000
By Bal C/d 3,00,000

3,50,000 3,50,000

5th Year
To Bal b/d 3,00,000 By Depreciation (7Lakhs/6 years) 1,16,667
To Bank (Refund) 4,00,000 By Bal C/d (Bal. fig) 5,83,333

7,00,000 7,00,000

Method II: Amortisation Method (Deferred Grant Method) (Imp)

Step I: At the time of Receipt of Grant

As per the provisions, grant will not be adjusted cost of Assets but it will be
transfer to a separate A/c ‘Deferred Grant A/c”. The following entries shall be
recorded as follows;

a) Bank a/c………Dr xxxx

To Govt Grant xxxxx
(Being Grant Received)
b) Govt Grant a/c…….Dr xxxx
To Deferred Grant a/c xxxx
(Being Grant transferred to separate A/c)

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Step II: Amortisation of Grant in Each year

As per the provision, balance in Deferred Grant A/c will be amortised in P&L A/c each
Year at B/S date according to method of Dep. Which will be opted by the entity for
the related Asset. The following calculations may be relevant;

Case I: If method of Dep is SLM

Amortisation of Grant= Deferred grant Balance

No. of years of useful life of related Asset

Case II: If method of Dep is WDV

Amortisation of Grant= Deferred grant Balance x% of Dep (WDV)

Deferred Grant a/c……Dr xxxx

To SO P&L a/c xxxx
(Being Grant amortised)

Notes:
I. The Amortised amt shall be disclosed in P&L under the heading of “other Income”
II. The Unamortised balance in Deferred Grant A/c shall be disclosed under the
heading of “other Equity “ in B/s.

Step III: Refund of Grant (Imp)

At the time of Refund of Grant, we will Reverse Deferred Grant A/c first. If Refund
of grant becomes more than o/s Balance in Deferred Grant A/c then excess of
refund will be debited in P&L A/c.

Deferred Grant a/c………Dr xxxx(unamortised)

P&L a/c……………………………Dr xxxx (bal.fig If required)
To Bank xxxx
(Being Refund of Grant made)

Note: If amount of refund is less than unamortised balance in Deferred Grant A/c
then remaining balance in Deferred Grant A/c will be amortised in P&L A/c over the
remaining useful life of related Assets.

Example:

i) Cost of Assets acquired : Rs.10,00,000

ii) Depreciation is to be charged @10% p.a. on WDV basis
iii) Grant Received : Rs.4,00,000
iv) After 2 years, Grant is to be refunded fully.
Show the entry for refund of Grant & also show Amortisation of Grant each year.

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Solution:
Journal Entries
Ist Year
i) Bank A/c …………………Dr 4,00,000
To G. Grant 4,00,000
(Being Grant Received) In the beginning
Of the year
ii) G. Grant A/c………….Dr 4,00,000
To Deferred Grant A/c 4,00,000
(Being Grant transferred to Deferred A/c)

iii) Deferred Grant A/c……..Dr 40,000 (4,00,000*10%) At the end of year

To P&L 40,000
(Being Grant Amortised on WDV basis)

IInd Year
iv) Deferred Grant A/c……..Dr 36,000 ({4,00,000-40000}*10%) At the end
To P&L 36,000
(Being Grant Amortised on WDV Basis)

In the beginning of IIIrd Year

Deferred Grant A/c…………Dr 3,24,000
(Refund) P&L A/c ……………………………..Dr 76,000 (Bal fig)
To Bank 4,00,000
(Being Refund of Grant Made)

Deferred Grant A/c

PT Rs. PT Rs.
To P&L 40,000 By Bank 4,00,000
To Bal c/d 3,60,000
4,00,000 4,00,000
To P&L 36,000 By Bal 3,60,000
To Bal c/d 3,24,000
3,60,000 3,60,000
To Bank 3,24,000 By Bal 3,24,000

3,24,000 3,24,000

Question-3
Solution:
Method I: Asset Reduction Method

Particulars Amount
Original Cost of Asset 25,00,000
Grant Received @20% of cost of Asset (5,00,000)
Reduced/ Revised Cost 20,00,000
Useful Life of Asset 10years
Annual Depreciation 2,00,000
Comments: Under Asset Reduction method, we have adjusted against cost of Asset
& calculation of depreciation has been made on the basis of reduced cost.

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Method II: Deferred Grant Received

Under this method, Grant will be kept in a separate A/c and there will be no impact
on Asser A/c as follows;

Particulars Machinery A/c Deferred Grant A/c

Original Balance 25,00,000 5,00,00
Useful life of Asset 10 years 10 years
Annual : Dep 2,50,000 -
Amortisation of Grant - 50,000

Question-4
Solution:
Journal Entries
(Asset Reduction Method)

1st Year
i) Assets a/c…………………Dr 75,00,000
To Bank 75,00,000
(Being Assets acquired)

ii) Bank a/c……………………….Dr 15,00,000

To G Grant 15,00,000
(Being Grant Received)

iii) G. Grant a/c………………….Dr 15,00,000

To Assets 15,00,000
(Being cost of Assets Reduced)

iv) Depreciation a/c……………..Dr 10,50,000

To Assets 10,50,000
(60,00,000-7,50,000)/5yrs
(Being depreciation charged)

v) P&L a/c………………………………Dr 10,50,000

To Dep 10,50,000
(Being depreciation written off)

2nnd Year
1) Depreciation a/c……………..Dr 10,50,000
To Assets 10,50,000
(Being depreciation charged)

2) P&L a/c………………………………Dr 10,50,000

To Dep 10,50,000
(Being depreciation written off)

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Journal Entries
Deferred Grant Method

1st Year
i) Assets a/c…………………Dr 75,00,000
To Bank 75,00,000
(Being Assets acquired)

ii) Bank a/c……………………….Dr 15,00,000

To G Grant 15,00,000
(Being Grant Received)

iii) G. Grant a/c………………….Dr 15,00,000

To Deferred Grant a/c 15,00,000
(Being transferred to a separate A/c)

iv) Depreciation a/c…………..Dr 13,50,000 (75lakhs-7.5 lakhs)/5 yrs

To Assets 13,50,000
(Being Depreciation charged)

v) Deferred Grant a/c………Dr 3,00,000 (15lakhs/5yrs)

To P&L A/c 3,00,000
(Being grant Amortised)

vi) P&L a/c…………………………….Dr 13,50,000

To Depreciation 13,50,000
(Being dep. Written off)

2nnd Year
i) Depreciation a/c……………..Dr 13,50,000
To Assets 13,50,000
(Being depreciation charged)

ii) P&L a/c…………………………….Dr 13,50,000

To Depreciation 13,50,000
(Being dep. Written off)

iii) Deferred Grant a/c………Dr 3,00,000

To P&L A/c 3,00,000
(Being grant Amortised)

Question-6
Solution:
Asset Reduction Method
A. Calculation of value of Asset after Refund

Particulars Amount
Original cost of Asset 40,00,000
Grant Received (16,00,000)

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Adjusted Cost 24,00,000

Depreciation for 2 years (8,00,000)
(24,00,000-8,00,000)x 2years
4 years
Carrying Amt after 2 years 16,00,000
Add: Refund of Grant 12,00,000
Revised value of Asset after Refund 28,00,000

Journal (For Refund):-

Assets a/c………………………Dr 12,00,000
To Bank 12,00,000
(Being carrying Amt of Asset increased due to refund)

Deferred Grant Method

Amount transferred to D.G. A/c 16,00,000
Amortisation of Grant to P&L A/c (8,00,000)
(16,00,000/4 years)x 2 years
Balance in D.G. A/c after 2 years 8,00,000

Journal: Deferred Grant a/c………………….Dr 8,00,000

P&L a/c……………………………………….Dr 4,00,000 (Bal)
To Bank 12,00,000
(Being Refund of Grant recognised)

Question-8
Solution:
Case I : Asset Reduction Method
Under this method, grant of Rs.4,00,000 will be added back to carrying Amt of Assets
such a treatment will increase carrying amt in Assets A/c due to which depreciation
over the remaining useful life will also get changed.

Case II: Deferred Grant Method

Under this method, Refund of grant will be debited to Deferred Grant A/c which
remains unamortised on such date.

Question-9
Solution:
In the given case, it is clearly specified that company is applying Asset Reduction
Method. So Refund of Grant of Rs. 300 Lakhs shall be added back to the carrying Amt
of Asset and carrying amt of Asset will get increased after such Refund.

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*Part 3*
Part II: Grants for Non-depreciable Assets (*Imp)

Case I : Grants without condition

Case II : Grants with condition

Case I: Grants without condition:

If any Grant is received for Non-depreciable Assets (“Grants for Land”)*
without any conditions then the Grant should be credited to P&L statement
immediately as follows:-
* No Conditions to develop it

Journal: 1) Bank A/c……………………Dr XXXX

To Govt. Grant XXXX
(Being grant Received)

2) Govt. Grant k A/c……..Dr XXXX

To P&L A/c XXXX
(Being Income recognized)

Case II: Grants with condition:

If Grant for Non-depreciable Asset “Land” is received with the conditions of
its development means structure is mandatory to be built on such Land within time
limit then it will be transferred to “Deferred Grant A/c” and it will be amortised
over the period of expenditure on construction.

Journal: 1) Bank A/c……………………Dr XXXX

To Govt. Grant XXXX
(Being grant Received)

2) Govt. Grant k A/c……..Dr XXXX

* To Deferred Grant A/c XXXX
(Being Grant deferred subject to conditions of Land development)

*Amortisation of Grant:
Over the period Deferred Grant A/c……………..Dr XXXX
of development To P&L XXXX
of Land (Being Grant Amortised)

If Refund of Such Grant takes place

Unconditional conditional
(Case I) (Case II)

P&L A/c…………….Dr XXXX Deferred Grant A/c……….Dr XXXX

To Bank XXXX P&L A/c……………………………Dr XXXX
(Being Refund of Grant Made) To Bank XXXX
(Being Refund of Grant Made)

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B. Grants For Expenses/ Grants for Incomes

If any Grant is received for expenses then the following 2 cases may be considered
For these Grants:-

Case I: If these Grants are received without any conditions [i.e , No time Limit is
Prescribed or any other condition of Results from expenses etc.] then the
Grant Will be credited to P&L A/c immediately.

Case II: If any condition is imposed by Govt on these Grants then we should
Transfer these Grants to a separate A/c “Deferred Grant A/c” and it will be
amortised to P& L A/c over the period of expenses out of such Grant.

Amortisation of Grant= Expenses incurred out of Grant during the period

Explanation on presentation of such Grant in P&L A/c

Presentation

Alternative I Alternative II
It can be disclosed in It can be set off against expenses
P&L A/c under the in debit side of P&L A/c.
heading of “other Incomes”

Grants for Immediate financial Support

If any Grant is provided to loss making entity for immediate financial help to
recover from losses in public interest then receipt of such Grant will be
Transferred to P&L A/c immediately without any deferment.

Question 1, 2 & 3 discussed in class.

C. Grants for immediate setup of Business

If ant Grant is provided by Govt. to an entity for setting up a new business then
such Grant will be transferred to P&L A/c “immediately”. These types of Grants are
provided by Govt. to promote industries in Backward Areas or to promote a
particulars line of Business. If these Grants are refunded due to non-compliance
of conditions then Refund will be debited to P&L A/c.

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*Part 4*
Unit II: Non-Monetary Grants
(Which are not paid by Govt. in cash)

D. Grants For Assets

If Assets are provided by Govt to the entities at concessional Rates then such
Grants are considered as Non-monetary Grants because these Grants are not
provided by Govt in cash, but Assets are provided at reduced price directly. These
are two methods for Accounting of these Grants:-

Method I: fair Value Method

Method II: Nominal Value Method

[Note: Any Method can be applied by entity out of above 2 methods]

Method I: fair Value Method

Under this method, Acquired Asset and Grant (both) are to be reduced at fair value.
The following entry may be recorded:-

Assets a/c………………….Dr XXXX (Fair Value)

To Bank XXXX (Payment)
To Deferred Grant A/c XXXX (F.V. of Assets)
(Being Non-monetary Grants recorded at fair value)

It will be amortised on systematically basis

Method II: Nominal Value Method

Under this method Assets are directly recoded at acquisition price. There is no need
to record is at fair value.

Journal : Assets A/c……………………….Dr XXXX

To Bank XXXX

Acquisition Price
(Being Asset acquired at nominal value)

Note:
If any Asset is received “Free of cost” then same accounting methods shall be
applied as we discussed above.

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Question-6
Solution:
In the Given case, Land is provided by the Govt. to entity at reduced price. We can
recognise it under methods as follows:-

Alternative I: Fair Value Method Alternative II: Nominal Value Method

Land A/c……………………Dr 5,00,000 Land A/c……………………Dr 5,00,000
To Bank 50,000 To Bank 50,000
To Deferred Grant 4,50,000 (Being Assets recognised at Nominal value)
(Being Non-monetary Grant recognised
at fair value)

Test Your Knowledge

Question-1
Solution:
I. Grant for Land
In the given case, Land is given by the Govt. at Nil price. It means there is
No cost for such Land and it is 100% free.
It can be recorded at fair value of Rs.10 Lakhs and same amount will be credited to
Deferred Grant A/c. Alternatively it can also be recorded at nominal value.

II. Grant for Machinery:-

In the given case, machinery is a depreciable Asset and the entity has
Received Grant of Rs. 2 Lacs in cash. There are two methods for recognition of this
Grant as follows:-

I. Asset Reduction Method: Under this method Grant will be adjusted against
Cost of P&M. So the net cost of P&M will be of Rs. 8 Lacs (10L-2L).

Annual Depreciation=8,00,000/ 5yrs= 1,60,000 P.A.

II. Amortisation Method: Alternatively Grant can be transferred to a

Separate A/c “ Deferred Grant A/c” and it will be amortised in P&L A/c over the
Period of 5 years.

Annual Amortisation = Rs.2,00,000/ 5 years= 40,000 P.A .

III. Grant for Immediate Set-up: In the given case, Grant of Rs. 20lacs is in the
Nature of promoter contribution which is made by Govt. to promote a particulars
Business. It will be credited to P&L A/c immediately under the heading of “other
Income”.

IV. Grant for Expenses (R&D): In the given case Grant of Rs. 50 lacs will be
Transferred to Deferred Grant A/c and it will be amortised on systematically basis
Over the Research period.

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E. Forgivable Loans *V.V. Imp

It may be possible that Govt has provided Loans to the entity at concessional Rate
of interest. It means that Actual Rate of Interest will be less than market Rate of
interest. In the Given case , Grant is provided by Govt in the form of saving in int.
to the entities. The following steps should be applied for recognition &Amortisation
of Grants.

Step I : Identify all cash outflow at Actual Rate of Interest which will be made by
Entity to Govt. over the period of Borrowings.

Step II: Calculate Present value factors at market Rate of Interest

Step III: Calculate Present Value of all cash outflows by PVF at Marker Rate and it
will be considered as “Fair value of Loan”

Step IV: Grant element in = Amount Provided by Govt.- Fair Value of Loan
Forgivable Loan (Principal)

Initial Recognition
Journal
Bank A/c……………………..Dr XXXX (Principal)
To Govt Loan XXXX (Fair value)
To Deferred Grant XXXX (Bal. fig)
(Being Forgivable Loan recognized at fair value)

Example:
i) Government Loan= Rs.10,00,000
ii) Market Rate=10%
iii) Actual Rate=4%
iv) Loan is to be repaid at the end of 3rd year .

Requirement: a) Initial Recognition

b) Loan A/c for 3 years
c) Amortisation of Grant over 3 years.

Solution:
Calculation of Fair value of Govt Loan
Cash outflows: 1 year 40,000*0.909 36,360
2 year 40,000*0.826 33,040
3 year 10,40,000*0.751 7,81,040
P.V. of C.O./F.V. 8,50,440
Grant Element=10,00,000-8,50,440=1,49,560

Journal (Initial)
Bank A/c……………………..Dr 10,00,000
To Govt Loan 8,50,440
To Deferred Grant 1,49,560
(Being Govt Loan recognized at fair value)

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Govt Loan A/c

Particulars Amount Particulars Amount

st
I Year
To Bank 40,000 By Bank (Fair Value) 8,50,440
To Bal C/d (Bal. fig) 8,95,484 By Interest (10%) 85,044
P&L A/c
9,35,484 9,35,484
IInd Year
To Bank 40,000 By Bal B/d 8,95,484
To Bal C/d (Bal. fig) 9,45,032 By Interest (10%) 89,548

9,85,032 9,85,032
rd
III Year
To Bank 10,40,000 By Bal B/d 9,45,032
By Interest (10%) (B.f) 94,968

10,40,000 10,40,000

Deferred Grant A/c

Particulars Amount Particulars Amount

st
I Year
To P&L 45,044 By Bank 1,49,560
(85044-40000)
To Bal C/d 1,04,516

1,49,560 1,49,560
nd
To P&L 49,548 II Year
(89548-40000) By Bal b/d 1,04,516
To Bal C/d 54,968

1,04,516 1,04,516
IIIrd Year
To P&L 54,968 IInd Year
(94968-40000) By Bal b/d 54,968

54,968 54,968

Step IV: Amortisation of Deferred Grant

Amortisation = Interest at Market Rate- Interest at Actual Rate

(saving in interest)

As per the provisions, Deferred Grant from forgivable Loans shall be credited to
P&L equal to saving in interest. (Refer above calculations)

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Test Your Knowledge

Question-2
Solution:
Calculation of Fair value of Loan

Cash outflows: Y1 5,00,000*0.893 446500

Y2 5,00,000*0.797 398500
Y3 5,00,000*0.712 356000
Y4 5,00,000*0.636 318000
Y5 1,05,00,000*0.567 5953500
F.V. Loan at Market Rate 74,72,500

Grant= 1,00,00,000-74,72,500=25,27,500

Initial Recognition
Bank A/c……………………..Dr 1,00,00,000
To Govt Loan 74,72,500
To Deferred Grant * 25,27,500
(Being Govt Loan recognized at fair value)

*It will be amortised over the period of 5 years equal to saving in interest Annually
by the difference of market Rate of Interest & Actual Rate of Interest.

(b)
If forgivable loan is provided by Govt. for the acquisition of depreciable Asset then
Amortisation of deferred Grant will be made in P&L according to method of
Depreciation on acquired Asset.

Question-4
Homework

Question-5
Discussed at class

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Concept 6: Disclosure requirement under Ind-As 20

(Notes to A/cs)
i) The entity should disclose the Accounting policy which has been applied for
Accounting of Grants.
ii) The entity should also mention how the Grants have been presented in
B/S & P&L.
iii) The nature & Amt of Grant which has been received during the year should
also be disclosed.

Concept 7: Treatment of Grants in cash flow statement

Monetary Grants: under the heading of financing Activities in cash flow statement.

“ Assuming source of funds”

*Part 5*

Solution of Q.5

Method I : Asset Reduction Method

Under the Specified method, Grant is directly reduced from cost of Asset &
Depreciation is charged on Net Cost. The following calculations may be considered :-

Balance sheet (Extracts)

Non Current Assets :-

PPE (W.N #1) 68000

Profit & Loss (Extracts)

Depreciation & Amort. (W.N #1) 17000

W.N #1
Cost of Equipment 100,000
Grant Received (15000)
N. Cost 85000
Depreciation @ 20% (17000)
Carrying Amount 68000

Method II : Amortisation Method

Under this method, Grant is not deducted from cost of Asset, but It is
Transferred to a Separate A/c “Deferred Grant A/c” and It is amortised in P&L A/c
According to method of Depreciation of related Asset.

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Balance sheet (Extracts)

Non Current Assets :-

PPE (W.N #2) 80000

Non Current Liab. :-

Deferred Grant (W.N #2) 9000

Current Liab.
Deferred Grant (W.N #2) 3000

W.N #2
i. Original Cost of Asset 100,000
Dep @ 20% (20,000)
Carrying Amount 80,000
ii. Deferred Grant 15000
Amortisation @20% (3000)
Balance o/s 12000

Next year Later

3000 9000
(CL) (NCL)

P&L Statement (Extracts)

Other Income :
Grant Amortisation (W.N #2) 3000

Dep & Amort. :

Cep on PPE (W.N #2) 20000

Solution of Q.6 *Imp

In the Given case, Grant is for 18 months which should be amortised in the ratio
Of 12:6 due to which we can amortise 20,000 in first year and 10,000 in next year. The
Given grant is for training Purpose due to which it can be classified as Grant for
Expenses. The following Presentations may be followed :-

Balance sheet (Extracts)

31.3.x1 31.3.x2 31.3.x3

Non Current Liab :
Deferred Grant 10,000 - -

Current Liab.
Deferred Garnt 20,000 10,000 -

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Profit & Loss Statement (Extract)

X1- X2 X2-X3
Method I : Separate Disclosure
Other Incomes :
Grant Amortisation 20,000 10,000

Other Expenses :
Training Exp. 50,000 25,000

Method II : Net Disclosures

Other Expenses :
Training Exp. (Net of Grant) 30,000 15,000

Solution of Q.1, Q.3 *Imp, (Discussed in Class)

Solution of Q.2 *Imp

As per the Provisions of Ind AS 20, Refund of grant can take place if related
Conditions, which are attached to it, do not get satisfied. In the Given case, Grant
Was recognised as income in past which should be reversed in P&L at the time of
Refund. The following Entries may be recorded :-

i. Govt. Grant a/c Dr 10 crores

To Grant Repayable 10 crores
(Being Repayable Grant Expensed)
ii. P&L a/c Dr 10 crores
To Govt. Grant 10 crores
(Being Expense written off)

*It will be disclosed in B/s under the heading of current Liabilities.

iii. Next year (20x6-x7)

Grant Repayable a/c Dr 10 Crores
To Bank 10 Crores
(Being Grant Refunded)

Solution of Q.4 (Discussed in Class)

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter 6: CORPORATE SOCIAL RESPONSIBILITY

(Section 135 of Companies Act 2013)
(Companies CSR Rules 2014)
*Part 1*

Concept 1: Applicability & Basic understanding of CSR

If an entity fulfils any of the following criteria during “Immediate financial year”
then it has to apply CSR Rules in current financial year:-

I. IF Company has Turnover* 1000 Crores or More

OR
II. If Company has Net worth* of 500 Crores or more
OR
III. If Company has Net profits* of 5 crores or more

* Refer Definitions explained in Next video.

As per the provisions, the companies have to consider the following 3 special points
in relation to CSR if it is Applicable due to above criteria:-

1. The Entity will spend on CSR Activities which are prescribed in schedule VII of
Companies Act 2013

2. If an Entity covers under application of section 135 then it will have to spend
under CSR activities for consecutive 3 years after satisfying one of above
Criteria whether entity fulfils or not any criteria during these 3 years. We will
check the criteria at the end of 3rd year for compliance with CSR for next 3 yrs.

3. The entity has to spend at least 2% of its Avg. net profits* of 3 immediate
Preceding years.
*Avg Net profits shall be computed as per section 198, Refer Next video for its
Explanations.

Note:
If an entity does not have track of 3 preceding years because it is a newly
incorporated Company then it will consider No. of years for Avg. profits from the
date of its incorporation.

Concept 2 : Concept of CSR Committee

As per the rules, it is mandatory to form CSR committee with minimum 3 directors
(including at least one independent director). It is the responsibility of CSR
Committee to perform following Actions/functions:-
1. It will form CSR policy for the company and it will recommend its formed policy
to BOD of the company.

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2. It will recommend the BOD:-

a) Amount of expenditure &
b) Activities (Schedule VII) where expenditure can be made
c) It will monitor CSR policy time to time.

Concept 3 Role of BOD *V.V. Imp

As per the provisions, the following functions are to be performed by BOD:-

I. It is the responsibility of BOD to approve Recommendations of CSR committee.

II. It is also the responsibility of BOD to execute the Approved CSR policy.

III. The BOD Shall disclose in Directors Report the following:-

a) Composition of CSR Committee
b) CSR Policy

IV. The BOD shall also deal with unspent Amount out of Minimum prescribed
Amount as follows:-
If any Amt remains unspent
out of prescribed Amt

If any projects/ Programme If any projects/ Programme

Under CSR activities is not PMNRF, Under CSR activities is going
Going on within the company Ganga under CSR activities within
Funds etc. the company

Deposit unspent Amt within Transfer unspend Amt to a

6 months from the ending of separate A/c “Unspent CSR A/c”
Financial year in specified funds in a scheduled Bank and spend it
Which are mentioned in schedule VII. within 3 years. After 3 yrs if it
remains unspent then it will be
transferred to funds as
mentioned in schedule VII
within n 30 days form the
Expiry of 3 years.
V. Penalties & Prosecution

Penalties
If failure in compliance is proved

Penalties on Companies Penalties on Directors (In charge)

Not less than 50,000 Max to 25 lakhs 1) Not less than 50,000 Max 5 lakhs OR
2) 3 years Imprisonment OR
3) Both

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Concept 4: Other Important Points to be considered

i) If ant entity want to clain CSR expense then it should be spent in India. If
any expenditure is incurred outside India on social activities then such an
expense will not be claimed as CSR expense.

ii) If ant CSR policy is formed for the benefit of employees of companies or for
their families then it will not be treated as CSR exp.

iii) If contributions have been made to political parties then it will not be
treated as CSR exp.

iv) If an entity has small CSR obligation then it can form its CSR policy with
Other small entity in an association but it has to explain its expenditure out
of Joint find.

v) If any social activity is carried which is not mentioned in schedule VII then
It will be considered as voluntary exp.

vi) The BOD should disclose CSR expenditure Director report.

vii) IF any social Activity is carried which can not be separated from Normal
course of business it will not be treated as CSR expense.

Concept 5 : Schedule VII

Refer class Book for Schedule VII

*Not required to be learned.

Question -1,2,3,4 , 5 & 6

Discussed at Class

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*Part 2*
Concept 6: Accounting for CSR expense

As per the provisions, the following entries should be recorded for CSR expense;-

i) CSR Expense A/c…………………Dr XXXX

To Bank XXXX
(Being CSR expenses paid)

ii) P&L Statement A/c………………..Dr XXXX

To CSR expense * XXXX
(Being CSR exp. Written off)

*Notes (1) A separate heading should be created in P&L statement (schedule III) for
disclosing CSR expense in separate Line.
(The Specified requirement is applicable for those companies only which
are covered under sec. 135)

(2) A separate note should be prepared for explanation on CSR expense debited
in P&L A/c as follows:-

CSR expenses on construction or acquisition of Assets * XXXX

CSR expense on other Activities XXXX
Total XXXX

*For Assets refer Concept 7

Concept 7: CSR Assets

If CSR expenditure is incurred on construction or acquisition of CSR Assets then

the following 2 cases may be considered in this case:-

Cases for CSR Assets

Case I : if control over Case II: if control over CSR

CSR Asset is not with Asset is still with
the entity company

We will treat Amt paid for CSR We will treat it as an Asset and
Asset as CSR expense and it will it will be disclosed in B/s under
be debited in P&L A/c. Appropriate heading According to
nature (i.e Ind-As 16, Ind-As 38 etc.)
“Only Depreciation or Amortisation
On these Assets can be claimed as
CSR exp in P&L A/c.

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Journal Entries
Case I Case II

i) CSR Exp. A/c …….Dr XXXX i) CSR Assets A/c…………….Dr XXXX

To Bank XXXX To Bank XXXX
(Being CSR Assets constructed but (Being Assets acquired for CSR
Control transferred to other entity) Activites)

ii) P&L Statement A/c….Dr XXXX ii)Depreciation A/c………..Dr XXXX

To CSR exp. XXXX Amortisation A/c………..Dr XXXX
(Being Exp, written off) To CSR Asset XXXX
(Being CSR Asset depreciated)

iii) CSR Exp…………………Dr XXXX

To Dep. XXXX
To amortisation XXXX
(Being CSR exp. Recognised)

iv) P&L statement A/c……..Dr XXXX

To CSR Exp. XXXX
(Being exp. Written off)

Question-7
Solution

As per the provisions , expenditure on CSR Assets can be claimed as CSR expense
only if control over these Assets is not with the entity. If control over the Assets
is still with company then expenditure on these Assets cannot be considered as CSR
expense, but CSR Assets should be recognised in the books.

In the given case, CSR Building has been recognized by company as an Asset in its
B/S due to which it can not be claimed as a CSR expense in P&L statement, but
Depreciation on such an Asset will be recognised as CSR expense because Building is
used in CSR Activities.

Concept 8: carry forward of CSR exp.

If actual expense on CSR Activities becomes higher than 2% of Avg. net profit it will
be considered as voluntary expense and it cannot be carried forward as prepaid
expense, but it will be written off in P&L in same year.

Question-7
Discussed at class

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Concept 9: Income Generated on CSR projects (Imp)

If any nominal income is generated from CSR Activities/ programmes then the
Following points should be considered for treatment of such an Income:-

Step 1: For Nominal Income

Bank a/c……………Dr XXXX

To CSR Incomes XXXX
(Being CSR Income received)

CSR Income a/c……….Dr XXXX

To P&L Statement XXXX
(Being income credited to P&L)

Step II: Treatment of Income

CSR Expense a/c……………Dr XXXX

To CSR Liability XXXX
(Being exp. Debited equal to CSR income to contra the affect on P&L)

P&L Statement A/c….Dr XXXX

To CSR exp. XXXX
(Being Exp, written off as per contra)

As per the provisions, CSR income will be credited to P&L statement but an equal Amt
Will also be debited in P&L statement as CSR expense to contra to affect on P&L.
In addition , CSR Liability will be created for such CSR income because resources
generated from CSR income shall also be utilised for CSR Activities only.

Note: The CSR expense out of CSR Income will be considered in addition to 2% of Avg.
Net profits of past 3 years.

Concept 10: Distribution of Goods/ services in CSR Activities for free

If free Goods/ Services are distributed by an entity under CSR Activities then
CSR Exp. Can be claimed equal to “Cost of such Goods/ Services”. The calculation of
Cost of Goods will be subject to provisions of Ind-As2.

Question-9
Discussed at class

Concept 11: CSR expenditure as a deduction in Income Tax Act

As per the provision , CSR expense can be claimed as an expense while computing
Taxable income only if it falls under sec.30 of Income Tax act. If it is an other
expense which is outside the scope of section 30-section 36 then no deduction will be
allowed.

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Concept 12: Important Definitions

1) Meaning of net Worth:

Net Worth= Paid up capital + All Reserves which are created out of profits (i.e.
G. Reserve, P&L , CRR Etc. ) + securities premium –Accumulated Lossed-
Deferred Rev. exp.- Misc. Exp.

2) Meaning of Net Profits:-

As per the provisions of sec.135, Net profit means profit disclosed by entity in
PL statement but we will not consider the following Incomes under Net profits:-

I. Profits/ Incomes from foreign operations (Branch, Subsidiary etc.)

II. Dividend Received from those companies which are covered under section 135

3) Meaning of Turnover:-

Turnover means Gross collection from sale of Goods/Services.

4) Average Net profits[3 preceding years] for 2% Application:-

Avg Net profits shall be computed as per section 198.

Note: Those profits are the same profit which are computed to find the maximum
limit of managerial Remuneration u/s 197.

*Part 3*

Illustration 5, 8 (Discussed in Class)

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Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter 7: Ind AS-41 Agricultural Activities

*Part 1*

Concept 1: Coverage of Ind AS 41

Coverage

Biological Agricultural Govt Grants

Assets Produce for Agriculture
(Imp) (Imp)

Concept 2: Important Definitions

A. Meaning of Biological Assets

As per the Provisions, A Biological Asset is a Living Plant (Except Bearer Plants
which are already discussed in Ind AS 16) & A Living Animal.

Biological Asset

A Living Plant A Living Animal

1. Crops (41): i) Cotton Plants i) Cows held in Dairy Farms

ii) Tobacco Plants ii) Sheeps, Goats etc
iii) Sugarcane Plants iii) Poultry farms etc.
iv) Wheat, Rice etc.

2. Woods (41): v) Pollar Trees

vi) Teak Trees Timbers
vii) Pinewood Trees

3. Bearer Plants (16): Apple trees, Mango trees,

All other fruits trees (these are considered as) PPE,
But not as Biological Assets under Ind AS 41.

The following Assets are not considered as Biological Assets under the scope of Ind
AS 41:-
(Note: If any Asset is used to obtain Agricultural Produce from Biological Assets
then such an Asset will be covered under Natural head of that Asset)
a) Agricultural Land (Refer Ind AS 16 PPE)
b) Other Fixed Assets used in Agricultural Activities (i.e; Tractors, Equipments)
[Refer Ind AS 16 PPE]
c) Bearer Plants (Ind AS 16)
d) Govt Grants for Bearer Plants (Ind AS 16)
e) Licenses or Permission for Agricultural Activities (Ind AS 38)
f) ROU Assets (i.e; Leasehold Land: Ind AS 16)

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B. Meaning of Agriculture Produce

As per the provisions of Ind AS 41, Agriculture Produce is a harvested product from
Biological Asset at the time of Harvesting. A Harvested Product is the detached
product from Biological Asset. If any processing is carried after Harvesting on
Agricultural Produce then processed goods shall be covered under the scope of
Ind AS 2 (Inventories). The following table may be considered for understanding the
Difference between Agricultural Produce & further processed Inventory:-

Biological Assets Agriculture Produce Processed Goods

(Ind AS 41) (Ind AS 41) (Ind AS 2)

(i) Cows Milk Ghee, Butter,

Buttermilk, Cheese etc.

(ii) Sheeps Wool Carpets, yarns etc.

(iii) Cotton Plants Picked Cotton Thread, Garments etc

(iv) Sugarcane Plants Sugarcane Sugar

(v) Tobacco Leaves Picked Leaves Tobacco

(vi) Timber Trees Felled Trees Wood loys, Lumber etc.

(Poplar, Teak etc.)

Note: As per the provisions, Bearer Plants are covered under the scope of Ind AS 16,
but Agricultural Produce from these Plants shall be covered under the heading of Ind
AS 41.

(vii) Fruit Trees (16) Fruits (Raw) Processed Fruits

(viii) Rubber Plant (16) Latex Rubber Products

(ix) Tea Plants (16) Picked Leaves Tea

Concept 3: Recognition Rules for Biological Assets in Balance Sheet

As per the Provisions of Ind AS41, the following 3 conditions should be satisfied
before any Recognition of Biological Asset in the Books of Accounts:-

I. The Entity should have an undisputed ownership over the Asset.

(Note- It means that Biological Asset should be under the control of Entity)

II. The Biological Asset should have some economic benefits and these Benefits shall
flow to the Entity

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III. A Reliable Estimate of its Fair Value/ Cost should also be available.

Concept 4: Accounting for Biological Assets

Unit I: Accounting for Animals

Unit II: Accounting for Plants

Unit I: Accounting for Animals (Imp)

Step 1: Initial Recognition

Example: i) Animals purchased for Rs.10,00,000

ii) Acquisition Expenses= Rs.50,000
iii) Fair Value of Animals on the date of acquisition is Rs.11,00,000 but subject
to a commission on sales @2%.
Pass the Journal Entries for Acquisition of Animals at the time of Initial
Recognition

Solution:

1) As per the provisions of Ind AS 41, Acquisition expenses which are incurred for
acquiring Animals, should be written off in P&L a/c on same date. It means that
Expenses on Acquisition can not be capitalised to the Cost of Animals.

(a) Acquisition Exp on Animals………..Dr 50,000

To Bank 50,000
(Being Expenses paid)

(b) Income Statement (P&L)……Dr 50,000

To Acquisition Expenses 50,000
(Being Expenses w/off)

2) Initial Recognition of Animal should be made at NRV (Fair value less cost to sell).
It means that animals are not recognised at purchase price, but NRV/NSP/FV less
cost to sell is considered. “ The difference between Fair Value less cost to sell &
purchase price will be considered as Loss or Profit at Initial Recognition”

Animals a/c……….Dr 10,45,000 (11,00,000 – 5%)

To Bank 10,00,000
To Gain on Initial Rec. 45,000 (Bal)
(Being Initial Recognition made at Net Fair Value)

Gain on Initial Rec…….Dr 45,000

To Income Statement 45,000
(Being Gain transferred to P&L)

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Example: With the help of given example as in above, Pass Journal Entry if
commission would have to be paid @ 10% instead of 5%

Solution:
1) Animals a/c………………….Dr 9,90,000 (11,00,000 – 10%)
Loss on Initial Recog….Dr 10,000 (Bal)
To Bank 10,00,000
(Being Initial Recogn. Made at Net Fair Value)

2) Income Statement………Dr 10,000

To Loss Initial Recogn 10,000
(Being Loss w/off)

Notes on Concept:

A. Initial Recognition of Animals should be made at Fair Value less cost to sell.
It means that purchase price of Animals is not relevant for Initial Recognition.

B. Difference between Fair Value Less cost to sell & Purchase Price “On Acquisition
Date” will be considered as Loss or Gain at Initial Recognition.
(The amount of Loss/Gain will be transferred to P&L a/c)

C. If any expense is incurred at the time of Acquisition of Animals (i.e, Transport

charges, Loading/ Unloading Expenses, Commissions etc.) then such an Expense
should be written off in P&L a/c. Normally, these expenses are capitalised to the
cost of assets, but these expenses shall be w/off in P&L.

Journal Entries

A. Acquisition Expenses…………Dr xxxx

To Bank xxxx
(Being Expenses incurred for Acquisition of Animals)

B. Animals a/c………………..Dr xxxx

Loss on Initial Recog..Dr xxx
To Bank xxx (Purchase Price)
To Gain on Initial Recogn. xxxx (Bal.)
(Being Initial Recognition made at Net Fair Value)

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*Part 2*

Step 2: Subsequent Valuation at Balance Sheet (Imp)

Example: A Ltd. purchased 500 cows @ Rs.11,00,000. At the time of acquisition fair value
less cost to sell for these cows was Rs.9,80,000. All the cows were 3 years in Age at
the time of Acquisition. At Balance Sheet date, Fair Value Less cost to sell was
measured for these cows @ Rs.12,60,000. If we purchase cows of 3 years age at Balance
Sheet date then we would have to pay Rs.10,00,000 which equals to Net Fair Value.
Pass Journal Entries for Initial Recognition & Also show Balance Sheet Valuation.

Solution:
Initial Recognition

Cows a/c………………………………....Dr 9,80,000

Loss on Initial Recognition…Dr 1,20,000 (Bal.fig)
To Bank 11,00,000
(Being Biological Assets initially recognised)

Balance Valuation

Fair Value Less cost to sell for 500 cows at B/S date = Rs. 12,60,000
Fair Value Less Cost to sell for 500 cows at Acquisition date = (Rs.9,80,000)
Changes in Fair Value = Rs.2,80,000

(i) Price Change [10,00,000 – 9,80,000] (20,000)

(ii) Physical Change Rs.2,60,000

(a) Cows a/c……………..Dr 2,80,000

To Fair Value Changes: Price 20,000
Physical 2,60,000
(Being Biological Assets appreciated due to change in F.V)

(b) Fair Value Changes: Price 20,000

Physical 2,60,000
To Income Statement 2,80,000
(Being F.V changes recognised as on Income)

As per the provisions of Ind AS 41, Biological Assets (Animals) should be valued at B/S
date on Fair Value Less cost to sell. There may be some difference between Net Fair
Value at acquisition date & Balance Sheet Date. Such a difference should be treated as
change in Fair Value & It should be transferred to P&L a/c (Income Statement).
The following Statement should be prepared for such calculation:-

Fair Value less cost to sell at B/S date = xxxx

Fair Value less cost to sell which was recorded earlier = xxxx
Changes in Fair Value* = xxxx

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Changes in Fair Value

Price Change Physical Change

Animals of same age are Total Fair Value (-) Price change
Compared as follows: Change
Net Fair Value (-) Net Fair Value which (Above statement)
At B/S date was recorded earlier

Q.1
Solution:
Statement showing valuation of Cattle at 31.03.x2

Total Fair Value at B/S date (250 x Rs.75) Rs.18,750

Fair Value for 250 animals which was recorded earlier (01.04.x1) (Rs.13,750)

Total Change Rs.5,000

(i) Price Change:
3 years cattle at B/S (250 x 60) Rs.15,000
3 years cattle at 01.04.x1 (Rs.13,750) Rs.1,250

(ii) Physical Change (Bal.fig) [(75-60) x 250] Rs.3,750

Q.2
Solution:

I. Calculation of Net Fair Value at Initial Recognition

Purchase Price (Reflects fair value) 5,00,000

Expenses to sell (Expected @2%) (10,000)
Net Fair Value 4,90,000

II. Valuation at B/S date

Fair Value less cost to sell at B/S date [6,00,000 – 2%] Rs.5,88,000
Initial Recognition (Rs.4,90,000)
Changes in Value Rs.98,000

Journal Entries
1. Biological Assets…………………...Dr 4,90,000
Loss on Initial Recognition…Dr 10,000
To Bank 5,00,000
(Being Biological Assets acquired)

2. Biological Assets……………….Dr 98,000

To Fair Value Change 98,000
(Being Appreciation in Value recorded at B/S date)

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3. Fair Value Change……………..Dr 98,000

To Income Statement 98,000
(Being Income recognised)

Q.6 (V.V.Imp) [Nov2020-RTP]

Solution:

I. Recognition of Biological Assets at the time of Initial Recognition

Purchase Price (Fair Value at Acquisition date) 60,000

Expenses to sell: Transportation (1,500)
Fees @1% (600)
Net Fair Value 57,900

Journal:
1) Acquisition Expenses…………Dr 2,100 (1,500 + 600)
To Bank 2,100
(Being Expenses paid for Acquisition of Biological Assets)

2) Biological Asset…………………..…..Dr 57,900

Loss on Initial Recognition…..Dr 2,100 (Bal.fig)
To Bank 60,000
(Being Initial Recognition of Biological assets made at Net Fair Value)

II. Valuation of Biological Assets at B/S date

Fair Value at B/S date Rs.65,000

Expenses to sell (1,500 + 1% of Rs.65,000) (Rs.2,150)
Net Fair Value 62,850

Net Fair Value (Initially Recognised) (57,900)

Change in Fair Value 4,950

Journal: P.C P.C

1) Biological Assets………..Dr 4,950
To Fair Value Change 4,950

2) Fair Value Changes…..Dr 4,950

To Income Statement 4,950

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Step 3: Special Point on Accounting for “Calves”

As per the Provisions of Ind AS-41, the following Steps should be applied for
Accounting of Calves:-

A. New Born Calves-

Calves a/c…………..Dr xxxx
To Income Statement xxxx
(Being Calves Recognised)

Note: As per the provisions, New Born Calf will be recognised as “An Income” at the
time of its birth at Fair Value less cost to sell because It is not acquired. It means
that It will be an Asset without any Acquisition Price.

B. Balance Sheet Valuation-

As B/S date, changes in Fair Value of Calves will be find out & will be recognised in P&L
a/c.

Fair Value less cost (-) Fair Value less cost to sell at
To sell at B/S date Initial Recognition

Note: The change in Fair Value of Calves will be considered as Physical change only. So,
No need to split the Fair Value change into separate headings of price change &
physical change.

Q.7 (Imp)
Solution:
Valuation of 4 years age Animals which were held on 01.01.2016
Rs. (‘000)
Total Fair Value of 5 years animals at 31.12.2016 [280 x 15] 4,200
Fair Value in the beginning of year [250 x 15] (3,750)
Change in Fair Value 450
Price Change:
4 years animal at B/S [15 x 258] 3,870
4 years animal at opening [15 x 250] (3,750) 120

Physical change (bal.fig) [(280-258) x 15] 330

Valuation of 4.5 years age animal which was acquired on 01.07.2016

Fair Value for 5 years age animal at B/S date Rs.280

Fair Value (Initial) (Rs.260)
Changes in Fair Value Rs.20

1) Price Change:
4.5 years animal at B/S 270
4.5 years animal at 01.07 (260) Rs.10

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2) Physical Change (Bal.fig) [280-270] Rs.10

Valuation of Calves

Fair Value at B/S date for 6 months age calf 220

Fair Value for New Born calf on 1st July (200)
Changes in Fair Value* 20

*No need to split it under Price Change & Physical Change as per Rules.

*Part 3*
Step 4: Accounting for Agriculture Produce(i.e; Milk from Cows, Wool from Sheep, Meat
from Goat etc.)

As per the provisions of Ind AS 41, the following steps should be applied for
Accounting for Agriculture produce obtained from Animals.

A. Initial Recognition: At the point of Harvest, Agriculture produce shall be recorded

at Fair Value less cost to sell as follows:-

Agriculture Produce a/c………….Dr xxxx

To Income Statement xxxx
(Being Income Recognised from Agriculture produce at the point of Harvest)

B. Valuation of unsold Inventory at B/S date out of Agriculture Produce: If any

Inventory out of Agriculture Produce remains unsold at B/S date then its valuation
will be made as per Ind AS-2 (Cost or NRV whichever is lower). The Value which was
initially recorded at the point of Harvest will be considered as “Cost” at B/S date.

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Unit II: Accounting for Plants(V.V.Imp)

Plants

Crops Wood
(i.e; wheat, Rice, cotton, sugarcane etc) (i.e; Teak, pollar, pinewood etc)

We will follow same rules as we (Refer Steps** as follows)

discussed in Step IV in Unit I
(No New Concept: It means that Accounting
For Crops is similar as for Animal
Agriculture Produce.)

** Steps for Accounting of Wood Plants:-

Step I: Initial Recognition (At First B/S after cultivation)

Calculate Present Value of Net Fair Value of a Mature Tree at the point of Harvest &
consider it as an Income.

Wood Tree a/c………………Dr xxxx

To Income Statement xxxxx
(Being Initial Recognition made)

Step II: At each B/S date after Initial Recognition

Calculate Present Value of Net Fair Value of a Mature Tree at the Point of Harvest at
each B/S date & updation of value in B/S will be made each year as follows:-

P.V of Net Fair Value of Mature Trees at Current B/S date xxxx
P.V of Net Fair Value which was recorded Last year (xxx)
Changes* in Value xxxx

*Changes in value will be transferred to P&L

a) Wood Trees a/c……………..Dr xxxx
To Fair Value Changes xxxx

b) Fair Value Changes………..Dr xxxx

To Income Statement xxxx

Q.2
Solution:
Valuation of Wood Trees

Fair Value as at 31.03.x2 (165 x 100 x 0.331) 5,461.50

Fair Value as at 31.03.x1 (171 x 100 x 0.312) (5,335.20)
Changes in Value 126.20

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Comments: (i) As per the provisions of Ind AS-41, Changes in Fair Value of Mature
Tree will be transferred to P&L a/c. So, we should transfer Rs.126.30 to
Income Statement.
(ii) In the given question, Transportation Cost is not mentioned due to
which we cannot calculate Net Fair Value. So we have calculated P.V of
Gross Fair Value.

Concept 5: Accounting for Expenses

As per the provisions of Ind AS 41, All expenses which are incurred for Growth &
Maintenance of Biological Assets, should be charged to P&L a/c. These expenses may
be in the form of seeds, pesticides, fertilisers, food, breeding etc.

Concept 6: Accounting for Government Grants

If any Grant is received for Agricultural purpose then It will not be covered under
Ind AS 20, but It will be treated as per Ind AS 41. These Grants can be considered
under 2 headings as follows:-

Grants

Unconditional Grants Conditional Grants

Transfer these Grants immediately Amortise these grants in P&L a/c

to P&L a/c as an Income according to condition on Grant

Concept 7: If Fair Value Less Cost to Sell is not available (Imp)

In case Fair Value less cost to sell is not available for Biological Assets then we can
recognise these Asset on Actual Cost Basis as well. If cost model has been applied by
the Entity then Accounting for Grants will also be considered as per Ind AS 20.

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Q.3 (V.V.Imp)
Solution:
Extracts of Income Statements

Incomes: 1) Income from Govt. Grants 10,00,000

2) Fair Value Change: Cows 1,00,000
3) Income from Calves: Initial 1,10,000
F.V. Change 20,000
4) Income from Agricultural Produce (Milk) 72,000

Total Incomes 13,02,000

Expenses: 1) Foods 6,00,000

2) Breeding 4,00,000
Total Expenses 10,00,000

Net Income Rs.3,02,000

(Extract) Balance Sheet

A. Non-Current Assets:
Property, Plant & Equipment (Land) 50,00,000
Biological Assets:
Cows 11,00,000
Calves 1,30,000 12,30,000

B. Current Assets:
Inventory (Milk) 72,000

Notes to Accounts:-
1. Purchase of Land: As per the provisions of Ind AS-41, Land will be covered under Ind
AS-16 which is used in Agricultural Activities. So, we will disclose it in B/S under the
heading of Non-Current Assets & Sub-Heading of PPE.

2. Accounting for Cows:

(a) Initial Recognition
There will be no Loss/Gain at the time of Initial Recognition of cows because
Acquisition Price & Net Fair Value are equal at the time of Purchase. So Initial
Recognition of Cows will be made at Rs.10,00,000.

(b) B/S Valuation

Net Fair Value for 3 years age (200 cows x 5,500) 11,00,000

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Initially Recognised value (10,00,000)

Changes* in Value 1,00,000
i) Price Change for 2 years age [(5,200 – 5,000) x 200] (40,000)

ii) Physical Change (Bal.) 60,000

*Rs.1,00,000 will be credited in P&L a/c as there is a Positive Change in Value of Cows
at B/S date.

3. Accounting for Calves:

Initial Recognition (1.10.x1)
Value of New Born Calves (1,100 x 100) 1,10,000
Comment: Recognise it as an Income

B/S Valuation
Value for 6 month age (1,300 x 100) 1,30,000
Initially Recognised (1,10,000)
Changes* 20,000
*Favourable Changes of Rs.20,000 shall be considered as an Income in P&L

Total Income from Calves = 1,10,000 + 20,000 = Rs.1,30,000

4. Accounting for Grants:

In the given case, Grant of Rs.10,00,000 should be credited in P&L a/c because grants
were given for Acquisition of Cows & Entity has purchased cows. So, condition is
already satisfied. So, Grant should be treated as an Income.

5. Accounting for Milk (3,000 litres at 31.3.x2):

As per the rules, unsold Agriculture Produce should be valued at Cost or NRV whichever
is lower, but cost is missing in the given case. So, we have to value 3,000 litres of Milk
@24 which is Net Fair Value at B/S date. There will be a credit of Rs.72,000 in P&L a/c
as Income from Agriculture Produce.

Q.4
Solution:

As per the provisions, Living Animals & Living Plants come under the scope of Ind AS-
41, but land or other assets do not come under its scope. So the re-classification is
not correctly made by the Entity. The following table can be considered for such
classification:

Asset Applicable Ind AS

1. Trees 41
2. Land 16
3. Roads 16

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Q.5
Solution: Homework

Concept 8: Disclosures (Notes to Accounts)

1. If the Entity has not followed Fair Value Model then Reason should be disclosed.

2. The Entity should also disclose Accounting Policy which has been opted for
Accounting of Govt. Grants.

3. The Entity should report Gain/Loss from Changes in Fair Values at B/S date from
Animals, Plants or Agriculture Produce.

4. The Entity shall present a Reconciliation Statement for all Biological Assets
between Opening Balance & Closing Balance.

*Part 4*

New Question

Solution of Q.3

Journal Entries

30.9.x1
Loss (P&L) a/c Dr 520,000
To Biological Assets 520,000
[(27000 – 1000) x 20 cows]
(Being Loss debited due to death of 20 cows)

Note : No Benefit of fair value measurement of Dead cows

1.10.x1
Biological Assets (New cows) a/c Dr 400,000 (21000 – 1000) x 20
Loss at initial Recognition a/c Dr 20000 (1000 x 20)
To Bank 420,000 (Total)
(Being initial Recognition made for 20 new cows at fair value Less cost to sell)

31.3.x2
a) Fair value Loss (P&L) a/c Dr 288000
To Biological Assets 288000
(Being Decline in value recorded at B/s date for 480 cows)
b) Biological Assets a/c Dr 48000
To fair value Gain (P&L) 48000
(Being Appreciation in value at B/s date recorded for 20 cows)

Inventory : 1000 litres x (20 -1) = Rs.19000

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W.N # 1 Fair value measurement of Biological Assets at B/s date

I Cows of 4 years Age

Fair value at B/s date 121,92,000
(26500 – 1100) x 480 Cows
Fair value in the beginning of year 124,80,000
(27000 – 1000) x 480 cows
Decline in value 288000

II cows of 1.5 years Age

Fair value at B/s date 448000
(23500 – 1100) x 20
Fair value (initial) (400000)
Appreciation 48000

Solution of Q.4 *Imp

Journal Entries

30.9.x1
Biological Assets a/c Dr 97000 (FV – Cost to sell)
Acquisition cost a/c Dr 1000 (Transportation)
Loss at initial Recog. a/c Dr 3000 (Exp. to Sell)
To Bank 101000
(Being initial Recognition of Biological Assets made at fair value Less cost to sell)

*97000 = 100,000 – 1000 – 2000

(Transp.) (fees :100000 x 2%)

31.3.x2
Biological Assets a/c Dr *9800
To fair value Gain (P&L) 9800
(Being valuation of Biological Assets at B/s made)
*[110000 – 1000 – 2200 (110000 x 2%)] – 97000
(B/s value) (Initial)

1.6.x2
Bank a/c Dr *19450
To Biological Assets 19224
106800 x 18
100
To Gain on sale (P&L) 226
(Being 18 cows sold)

[*20000 – 150 – 400 (20000 x 2%)]

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15.9.x2
Inventory a/c Dr (48300 – 420) 47880
Fair value Loss a/c Dr (Bal fig) 1176
To Biological Asset 44856
106800 x 42
100
To Bank 4200
(Being Agricultural Produce recognised at fair value Less cost to sell)

30.9.x2
Biological Assets a/c Dr *784
To fair value Gain (P&L) 784
(Being valuation made for 40 cows)

*[44800 – 400 – 896 (44800 x 2%)] - 106800 x 40

100
(final value) (Previous value)

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter-8 Ind AS : 2
Accounting for Inventories (Valuation)

*Part 1*

Concept 1 : Basic Objective

As per the Provisions of Ind AS -2, Valuation of Inventory is directly

Related with Profits & EPS of the company. If we over- value our Inventory then
It will increase our Profits or Vice-Versa. So, we need to value the inventory at
Correct value.

Concept 2 : Meaning of Inventories

As per the Provisions of Ind AS-2, we can Classify the Inventories into 3 different
Headings as follows : -
Inventories

Held for Sale Held in Process of Held for consumption

Production in Production

Finished Goods WIP Raw Materials & *Supplies

100% 0% - 100% 0%

❖ Supplies means consumables stores Ind AS-2 considers it as an Inventory

i.e., Loose Tools, Oils etc.

Important Note : Specific Loose Tools shall be covered under Ind AS 16 PPE, but
(Source : Ind AS General Supplies are covered under Ind AS-2
16 PPE)

Concept 3 : Out of Scope of Ind AS-2

As per the Provisions of Ind AS-2, there are some Specific Inventories which are
Valued as per other Standards and these are not covered under the coverage of Ind
AS -2 : -
a) Financial Instruments (Ind AS 109)
b) Deferred Tax Assets (Ind AS 12)
c) Biological Assets (Ind AS-41)
d) Agricultural Produces after Harvest, Forest, mineral Oils etc.
e) Construction WIP held by Contractors (Ind AS 11)
f) Commodity Brokers/ Traders who are Valuing their Stocks at Cost or Fair value
Whichever is Lower

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(i.e., Stock of Shares or Debentures held by Broker are valued at Cost or Fair value
Whichever is Lower)

Fair Value V/s NRV

Fair Value means Expected selling price at the time of Sale of Assets, but NRV means
Expected Price from the Sale of Goods in Ordinary Course of Business.
Fair Value is based on NRV is fixed by owner
Market conditions of Goods

Concept 4 : Valuation Rule

Valuation Rule : Cost or Net Realisable Value

Whichever is Lower

Notes :
i. We cannot show inventory in the financial statements above cost, because
Unrealised profits cannot disclosed in the books as a matter of “Prudence”.
ii. In case, Inventories are valued below Cost due to decline in Expected Price
then the following Entries shall be recorded : -
a) Valuation Loss a/c Dr xxxx
To Inventory xxxx
(Being Inventory reduced)
b) P&L a/c Dr xxxx
To Valuation Loss xxxx
(Being Losses written off)

Reasons for decline in Value of Inventory : -

a) Defective/ Damaged Goods
b) Obsolete Goods
c) Less Demand etc

There are two Key factors to understand the valuation of Inventory as follows :-
Unit I : Calculation of Cost
Unit II : Calculation of NRV

Unit I : Calculation of cost of Inventory

Cost

Direct material Conversation Cost

Direct wages Factory overheads Other cost

Fixed OH Variable OH

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1) Cost of Direct Material

Purchase Price* xxxx

Taxes & Duties * xxxx
Transportation/ Freights xxxx
Loading/ Unloading Charges xxxx
Transit Insurance xxxx
Any other Expense which is
directly related with
Purchase of Material xxxx
Cost of Raw material xxxx

❖ Rebates/ Trade discount, which is based on volume of Purchased Goods, is received

Then we should not consider it in cost of R.M, but It will be reduced from total
Cost.
❖ We will consider No Refundable or Non Adjustable duties only for Cost of RM.

2) Direct Wages

There will be no Separate calculation of Wages, because we will consider Direct Wages
Directly from factory Record. Pay Roll Sheets OR
Wage payment Register

3) Variable Overheads

Variable OH = No. of Units Actually Produced x V.OH per units

Note : These Expenses shall be calculated as per Actual Production.

4) Fixed Overheads *V.V.Imp

Example :
i. Fixed OH : ₹ 10,00,000
ii. Normal Output : 10,000 Units
iii. Actual Output : 8200 Units
Calculate the amount of Fixed OH for Cost Of Inventory.

Solution :
a) Recovery rate (P.U.) = 10,00,000 = 100 P.U
10,000 units
b) Recovered OH = 8200 x 100 = 820,000 to be included in Cost
c) OH (Un-Recovered) = 1800 x 100 = 180,000 To be written off in P&L A/c.

Example :
a) Fixed Oh : ₹ 20,00,000
b) Normal Output : 100,000 Units
c) Actual Output : 110000 Units
Calculate the amount of F.OH to be included in Cost.

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Solution :
In the Given Case, we should not Calculate Recovery Rate per unit on the
Basis of Normal output, because we cannot Consider recovered OH more than Actual
F.OH. It can also be said that Over – Recovery is not allowed under Ind AS-2.
So, we should revise our Recovery Rate on the basis of Actual Production as below:-

F.OH (P.U) = ₹ 20,00,000 = 18.18 P.U

110,000 units

As per the Provisions of Ind As-2, we should convert fixed OH from fixed Amount into
P.V OH. It will be done on the basis of following Equation :-

Fixed OH (P.U) = Fixed overheads .

Normal Output or Actual Output

Higher

5) Other Cost (Specific Cost)

As per the Provisions of Ind AS-2, Any other Expense which is incurred for
Production of Goods, and It is not covered in the earlier 4 Expenses, then It can
Also be included in the cost of Inventory.

Cost = RM + DW + V.OH + F.OH + O. Cost = Total Cost

Additional Concepts to be considered :-

Concept (a) : If Inventory is Purchased on Credit *V.V.Imp

As per the Provisions of Ind AS-2, we should discount the Purchase Price
Of Inventory if we buy it on credit. The Present Value of Purchase price will be
Considered as Cost of Inventory, but the remaining amount will be taken as finance
Cost/Unwinding Cost which will be written off in P&L A/c.

Example :
i. Purchase Price : 10,00,000
ii. Payment to be made after 2 years
iii. Market rate of Interest : 10%
Pass Journal Entries under Ind AS-2.

Solution :
i. P.V of Purchase Price = 10,00,000 x .826
= 826,000
ii. Journal Entries
a) Purchases a/c Dr 826,000
To Creditors/Trade Payables 826,000
(Being Goods Purchased on Credit)

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Interest
b) Unwinding cost a/c Dr 82600 (826000 x 10%)
To Creditors 82600
st
(Being Interest for I year debited)
c) P&L a/c Dr 82600
To U. Cost 82600
(being Exp. Written off)
d) Unwinding Cost a/c Dr 91400 (908600 x 10%)
To Creditors 91400
nd
(Being Interest debited for 2 Year )
e) P&L a/c Dr 91400
To U. Cost 91400
(Being Int. written off0
f) Creditors a/c Dr 10,00,000
To Bank 10,00,000
(Being Payment made)

*Part 2*

Solution of Q.1

Calculation of Cost per Unit (Finished Goods)

Direct Material 100

Direct Wages 20
Variable OH 10
Fixed OH ₹ 10,00,000 10
100,000 Kgs
T. Cost P.U 140

Cost of Inventory = 2000 kgs x 140 = 280,000 /-

Solution of Q.2

Calculation of Fixed OH to be included in Cost of Stock

Case I : Actual Production = 42000 Units

Recovery Rate (P.U) = ₹ 500,000 = 10 P.U.

50,000 Units

Recovery OH = 42000 x 10 = 420,000 (To be included in cost of Stock)

Un-absorbed OH = 8000 x 10 = 80,000 (To be written off in PL A/c)

Case II : Actual Production = 50,000 Units

Recovery rate = ₹ 500,000 = 10 P.U

50,000 Units

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Recovery OH = 50,000 U x 10 = ₹ 500,000

- No Unabsorbed/ No Over absorbed -

Case III : Actual Production : 60,000 units

Recovery Rate P.U = ₹ 500000 = 8.33 P.U

60,000 U
Recovered OH = 60,000 Units x 8.33 P.U = ₹ 500,000

Note : In the Given Case, we should not use Normal Recovery of ₹ 10 P.U., Otherwise
there will be over- recovery of OH due to high Production.

Solution of Q.7 (2 marks)

Direct Material 500 P.U

Direct Wages 250 P.U
Fixed OH ₹ 20,00,000 20 P.U
100,000 Units
Cost P.U 770 P.U

Cost of Inventory = 10,000 x 770 = 7700,000

Note : A.OH & S. OH are not considered as a part of cost of Inventory due to Which we
Have ignored the Given amount of A.OH.

Solution of Q.9

Calculation of Cost of R.M

Purchase Price ( 500 Units x 150) 75000

Trade Discount @ 10% (7500)
Net Price 67500
Add : GST @ 5% 3375
Less : Duty Credit (500 x 12) (6000)
Add : Transportation Exp. 1000
Add : Loading/ Unloading 500
T. Cost 66,375

Solution of Q.10

Calculation of Cost of Inventory

Prime Cost (200,000 Units x 152) 304,00,000

Variable OH (20L x 60%) x 200,000 240,000
10,00,000
Fixed OH (20L x 40%) x 200,000 160000
10,00,000 * 30800000

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❖ Actual Production is higher than Normal Production

Solution of Q.13 (2 marks)

Calculation of cost of Raw Material

Purchase Price (125000 – 2%) 122,500

Import Duty (25000 – 10000) 15,000
Ocean Freight 8000
Agent Charges 2000
Cost of Raw Material 147500

❖ Warehouse Rent & Watchman Salary are not incurred for acquisition of RM.

Concept (b) : Treatment of Joint Cost

As per the Provisions of Ind As -2, Allocation of joint cost ver Join Products should
be made in the ration of Sales value at Separation Point.

Solution of Q.3 ( Joint Cost)

a) Statement Showing Allocation of Joint cost

Products Qty. Produced Sale value for Qty. Produced Allocation of J. Cost

L 10000 @ 13 = 130,000 68,250

M 12000 @ 17 = 340,000 178,500
N 14000 @ 19 = 266,000 139,650
P 16000 @ 22 = 352,000 184,800
10,88,000 571200

b) Value of Closing Stock

L M N P
Share in J. Cost 68,250 178,500 139,650 184,800
Units Produced 10,000 12,000 14,000 16,000
Cost P.U Joint Cost 6.825 14.875 9.975 11.55
Units X X X
Closing Stock 1625 400 - 1550
Value of Closing Stock = 11091 5950 17903

Concept (c) : Treatment of “By Product”

As per the Provisions of Ind AS -2, Net Realisable Value of By Product will be reduced
From the total Joint cost. It means that we will consider Net Joint Cost (i.e.,
Joint Cost – NRV of By Product) for Allocation over Joint Products.

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Solution of Q.4 *Imp (4 marks) (Study Material)

Calculation of Net Joint Cost

Total Cost : Material 150,000

Wages 90,000
V.OH 65,000
F.OH 50,000
Total Joint Cost 355,000
i. Scrap Value Realised (5000)
ii. NRV from By-Product (30,000)
[2000 x 20] – 8000 -2000
Net Joint Cost 320,000

Statement Showing Allocation of Joint Cost

Products Units Produced Sales Value Share in Jointcost

mP1 5000 @ 60 300,000 192,000

mP2 4000 @ 50 200,000 128,000
500,000 320,000

Closing Stock : mP1 = 192000 = 38.4 x 250 = 9600

5000
mP2 = 128000 = 32 x 100 = 3200
4000
Total Cost 12800

Concept (d) : Cost of Service by Service Providers

It was not in AS-2

As per the Provisions of Ind AS-2, Cost of Services can be calculated by a Service
Provider on the basis of following Points :-

1) Cost of Professionals ( Direct Personnel) who are directly included in Providing

Of Services.
Notes : Salaries or Wages which are Paid to other Staff shall be written off as an
Expense in PL A/c.
+
2) Direct Expense which are incurred for the services means Expenses attributable
On Services.
Note : All other Expenses shall be written off PL Statement.

Concept (e) : Items not to be included in cost of Stock

(Exclusions from Costs)

As per the Provisions of Ind AS -2, the following Items should not be included in the
Cost of Inventory : -

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i. Administration OH
ii. Selling OH &
iii. Distribution OH
iv. Storage Cost
v. Abnormal Losses (PL A/c)
vi. B. Cost (unless it is allowed by Ind AS-23)
vii. Any other Exp. which is not related with Production of Goods

Unit II : Explanation on NRV

Net Realisable Value = Expected Selling price – Expected Cost of Disposal of Goods
( Cost to Sell)

A.OH , S.OH

NRV is Calculated on the basis of an assumption

of sale of Goods directly from factory

*Part 3*

Concept 4 : Valuation of Inventories (step by Step)

Case I : Valuation of Finished Goods

Rule : Cost or NRV

Whichever is Lower
❖ If Valuation is made at NRV then Reduction in value of Stock will be debited in
P&L A/c as an Expense.

Case II : Valuation of Raw Materials & Supplies *V.V.Imp

As per the provisions of ind AS-2, Raw material is Purchased for consumption
Only. It is not held for sale, so we should not value these inventories. It can also be
Said that valuation of Raw Materials & Supplies that valuation of Raw materials &
Supplies will be made “ at Cost only”

Exception

In case valuation of Finished Goods is made at NRV then Valuation of Raw

Material can be made on the basis of valuation Rule which is Cost or NRV whichever is
Lower
Summary
i. If FG is valued at cost : RM at Cost
ii. If FG is valued at NRV : Apply Valuation Rule for RM

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Solution of Q.11 (4m) *Imp

Case I : FG @ 275

In the Given Case, Cost P.U of Finished Product is ₹ 250, but Its NRV is 275 which
indicates that valuation of Finished Product will be made at Cost and there is no Loss
on F.G. in this Case. So, we should value Raw material directly at Cost.

Cost of RM = 1000 units x 120 P.U = 120,000

Case II : FG @ 230 P.U

In this case, NRV of FG is Lower than Cost due to which valuation of F.G will be made
at NRV. So, we need to apply valuation Rule on valuation of Raw material, which is as
Follows :

Cost (1000 x 120) or NRV (1000 x 110)

Whichever is Lower = 110,000

Case III : Valuation of WIP *Imp

Valuation of WIP Goods will be made at Cost or NRV whichever is Lower, but NRV for
WIP Goods will be computed as follows :-

NRV = Selling Price – Expected Cost to sell the Goods – Expected Cost of conversion

Solution of Q.16

Calculation of NRV of WIP

Selling Price 750

Brokerage @ 4% (30)
Expected conversion Cost (310)
NRV 410

Valuation = (Cost) 530 0r (NRV) 410 whichever is Lower = 410

Case IV : Valuation of Contract Sale Units

As per the Provisions of Ind AS-2, Valuation of Contract selling units

Should be made as follows :
Cost or Contract Price

Whichever is Lower
❖ Normal NRV which is based on Existing M.V will not Effect this valuation.

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Note : If there is Some Possibility about cancellation of contract due to heavy

Decline in market Price, then we can value all the Goods on the basis of Normal
NRV.

Solution of Q.15

Valuation of Stock

i. Contract Selling units = 150 or 200 whichever is Lower for 6000 Units = 900,000
ii. Normal Units = 150 or 90 whichever is Lower for 4000 Units = 360,000
Cost 12,60,000

Solution of Q.5 (4 marks)

a) Valuation of Shirts

i. Cost of shirts (350 shirts @ 380) 133,000

ii. NRV of Shirts (350 U x 750 – 50% - 5%) 124,688
Whichever is Lower = 124,688

b) Valuation of Trousers

i. Cost of Inventory (7000 x 520) 364,000

ii. NRV ( 700U x 950) – 3800 661200
Whichever is Lower =m 364000

Total (a + b) = 488,688

Concept 5 : Costing Formulas

Costing Formulas

Historical Cost Based Non Historical Based

FIFO Weighted Avg. Retail value Standard Cost Specific

Identification
Method

i. Specific Identification Method : - It is used for only Expensive Items

(i.e., Jewellery etc.)
ii.Retail Value Method : -
Cost = Retail value of Stock - % of Estimated Gross margin
➢ This method is allowed for retailers only where physical valuation is not Possible

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Concept 6 : Reversal of Valuation Loss

(It was also not in AS-2)

As per the provisions of Ind AS-2, we can reverse the written down
Inventories in future if NRV of Such Goods improves. But, It should be noted that
Reversal of Valuation Loss cannot Exceed the amount of Actual Loss which was
Written off Previously.

Journal :
i. Inventory a/c Dr xxxx
To Reversal of Loss xxxx
ii. Reversal of Loss a/c Dr xxxx
To P&L xxxx

Concept 7 : Disclosures (Notes to A/cs)

i. Accounting Policy should be disclosed including Costing formula

ii. The amount of Valuation Loss which has been written off (if any) should also be
Reported
iii. Reversal of Valuation Loss (if any)
iv. Classification of Stock : RM, FG or WIP etc.
v. Inventories which are carrying at fair value should also be disclosed

*Part 4*

Solution of Q.1

Calculation of Cost of Inventory

Purchase Price [(1200 – 5%) x 1000 units] ₹1140,000

Import Duty (1000 Units x 60) ₹60,000
Transportation charges ₹5000
Cost of Inventory ₹1205000

Solution of Q.2

i. Calculation of Cost Per unit

Other Costs (P.U.) 126
Fixed OH (P.U.) 10,00,000 10
100000 unit
Cost P.U 136
ii. Under –Absorbed overheads which are required to be Expensed in P&L as follows :-
Under Absorbed Exp. = [ 100,000 (unit: Normal) - 75000 (Unit: Actual) ] x 100
= ₹250,000 (To be Expensed)

Solution of Q.3

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Calculation of Cost Per unit

Direct Material Per unit : Component x 1205

Component y 800
Other materials 150
Direct wages (300 Per hour x 2 hours) 600
Production Fixed OH [(16500 + 7500)/ 1000 Hours) x 2H 48
Cost Per unit 2803

*Selling & Adm. OH shall be Expensed in P&L A/c.

Solution of Q.4

Calculation of Required values

I Finance Cost Per Car : (25000 P.m. x 12) – 280000 = 20,000

II Inventory : 20 Cars x 280000 = ₹56,00,000
III COGS : 980 cars x 280000 = ₹27,44,00,000
IV *Finance Cost (Total) : 1000 Cars x 20000 = ₹200,00,000
*It will be Expensed in P&L because It is not incurred for Q. Assets.

Solution of Q.5

As per the Provisions of Ind AS 10, Decline in Selling Price of Inventory after
b/s date, but before Approval on statements by BOD will be considered as an
adjusting Event for the purpose of valuation of Inventory on B/s date. In the
Given case, the selling Price of stock has been declined to ₹40 after B/s date, but
Before Approval by BOD on financial statements. So, we should consider this selling
Price for computing NRV on B/s date. The following calculations may be referred:-
i. NRV of stock = Selling Price – Expected cost to be incurred
= 40 – 15
= 25
ii. Valuation Loss (P&L) = 50 – 25 = 25 per unit
(cost) (NRV)

Solution of Q.6

As per the provisions of Ind AS 2, valuation Rule for contract sale unit shall be
Based on contract selling price, but for Normal stock, we use Normal selling Price
Which prevails in market on B/s date. The following calculations may be considered :-

I. Calculation of NRV
Contract units Normal Units
Selling Price 11 P.U 8 P.U
Expenses to be incurred (1 P.U) (1 P.U)
NRV 10 7

II. Valuation of Stock

Contract Units Normal Units

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Units 60 40
Cost or NRV 10/- 7/-
Whichever is lower (10 or 10) (10 or 7)
Value of stock 600 280

Total stock = 600 + 280 = 880

Solution of Q.7

Valuation of Closing Stock

Inventory Cost NRV Whichever is lower

A1 8000 (7800 – 500) = 7300 7300

A2 14000 (18000 – 200) = 17800 14000
B1 16000 (17000 – 200) = 16800 16000
C1 6000 (7500 – 150) = 7350 6000
Total 43300

Solution of Q.8

I. Valuation of Inventory as at 31.3.x1

As per the Provisions of Ind AS 10 : Events after B/s date, Decline in value of
Stock after B/s date, but before Approval on statements shall be considered as an
Adjusting Event. So, Decline in NRV of stock in Given case shall be taken into Account
as an adjusting Event. The following calculations may be relevant :-
1) Cost of Inventories : 10 millions
2) NRV of Inventories (8-5) : 7.5 million
Whichever is lower : 7.5 million

*Valuation Loss of ₹2.5 million shall be Expensed in P&L A/c.

II. Valuation of stock as at 31.3.x2

In the Given case, NRV of Previously values stock has improved at B/s date from
7.5 million to 10.5 million (11-5). As per the Provisions of Ind-AS 2, we can reverse the
Previously written off valuation Loss in case of subsequent improvement in NRV. So,
We will Reverse the previous valuation Loss & carrying Amount of stock will be 10
million again

Solution of Q.9 *Imp

I. Calculation of Per unit Recovery Rate for V.OH & F.OH

i. Time taken Per unit = Actual Output = 6500 Units

Actual Hours 6500 H

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= 1 Hour Per unit

ii. Recovery Rate Per hour/ Per unit
F.OH = ₹1500 = .20 Per Hour/ per unit
7500 Hours
(Normal)
V.OH = ₹2600 = .40 Per Hour/ Per Unit
6500 H
Total OH Per Unit = .20 + .40 = .60 P.U

II. Allocation of Overheads

Total Overheads (1500 + 2600) ₹4100
Overheads to be included in Inventory (₹1380)
(2500U + 6500U – 6700U = 2300 x .60)
Overheads to be Expensed in PL ₹2720
i. Under- Recovery (1000H x .20) (₹200) Other Exp.
ii. COGS ₹2520

Solution of Q.10

Calculation of cost of stock

Cost of Purchase 500,000

Trade discount (10,000)
Import duty 200
Freight 250
Other Cost 100
Broker 300
Cost 490850

*Part 5*

Discussion of Solution of Q.3, Q.5, Q.9, Q.19, Q.25, Q.32, Q.42

Thank You 😊
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter-9 Ind As -16

Property, Plant & Equipment (4-5 marks)

*Part 1*

Concept 1 : Meaning of PPE

As per the Provisions of Ind AS-16, the following five conditions should be
Satisfied to Classify an Asset under the heading of PPE :-

Condition I: It should be a Tangible * fixed Asset.

Fixed Assets

Tangible * Intangible
(Ind As 16) (Ind AS 37)
(we will not discuss these Assets
in this statement)
❖ It means that this statement will cover all Tangible fixed Assets i.e., Land,
Building, furniture etc.
+
Condition II: It should be held for use in Production, Administration or Selling DepH.
Of Goods or Services.
(Note : It means that It should be a Tangible fixed Asset whether it is
Used in factory or showroom)
OR
Condition III: It should be held for earning Rental purpose.

Rental

Ind AS 40 : IP Ind AS 17 : Leased Assets

❖ Accounting for rentals will be done as per Ind AS 40 or Ind AS 17, but Accounting
For Assets will be done under Ind AS :16 PPE.
+
Condition IV: It should have some Economic Benefits for the Enterprise.
+
Condition V : It’s Cost should be Known to the Enterprise

Important Issues Relating to meaning of PPE

Issue 1 : If any Enterprise installs safety & Pollution control Equipment’s (i.e., fire
Safety Equipment’s or Air Purifiers etc.) then these Assets should
also be considered as PPE, because these Assets help other factors to
Perform better.

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Issue 2 : We can aggregate multiple Assets having “ in significant value” as a single

Asset for simple Reporting such as moulds, dies etc.
Issue 3 : If any Asset is not having material value then It can be Expenses in same
Year instead of its capitalisation.

Concept 2 : Assets out of Scope of Ind As 16

Out of Scope

*Biological Assets Mineral Oils, Revised Assets

(Ind AS 41) Mineral Ores or &
Other wasting Assets held for Sale
*other than (Ind As 106) (Ind As 105)
Bearer Plants
These Assets are
Out of Active Use

“Important Note on Bearer Plants”

As per the Provisions of Ind AS-16, Bearer Plants are not Biological Assets, but
these Plants should be considered as PPE. The following conditions should be satisfied
to classify a Plant under the heading of Bearer Plant :-

Condition I: It should have some Agricultural Produce (i.e., fruits etc.)

`
Apple Tree Mango Tree Coconut Tree
+
Condition II : It should have useful Life more than 1 Year
+
Condition III : These trees are not Grown with the intention of getting Lumber

Woods Logs
➢ If any Tree/ Plant is Grown with the intention of Getting woods or crops then
It will be considered as a Biological Asset (i.e., Teak Trees, Pine wood, Wheat crop,
Maize Crops etc.

Concept 3 : “ Measurement of cost” of PPE at “initial Recognition”

As per the Provisions of AS-16, Cost of PPE can be measured at the time of
Initial Recognition in the following 4 Cases :-
Case I : Payment by Cash
Case II : Exchange of Assets
Case III : Self Constructed Assets
Case Iv : Hire Purchase Acquisition

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Case I : Acquisition by Cash

If any PPE is acquired by Payment in cash then the following 3 Expenses should be
Considered as a Part of Cost of Assets :-

Cost

Components

Purchase Price Related Expenses Estimated Removal

Cost

Statement Showing Calculation of Cost

Purchase Price xxxx

Related Expenses : -
i. Non Refundable Duties or Taxes xxxx
ii. Transportation Exp. xxxx
iii. Loading/ Unloading xxxx
iv. Transit Insurance xxxx
v. Brokerage/Comm. xxxx
vi. Site Preparation Exp. xxxx
vii. Professional Fees xxxx
viii. Installation charges xxxx
ix. Cost of Sample units (M+L+O) xxxx
x. Any other Exp. Which is Directly related with
Acquisition of PPE xxxx
Present Value of Expected Cost of Removal or
Dismantaling at the end of Useful life of Assets xxxx
(i.e., Removal Cost on ships, Aircrafts, Nuclear Plants etc.)
Total Cost * xxxx

*It should not include :

i. Trade Discount
ii. Govt. Grant All these Items shall reduce the Cost of
iii. Scrap from sale of Sample units PPE
iv. Refundable duties/ Taxes

Example : A ltd. Purchased An Aircraft for use of Directors to save time in travelling
For Business meetings. It is Expected that It will work for 5 years and
A Ltd. Need to Pay ₹ 50 Lacs as Dismantling Cost at the end of 5th Year.
Assuming Discounting factor (Pre-Tax) 10%, show the Accounting for
Provision for Cost of Removal.

Solution:
i. P.V of Dismantling cost = 50,00,000 x .621 = 31,05,000

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ii. Journal : PPE (Air craft) a/c Dr 31,05,000

To Prov. For D. cost 31,05,000
(Being Prov. Created)

Subsequent Years

1 2 3 4 5
Opening Bal in 31,05,000 34,15,500 37,57,050 41,32,755 45,46,030
Prov.
Interest Cost/ 310500 341550 375705 413275 454603
Unwinding Cost
(10%)
3415500 3757050 4132755 4546030 5000633

a) Int. a/c Dr Prov. a/c Dr

To Prov To Cash
b) P&L a/c Dr
To Int

Expenses out of Scope while Computing Cost of PPE :-

The Following Expenses are not be included while Computing Cost of PPE :-

i. Advertisement Exp. For the Promotion of New Product or Location These are
ii. Inauguration Expenses not
iii. Staff training Cost related
iv. General A.OH/ S.OH with PPE

Case 3 : Self Constructed Assets

If any Asset is constructed by the Entity itself then cost of Such Asset
Shall be computed as follows :-

Direct Material xxxx

Direct Wages xxxx
Direct Expenses xxxx
Share in Common Exp. xxxx
(Reasonable Basis)
Cost of PPE xxxx

Important Point

If any Inter Dept Transfer is made from stores to construction then cost of such
Transfer should be taken after Elimination of Internal Profits.

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*Part 2*

Solution of Q.2
Calculation of Cost of Assets

Purchase Price of Machine (80,00,000 – 10%) 7200,000

Related Expenses :
Import Duty 500,000
Delivery fees 100,000
Electrical Installation Cost 10,00,000
Pre Production Testing (Trial) 400,000 20,00,000
Cost of P&M 92,00,000

Notes :
i. Cash discount (7200,000 x 5%) cannot be reduced from cost of P&M, because It
is not related with Purchase of P&M, but It is related with Payment. So, It will
be transferred to P&L A/c under the heading of Other Income.
ii. The company has paid maintenance Charges for 5 Years in advance. It will be
Considered as a Prepaid Exp. and It will be written off over the Period of 5 Years.

Solution of Q.4 (self construction)

Calculation of cost for Self Constructed Assets

Purchase of Land 30,00,000

Stamp Duty & Legal fees 200,000
Architect fees 200,000
Site Preparation Cost 50,000
Direct Materials ( 10L – 2.5L *) 750,000
Direct Wages ( 4L - .22L) 378,000
Borrowing Cost (40L x 8% x 9*/12) 240,000
Cost of Self Const. 4818000

Notes :
1) General OH cannot be related with cost of Construction due to which we should
Transfer these Expenses to P&L A/c.
2) We cannot consider Abnormal Losses as a Part of Cost of Assets. These Losses
Should be transferred to P&L A/c. In the given case, there is an abnormal Loss of
₹ 272,000 (250000 + 22000) on account of wastage of material & wages.
3) We have assumed that suspension of work during 2 weeks is a temporary
Suspension.

Solution of Q.8

Calculation of Cost of Assets

Purchase Price 25,00,000
Transportation Charges 200,000
Site Preparation Exp. 600,000
Professional fees 700,000

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Provision for dismantaling charges 300,000

Cost of P&M 43,00,000

Note :
1) Interest can be capitalised to the cost of Q. Assets only. So, Interest on
Deferred credit will be written off in PL A/c.
2) Opening Losses due to Less demand of product is not related with acquisition of
P&M.

Case II : Exchange of Assets

- Refer IND -40 Class Notes – for this concept

Solution of Q.17 (2 marks)

Journal Entry

PPE (Private Jet) a/c Dr 180,00,000

To L&B 100,00,000
To Profit on Exchange 50,00,000 (15-10)
To Cash 30,00,000
(Being Assets Exchanged)

Case IV : Assets acquired on Hire Purchase

If any PPE is acquired on Hire Purchase then we should consider Cost of Assets equal
to Cash Price only. The Extra Payment above Cash price will be transferred to P&L
as an Expense which is Known as Interest Expense.

Additional Cases to be considered for measurement of Cost :-

Case I : If PPE is acquired on Deferred Credit

If PPE is acquired on Deferred credit & No Interest is required to be paid

Additionally then It will be assumed that Purchase Price is inclusive of Interest. We
Need to calculate Present value of Purchase Price to identify Interest/ unwinding
Cost.

Solution of Q.16 (4 marks)

Calculation of Present value of future Payments

Period Payment PVF @ 5.36% P.V
0 33,33,333 1 33,33,333
1 33,33,333 .949 31,63,333
2 33,33,334 .901 30,03,334
P.V of Payments 95,00,000

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Journal Entries

1.4.x1 PPE a/c Dr 95,00,000

To Payables 95,00,000
(Being Asset acquired on Credit)
1.4.x1 Payable a/c Dr 33,33,333
To Bank 33,33,333
(Being Payment made)
31.3.x2 Interest/ Unwinding Cost a/c Dr 330533
To Payables 330533
(95,00,000 – 33,33,333) 5.36%
(Being Interest made due)
31.2.x2 Payables a/c Dr 33,33,333
To Bank 33,33,333
(Being Payment made)
31.3.x3 Interest a/c Dr 169,583
To Payables 169,583
( 95,00,000 – 33,33,333 + 330,533 – 33,33,333) 5.36%
(Being Int. made due)
31.3.x3 Payables a/c Dr 33,33,334
To Bank 33,33,334

Case II : Incidental Operation

As per the Provisions of Ind AS -16, Temporary Income on PPE form its
Incidental operations should not be reduced from cost of PPE, but It will be
Transferred to P&L A/c. It means that Income from incidental operations will not
Effect cost of PPE.
(i.e., Use of Land for Parking Area which was acquired for const. of factory building
Etc.)
Alternative use than main use

Case III : Cost of PPE if It is Given of Lease

If any PPE is given or taken on Lease then cost of Leased Assets should be
Calculated as follows :-

Leased Assets

Operating Leased Assets Finance Leased Assets

Ind AS : 16 shall cover these Assets Ind AS : 17 will be applied

Apply Normal Principles PV of MLP or Fair Value

Lower

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Solution of Q.6 (6 marks) V.V.Imp

Calculation of Cost of factory

Purchase Price (1.4.x1) 100,00,000

Related Expenses :
i. Site Preparation 300,000
ii. Construction Exp. :-
a) Direct Material 60,08,000
b) Employees Cost (1.5 – 30.11) @ 2L P.m. 14,00,000
c) Direct OH @ 1L P.m for 1.5 – 30.11 700,000
d) Borrowing Cost 700,000
(175,00,000 x 6% x 8m)
1.4 – 30.11
e) Income on Investments made out of Borrowed funds (100,000)
iii. Provision for Removal Cost 920,000
( 2 Crore x 4.67%)
Cost 199,28,000

❖ All other Expenses are not related with construction of factory

Calculation of Depreciation

a) Roof = 19928000 x 30% x 1/20 x 4/12 = 99,640

Component Life C.Y

b) Building = 199,28,000 x 70% x 1/40 x 4/12 = 116247
215887

*Part 3*

Concept 4 : Subsequent Recognition

Further Expenditure on Assets

Cases

Case I : Case II : Case III :

Repairs & maintenance Replacement Inspection &
Overhaul

Case I : Repairs & maintenance

As per the provisions of Ind AS-16, Repairs or maintenance is incurred to

Maintain the normal working condition of the Asset. It is just like day to day
Servicing. This Expenditure is Revenue Expenditure in nature and It should be
Written off in P&L A/c in the same year. The following Entries should be recorded
in books : -

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i. Repairs a/c Dr xxxx

To Bank xxxx
(Being repairs Paid)
ii. P&L a/c Dr xxxx
To Repairs xxxx
(Being Repairs written off)

Case II : Replacement of Assets *V.V.Imp

As per the Provisions of Ind As -16, Replacement of Assets should be considered as a

Capital Expenditure. The following 2 steps should be applies for Accounting for
Replacement : -

Step I : De- recognise the Carrying Amount of Old Parts

It would be available by Component Based Depreciation
Step II : Recognise Expenditure on new parts as capital Expenditure in carrying
Amount of total Asset.

Example :
i. Cost of P&M (10 years ) : 200,000
ii. Engine Part (main component) : 40% of Cost
iii. Life of Asset : 10years, but for component It is 2 years
iv. At the end of 2nd year, new Engine Replaced for 90,000
Show the revised carrying Amount of Asset at the end of 2nd year.

Solution :

Calculation of Carrying Amount of Asset at the end of 2nd Year

Particulars Engine component Other Asset Total

Original Cost 80,000 120,000 200,000
Depreciation for Ist Year (40000) (12000) (52000)
(80000/2) (120000/10)
Depreciation for IInd Year (40000) (12000) (52000)
(80000/2) (120000/10)
Carrying Amount at the
End of 2nd Year NIL 96000 96000
New Engine Purchased 90000 - 90000
Revised C. Amount 90,000 96,000 186,000

Example :
i. P&M : 20,00,000 (10 Years)
ii. Engine : 60% of Cost (4 years)
After 3 Years, replacement of Engine made at a cost of 15,00,000. Pass Journal
Entries for Replacement assuming ₹ 5000 realised from Scrap of old Engine.

Solution :

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Calculation of Carrying Amount of Asset at the end of 3rd Year

Engine Component Other Component Total

Original Cost 12,00,000 800,000 20,00,000
Depreciation for 3 years (900,000) (240,000) (11,40,000)
[1200000/4x 3] [800000/10 x 3]
Carrying Amount 300,000 560,000 860,000

Step I : De- Recognition : Bank a/c Dr 5000

P&L a/c Dr 295000
To P&M 300,000
(Being De- Recognition of old parts made)
Step II : Recognition : P&M a/c Dr 1500,000
To Bank 15,00,000
(Being New Engine Bought)

Revised C. Amount = 860000 – 300000 + 1500000 = 2060000

C1 C2
15,00,000 560,000
(4Y) (10Y)
Case III : Inspections & Overhauls *Imp

As per the Provisions of Ind AS -16, Inspection Cost may be a major component
Of Total Cost of Asset in some cases (i.e., Ships, Cruises, Aircrafts, Chemical boilers,
Oil Refineries etc). In this Case, Inspection Cost should be amortised over its
Permit life. The Accounting treatment would be same as for Replacement of Assets

Step I : De recognition Step II : Recognition

Solution of Q.15 (4marks) *Imp

Calculation of Actual Carrying Amount at the end of 5th Year

Inspection Other Total

Original Cost 50,00,000 150,00,000 200,00,000
Depreciation for 5 years (50,00,000) (37,50,000) (87,50,000)
[5000000/5 x5) [15000000/20 x 5]
Original C. Amount NIL 1,12,50,000 1,12,50,000

New Inspection 50,00,000 - 50,00,000

Revised carrying Amount 50,00,000 1,12,50,000 1,62,50,000

Concept 5 : Models for Accounting

(Presentation)

Models

Cost Model Revaluation Model *Imp

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Case I : Presentation at Cost Model

Under Cost Model, Presentation of PPE is to be made on the basis of following

Statement :-

Original Cost xxxx

Accumulated Dep. xxxx
WDV of PPE xxxx
*Impairment Loss (xxxx)
Carrying Amount xxxx

*Impairment Loss is calculated when fair value of PPE becomes Less than carrying
Assets. It is also Known as Downward Revaluation.

Important Note

It can be said that Downward Revaluation can be made under Cost model for True &
Fair Presentation. (Upward is not allowed)

** Whenever Downward Revaluation is made, we should transfer the amount of

Impairment Loss to P&L A/c.
a) Impairment Loss a/c Dr
To Assets
b) P&L a/c Dr
To Impairment Loss

Case II : Revaluation Model *V.V.Imp

As per the Provisions of Ind AS – 16, Entities can choose for revaluation model for
True & fair Presentation of Assets. The following Concepts should be applied while
Adopting revaluation model :-

Concept 1 : Accounting at the time of revaluation

Under Revaluation, we consider upward Revaluation due to increase in fair value of

Assets. The following Journal Entries shall take place :-

PPE a/c Dr xxxx fair value - WDV

To Revaluation Res. Xxxx
(Being Assets increased) Increase in value

Concept 2 : After Increase in value of Assets, Depreciation will be calculated on

Revised carrying Amount, but New Depreciation will be higher than original
Depreciation. The difference between Revised Depreciation & Actual
Depreciation will be recognised as “ Additional Depreciation”. The amount
Of Additional Depreciation will be transferred from Revaluation Reserve
to Retained Earnings to Compensate Additional Depreciation, but It will
not be routed through P&L A/c.

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Journal :
i. Depreciation a/c Dr Revised C. Amount
To PPE
ii. PL a/c Dr Dep. Written off as an Exp.
To Depreciation
iii. Rev. Res. a/c Dr Additional Dep compensated but not through
To Retained Earning PL A/c

Solution of Q.20 (2 marks)

Statement Showing Surplus on Revaluation

Original Cost 900,000

Depreciation for 2 years (900000/10 x 2) (180,000)
Book Value (31.3.x3) 720,000
Fair Value (1.4.x3) 960,000
Appreciation 240,000

i. Depreciation on Revised C. Amount = 960,000 = 120,000

8Y
ii. Depreciation on Original Value = 720,000 = 90,000
8Y
iii. Additional Dep. = 120,000 – 90,000 = 30,000

Journal :

1.4.x3
a) PPE a/c Dr 240,000
To Revaluation Res. 240,000
(Being Assets increased)
31.3.x4
b) Dep. a/c Dr 120,000
To PPE 120,000
(Being Dep. Charged on revised value)

c) PL a/c Dr 120,000
To Dep. 120,000
(Being Dep. Written off)
d) Rev. Res a/c Dr 30,000
To Retained Earning 30,000
(Being Additional Dep. Compensated)

Concept 3 : Interval (minimum) for Revaluation

As per the Provisions of Ind AS-16, Revaluation is to be reviewed for atleast once
During 3-5 years. But It can be done annually if market is not stable from the
Point of view of prices.

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Concept 4 : Class wise Revaluation

As per the Provisions of Ind AS-16, Revaluation model can be adopted for a
Class of Assets. It cannot be adopted for a Single Asset. It means that :-
i. One Class of Assets can be covered under Revaluation model and other Class on
the basis of Cost model.
ii. Class of Assets can be formed by Grouping of Similar Assets.
iii. Class of Assets may be for L&B, P&M, Furniture, Motor vehicles etc.

*Part 4*
Concept 5 : Presentation at the time of Revaluation *Imp

At the time of Revaluation of Assets, Increase in Carrying Amount of Assets

Can be recorded by 2 methods as follows:-

Method I : Direct Method (Carrying Amount method)

Under this Method, O. Cost & Accumulated Depreciation are not Revised, but we change
The carrying Amount onlu.

Journal : PPE a/c Dr xxxx

To Rev. Res. xxxx

Method II : Original Cost Method

Under this method, we increase original cost and Accumulated depreciation

Proportionately as per the increase in Carrying Amount of Assets.

Journal : PPE a/c Dr xxxx

To Accumulated Dep xxxx
To Rev. Res. xxxx
(Being Original Cost & A. Dep.)

Example :
i. Original Cost : 600,000
A. Dep : (240,000)
WDV/Carrying Amount 360,000
ii. Revalued Amount : 550,000
Pass Journal Entries for revaluation.
Method I : C.A Method
PE a/c Dr 190,000
To Rev. Res. 190,000
(Being upward Rev made)

Method II : O.C Method

*PPE a/c Dr 316667
To A. Dep. 126667
To Rev. Res 190,000
(Being Assets revalued)

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*Calculation of Increase in O. Cost

a) WDV to O. Cost Ratio
= 360000 x 100 = 60%
600000
b) Revised O. Cost
= 550000 (New WDV)
60%
= 916667 New Existing
c) Changes = 916667 – 600000 = 316667

Solution of Q.18 *Imp (4 marks)

Method I : C.A . Method

PPE a/c Dr 20,000 (65,000 -45,000)

To Rev. Res. 20,000
(Being upward Rev. made)

Method II : O. Cost Method

a) Existing % of WDV to O. cost = 45000 x 100 = 45%
100,000
b) Revised O. Cost = 65000 = 144,444
45%
c) Charges in O. Cost = 144,444 -100,000 = 44,444
d) Changes in A. Dep = (144444 x 55%) – 55000 =24444

PPE a/c Dr 44444

To A. Dep 24444
To Rev. Res 20000
(Being Rev made)

Concept 6 : Treatment in case of further Revaluation * V.V.Imp

Case I : First Revaluation Upward, but further is Downward

31.3.2016 (WDV) : 200,000
31.3.2016 (FV) : 350,000
31.3.2017 (FV) : i) 250000
ii) 180,000
Pass Journal Entries in Both Cases.

Case I Case II
a) PPE a/c Dr 150000 a) PPE a/c Dr 150000
To R. Res. 150000 To R. Res. 150,000
(Being Upward Rev. made) (Being Upward Rev. made)
b) FV = 250000 b) FV = 180000
R. Res a/c Dr 100000 R. Res a/c Dr 150000
To PPE 100000 PL a/c Dr 20000
(Being Decline adjusted against R. Res.) To PPE 170000
(Being Decline Adjusted)

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If downward Revaluation is to be recognised under further Revaluation, but

It was recorded as upward earlier, then we should reverse Revaluation Reserve First.
If decline is higher than Rev. Reserve then It will be Debited in P&L A/c.

Case II : First Revaluation Downward, but Further is Upward

Example :
31.3.2016 (WDV) : 200,000
31.3.2016 (FV) : 150000
31.3.2017 (FV) : i) 180000
ii) 210000
Pass journal Entries.

Solution :
a) PL a/c Dr 50,000
To PPE 50,000
(Being Downward Rev. made)
b) (i) PPE a/c Dr 30,000
To PL 30,000
(Being reversal made)
(ii) PPE a/c Dr 60,000
To PL 50000
To R. Res 10000
(Being reversal made)

Concept 6 : Depreciation

a) Methods of Depreciation

SLM WDV UoP

(Straight Line method) (Written Down value (Units of Production
method) Method)
*Selection of Method is choice of management according to nature of Assets.

b) Basic Points Related with Depreciation

As per the Provisions of Ind As-16, Dep. Is just an allocation of cost of PPE over its
Useful life. The following Points should be considered :-
i. Dep. Should be calculated for each Asset separately. However, Group of Assets
Can also be formed only if Assets are similar.
ii. If an Asset is formed by different components that are having different life
Then component Based Depreciation can be charged.
iii. If L&B are acquired together then Depreciation can be Charged on Building only.
(Land cannot be depreciated due to unlimited Life)
iv. We can commence Dep. On PPE only if Life of PPE is more than one year and It
is ready for use.
v. We can Cease Dep. On PPE only if It is De- Recognised or Held for Sale (105).
Disposed off (sold)

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c) Some changes in Accounting Related with Dep.

Changes

Estimated Useful Estimated Salvage Method of

Life Value Depreciation

All these changes are Recognised as change in

Estimation ( Ind AS 8)
Prospectively

Example : Change in Estimated Life

i. Original Cost 100,000

ii. Salvage Value 10,000
iii. Estimated Useful Life 10Y
After 2 years, It is Estimated that this Asset can be used for further 10 years.
Calculate Revised Dep. For 3rd Year.

Solution :
Statement Showing Revised Dep. For 3rd Year

Original Cost 100,000

Depreciation for 2 years (18,000)
(100,000 – 10,000/10y x 2Y)
Carrying Amount at the end of 2nd year
& beginning of 3rd year 82,000
Depreciation for 3rd Year 7200
(82000 – 10000/10Y)
New Life

Solution of Q.10 (2 marks)

Calculation of revised Dep. For 9th Year

Original Cost 200,000

Dep. For 8 years (144000)
(200000 – 20000/10Y) x 8Y
Carrying Amount 56,000

Dep. For 9th year 9000

(56000 – 20000/4 y)
Salvage Value same (Assumed)

Example : (Change in estimated salvage Value)

i. Original Cost : 200,000
ii. Salvage Value : 20000
iii. Life : 10 years

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After 2 years , It is Estimated that company would realise only ₹ 5000 from Salvage
Value. The company also Estimates that Asset can be used for further 10 years.

Solution :

Calculation of Revised Dep. For 3rd Year

Original Cost 200,000

Depreciation for 2 Years (36000)
(200,000 – 20,000/10y) x 2y
Carrying Amount after 2 years 164000

Depreciation for 3rd Year 15900

(164000 – 5000/10y)
New Life

Example : Calculate Revised Dep. In above Example if Asset can be used for further
6 years
Depreciation = (164000 – 5000/6Y) = 26500
New Life

Example : (Change in method of Depreciation)

Original Cost 20,00,000

Dep @ 10% P.a. on WDV Basis
After 1 year, SLM is to be Applied with useful Life o 12 years .
Calculate Depreciation for 2nd Year.

Solution :
Original Cost 20,00,000
Dep. For Ist Year @ 10% P.a. (200,000)
18,00,000

New Dep. = 1800,000 = 150000 P.a

12 Y
New Method

Example : what will be revised Dep in above Example, if method is changed after 2 Years

Solution :

WDV after 2 years = 20,00,000 – 10% - 10% = 16,20,000

(i) (ii)
New Dep. (SLM) = 1620000 = 135000 P.a.
12Y

Concept 7 : De-Recognition of PPE

Sale of PPE

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As per the Provisions of Ind AS-16, Profit or Loss on sale of Assets should be
Transferred to PL statement.

Concept 8 : Disclosures in Notes to A/c s

a) Basic Disclosures :
i. Accounting Policy for the Measurement of cost
ii. Accounting Policy for the Subsequent cost
iii. Description about model for Presentation
iv. Class of Assets
v. Additions during the year
vi. Disposal during the year
vii. Reconciliation between opening & Closing values

b) Revaluation :
i. Class of Assets for revaluation made
ii. Treatment of further Revaluation
iii. Revaluation Res. in the beginning and at the end

c) Depreciation :
i. Method of Dep. : Class wise
ii. Basis for Selection of method
iii. Changes in Estimates during the year
`
Life SV Method

*Part 5*

Concept 9 : Change in Expected Cost of Dismantaling/ Removal/

De- Commissioning

In case Provision for Dismantaling cost gets revised then It will also Effect
the carrying Amount of PPE. If Such Provision is incurred then Cost of PPE will also
increase or vice- versa. There may be 2 reasons for change in such Provision :-
a) Change in Estimated Cost of Removal
b) Change in Discounting Rate

Example :
i. Asset acquired : 1.4.2017
ii. Cost of removal to be paid after 10 years (estimated) : ₹ 20,000
iii. Discounting Rate : 10%
As on 1.4.2019, It is Estimated that cost of Removal would be ₹ 25,000 at the time of
Disposal of Asset. Show the effect of such Change on cost of PPE.

Solution :
a) Calculation of balance in Provision for Cost of Removal A/c (As at 31.3.2019)
1) P.V of removal Cost = 20,000 x .386 = 7720

10%

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2) Current Balance in Prov. A/c = 7720 + 10% = 8492 + 10% = 9341

(1.4.17) (31.3.18)
31.3.2019

b) Calculation of Provision on the basis of revised Cost as at 31.3.2019

1) P.V of Removal Cost = 25000 x .386 = 9650

2) Current Balance = 9650 + 10% = 10615 + 10% = 11677

Increase in Prov. = 11677 – 9341 = 2336

1.4.19 Asset (PPE) a/c Dr 2336

To Prov. For removal 2336
(Being Prov. Increased)

Example : With the help of Given information in previous Example, Calculate Change in
Provision for removal Cost if Discount Rate is also revised to 7%.

Solution :

Calculation of New Balance in Prov. A/c

1) Discounted Value = 25000 x .508 = 12700

(7% : 10Y)
2) Current Revised Bal. = 12700 + 7% = 13589 + 7% = 14540
Original
Changes = 14540 – 9341 = 5199
Revised
PPE a/c Dr 5199
To Prov. 5199

Step I : Calculate Original Balance in Provision for D.C A/c on the basis of Original
Estimate on the date of changes in Estimation.
Step II : Calculate Revised Balance in Provision for D.C A/c on the basis of Revised
estimate on the same date
Step III : Step I – Step II = Increase/ Decrease in Liability

Solution of Q.12

Calculation of Balance in Prov. A/c as at 31.3.2027

Current Balance in Provision A/c = 10000 + (5%) 10y = 16289

Revised Liab. = 16289 – 8000 = 8289

Entry : Prov. For D. Cost a/c Dr 8000

To PPE 8000
(Being Cost of Asset reduced)

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Calculation of Depreciation for 11th Year

Original Cost 120,000

Dep. For 10 years (120000/40 x10) (30,000)
90,000
Reduction in Prov. For Removal (10000)
Revised carrying Amount 80000
Remaining Useful Life 30Y (40-10)
Revised Dep. 2733

Solution of Q.13

I. Statement Showing Revaluation of Asset as at 31.3.x4

Fair Value of Asset (Net of Prov.) 115,000

Prov. For D.C Cost (10000 + 5% + 5%+ 5%) 11600
Total Fair value 126600
Carrying Amount as at 31.3.x4 111000
(120000/40Y x 37Y)
Revaluation Surplus 15600

Journal : Asset a/c Dr 15600

To Revaluation Res. 15600
(being Asset Revalued)

II. Accounting for Changes in D. C. Cost

In the Given Case, we are Revising Provision for D.C. Cost under Revaluation model.
So we will consider changes in Prov. For D. cost in Rev. reserve instead of changes
in Asset A/c as we did in earlier cases.

Journal : Prov. For D. Cost a/c Dr 5000

To Rev. Res 5000
(Being Liab. Reduced)

Revised Balance in Prov. = 11600 + 5% = 12200 – 5000 = 7200

(31.3.x4)

Statement Showing Revaluation of Asset as at 31.3.x5

Fair value as at 31.3.x5 (Net of Prov.) 107000

Prov. For D.C cost (Revised) 7200
FV 114200
Carrying Amount [126600 – (126600/37)] 123180
Loss 8980
31.3.x4

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Journal : Revaluation Res. a/c Dr 8980

To Asset 8980
(Being Downward Rev. made)

*Part 6*

Solution of Q.1

Statement showing carrying Amount of Asset & Provisions at the end of each year

i. Calculation of P.V of Cost = 5 million x .463 = 2.315 m

ii. Initial Recognition of PPE = PPE a/c Dr 102.315 million
To Cash 100 million
To Prov. For D. Cost 2.315 million
(Being Asset Initially Recognised)
iii. Calculation of carrying Amount :-

PPE Provisions For D. Cost

Year O. Bal Dep. C.Bal Year O. Bal Int. @ C.Bal
(Cost/10) 8%
1. 102.315 10.23 92.085 1. 2.315 .185 2.5
2. 92.085 10.23 81.855 2. 2.5 .2 2.7
3. 81.855 10.23 71.625 3. 2.7 .216 2.916
4. 71.625 10.23 61.395 4. 2.916 .233 3.149
5. 61.395 10.23 51.165 5. 3.149 .252 3.40
6. 51.165 10.23 40.935 6. 3.40 .272 3.672
7. 40.935 10.23 30.705 7. 3.672 .294 3.966
8. 30.705 10.23 20.475 8. 3.966 .317 4.283
9. 20.475 10.23 10.245 9. 4.283 .343 4.626
10. 10.245 10.23 NIL 10. 4.626 .374 5

Accounting for changes in Decommissioning Cost

I. At the end of 4th year = 8 million x .630 = 5.04 million

II. Increase in Provision = 5.04 million – 3.149 million = 1.891

Journal : PPE a/c Dr 1.891

To Prov. For D. cost 1.891
(Being changes in Liab. recognised)

III. Revised carrying Amount of PPE = 61.395 million + 1.891 million

= 63.286 million
IV. Revised Depreciation = 63.286/ 6 years = 10.55
V. Revised Provision = 3.149 million + 1.891 = 5.04 million

Solution of Q.2

I. Calculation of Annual Depreciation on the basis of original life of Asset

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Building (15000000/ 15 years ) 10,00,000

P&M (100,00,000/ 10 years) 10,00,000
Furniture (35,00,000/ 7 years) 500,000
Annual Dep. 25,00,000

II. Calculation of Annual Depreciation on the basis of Revised useful life (After 3
years)

Building [150,00,000 – (10,00,000 x 3)] / 10 years 1200,000

P&M [ 100,00,000 – (10,00,000 x 3)] 7 years 10,00,000
Furniture [35,00,000 – (500,000 x 3)] 5 years 400,000
Revised 26,00,000

Impact on P&L = 2600000 – 2500000 = 100000

(New) (old) (Additional Dep.)
*Due to Additional Dep. , Future Profit shall get impaired by 100,000

Solution of Q.3

In the Given case, Mr.x will Explain the questions raised by Mr. Y as follows :-
1. As per the Provisions of Ind AS 16, Revaluation is mandatory for all Assets in some
Class. In the Given case, P&M has been held at cost model, but Property under
Revaluation model because Both are covered by different classes so, Different
Policies Can be adopted.
2. If Revaluation is made of a Normal Asset then Revaluation surplus will be disclosed
in OCI, but in case Revaluation of an impaired Asset is made then we will reverse
Impairment loss in P&L first, then Excess Profit will be shown in OCI.
3. The Depreciation on P&M is normally charged as higher Rate because life of P&M is
Usually low than Buildings. So, Dep on P&M is charged at higher Amount in compare to
Building.
4. We have disclosed Investment Property at cost model because Ind AS 40 does not
Allow Revaluation for I.P and Investment Property shall be considered as a
different Asset than owner occupied Property.

*Part 7*

Solution of Q.14, Q.8, Q.6, Q.13 Discussed in Class

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter-10 Ind AS : 36
Impairment of Assets

*Part 1*

Coverage

Unit I : Unit II :
Impairment of Individual Impairment of cash
Assets Generating units

Group of Assets

Unit I : Impairment of Individual Assets

Concept 1 : Meaning of Impairment of Assets

As per the Provisions of Ind AS-36, Impairment means Reaction in Value

Of Assets. Whenever carrying Amount of Assets Exceeds Recoverable Amount of
Assets, It is an Indication of impairment in value of Assets. It is also Called
Downward Revaluation. The Excess of Carrying Amount over Recoverable Amount of
Assets is Called Impairment Loss.

Impairment Loss = Carrying Amount > Recoverable Amount

Issue 1 : Meaning of carrying Amount of Assets

Carrying Amount means Book value/ B/s Value of Assets.

Issue 2 : Meaning of Recoverable Amount

Recoverable Amount

Net Fair Value or Value in Use

Whichever is higher

Issue 3 : Net fair value = fair value of Asset (Expected) – Cost of Disposal

Issue 4 : Value in Use = Present Value of all Expected cash inflows from the
Asset
(Including Salvage Value of Assets)

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Issue 5 : Journal Entries

a) Impairment Loss a/c Dr xxxx
To Assets xxxx
(Being Value of Assets reduced)
b) P&L a/c Dr xxxx
To Impairment Loss xxxx
(Being Losses written off)

Note : After reducing the value of Assets, the future Depreciation will decline due to
Reduction in Value of Assets.

Example :
i. Carrying Amount of Assets : 10,000
ii. Expected Useful Life : 5Y
iii. Fair Value of Assets : 8000
iv. Cost of disposal : 1000
v. Expected Cash Inflows :-
Y1 = 2000
Y2 = 2500
Y3 = 4000
Y4 = 3000
Y5 = 1000
Salvage Value = 500
vi. Discount rate : 10% P.a.
Calculate I. Loss

Solution :
a) Calculation of Recoverable Amount

i. Net Fair value (8000 – 1000) 7000

OR
ii. Value in Use :-

Y1 2000 x .909 = 1818

Y2 2500 x .826 = 2065
Y3 4000 x .751 = 3004
Y4 3000 x .683 = 2049
Y5 1000 x .621 = 621
Y5 500 x .621 = 310 9867

Whichever is higher = 9867

b) Calculation of Impairment Loss

(if C. Amount > R. Amt)

Carrying Amount 10,000

Recoverable Amount (9867)
Impairment Loss 133

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Journal :
i. Impairment Loss a/c Dr 133
To Assets 133
(Being I. Loss Recognised)
ii. P&L a/c Dr 133
To Impairment Loss 133
(Being Losses written off)
Revised Carrying Amount
c) Future Dep. = 9867 = 1973.40
5 years

Solution of Q.3

a) Calculation of Recoverable Amount

i. Net Fair value 10,000

OR
ii. Value in Use :-
X4 – X5 2000 x .870 = 1740
X5 – X6 3000 x .756 = 2268
X6 – X7 3000 x .658 = 1974
X7 – X8 4000 x .572 = 2288
X8 – X9 2500 x .497 = 1242 9512
Whichever is higher = 10,000

b) Calculation of carrying amount as at 31.3.X4

Cost of PPE as at 1.4.x1 20000

Depreciation for 3 Years (20000 – 500/8y) x 3Y (7312.50)
WDV of Assets as at 31.3.X4 12687.50

c) I. Loss = Carrying Amount – Recoverable Amount

= 12687.50 – 10000
= 2687.50 It will be written off in P&L A/c
New carrying Amt
d) Revised Depreciation = 10000 – 500 = 1900
5 years Salvage Value

Solution of Q.5 (2 marks)

Calculation of Recoverable Amount

a) Net Fair Value 70 Crores

OR
b) Value in Use : -
X2 –X3 15 x .909 = 13.64
X3 –X4 30 x .826 = 24.78
X4 –X5 40 x .75 = 30.04

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X5 –X6 10 x .683 = 6.83 75.29

Whichever is higher = 75.29

Calculation of carrying Amount

Cost of Asset (1.4.x1) 100 Crores

Depreciation for X1 – X2 (100/5 x1) (20 Crores)
Carrying Amount as at 31.3.x2 80 Crores

Impairment Loss = 80 Crores – 75.29 crores = 4.71 Crores

Revised Dep. = 75.29 = 18.83 Crores

4 Years

Concept 2 : Reversal of impairment Loss *V.V.Imp

Example :
i. Cost of Asset (1.4.2017) : 10,000
ii. Estimated Useful Life : 10 years
iii. Salvage Value : 0
iv. Recoverable Amount as at 31.3.18 : 7000
v. Recoverable Amount as at 31.3.20 : 9000
Calculate Impairment Loss in 17-18 and Reversal of impairment Loss for 19-20.

Solution :

Calculation of Impairment Loss for 17-18

Cost of Asset (1.4.17) 10,000

Depreciation for 17-18 (10000/10) (1000)
Carrying Amount as at 31.3.18 9000
Recoverable Amount as at 31.3.18 (7000)
Impairment Loss (17-18) 2000

Calculation of Reversal of I. Loss for 19-20

Carrying Amount as at 1.4.18 7000

Depreciation for 2 years (7000/9 x2) (1556)
Carrying Amount as at 31.3.20 5444

Recoverable Amount as at 31.3.20 9000

Original Carrying Amount as at 31.3.20 = 10000 – (10000/10 x 3) = 7000

As per the Provisions of Ind As-37, Reversal of I. Loss cannot Exceed carrying Amt.
a) Total Appreciation = 9000 – 5444 = 3556
b) Max. allowed Reversal of I. Loss = 7000 – 5444 = 1556
Revaluation Res. 2000

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i. Asset a/c Dr 3556

To Revaluation Res. 2000
To Reversal of I. Loss 1556
ii. Reversal of I. Loss a/c Dr 1556
To PL 1556

Example : With the given information in above Example Calculate I. Loss & its Reversal
If Dep. Is to be charged @ 10% P.a. on WDV Absis.

Solution :

Calculation of I. Loss as at 31.3.18

Cost of Asset as at 1.4.17 10,000

Dep. For 17-18 @ 10% P.a. (1000)
WDV as at 31.3.18 9000
Recoverable Amount (7000)
Impairment Loss 2000

Calculation of Reversal of Impairment Loss

WDV of Assets as at 1.4.18 (Revised) 7000

Depreciation for 2 Years :
18-19 (7000 x 10%) (700)
19-20 (6300 x 10%) (630)
WDV as at 31.3.20 5670

Recoverable Amount as at 31.3.20 9000

Original WDV as at 31.3.20 = 10,000 – 10% - 10%- 10% = 7290

a) Max. Allowed Reversal = 7290 – 5670 = 1620

b) Total Appreciation = 9000 – 5670 = 3330
Revaluation Res. 1710

Asset a/c Dr 3330

To Revaluation Res. 1710
To Reversal 1620
Reversal a/c Dr 1620
To PL 1620

Note on Concept 2 :- If Recoverable Amount increases Subsequently after

Impairment of Assets, then we can Reverse the impairment loss
Which was Previously written off. The following Journal Entries
Shall be recorded :-
a) Assets a/c Dr xxxx
To *Reversal of I. Loss xxxx
(Being Loss Reversed)

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b) *Reversal of I. Loss a/c Dr xxxx

To PL xxxx
9Being Income recognised)

*As per the provisions of Ind AS-36, Reversal of I. Loss cannot Exceed Original
Carrying Amount which would have been there without any Impairment in Past. If
Recoverable Amount Exceeds Original Carrying Amount then It will be taken as
Revaluation Reserve.

Solution of Q.6

Calculation of Recoverable Amount

Recoverable Amount = Fair Value or VIU whichever is higher

= 40 crores or 67.84 Crores
= 67.84 Crores

Calculation of Reversal of Impairment Loss

Carrying Amount as at 1.4.x2 75.29

Depreciation for x2-x3 (75.29/4) (18.83)
Carrying Amount as at 31.3.x3 56.46

Recoverable Amount as at 31.3.x3 67.84

Original Carrying Amount (31.3.X3) = 100 crores – (100/5x2) = 60 crores

Total Appreciation = 67.84 – 56.46 = 11.38

Max. Allowed Reversal = 60 – 56.46 = (3.54)
Revaluation Reserve 7.84

Solution of Q.7

Statement Showing Calculation of I. Loss/ Reversal

X0 –X1
Original Cost 100 Lacs
Depreciation for X0- X1 (25 Lacs)
(100/4 x1)
Carrying Amount as at 31.3.x1 75 Lacs
Recoverable Amt as at 31.3.x1 (60 Lacs)
Impairment Loss 15 Lacs

X1 – X2
Revised Carrying Amount 60 Lacs
Depreciation for X1 – X2 (20 Lacs)
(60/3x1)
Carrying Amount at 31.3.x2 40 Lacs

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Recoverable Amount at 31.3.X2 40 lacs

Impairment Loss NIL

X2 –X3 :-
Carrying Amount as at 1.4.X2 40
Depreciation (40/2 x 1) (20)
Carrying Amount as at 31.3.X3 20
Recoverable Amount as at 31.3. x3 28

Original Carrying Amount (31.3.X3) = 100L – (100/4 x3) = 25 Lacs

Max. Allowed Reversal = 25 – 20 = 5 Lacs

Note : As per Ind As-36, Reversal cannot be Exceeding its Original Carrying Amount

Solution of Q.14 (Impairment Loss for Revalued Assets)

Calculation of Impairment Loss & Its Treatment

a) Impairment Loss = C. Amount > R. Amount

= 27.30 – 12
= 15.30
Note : The Company has already Revaluation Reserve of ₹ 14 Lacs due to Which we
Cannot Set off Total I. Loss against PL A/c .

b) Treatment : - Impairment Loss a/c Dr 15.30

To Asset 15.30
(Being Downward Rev. made)
Revaluation Res. a/c Dr 14
PL a/c Dr 1.30
To I. Loss 15.30
(Being I. Loss written off)

Concept 3 : Assets out of Scope of Ind AS : 36

As per the Provisions of Ind AS -36, the following Assets are not covered under the
Scope of this Statement : -
i. Inventories (Ind AS -2)
ii. Const. Contracts (Ind AS-11)
iii. Investments held for Retirement of Employees (Ind AS-19)
iv. Deferred Tax Assets (Ind AS 12)
v. Biological Assets (Ind As 41)
vi. Financial Instruments / Assets (Ind AS 109)

Except
Investment in Subsidiary, Joint Venture & Associates can be Covered under this
Statement.
Ind As : 36 is Applicable

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vii. Non- Current Assets held for sale (Ind AS 105)

Assets can be Covered under Ind AS :36 i) Tangible F. Assets (PPE)

ii) Intangible F. Assets

*Part 2*

Concept 4 : Indications for Impairment

As per the Provisions of Ind AS-36, Application of Rules for Impairment can be made
Only if there are some Indications. These Indications can be Classified under 2
Headings :-
Indications

External Indications Internal Indications

a) External Indications

i. If decline in value of Assets takes place than Expected decline

(Note : It may be due to change in technology of Assets etc.)
ii. If market Rate of Interest increases
(Note : It will Effect value in use due to Low P.V factors)
iii. If decline in value of Assets takes place Exceptionally due to restriction
Imposed on use of Assets (Note : Legal Environment)
iv. If Book value of Assets Exceeds market capitalisation
(Note : It may be due to decline in market Price per share)

b) Internal Indications

i. Physical Damage of an Asset indicates Reduction in Recoverable Amount

ii. If manner of use of Assets is not Adequate
iii. If Expected Cash flows from the Assets declines

Expectations to Indications

As per the Provisions of Ind As-36, there are some Assets which are required to be
Tested annually from the Point of impairment. Whether there are indications or Not.
These Assets are as follows :-

Annual Test
( It does not require any Indication)

Goodwill I. Assets which I. Assets which

(Acquired in Business are not in Use Definite Life
Combination)

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Concept 5 : Basic Points relating to Cash Flows *V.V.Imp

a) If Eliminated Cash flows are Given in Range of values then Recoverable Amount
Should be calculated on the basis of Average cash flow.
Average Cash Flow = High Range + Low Range
2
b) If Cash Flows are not Probable then we should consider cash flows after applying
Probability factor.
% of Shares
c) If Assets are located in Foreign country then Cash flows can be Estimated in
Foreign currency, but Exchange Rate will be taken which Prevails on the date of
Impairment.

Note : It can also be said that we can consider cash flow on Estimation basis, but
Exchange Rates cannot be anticipated.

Solution of Q.10

Calculation of Value in Use

Years CF Prob. factor Estimated CF PVF P.V

1 1000 10% 100 .952 (5%) 95.2
2 1000 60% 600 .903 (5.25%) 541.8
3 1000 30% 300 .852 (5.5%) 255.6
Value in Use 892.60

Solution of Q.11

Case I : Average Cash flow = 50 + 250 = 150

2
Case II : Average cash flow = 50 + 250 + 100 = 133.33
3
Case III : Expected Cash Flow = (50 x .10) + (250 x .30) + ( 100 x .60)
3
= 46.67

Solution of Q.8 (4 marks) *Imp

Calculation of VIU

Years CF PVF PV of CF Indian value @45

1 $80 .909 $72.72 3272.40
2 $100 .826 $82.60 3717
3 $20 .751 $15.02 675.90
7665.30
American CF American Rate Current Exchange Rate

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d) As per the Provisions of Ind AS – 36, An Enterprise should not Estimate Cash
Flows beyond 5 Years. It can be said that Expected CF can be taken as reliable upto
5 Years . If useful life of Assets is higher than 5years then Salvage value should
also be assumed at the end of 5th Year.

Note : While Solving Practical questions, we will use the total given information
Whether it is Less than 5 Years or more than 5 years.

e) As per the Provisions of Ind AS -36, Cash flows should be discounted at Cost of
Capital rate. In case, COC is not available then discounting can be done at
Incremental Borrowing Rate.

Concept 6 : Basic understanding of fair value

a) We should consider Net fair value while computing Recoverable Amount of Asset.
Net fair value = Fair Value – Expected Cost to sell the Asset
b) We can identify fair value of an Asset from :-
1) Recent Transaction in Market
2) Active Market for Second Assets
c) If fair Value cannot be identified due to any reason then VIU will be considered
as Recoverable Amount.

Unit 2 : Impairment of Cash Generating Units (CGU)

Concept 1 : Meaning of C.G.U & its impairments

If Recoverable Amount of an Individual cannot calculated, because cash flows

are Generated by Interdependent Group of Assets then we should Calculate
Recoverable Amount for Such Group in Total instead of Individual Cash Flows.

Such Group of Assets is Known as “Cash Generating unit” under this Statement.
But
It should be the smallest Group of Assets for which individual Recoverable
Amount is not Available.

Solution of Q.17 , Q.18 Discussed in Class

Concept 2 : Impairment of C.G Unit

Example :
i. Carrying Amount of Licence of Coal mine : ₹ 50,00,000
ii. Carrying Amount of roads constructed for mine : ₹ 10,00,000
iii. Net Fair value for CGU : ₹ 35,00,000
iv. C.I (p.a) for C.G.U for 5 Years : ₹ 15,00,000
v. Salvage Value of CGU : ₹ 200,000
vi. Discount Rate : 10 % P.a.
Calculate I. Loss.

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Solution :

Calculation of recoverable Amount

i. Net fair Value ₹ 35,00,000

OR
ii. P.V of Cash Inflows :-
Annual = 15,00,000 x 3.79 = 5685000
SV = 200,000 x .621 = 124200
5809200
Whichever is Higher = 5809200

Calculation of I. Loss for C.G.U

Total Carrying Amount : Coal mine 50,00,000

Roads 10,00,000
60,00,000
Recoverable Amount (5809200)
Impairment Loss 190800

Statement Showing Allocation of Asset wise Loss

Asset C. Amount Share in I. Loss Revised C. Amount

Coal Mine 50,00,000 (159000) (5/6) 4841000
Roads 10,00,000 (31800) (1/6) 968200
60,00,000 (190800) 5809200

Carrying Amount Ratio

Step I : Calculate Total Carrying Amount of all Assets which are related to C.G Unit
Step II : Calculate Recovered Amount for C.G Unit
Step III : Calculate I. Loss for C.G unit
Step IV : Allocate Impairment Loss over the Assets in C.G.U in the ratio of carrying
Amount of Assets

H.W Q.1, 4, 15, 17, 18

*Part 3*

Concept 3 : Reversal of Loss to C.G.U

Example :
a) C.G. Unit formed : Asset1
Asset2
b) Carrying Amount : Asset1 = 400,000 (10y)
Asset2 = 600,000 (20y)
c) Recoverable Amount for C.G.U = 800,000
After 2 Years, Recoverable Amount for C.G.U is identified ₹ 10,00,00

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Calculate :
i. Impairment Loss for C. G.U
ii. Revised Carrying Amount after I. Loss
iii. Max. Reversible Amount of I. Loss & its Allocation
Assume company follows Cost model for PPE.

Solution :
a) Calculation of I. Loss

Carrying Amount for C.G.U : Asset1 400,000

Asset2 600,000
Total 10,00,00
Recoverable Amount (800,000)
Impairment Loss 200,000

b) Calculation of Revised Carrying Amount of Assets

Assets Original C. Amount Ratio Share in I. Loss Revised C.

Amount
Asset1 400,000 4 (80,000) 320,000
Asset2 600,000 6 (120,000) 480,000
10,00,000 10 (200,000) 800,000

c) Max. Reversible Amount *V.V.Imp

(After 2 Years)

Carrying Amount of C.G.U after 2 years :-

Asset1 (320000/10 x 8) 256000
Asset2 ( 480000/20 x 18) 432000
Total carrying Amount 688000
Recoverable Amount after 2 Years 10,00,000

❖ Calculation of Original Carrying Amount

Asset1 = 400000 x 8 = 320000

10
Asset2 = 600000 x 18 = 540000
20
860000

a) Total Appreciation = 10,00,000 – 688,000 = 312,000

b) Allowed Limit for Reversal = 860,000 – 688000 = 172000

Statement Showing Revised C. Amount after Reversal

Assets Existing C. Amt Ratio Share in Reversal Revised C. Amount

Asset1 256000 256 + 64000 320000
Asset2 432000 432 +108000 540000

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688000 688 172000 860000

Journal Entries

a) Asset1 a/c Dr 64000

Asset2 a/c Dr 108000
To Reversal of I. Loss 172000
(Being Reversal made)
b) Reversal of I. Loss a/c Dr 172000
To P&L A/c 172000
(Being Reversal Recognised)

Notes on Concept : If Reversal of I. Loss is required for a C.G.U in case of Increase

in Recoverable Amount of C.G.U then the following points should be considered :-

a) As per the Provisions of Ind AS- 36, Reversal can be made upto Original Carrying
Amount assuming It will be the maximum Book Value of Assets if No impairment
Would not have been made.
b) As per the Provisions, Reversible Amount will be allocated to each Asset in C.G.U
in the ratio of carrying Amount of Assets on the date of Reversal of Impairment
Loss.

Concept 4 : Treatment of Goodwill *V.V.Imp

(8-10 marks)

As per the Provisions of Ind AS-36, Goodwill debited in books of A/c s at the
time of Acquisition of business. It never Generates Cash flows directly, but It helps
in increasing Cash flows for other Cash Generating Units by Synergy Effect from
Acquisition of Business. We Should Test impairment of Goodwill Annually, but in two
Different cases as follows:-

Cases For Impairment of Goodwill

Ist Case : If Goodwill is not Allocable

IInd Case : If Goodwill is Allocable

Explanation on Case I : If Goodwill is unallocable *Imp

Example :
a) Goodwill recognised at the time of Business acquisition = ₹ 600,000
b) Cash Generating Unit to which it is related : X, Y & Z
c) Carrying Amount of Assets : X = 10,00,000
Y = 700,000
Z = 12,00,000
d) Goodwill will increase Cash flows for X, Y & Z, but Such an increase cannot be valued
/ Quantified.
Give your Comments.

Solution :

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In the Given Case, Goodwill will remain unallocable, because benefit from
Goodwill Cannot be qualified in Figures. We Know that Goodwill will help X, Y & Z in
Increasing their Profits even though we cannot allocate goodwill over X, Y, & Z in the
Absence of Reasonable Basis.

Note 1 : Goodwill will remain Un- allocable if Benefit from Goodwill cannot be Quantified
For related C.G.U.

Example :
i. Goodwill = ₹ 600,000
ii. Related C.G.U = X, Y & L
iii. Carrying Amount of Assets :
X = 2500,000
Y = 17,00,000
Z = 20,00,000
iv. Recoverable Amount : X = 17,00,000
Y = 20,00,000
Z = 21,00,000
Assume it is a case of Un- allocable Goodwill, show the treatment of I. Loss.

Solution :
Calculation of Impairment Loss

a) X = Carrying Amount > R. Amount

= 25,00,000 > 17,00,000
= 800,000
b) Y & Z = There will be no Impairment Loss for Y & Z because their recoverable
Amount are higher.

Application of Ind AS 36 :- As per the Provisions, Impairment Loss will be adjusted

Against Goodwill first. The remaining Amount can be
Adjusted against Carrying Amount of Assets.

Treatment of Impairment Loss

Total Impairment Loss 800,000

Goodwill (600,000)
Remaining to be adjusted against 200,000

Revised carrying Amount for x = 2500,000 – 200,000

= 23,00,000

Journal : Impairment Loss a/c Dr 800,000

To Goodwill 600,000
To X 200,000
P&L a/c Dr 800,000
To Impairment Loss 800,000

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Example : *Imp
1) Goodwill = ₹ 600,000
2) C. G Units = Carrying Amount Recoverable Amount
X 25,00,000 17,00,000
Y 20,00,000 18,00,000
Z 15,00,000 12,00,000
Show Treatment of Impairment Loss.
(Assume Goodwill cannot be allocated)

Solution :

Calculation of Impairment Loss

a) X = 25,00,000 - 17,00,000 = 800,000

b) Y = 20,00,000 – 18,00,000 = 200,000
c) Z = 15,00,000 – 12,00,000 = 300,000
Total 13,00,000

Treatment of Impairment Loss

Total Impairment Loss 13,00,000

Goodwill to be written off (600,000)
Remaining for X, Y & Z 700,000

CGU CA Ratio Shares in IL Revised CA

X 25,00,000 5 291667 2208333
Y 20,00,000 4 233333 1766667
Z 15,00,000 3 175000 1325000
700,000

Note 2 : As per the Provisions of Ind As-36, the following Steps should be applied to
test the impairment of Goodwill :-
Step I : Calculate Impairment Loss for each C.G.U separately to which goodwill is
Related
Step II : Allocate Impairment Loss to Goodwill first
Step III : If Impairment Loss becomes higher than Goodwill then the remaining loss
Will be allocated over C.G.U in the ratio of their carrying amount of Assets.

Example : (Reversal of Impairment Loss)

a) Goodwill : ₹ 600,000
b) C.G.U : Carrying Amount R. Amount
A 20,00,000 15,00,000 (10y)
B 15,00,000 12,00,000 (20Y)
After 2 years, Recoverable Amount for A & B are 18,00,000 & 14,00,000 Respectively.
Show the Treatment of impairment Loss and its Reversal assuming Goodwill is
Un-allocable.

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Solution :
Calculation of Impairment Loss
A = 20,00,000 – 15,00,000 = 500,000
B = 15,00,000 - 12,00,000 = 300,000
Total Loss 800,000

Treatment of Loss

Total Impairment Loss 800,000

Goodwill to be written off First (600,000)
Remaining to be written off
Against A & B 200,000

Statement Showing Revised carrying Amount

A 20,00,000 4 114,286 1885714

B 15,00,000 3 85,714 1414286
7 200,000

Statement Showing Reversal of Impairment Loss

A B
Carrying Amount after 2 years 1508571 1272857
(1885714 /10 x8) (1414286 /20 x18)
Recoverable Amount after 2 years 18,00,000 14,00,000
Total Appreciation 291429 127143

Original C. Amount

A = 20,00,000 x 8 = 1600,000
10
B = 15,00,000 x 18 = 13,50,000
20

Allowed Limit : A = 1600,000 - 1508571 = 91429

B = 1350,000 – 1272857 = 77143

❖ Goodwill cannot be reversed as per Ind AS -36

Note 3 : As per the provisions of Ind As- 36, reversal of Impairment Loss cannot be
Made for Goodwill, but Reversal for Other Assets will be Same as we discussed
Earlier.

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Explanation on Case II : If Goodwill is Allocable

Format
CGU1 CGU2 CGU3
Carrying Amount of Assets xxxx xxxx xxxx
Share in Goodwill
(Ratio of Quantified Synergy) xxxx xxxx xxxx
Carrying Amount including Goodwill xxxx xxxx xxxx
Recoverable Amount xxxx xxxx xxxx
Impairment Loss xxxx xxxx xxxx

It Should be written off against Goodwill first. The remaining Amount will be
Adjusted against C. Amount.

❖ Goodwill is allocated in the ratio of Quantified Benefit to related C.G.U.

Example :

i. Goodwill = ₹ 600,000
ii. CGU = A 10,00,000
B 15,00,000
iii. Benefit to A : 40%
Benefit to B : 60%
iv. Recoverable Amount : A = 900,000
B = 12,00,000
Show Impairment Loss.

Solution :

Calculation of Impairment Loss

A B
Carrying Amount 10,00,000 15,00,000
Share in Goodwill 240,000 360,000
(40%) (60%)
Total carrying Amount 12,40,000 18,60,000
Recoverable Amount 900,000 12,00,000
Impairment Loss 340,000 660,000
Goodwill (240,000) (360,000)
Balance 100,000 300,000

Revised Carrying Amount : A = 10,00,000 – 100,000 = 900,000

B = 15,00,000 - 300,000 = 12,00,000

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*Part 4*

Step I : First of all, Goodwill is allocated to respective C.G.U on Some Reasonable basis
Step II : Calculate Recoverable Amount for each C.G.U Separately.
Step III : Calculate Impairment Loss for each C.G.U Separately.
Step IV : Adjust Impairment Loss against Goodwill first, but to the Extent of
Respective share in Goodwill.
( Note : Impairment Loss of one C.G.U cannot be adjusted Goodwill of
Other C.G.U.

Solution of Q.13

In the Given question, Goodwill is related with a Single C.G.U due to which
It can be related directly with this Coal mine. So, It is a Case of allocable Goodwill.
The following statement may be Prepared to Calculate impairment Loss of Goodwill :-

Cost of Assets (1.4.x1) 320,000

Depreciation for 2 Years (320000/20 x 2) (32000)
Carrying Amount of CGU as at 31.3.x3 288,000
Add : Related Goodwill 80,000
Total Carrying Amount including Goodwill 368,000
Recoverable Amount (212,000)
Impairment Loss * 156,000

*It will be adjusted against Goodwill First

Treatment of Impairment Loss

Total I. Loss 156,000

GW to be impaired (80,000)
Remaining against C.G.U 76,000

Revised Carrying Amount of CGU = 288000 – 76000

= 212,000
18 Years

Statement Showing Reversal of I. Loss

Carrying Amount as at 31.3.x5 188444

(212000/ 18 x 16)
Recoverable Amount as at 31.3.x5 304000
Total App. 115556

Original Carrying Amount

Carrying Amount = 320000 – (320000/20 x 4)

(31.3.X5) = 256000

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Allowed Max. Reversal = 256000 – 188444 = 67556

❖ Goodwill cannot be reversed as per Ind AS -36

Solution of Q.23

Calculation of Impairment Loss

Carrying Amount of Assets (1.4.x1) 1000 Crores

Depreciation for C.Y (1000/10) (100 Crores)
Carrying Amount as at 31.3.X2 900 Crores
Goodwill (Allocable) 200 Crores
Total Carrying including Goodwill 1100 Crores
Recoverable Amount 600 Crores
Impairment Loss 500 Crores

Treatment Of I. Loss

Total I. Loss 500

Goodwill to be written off (200)
Balance against Plant A 300

Revised Carrying Amount for Plant A = 900 – 300 = 600

Concept 5 : Corporate Assets *Imp

(i.e., H.O Building, R & D Centre etc.)

As per the Provisions of Ind AS-36, Company should Test impairment for Corporate
Assets also.
As per the Provisions, Corporate Assets are those Assets which do not
Generate cash flows, but these Assets are necessary to obtain cash flow from other
Assets & C.G.U. There may be 2 Cases to test the impairment of Corporate Assets as
Follows :-
Case I : If Corporate Assets can be Allocated over other Assets
Case II : If Corporate Assets cannot be Allocated

Case I : If Allocation of Corporate Assets is Possible

Example :
i. Corporate Building : ₹ 10,00,000
ii. Related CGU with Building :-
Carrying Amt A = 50,00,000
B = 75,00,000
iii. Recoverable Amount : A = 40,00,000
B = 60,00,000
Calculate Revised Carrying Amount for A, B & Corporate Building.

Solution :

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Assumption : Useful Life of Assets is same for A & B.

Statement Showing I. Loss

A B
Carrying Amount 50,00,000 75,00,000
Corporate Building (50 :75) 400,000 600,000
54,00,000 81,00,000
Recoverable Amount (40,00,000) (60,00,000)
Impairment loss 14,00,000 21,00,000

A Building B Building
50/54 4/54 75/81 6/81
12,96,296 103,704 1944,444 155,556

Revised Carrying Amount :

A = 50,00,000 – 12,96,296 = 37,03,704
B = 7500,000 – 19,44,444 = 55,55,556
Building = 10,00,000 – 103,704 – 155,556 = 740,740

Step I : Allocate Corporate Asset in the ratio of Carrying Amount of Related C.G.U.

Note : If Useful life is different for C.G.U then Allocation of Corporate Assets will be
Made on the basis of following weights :
Weights = Carrying Amount x Useful Life

Step II : Calculate I .Loss for each C.G.U after including share in Corporate Assets
Step III : Divide I. Loss between CGU & Corporate Assets in the ratio of their
Carrying Amount.

Solution of Q.11

Statement Showing Impairment Loss

X Y
Carrying Amount 20 30
Office Building (2:3) 4 6
24 36
Recoverable Amount 18 38
Impairment loss 6 NIL

20/24 4/24
5 1

Revised C. Amount
1. X = 20 – 5 = 15
2. Y = 30 – 0 = 30
3. Building = 10 -1 = 9

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Case II : If Corporate Assets are Un-Allocable

Example :
i. Office Building : ₹ 10,00,000
ii. C.G.U : A ₹ 40,00,000
B ₹ 50,00,000
iii. Recoverable Amount : A ₹ 38,00,000
B ₹ 45,00,000
iv. Total Recoverable Amount for all : 90,00,000
CGU including Building
Calculate impairment Loss for Building.

Solution :

Calculation of Impairment Loss

A B Total
Carrying Amount 40,00,000 50,00,000 90,00,000
Recoverable Amount (38,00,000) (45,00,000) (83,00,000)
Impairment Loss 200,000 500,000 700,000
Revised C. Amount 3800,000 45,00,000 83,00,000
(40 – 2) (50-5)
Office Building - - 10,00,000
Carrying Amount of Business - - 93,00,000
Recoverable Amount in Total - - 90,00,000
Impairment Loss * 300,000

*This Loss should be adjusted against office Building.

Revised C. Amount = 10,00,000 – 300,000 = 700,000

Solution of Q.2 * V. Imp (Extra Question)

a) Calculation of Weights for Allocation of X

(Weight = Carrying Amount x Useful life)

A = 500 x 10Y = 5000

B = 750 x 20Y = 15000 5 : 15 :22
C = 1100 x 20Y = 22000

b) Calculation of Impairment loss Excluding Y Unallocable

A B C
Carrying Amount 500 750 1100
x (5 : 15 :22) 71 214 314
571 964 1414
Recoverable Amount 600 900 1400

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Impairment loss NIL 64 14

750 214 1100 314

964 964 1414 1414
50 14 11 3

Revised C. Amount = A = 500 – 0 = 500

B = 750 – 50 = 700
C = 1100 – 11 = 1089
B = 600 – 14 - 3 = 583

Calculation of Impairment Loss for Y

Calculation (Revised) (A + B + C + X) 2872

Add : Y 200
3072
Recoverable Amount for ABC Ltd. 3200
Loss for Y NIL

Step I : calculate Impairment Loss for individual CGU without including Carrying
Amount of Corporate Assets
Step II : Revise the carrying Amount of all CGU after impairment Loss
Step III : Add the carrying Amount of unallocated Corporate Assets to Total
Carrying Amount of all CGU
Step IV : Identify Recoverable Amount for whole Business
Step V : Impairment Loss = Step III – Step IV

Un-allocable Corporate Assets

*Part 5*

Unit III : Additional Issues to be Discussed in Ind AS :36

Issue 1 : Annual Test for Impairment Assets

As per the provisions of Ind AS-36, the following Assets are to be considered for
Annual Test irrespective of Existence of Indications :-
a) I. Assets having Indefinite Life
b) I. Assets which are not in use at Present
c) Goodwill in Business Acquisition
The Following Important points are to be considered :-
i. The Company can Carry Annual Test at any time during the year, but It will
be done on same date in Next year. We cannot change the date of Annual Test
After first Test is done.
ii. If any indication for impairment takes place on an Earlier date than Annual
Test, then we should carry Impairment Test on the date of Such Indication & we
Should not wait for the date of Annual Test.

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Issue 2 : Inter Dept. Transfers *Imp

If output of one Process is input for other Process then It will be considered as a
Case of captive consumption/ IDT. The following Points should be considered in this
Case :-
a) If Active market Exists for such Output then we will Estimate Separate cash
Flows for such Process and we will consider Separate Impairment Test for this
Process.
b) If Active market does not Exist for Output of such process then we will
Consolidate all Processes together and a Larger CGU will be Formed for impairment
Test.

Issue 3 : Disclosures (Notes to A/c s)

a) Individual Assets :-
i. Impairment Loss written off during Current year
ii. Reversal of Impairment Loss 9if any) during Current Year

b) Cash Generating Unit :-

i. Impairment Loss (Current Year)
ii. Reversal of Impairment Loss (current Year)
iii. Carrying Amount of Assets covered in CGU
iv. Revised Carrying Amount of Assets
v. Basis of formation of CGU

c) Goodwill :-
i.Impairment Loss (C.Y)
ii.Method of Treatment of GW
(i.e., Allocable or Un-allocable)
iii. Basis of identification of related CGU

d) Corporate Assets :-
i. Carrying Amount of Corporate Assets
ii. Impairment Loss (CY)
iii. Reversal of I. Loss (CY)
iv. Revised Carrying Amount
v. Nature of corporate Assets
(Allocable/ Un-allocable)

Issue 4 : Impairment of Investments in Subsidiaries *V.V.Imp (5-10 Marks)

Example :
i. Cost of Investments made by Holding : 400,000
ii. Net Assets held by Subsidiary on Same date : 10,00,000
iii. % of share of Holding co. : 70%
Calculate GW if any for Holding co.

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Solution :
Identification of Goodwill

Net Assets of S ltd. 10,00,000

Share of Non controlling Int. (300,000)
Net Assets for Holding 700,000
Cost of Invest. 14,00,000
Goodwill 700,000

Example : With the help of given information, Identify Goodwill for Holding & NCI as a
Whole. 70% 30%

Solution :
a) Total COI (Holding + NCI) :
Holding 14,00,000
NCI (10L x 30%) 300,000
17,00,000
b) Total N. Assets 10,00,000
Goodwill 700,000

Whole

Example : With the help of Previous Example (Business as a whole) , calculate I. Loss
If :-
a) Carrying Amount of Net Assets at B/S date : 12,00,000
b) Recoverable Amount : 900,000

Solution :

Calculation of I. Loss

Carrying Amount of Net Assets 12,00,000

Add : Goodwill 700,000
19,00,000
Recoverable Amount (900,000)
Impairment Loss 10,00,000

1) Goodwill = 700,000 - 700,000 = 0

2) Other Assets = 12,00,000 – 300,000 = 900,000

Journal :-
a) I . Loss A/c Dr 10,00,000
To Goodwill 700,000
To Other Assets 300,000
b) P&L a/c Dr 600,000 (60%)
NCI a/c Dr 400,000 (40%)

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To I. Loss 10,00,000

Example :
i. Cost of Investments :
a) Holding 400,000
b) NCI 200,000
ii. N. Assets on Same date 500,000
iii. B/S date :
a) Carrying Amount 300,000
b) Recoverable Amount 180000
Calculate I. Loss in consolidated B/S.

Solution :
a) Goodwill as a Whole = (400,000 + 200,000) – 500,000
= 100,000
b) I. Loss = carrying Amount Present 300,000
Goodwill 100,000
400,000
Recoverable Amount (180,000)
Loss 220,000

Goodwill = 100,000 – 100,000 = 0

Other Assets = 300,000 – 120,000 = 180,000

Journal :
a) I. loss a/c Dr 220,000
To Goodwill 100,000
To Other Assets 120,000
b) P&L a/c Dr 176,000 80%
NCI a/c Dr 44,000 20%
To Impairment loss 220,000

Step I : Identify Goodwill in Subsidiary as a Whole from the point of View of holding
& Non-controlling Interest together.
Step II : Calculate Impairment Loss including Goodwill as a Whole
Step III : Divide I . Loss between holding & NCI in the ratio of their % of
Investment

Note : Ind AS 36 is Applicable on Consolidated B/S only. (Holding co. will read Ind As 109
For its Separate statements)

Solution of Q.24 (6-8 marks)

Calculation of Goodwill as at 1.7.X1

Cost of Investments :
1) Made by Sun ltd. 12,80,000
(800,000/5 x 2 x4)

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2) NCI 28,00,000

800000 x 20% = 200000 @ 1.40

80%
Total investment 15,60,000
Assets as at 1.7.x1 (13,00,000)
Goodwill 260,000

Calculation of I. Loss

A B C
Carrying Amount 600,000 550,000 450,000
Goodwill (2:2:1) 104,000 104,000 52,000
704000 654000 502000
R. Amount 740000 650000 400000
Impairment loss NIL 4000 102000
Goodwill to be written off first - (4000) (52000)
Balance against Assets - - 50000

a) Impairment Loss a/c Dr 106000

To Goodwill 56000
To Assets 50000
b) P&L a/c Dr 84800 (80%)
NCI a/c Dr 21200 (20%)
To I. Loss 106000

Solution of Q.4 (4 marks)

Calculation of Goodwill

Cost of Investments :
Holding 2100
NCI (1500 x20%) 300
2400
Net Assets (1500)
Goodwill 900

Statement Showing Impairment

Carrying Amount 1350

Goodwill (900 – 500*) 400
1750
Recoverable Amount (1000)
Loss 750

Goodwill = 400 -400 = 0

Assets = 1350 – 350 = 1000

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a) I. Loss a/c Dr 750

To Goodwill 400
To Assets 350
b) P&L a/c Dr 600 (80%)
NCI a/c Dr 150 (20%)
To Impairment Loss 750

❖ Goodwill of ₹ 500 has already been Allocated by holding to its C.G.U

*Part 6*

New Questions

Solution of Q.5

i. Calculation of carrying Amount of Machine at the end of 2nd year & Revaluation
surplus.

Original Cost (Ist jan : year I) 240,000

Depreciation for Y1 & Y2 (24,000)
240,000 x 2Y
20Y
Carrying Amount at the end of 2nd year 216,000
Recoverable Amount in the beginning of 3rd year 250,000
Revaluation Surplus 34,000

ii. Carrying Amount of Asset (Ist Jan :Y3) after revaluation 250,000
Depreciation for 3rd year (250,000/ 18Y) (13889)
Carrying Amount of Asset at the end of Y3 236111

iii. Impairment Loss = 236111 – 100000 = 136111

*The Impairment Loss will be adjusted against Rev. Surplus first, then the remaining
Loss will be transferred to P&L A/c.

Revaluation Reserve a/c Dr 34000

P&L a/c Dr 102111 (Bal fig.)
To Impairment Loss 136111
(Being Loss written off)
Impairment Loss a/c Dr 136111
To Assets 136111
(Being value of Asset reduced)

iv. Revised Dep (4th Year) = 100000/ 10years - 10000 P.a

(Revised c. Amt)

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(Revised Life)

Solution of Q.1 *Imp

Step I : Identification of GW (date of Acquisition)

N. Assets a/c Dr 3000

Goodwill (Bal fig.) a/c Dr 800
To NCI (20%) 600
To Cash (80% PC) 3200
(Being Initial Recognition made)

Goodwill as a whole = 800 x 100% = 1000

80%
800 200
(Recognised) (Not Recog.)

NCI at N. Assets

Case I : Calculation of Impairment Loss in CFS

Carrying Amount of Subsidiary Assets 2700

(without Goodwill)
Goodwill as a Whole 1000
Total Assets 3700
Recoverable Amount 2000
*I. loss 1700

*It will be adjusted against GW first to the Extent of ₹ 1000, but remaining 700 will
be adjusted against other Assets. The above Loss will be shared by holding & NCI as
Follows :-

Holding co. NCI Total

(80%) (20%) (100%)
Impairment Loss : GW 800 200 1000
Others 560 140 700
Total 1360 340 1700

*Out of 340, we will recognise only 140 because GW for NCI was not recognised on
Initial date, so its impairment cannot be shown in Books

Case II : calculation of I. Loss

Carrying Amount of B ltd Assets (without GW) 2700

Add : GW as a whole 1000
Total Assets 3700
Recoverable Amount 2800
*I. loss 900

*It will be adjusted against GW only

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Holding NCI Total

Impairment 720 *180 900

*It will not be disclosed in Books because Goodwill related to NCI is not disclosed in
Books.

*Part 7*

Solution of Q.9, Q.10, Q.8, Q.12, Q.11, Q.16 Discussed in Class

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter-11 Ind-AS: 38 (V.Simple)

Intangible Assets

*Part 1*

Concept 1 : Meaning of Intangible Assets

As per the Provisions of Ind AS-38, Intangible Assets can be recognised

in B/S only if the following 5 Conditions are satisfied :-

Condition I : It should not have any Physical Substance

Note : It should not be a Tangible Asset.
+
Condition II : It should be under the control of the Enterprise
Note : It means that It should be under undisputed Ownership of the
Enterprise. We can Establish undisputed rights on Assets only if
the enterprise can restrict others from taking benefits from
Controlled Assets.
+
Condition III : It should be an identifiable Asset which is separate from others.
Note : An Asset can be identified Separately from others only if It has
Some Economic Benefits. Further, Economic Benefits can be
Identified only if Assets can be sold, Exchanged or Given on Rent/
Royalty.
+
Condition IV: It should be a Non-Monetary Asset.
Note : It means that It should not be held for Sale in Ordinary Course of
business, but It should be held for Use.
+
Condition V : The Enterprise should have reliable Estimate for the cost of these
Assets.

Important Note

If any condition out of above specified condition is not Satisfied then Such an Asset
Will be transferred to P&L A/c as an Expense in the same year. It means that all the
Conditions are required to be satisfied to recognise an Asset in B/S as an
Intangible Asset.

The following Assets can be considered as Intangible Assets normally : -

i. Patents ii. Copy Rights iii. Trademarks/ Brand

iv. Scientific Knowledge v. Technical
Know How

Purchased

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vi. Franchise Agreement

vii. Customer Database etc.
viii. Licenses for fishing, Imports etc
ix. Motion films etc.
x. Computer software
xi. Websites
xii. Domain Names

Concept 2 : Intangible Assets which are out of Scope of Ind AS 38

As per the Provisions of Ind AS 38, the following Intangible Assets are not covered
Under the Scope of Ind AS 38 :-
i. C. Assets held for sale in Ordinary Course of Business (Ind As 2 : Inventories)
ii. Deferred Tax Assets (Ind AS 12)
iii. Lease Contracts (Ind AS 116)
iv. Employees Benefits (Ind AS -19)
v. Goodwill (Ind 103) Business Combination
vi. Non current Assets held for Sale (105)
vii. Mineral oils, Ores (106)

Concept 3 : Initial Measurement of Cost of Intangible Assets

Cases for Acquisition

Purchase by Exchange of Business Internally Govt.

Cash Assets Acquisition Generated Grants

Case I : Purchase by Cash

Statement Showing Cost of Intangible Assets

Purchase Price xxxx

Non- Refundable Duties xxxx
Brokerage/ Commission xxxx
Cost of testing xxxx
Any other Expense which is directly xxxx
Related with Acquisition
COIA xxxx

Expenses not to be included in Cost :-

a) Staff Training Cost

Note : The company not control its staff because staff can resign any time. So,
It should be written off in P&L A/c in the same Year.
b) Expenditure on Advertising
Note : It is not certain that Economic benefits will flow to the Enterprise after
Incurring Expenditure on Advertising. So It will be written off in same year
in P&L Statement.

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c) Allocation of General & Selling Overheads

These Expenses are not related directly with Acquisition of Intangible Assets
d) Start-up Cost
These Expenses are not incurred to acquire or Generate I. Assets, but these are
Incurred to Establish the Product in the market. It may include Cost of
Exhibitions, Inaugrations, Ceremonies etc. These Expenses should be Written off
In PL A/c in Same year.
e) Operating Losses
(Initial losses at the time of adoption of New Technology)
f) Trade Discount, Refundable Duties or Taxes etc.
(These Items should be reduced from cost of I. Assets.)
g) Acquisition of I. Assets on Deferred Credit

In Case I. Assets are acquired on Deferred Credit then we will discount the
Purchase Price. We will Compute Interest Cost on Purchase Price and we will write off
it in PL Statement as an Expense.

Conclusion : It means that Interest cost on acquisition of I. Assets will not be

Considered as a Cost.

Case II : Exchange of Assets

- Refer Ind AS 40 & Ind AS 16 -

(Same Concept)

Case III : Acquisition in Business Combination *Imp

As per the Provisions of Ind AS-38, Intangible Assets of Vendor Company can
be incorporated in the books of P.Co only if fair value is available for the I. Assets.
It can also be said that I. Assets of V.co cannot be taken over at Book
Value by P.co.

*Part 2*

Solution of Q.4

Calculation of Cost of Intangible Asset

Purchase Price :
i. Cash payment 600,000
ii. Deferred Credit 363,600
(400,000 x .909)
Purchase Tax 100,000
Legal fees 87,000 Professional fees
Consultancy fees 120,000
Cost of I. Assets 12,70,600

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Solution of Q.6 (2 marks)

Calculation of Cost of I. Assets

Purchase Price 30,00,000

Trade discount (5%) (150,000)
Taxes 50,000
Customisation Cost 700,000
COIA 36,00,000

Note : We should not Consider maintenance Cost as a Part of Cost of I. Assets,

Because It is paid for Smooth operation of Software. It will be Considered as a
Prepaid Expense and will be written off over the Period of 5 Years.

Solution of Q.10

Journal Entries
(In the books of X ltd)

Case I Case II

Patent a/c Dr 20,00,000 Patent a/c Dr 20,00,000

To I.P. Rights 18,00,000 To I.P.Rights 18,00,000
To Profit on Exchange 200,000 To cash 200,000
(Being Assets Exchanged) (Being Assets Exchanged)

Solution of Q.11

As per the Provisions of Ind AS- 38, Entities should not recognise Expenditure
On Advertising as an I. Asset, because Entity cannot identify Benefit from sale
Promotion Expense. It is also not certain that Advertising will work.
So, the Entity should write off this Expense in P&L A/c as a Normal Expense.

Solution of Q.5

In the Given Case, X ltd should recognise the obtained licence as an I. Asset,
Because It is satisfying all the conditions which are required to identify an I. Asset.

Solution of Q.2

In the Given Case, We can recognise franchise fees of ₹ 1 Crore as an I. Asset

Because It is Just Like licence fees, but Share in Revenue (Royalty) will be written
off in PL Statement.

Solution of Q.4 Discussed in Class

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Solution of Q.6

Journal Entries

In the books of Sun Ltd. In the books of Earth Ltd.

(Owner : Licence) (Owner : Software)
Book Value = 500,000 Book Value = 10,000

Case I :

Software a/c Dr 520,000 Licence a/c Dr 500,000

To Licence 500,000 Cash a/c Dr 20,000
To Cash (Bal fig) 20,000 To Software 10,000
(Being Exchange made) To Profit on Exchange 510,000
(Being Exchange made)
Case II :
Software a/c Dr 490,000 Licence a/c Dr 490,000
Exchange Loss a/c Dr 10,000 To Software 10000
To Licence 500,000 (BV) To Profit on Exchange 480,000
(Being Assets Exchanged) (Being Assets Exchanged)

Fair value of Acquired Asset is not

available due to which fair value of Given
up Assets has been considered

Case III :
Software a/c Dr 500,000 Licence a/c Dr 10000
To Licence 500,000 To Software 10000
(Being Assets Exchanged) (Being Assets Exchanged)

Solution of Q.5

Statement Showing Calculation of Goodwill & Other I. Assets

Purchase Consideration 50,00,000

Assets : Tangible N. Assets (30,00,000)
Intangible Assets :
1) Trade Mark 180,000
2) Licence 654000 (834000)
(150000 x 4.36)
Goodwill 11,66,000

These I. Assets are Separately Recognised because fair value is available

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Solution of Q.7 (Extra Question)

Statement Showing Calculation of GW

Purchase Consideration 400,000

Net Assets acquired : -
PPE 150,000
I.A 1 30,000
I.A 2 70,000
C &B 130,000
Payable (50,000) (330,000)
Goodwill 70,000

Important Note : *Imp

In case, I. Assets are not recognised Separately in the absence of fair value then
these I. Assets are recognised as Goodwill and These I. Assets are amortised as GW
is amortised.

Case IV : Internally Generated I. Assets *V.V.Imp

As per the Provisions of Ind AS -38, Internally Generated I. Assets can be

Classified into 2 headings as follows :-
a) Self Generated
b) In House research & Development

a) Self -Generated

If any I. Asset is generated automatically without incurring any Expenditure

then It is Known as Self- Generated Assets. These I. Assets are Generated by
Conditions Efforts of Business for Customer Satisfaction. These may be in the form
Of :
➢ Goodwill
➢ Brand Name
➢ Customer List
➢ Publication Titles etc.

Treatment : As per the Provisions, these Assets are not recognised in B/S, because
These Items are free of cost. These Assets do not satisfy the Basic
Conditions which are required for Initial recognition.
“ Reliable Estimate of Cost is not Available”

b) In House R & D
R&D

Research Activities Development Activities

(Identification of Technical (Testing Stage after identifying
Feasibility) Technical Feasibility)

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Research Phase : If any Enterprise has incurred some Expenditure in finding of new
designs, formulas, technology etc. , but findings are not yet
Completed then It will be recognised as research phase. Under this
Phase, feasibility of New technology New formulas or New design
Remain in Process.

Treatment : The Enterprise should write off the total Expenditure in PL statement
Which is incurred during Research Phase.

Development Phase : After Identifying technical feasibility of a Research, Testing is

done which is Known Development Phase.

The Enterprise should Capitalise all the Expenses which are incurred during this phase
The following Expenses may be included in the cost of I. Assets :-

Material Consumed xxxx

Employees Cost directly related with this phase xxxx
Title registration Cost xxxx
Master Copies Cost xxxx
Any other Expense which is directly related with
Trial Runs xxxx
COIA xxxx

Solution of Q.12

Calculation of Cost of I. Asset

Capitalisation Expense
F.Y : 2000 – 01
Research Expenditure - 20
2001 – 02
Development Expense:
Salaries 30 -
Overheads 12 -
Staff Training - 10
Adm. oH - 10
2002 – 03
Salaries & Wages 40 -
Total 82 40

❖ We will write off ₹ 40 Lacs in P&L Statement.

Statement Showing I. Loss & Revised C. Amount

I . Loss = Carrying Amount > Recoverable Amount

= 82 > 70
= 12
Revised Carrying Amount = 82 – 12 = 70

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Solution of Q.7
Accounting for 20x1 – x2

1.4.x1 – 31.12.x1 Research Phase 2700

To be written off in P&L statement 2700
1.1.x2 - 31.3.x2 Development Phase 900
Carrying Amount 900
Recoverable Amount as at 31.3.x2 1000
Intangible Loss 0

❖ No Change in Carrying Amount will take Place.

Accounting for 20x2- x3

Opening Balance (1.4.x2) 900

New Expenditure (x2 – x3) 6000
Carrying Amount 6900
Recoverable Amount (5000)
Intangible Loss 1900

Revised Carrying Amount = 6900 – 1900 = 5000

Solution of Q.9

a) Cost of I. Asset : Acquired Research Cost 10L

Development Exp. 7L
17L
b) Exp. to be written off in PL : Research Exp. 5L
Technical fees 2L
7L

Note : we have considered ₹ 10 Lacs as a Cost of I. Asset because It is an acquired

Research. It cannot be considered as in house (Internal) Research.

Solution of Q.13
Statement showing Calculation of Cost

Particulars Cost Expense

Research Phase :
Salary to designers - 200,000
Program design - 500,000
Coding - 200,000
Development :
Direct Cost 700,000 -
Testing 200,000 -
Master 300,000 -
Inaugration Exp - 70,000
Total 12,00,000 970,000
(B/S) (PL)

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*Part 3*

Solution of Q.12

Statement Showing Cost & Valuation of I. Assets (20x1- x2)

Cost Expense
Expenditure made upto 1.3.x2 - 900
Expenditure made after 1.3.x2 but upto 31.3.x2 100 -
Total 100 900*
Recoverable Amount as at 31.3.x2 500
Intangible Loss NIL

❖ Expenditure of ₹ 900 will be written off in PL statement, because It does not

Fulfil the conditions which are required for recognition of AS-26.

Statement Showing Cost & Carrying Amount for X2 –X3

Opening Balance (1.4.x2) 100

New Expenditure (x2-x3) 2000
2100
Recoverable Amount 1900
Intangible Loss 200

Revised Carrying Amount = 2100 -200 = 1900

Solution of Q.14

Cost of I.A = 70,00,000 (1.7.x1 – 30.9.x1)

Expenses to be written off in PL = 30,00,000

Solution of Q.4

As per the Provisions of Ind AS-38, An Enterprise cannot control its Human
Resources/ Employees Benefits. So, It cannot be recognised as an Asset, but
Employees Benefits should be Expected in the same year. The intention of company
To record HRA as an Intangible is not valid.

Solution of Q.3

In the Given Case, Company is incurring Expenditure on Advertisement to

Generate customer List, but Ind AS-38 does not allow capitalisation of Adv. Exp as an
Intangible Asset. So, Identification of cost of Customer List cannot be made due to
Which It cannot be recognised as an I. Asset.

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Solution of Q.1
Calculation of Goodwill

Purchase consideration 10,00,00,000

Net Assets Acquired (8,50,00,000)
Non Compete Agreement fees (50,00,000)
Goodwill 1,00,00,000

❖ Staff cost cannot considered as an I. Asset.

Case 5 : Acquisition of I. Assets by Govt. Grants

- Refer Ind AS -20 : Govt. Grants -

Concept 4 : Models for Presentation of I. Assets

It is not allowed
Models under As-26

Cost Model Revaluation Model

Refer Ind AS : 16 (PPE)

Solution of Q.8

Case I :
a) 31.3.x2 : I. Assets a/c Dr 20,000 (120,000 – 100,000)
To Rev. Res. 20,000
(Being Upward Rev. made)
b) 31.3.x3 : Revaluation Res. a/c Dr 20,000
P&L a/c Dr 15,000
To I. Asset 35,000 (120000 – 85000)
(Being downward rev. made)

Case II :
a) 31.3.x2 : P& L a/c Dr 15,000
To I. Asset 15,000
(Being I. Loss written off)
b) 31.3.x3 : I. Asset a/c Dr 20,000
To PL 15,000
To Rev. Res 5000
(Being Reversal of I. Loss made)

Solution of Q.15 extra Questions

Method I : I. Asset a/c Dr 90,00,000

To Rev. Res. 90,00,000
(Being carrying Amount directly increased from 60L to 150L)

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OR
Method II : * I. Asset a/c Dr 1,50,00,000
*To Accumulated Amort. 60,00,000
To Rev. res. 90,00,000
(Being cost, Accumulated Amort. & Rev. Res Increased Proportionately)

❖ Existing Revalued Changes

Cost 100 L 100% 250 150 L
A.Amort. (40 L) 40% (100 L) (60 L)
C. Amount 60 L 60% 150 L 90 L

Concept 5 : Amortisation Policy *V.V.Imp

Amortisation

Intangible Assets with Finite Intangible Assets with

Useful Life indefinite Life

Case I : Finite Life

Limited Life

As per the Provisions of Ind AS-38, the following Points should be

Considered while Calculating Amortisation Exp. For I. Assets with Finite Life :-

1) Amortisation method :-

Methods

Ratio of Expected Cash Inflows/ OR SLM, WDV or UoP over its

Economic Benefit over its useful life
(1st Preference) (2nd Preference)

Selection is 100% Judgemental

2) Useful life : As per the Provisions, Useful Life or Expected Benefits from I.Assets
Shall be revised at the end of each year. If any Change takes place
Then we will consider it as change in an Estimate.
3) Salvage Value : As per the Provisions of Ind AS -38, salvage Value will always be
Assumed ‘zero” for I. Assets.

Exception

If there is an Active market for disposal of I. Asset at the end of useful

Life then we can assume some salvage value.

4) Impairment : We will carry impairment Test for these I. Assets only if there is
An Indication.

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Solution of Q.10
Statement Value of I. Asset at the end of Year

X1 – X2 : Patent acquired (1.4.x1) 300,000

Amortisation as at 31.3.X2 (60,000)
(300000/ 5 x 1)
Carrying Amount as at 31.3/1.4 240,0000
X2 – X3 : Impairment Loss as at 1.4.x2 (90,000)
Revised carrying Amount as at 1.4.x2 150,000
Amort. Exp. (150000/2 x 1) (75,000)
Carrying Amount as at 31.3.x3/1.4 75,000
X3-X4 : Appreciation in Value 1.4.x3 225000
(300000 – 75000 = 225000

90000 135000

Reversal Rev. Res

Of I.L
Carrying Amount as at 1.4.x3 300,000
Amortisation (300000/4Y) (75000)
Carrying Amount as at 31.3.x4 225000

Solution of Q.9
Calculation of Amortisation Exp.

Year 1 :
Amort. Exp = 10,00,00,000 x 50,000 U = 1,11,11,111
450,000 U
Revised carrying Amount = 10,00,00,000 = 1,11,11,111 = 8,88,88,889
Year 2 = 8,88,88,889 x 65000 = 1,56,15,615
65 + 85 + 105 + 115
Revised Carrying Amount = 8,88,88,889 – 1,56,15,615 = 7,32,73,274

Case II : Indefinite Life

1) There will be no Amortisation Expense for these Assets in the absence of Limited
Life. These Assets are not amortised, but these Assets are carried at cost only.
2) These Assets should be Tested Annually for impairment.

Concept 6 : De- Recognition of I. Assets

De- Recognition

Disposal OR Retired Ind AS 105

Whichever is Earlier

Note : Profit or Loss at the time of Disposal of Assets should be transferred to

P&L A/c.

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Concept 7 : Disclosures

1) General Disclosures :-
a) I. Assets with finite or Indefinite Life
b) Amortisation Method : Asset wise
c) Carrying Amount, Accumulated Amortisation at the beginning & at the end
d) I. Assets with indefinite Life : Annual Impairment Test Effect
e) Revalued I. Assets with Reconciliation

OB & CB
f) Research Exp. that has been written off

Other Disclosures : If Management wants to disclose any other information then

Additional disclosures can also be made.

*Part 4*

Solution of Q.4 , Q.6, Q.20, Q.21, Q.23, Q.24

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Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter-12 Ind AS 105 :

Non-Current Assets held for sale & Discontinued Operation

*Part 1*

Coverage

Unit I : Unit II : Unit III :

NCA held for sale Disposal Group held for sale Discontinued Sale

Unit I : NCA held for sale *V. Imp

As per the Provisions of Ind-AS 105, A Non- Current Asset (i.e., PPE or Intangible
Asset), which was held for use in normal Course of Business, can be considered as held
For Sale only if the following 2 conditions are satisfied :-

Condition I : It should be available for Immediate Sale in Present Condition

+
Condition II : Sale of Such Assets should be highly Probable

Explanation on Condition I
Immediate Sale in Present condition

As per the Provisions of Ind AS 105, A Non- current Asset should be

available for immediate sale in Present condition without any Excuse. It is Expected
that NCA will be available for Sale in distant future then Such an Asset should
be considered as Held for Sale underInd-AS 105.

Examples of Sale in Distant Future :-

1. If A Plant & Machinery is still used to complete pending orders then It will be
Available for Sale in Distant Future.
2. If A Property will be sold after its Renovation then It will be available for sale in
Distant future.
3. If A Building will be sold after Purchase of New Building then It will also be a case
Of Distant future.

Exception to Distant Future

If any sale takes time due to Customary Practices then It will not be
Considered as Distant Future.
(i.e., If customer will take time for Payment or small Repairs are undertaken
at Customer request etc.)
+

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Explanation on Condition II
Sale Should be highly Probable

As per the Provisions of Ind AS 105, A Non-current Asset can be Classified

as “Held for Sale” under Ind AS 105 only if It is available for immediate sale in present
Condition as well as sale is highly Probable. If the following conditions are satisfied
then It will be assumed that sale is highly Probable :-

I. The Entity should have a Plan to sell the Asset

II. The Entity should start tracing a buyer
III. The Entity should Expect a reasonable Price which should be near to fair value
of NCA
IV. The Entity Expects the completion of Transaction within one Year
V. There should be no Certainty that Entity will withdraw the Plan or Change the
plan.

Additional Concepts to be considered

Concept 1 : When to Apply Ind AS 105

As per the Provisions, Application Ind AS 105 can be made at any time during the
Period Subject to be Specified 2 Conditions in main Concept :

Concept 2 : How to Apply 105

Step I : First of all, Calculate depreciation/ Amortisation on NCA from the beginning
of year till the date of Classification of Held for sale. So that carrying Amount
of NCA on that date can be calculated.

Calculation of carrying Amount on the date of Initial Application of Ind AS 105

Opening Balance in Assets a/c in the beginning of Year xxxx

Depreciation till the date of Classification as HFS (xxxx)
Carrying Amount as on that date xxxx

Step II : Before Appling 105, check any impairment Loss under Ind AS 36 and Adjust
The carrying Amount which is calculated in Step I.

Statement showing I. Loss under Ind AS 36

Carrying Amount (step I) xxxx

Recoverable Amount as per Ind AS 36 (xxxx)
I. Loss ++

❖ If Recoverable Amount becomes Less than Carrying Amount then It will be

Written off in P&L as Impairment Loss as Follows :

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1. I. Loss a/c Dr xxxx

To N. C Asset xxxx
(Being downward Revaluation made)
2. P&L a/c Dr xxxx
To I. Loss xxxx
(Being Loss written off)

Revised Carrying Amount = Carrying Amount (step I) – I. Loss

*Note : If Recoverable Amount becomes higher than Carrying amount then we will
Ignore such Appreciation.

Step III : Application of Ind AS 105 *V.V. Imp

While Classifying A Non- Current Asset as Held for Sale, the following Rule should be
Applied :-

Revised Carrying Amount (Step II) OR Fair value Less Cost to Sell of NCA
On the date

Whichever is Lower will be the Amount at which NCA will

Be Disclosed as Held for Sale in B/S

Notes :
a) If fair value Less Cost to sell becomes Lower than Carrying Amount then It will
be written off as Loss as per 105.
b) No Depreciation will be computed on such Asset after Classifying it as held for
Sale in future.

Example :
i. Accounting Year : 2021 – 22
ii. Book Value of PPE (1.4.2021) : 500,000
iii. PPE Classified as HFS on 1.7.2021
iv. Depreciation @ 10% P.A. WDV
v. Recoverable Amount as per Ind AS 36 on 1.7.2021 ₹ 440,000
vi. Fair Value Less Cost to sell on that date ₹ 370,000
Calculate Depreciation & I. Loss (Total under Ind AS 36 as well as Ind AS 105)

Solution :

Calculation of carrying Amount of PPE before Applying 105

Opening Balance (1.4.21) 500,000

Depreciation for 3m (5L x 10% x 3/12) (12500)
C. Amount as on 1.7.21 487,500
Recoverable Amount as per Ind AS 36 (440,000)
Normal I. Loss 47500
Revised C. Amount = 487500 – 47500 = 440,000

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Calculation of I. Loss under 105

Revised Carrying Amount (After Normal Impairment) 440,000

Fair Value Less Cost to Sell (370,000)
Further Decline 70,000

Total Decline = 47500 + 70000 = 117500

*NCA which is HFS will be disclosed in B/s at 370,000 and No Depreciation will be charged
On it in future.

Concept 3 : Reversal of Impairment Loss if Fair value Improves Subsequently

*Imp

If any Subsequent Valuation is made at B/S date before sale of NC Assets Held
For sale then there may be the following situations : -

Situation I : If Subsequent fair value Less cost to sell becomes Less than the
Previous Valuation as per 105 then Further decline will be written off in
P&L A.c and Carrying Amount will be adjusted according to Subsequent
Valuation.

Example :
With the help of Given information in Previous Example, Adjust carrying Amount of
PPE as at 31.3.2022 if fair value Less Cost to sell is ₹ 350,000

Solution :

Carrying Amount (1.7.21) for HFS Asset 370,000

Fair Value as at 31.3.22 (350,000)
Further Decline 20,000
Revised Carrying Amount on 31.3.22 = 370,000 – 20,000 = 350,000
(1.7)

Situation II : If Subsequent fair value Less cost to sell becomes higher than original
Valuation then Improvement in fair value can be Recorded by Reversal
Of Impairment Loss but subject to Extent of Total Impairment Loss
Which was Written off Earlier under Ind AS 36 & 105.

Example : with the help of Original Example, calculate the maximum reversal of I. Loss
As per Rules if fair value on B/S date increases upto ₹ 490,000
Solution :

Calculation of Increase in Value of Assets

Increase = Subsequent F.V – Original f. Value

= 490,000 – 370,000
(31.3.22) (1.7.21)
= 120,000 *

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Comments : In the Given Case, there ia an Increase in Value of ₹ 120,000, but

Maximum limit of reversal is 117500 (47500 + 70000). So we can consider
Increase in value by ₹ 117500 which was written off as I. Loss Earlier.

Revised C. Amount = 370,000 + 117500 = 487500 (max)

*Part 2*

Concept 4 : Change in Plan *V.V.Imp

Example :
i. Accounting Year : 2021 – 22
ii. PPE : Balance as on 1.4.21 = ₹ 10,00,000
iii. Depreciation @ 10% P.a. SLM
iv. Asset classified as Held for sale on 1.7.21
v. Recoverable Amount as per Ind AS 36 on 1.7.21 = ₹ 700,000
vi. Fair value Less cost to sell on 1.7.21 = ₹ 680,000
After 3 months, Entity Changes its mind and It has decided that it will use this
Asset instead of selling it in near future. Recoverable Amount on 1.10.21 is to be
Assumed ₹ 820,000. Show the Application of 105.

Solution :

I. Application of 105 on 1.7.21

a) Calculation of Carrying Amount of PPE (Before Applying 105)

Opening Balance (1.4.2021) ₹ 10,00,000

Depreciation ( 10,00,000 x 10% x 3/12) (₹ 25000)
Apr – june
Carrying Amount as on 1.7.21 ₹975000
Recoverable Amount as on 1.7.21 as per (₹ 700,000)
Ind AS 36
I.Loss ₹ 275000

Revised C. Amount as per Ind AS 36 = 975000 – 275000 = 700000

b) Calculation of value of Asset as per Ind AS 105

Revised carrying Amount (Ind AS 36) 700,000

Fair Value Less Cost to Sell 680,000
Decline 20000

Carrying Amount as per Ind AS 105 = 700,000 – 20000 = *680,000

*Depreciation will not be charged on ₹ 680,000 in future

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Journal Entries

a) Depreciation a/c Dr 25000

I.Loss a/c Dr 275000 (Ind AS 36)
Decline in value a/c Dr 20000 (Ind AS 105)
To PPE 320000
(Being Loss on Classification of PPE into HFS recognised)
b) P& L a/c Dr 320,000
To Dep. 25000
To I. L 275000
To Decline 20000
(Being Dep. & Losses written off)

❖ Max. Reversal Amount = 295000 (275000 +20000)

II. Accounting for Change in Plan

Step I : Calculate Carrying Amount of NCA that would have been there if we had not
Applied Ind AS 105
Carrying Amount as on 1.7.21 before Applying 105 ₹ 700,000
Depreciation for 3 months (July, Aug, Sep) (17500)
(700,000 x 10% x 3/12)
Normal C. Amount without Application of 105 682500

Step II : Identify Recoverable Amount of NCA on the date of Change in Plan

(Given in Question = ₹ 820,000)

Step III : Step I or Step II

682500 820000
Lower

At this value, HFS Assets shall be Reclassified as PPE/IA

= 682500

Step IV : Changes in Value of NCA due to Change in Plan will be transferred to P&L A/c
Changes = Value under 105 =680000 VS Value as per Step III = 682500

It will be transferred to P&L A/c = 2500

i. PPE a/c Dr 2500

To Reversal of Loss 2500
ii. Reversal of Loss a/c Dr 2500
To P&L 2500

❖ We will calculate Dep. On 682500 in Ind AS 16

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Solution of Q.3 *Imp (8-10Marks)

Calculation of Value of Asset as on 31.3.x3

A. Carrying Amount as on 31.3.x3 before Applying Ind AS 105

Original Cost (1.4.x1) ₹ 600,000

Depreciation for 2 Years (600000/15 x 2) (₹ 80000)
Normal Carrying Amount as on 31.3.x3 ₹ 520000
Recoverable Amount as on 31.3.x3 ₹ 470000
Normal I. Loss as per Ind AS 36 ₹ 50,000

Revised C. Amount before 105 = 520000 – 50000 = 470000

B. Value of Asset as on 31.3.x3 after Applying Ind AS 105

Revised C. Amount as per above Calculation 470,000

Fair value Less Cost to Sell 460,000
Whichever is Lower 460,000

Further Decline = 470,000 – 460,000 = ₹ 10,000

❖ Total Impairment = ₹ 50,000 + ₹ 10,000 = 60,000

(36) (105)

a) Calculation of Value of NCA as on 31.3.x4

(After Change in Plan)

Normal Carrying Amount before Applying 105 as on 31.3.x3 470,000

Depreciation for X3- X4 (36,154)
(470000/13y x 1y)
Carrying Amount as on 31.3.x4 without applying 105 433846

b) Recoverable Amount as on 31.3.x4 = ₹ 500,000

c) Whichever is Lower, It will be New carrying Amount after = 433846
Change in Plan

Changes in Carrying Amount : Existing C. Amount under 105 ₹ 460,000

New Carrying Amount after
Change in Plan ₹ 433846
Diff * 26154
❖ It will be written off in P&L at the time of Change in Plan

Notes on concept:

An entity can Change its decision regarding Held for sale Assets. It can
Continue its use of Assets instead of being selling it near future. If there is a
Change in plan then the following steps should be applied to Calculate “ the carrying
Amount at which it will be Re- Classified from Held for sale Assets to Normal Assets“ :

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Step I : First of all, Calculate Normal Carrying Amount of such Assets that would
have been there without Applying 105
Step II : Find out Recoverable Amount as per Ind AS 36 on Same date for Such Assets
Step III : Consider Lower Amount out if Step I & Step II as New carrying Amount
After Re- Classification
Step IV : find out Changes in Carrying Amount & Transfer it to P&L A/c

Changes = Value of NCA under 105 – New Carrying Amount as per Step III

Concept 5 : Exception to “ one year Concept”

If Non- Current Asset held for sale is not sold by the entity within 12 months
From the date of its classification as Held for sale then It will be assumed Entity has
Changed its mind and we will follow the Entire Procedure which we have discussed in
Concept 4. There is an Exception to 12 months concept. It means that we can
Continue NCA under 105 even if these Assets remain unsold for 12 months but Entity
Has to fulfil the following conditions :-

I. The Entity has to Prove that Reason was beyond its control due to which it
Remained unsold.
II. It is still committed to Plan.

Concept 6 : Events after B/s date

As per the Provisions of Ind AS 105, Events after B/s date shall not be
Incorporated in any case which are related with Assets Held for sale. The following 2
Cases may take place :-

B/S date After B/s date

But Before Approval

Case I : There is no Asset under 105 Entity decides to sell NCA

Result : No Adjustment will be made in B/s

Case II : There is an Asset under 105 Entity changes its decision

Result : We will Still Apply 105 on B/S date. It means that

There will be no Adjustment on B/s date

❖ Disclosures can be Given for Events after B/S date in Notes to A/cs.

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Concept 7 : Assets acquired with intention of Subsequent Disposal *Imp

As per the Provisions of Ind AS 105, grace period of 3 months for Renovation
For Newly Acquired Assets if these Assets are acquired for Subsequent Disposal.

Concept 8 : Out of Scope Assets

We cannot Apply 105 on following Assets :-

i. Deferred Tax Assets (Ind AS 12)

ii. Retirement Benefit Assets held for Employee Benefits (Ind AS 19)
iii. Financial Assets (Ind As 109)
iv. Agricultural Assets (Ind AS 41)

*Part 3*

Unit II : Disposal Group Held for Sale

Example :
An Entity wants to sell the following Group Assets & Liab. On 1.4.2021 :-

Items Carrying Amount (31.3.2021) Recoverable/ NRV (1.4.2021)

Goodwill 10,000 10,000
PPE 60,000 55,000
I.Assets 40,000 38,000
Inventories 20,000 18,000
Investments 10,000 9,000
Liabilities 20,000 20,000

In Addition to above information, Fair value Less Cost to sell of Entire Group on
1.4.2021 in ₹ 60,000. Calculate Loss on Classification of Group under 105.

Solution : Before Applying 105

Calculation of Adjusted Carrying Amount of Disposal Group

(As per Original Ind AS)

Items Carrying Amount Revised C. Amount Impairment Loss

(Given) As per Related Ind
AS

Goodwill 10,000 10,000 -

PPE 60,000 55,000 (Ind AS 5000
16,36)
I.Assets 40,000 38,000 (Ind AS 2000
38,36)
Inventories 20,000 18,000 (Ind AS 2) 2000
Investments 10,000 9000 (109) 1000
Liabilities (20000) (20000) -

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Total 120,000 110,000 10,000

It will be written off in P&L A/c

Calculation of carrying Amount of Disposal Group under 105

Carrying Amount of Disposal group as per Original Ind AS 110,000

Fair Value Less Cost to sell 60,000
Whichever is Lower 60,000

Impairment Loss under 105 = 110000 – 60000 = 50000

It will also be written off in P&L

Example : With the help of Given information in above Example, Calculate the amount
Of I. Loss which can be reverse due to Subsequent increase in fair value of
Disposal Group.

Solution:
We can reverse the impairment Loss due to Subsequent increase in fair value less
Cost to sell to the Extent of Total Loss which was written off under Original Ind
AS & 105

Max. Limit for Reversal = 10,000 + 50,000 = 60,000

(Original) (105)

*Note : Reversal of I.Loss for goodwill is not allowed as per Rules due to which max.
Rev. will be ₹ 50,000

Example : With the help of above Original Example, show How the impairment Loss
Under 105 will be allocated on Assets in the Disposal Group ? *V.V.Imp

Solution :

Statement Showing Allocation of Loss in Disposal group

Total I. Loss under 105 50,000

Goodwill to be written off (10,000)
Remaining Loss 40,000

PPE *(55/93) 23656

IA *(38/93) 16344
*Ratio of Carrying Amount

1) I. Loss a/c Dr 50,000

To Goodwill 10,000
To PPE 23,656
To IA 16,344
(Being I. Loss adjusted under 105)
2) P&L a/c Dr 50,000

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To I. Loss 50,000
(Being Losses written off)

Statement Showing Disposal Group

Items Carrying Amount under 105

Goodwill 10,000 – 10,000 = 0

PPE 55000 – 23656 = 31344
I.A 38000 – 16344 = 21656
Stock 18000
Invest. 9000
Liab. (20,000)
C Amount
under 105 60000

Notes on Concept

If any Entity wants to sell “ A group of Assets & Liab.” Instead of a Single Non-
Current Asset then All Rules & conditions shall remain same as in Unit II, but the
Following Additional Points are to be considered :-

Step I : All Assets & Liab. in Disposal Group shall be measured as per Original Ind AS
to which the Asset & Liab. are related.
(Note : It means that carrying Amount will be adjusted according to original
Ind AS i.e.,
PPE, I.A = 36
Stocks = 2
Invest. – 109 etc.

Step II : After Applying Original Ind AS, we should go for application of Ind AS 105.

Revised Carrying Amount OR Fair value Less cost to sell

(Original Ind AS )

Lower It will be New carrying

Amount under 105

❖ If fair value Less cost to sell becomes Lower than Carrying Amount (step I)
Then I. Loss will be written off in P&L A/c

Step III : Allocation of I. Loss under 105 on Disposal Group will be made as follows :-
1) First of all, Adjust the entire Loss against GW PPE
2) After writing off GW, remaining Loss will be allocated on Tangible & I. Assets in
The ratio of their carrying Amount. No Allocation will be made on other Assets or Liab
Because 105 is applicable on Non-current Assets only

Note : If there is an increase in fair value subsequently then total I. Loss which was
Written off under Original Ind AS & 105 can be reversed, but Reversal of GW

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Cannot be made.

Solution of Q.2 *V.V.Imp

Calculation of Carrying Amount of Disposal Group (Original Ind AS Valuation)

Before 105

Items C Amount (Given) C Amount (original Ind AS) I Loss

GW 1500 1500 -
PPE 4600 4000 600 (36)
Building 5700 5700 -
Stock 2400 2200 200 (2)
Investment 1800 1500 300 (109)
Total 16000 14900 1100

Journal : I . Loss a/c Dr 1100

To PPE 600
To Stock 200
To investments 300
(Being Decline in value recognised before applying 105)
P&L a/c Dr 1100
To I. Loss 1100
(Being I. Loss written off)

Calculation of Carrying Amount for Disposal Group under 105

Revised Carrying Amount 14900

Fair value Less Cost to Sell 13,000
Whichever is Lower 13,000

*Decline in value = 14900 – 13000 = 1900

Allocation of Decline :-
Total Decline 1900
Goodwill to be Written off (1500)
Remaining Decline 400
PPE (40/97) 165
Building (57/97) 235

Revised carrying Amount

Goodwill NIL
PPE (4000 – 165) 3835
Building (5700 – 235) 5465
Stock 2200
Invest. 1500

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Revised C. Amount 13,000

Comments on Reversal :-

A. Max. Allowed Reversal = Original I. Loss + Decline under 105

= 1100 + 1900
= 3000
B. Reversal of Goodwill cannot be made due to which Allowed Max. Reversal will remain
Upto 1500 only (3000 – 1500)

In the ratio of carrying Amount of PPE & Building

*Part 4*

Solution of Q.5

As per the Provisions of Ind AS 105, A Non Current Asset can be Classified
As Held for Sale only if It is available for immediate Sale in Present condition & Sale
Is highly Probable.
In the Given Case, Property is not ready for immediate Sale in Present
Condition because It will take 2 Months for renovations. It can also be said that
Property will become ready for sale after 2 months (i.e., after 31.1.x2)
On the basis of above facts, It can be said that the Given Property should
Not be Classified as Held for sale as on 31.12.x1

Solution of Q.6 *Imp

As per the Provisions of Ind AS 105, Events after B/s date, but before
Approval on Financial Statements should be ignored and there will be no impact of
These events on B/S reporting. However, the Entity may provide disclosures in
Notes to A/cs for these Events.
In the Given Case, price of factory has declined after B/s date
Which indicates that sale is not highly Probable on B/s date. But we will not consider
This Event while Preparing B/S.

Conclusion : We should Still disclose the Given factory as held for sale on B/S date.
The Entity may provide appropriate disclosures regarding decline in value
Of factory after B/S date in Notes to A/c s .

Solution of Q.7 *V.V.Imp

A. In the Given Case, Disposal Group should be Classified as held for sale on 31.7.x1
Because of the following reasons :-
I. The management became committed to Plan to sell the disposal Group on
31.7.x1 for immediate sale in present condition
II. The sale of Disposal Group is highly Probable within 12 months because sale is
Expected to be Completed before 31.3.x2 which is a 9 months period from 31.7.x1

*we have ignored Permission from Regulator because its just a formality & It is

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highly Probable. If permission is not highly Probable in the Given case then held for
Sale date would have been identified only after Getting permission.

B. Measurement of Disposal Group on 31.7.x1

Total Carrying Amount of Disposal Group 2600

Fair value Less cost to Sell (1850 -100) 1750
Whichever is Lower 1750
Decline in value = 2600 -1750 = 850

Allocation of Loss :

Total Decline ₹ 850

Goodwill to be written off (₹ 500)
Remaining Loss ₹ 350

P&M (900/2750) ₹ 114

Building (1850/2750) ₹ 236

C. At B/s date, carrying Amount will be reduced by further decline in fair value as it
is clearly mentioned in the question that fair value on B/s date has been declined.

Disclosures for Unit I & unit II in Financial Statements

A. Disclosures in B/s :-

Unit I : NCA held for sale

These Assets shall be disclosed in B/s under a “Separate heading “:
After current Assets as follows :-

Balance sheet

Non Current Assets

Current Assets

Non Current Assets held for sale xxxx

(New Separate heading)

Unit II : Disposal Group (Assets & Liab.)

The disclosure of Assets & Liab in a Disposal Group will be made Separately
In Assets & Liab. side in B/s. we cannot show Net Assets in Disposal group.

Balance sheet (Ind AS)

Non Current Assets xxxx

Current Assets xxxx
Assets held for sale in Disposal Group xxxx

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(Separate New Heading)

Shareholders fund xxxx
Non Current Liab Xxxx
Current Liab.
Liab. held for sale in Disposal Group xxxx
(Separate New heading)

B. Disclosures in Notes to A/cs :-

1) The Entity has to Maintain description of NCA held for Sale & Disposal Group
2) The Entity has to maintain the Expected time of Completion of the Disposal of
Assets & Disposal Group
3) Gain/ Loss at the time of Classification of Assets or Group under 105 should also
Be reported.
4) If any Change in Plan has taken place before reporting Period end then It should
be reported.

Unit III : Dis-Continued Operations *V.V.Imp

As per the Provisions of Ind AS 105, Discontinued Operation is a component of an

Entity which has been Discontinued or is held for Sale, but Subject to Following
Conditions :-

I. It should be a Business Segment or Geographical Segment

Product Area
II. All other conditions are Same as we discussed in Unit I & Unit II
(Immediate Sale & Highly Probable Sale)

In the Given Case, All Rules for Accounting & Disclosures are quite similar as we
Discussed in Unit I & Unit II, Except the following Additional Disclosures :-

I. Disclosures in P&L A/c :-

The Entity has to report Profit or Loss from Discontinued Operation

in Statement of P&L under a Separate heading in *Single Line. It means that
Calculation of Profit/Loss from Discontinued Operation will be reported in Notes to
A/cs as Follows :-

Revenues xxxx
Expenses (xxxx)
PBT xxxx
Tax Exp. (xxxx)
Net xxxx
It will be reported in SOPL

II. Disclosures in Cash Flow Statement :-

The Entity will report cash flow from Discontinued Operations in Cash flows
Under all heading of Operating, Investing or financing

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Solution of Q.4 Discussed in Class

Additional Discussion

1) Abandonment of Assets

If any Asset is retired from its use as well as it is not held for Sale then
It will be called as Abandonment of Assets. The Assets shall not be covered by Ind AS
105, but Original Ind AS shall be continued for disclosures.

2) Investment in Subsidiary for Subsequent Disposal

If any Subsidiary is acquired for Subsequent Disposal then this Investment will be
Treated as Discontinued operation

*Part 5*

New Questions

Solution of Q.4

As per the Provisions of Ind AS 105, Non current Assets can be classified as
Held for sale only if the following 2 Basic conditions are satisfied :-
i. If Asset is available for immediate sale &
ii. Sale is highly Probable

On the basis of above conditions, the following cases may be considered :-

Case I : In the Given Case, intention to sell investment in subsidiary cannot be

Considered as Disposal Group held for sale because Approval from shareholders
Of Alpha is not Expected in near future which indicates that It is not available
For immediate sale. Further, No Buyer is identified yet which indicates that sale
is not highly probable.

Case II: In the Given case, sale of vehicles can be considered as Disposal Group held
For sale because PQR has already Entered into a contract with LMV which
Indicates that vehicles are already sold. It is also mentioned that Delivery of
Vehicles will take place in April which indicates that sale is highly probable.

Case III : In the Given case, Retail Business can be classified as Disposal Group held
For sale because contract is already Entered into and final Terms will be
Finalised Soon. It clearly indicates that Retail Business is available for
Immediate sale & sale is highly Probable

Solution of Q.3 *Imp

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In the Given case, the following Points should be considered while Preparing IFR
Ending 30.6.x1 :-

A. As per the Provisions of Ind AS 105, Assets/ Disposal Group/ Discontinued

Operation can be classified as held for sale only if Assets are available for
immediate sale & sale is highly Probable. In the Given case, Company has decided
that It will sell the division & company has also started Receiving serious Enquiries
Which indicates that the specified Division can be considered as HFS.
B. As per the Provisions of Ind AS 105, Initial Recognition of HFS Assets should be
made at carrying Amount or fair value Less cost to sell whichever is Lower. In the
Given case, Carrying Amount of related Assets on 1.4.x1 is 30,60,000 but fair value
is 3200,000 which indicates that there iis no Loss on initial Recognition.
C. As per the Provisions, Depreciation will be stooped on HFS Assets due to which we
Will not calculate any Dep for the Qtr on PPE. But other Assets shall be valued as
Per original Ind AS.
D. The company has sold Goods during this Period at Profit which will be disclosed in
P&L under the heading of Profit or Loss from Discontinued Operations.
E. The Company should update carrying Amount of Inventories as on 30.6.x1 from 10
lacs to 9 lacs.

Solution of Q.2 *V.V.Imp

Statement showing value of Assets & Liab under 105 on 15.9.x1

i. Initial Recognition : As per the Provisions of 105, initial Recognition of

Disposal Group will be made at carrying Amount or Net fair value whichever is Lower
ii. If fair value Less cost to sell becomes Less than carrying Amount then
Impairment Loss at initial Recognition will be adjusted against GW and Excess Loss
Will be distributed among Non current Assets in the ratio of carrying Amount.
iii. Impairment Loss = 2160,000 – 1830,000 = *330,000
(carrying Amt) (Net fair value)

*It will be adjusted against goodwill first the remaining loss will be allocated on
I Assets & PPE in the ratio of carrying Amount of Assets.

Assets Carrying Amount Impairment Loss Revised C. Amount

Goodwill 200,000 (200,000) NIL
I Assets 930,000 (130 x 930/1960) 61684 868316
Financial Assets 360,000 - 360,000
PPE 10,30,000 (130 x 1030/1960) 68316 961684
DTA 250,000 - 250,000
C. Assets 520,000 - 520,000
C Liab (900,00) - (900,00)
Prov. (250,000) - (250,000)
Revised C Amount 1830,000

Statement showing changes in values on 31.3.x2

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i. Total Decline = 1830,000 – 1650,000 = 180,000

(Initial) (B/s)
ii.
Assets Carrying Changes in values Revised
Amount Ind AS 105 Other Ind AS Amount

I Assets 868316 868316 x 60000 839847

1830000
= (28469)
F Assets (109) 360,000 50,000 - 410,000
PPE 961684 - (31531) 930153
C Assets (various) 520,000 (120,000) - 400,000
DTA (Ind AS 12) 250,000 (20,000) - 230,000
CL (870,000) (30,000) - (900,000)
Provisions (250,000) - - (250,000)
1830,000 (120000) (60000) 1650000

Solution of Q.1 (Discussed in class)

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter13: Integrated Reporting (4-6 marks)

(Theory)
*Part 1*
Concept 1: Legal Status of “Integrated Reporting” in India

At present, Integrated Reporting (IR) is not mandatory in India, but SEBI has
advised to its Top 500 companies to include this reporting in their Annual Reports of
2017-18 on Feb, 2017. It clearly indicates the acceptance of this Reporting by SEBI. It
may Become mandatory for Listed Company soon in Future.

History: This concept was initially introduced in South Africa & It became mandatory
for Listed Companies in 2009 in South Africa. Thereafter, Prince of Wales (UK)
established “International Integrated Reporting Council” (IIRC) in 2010 to set up
framework of <IR>. This reporting became mandatory in UK in 2013 after signing MOU
between IIRC & IASB. [the IIRC.ORG]

Concept 2: Objective & Features of Integrated Report

(a) Objective
The Big Investors do not trust the Annual Reports which are prepared as per
Traditional AS/IndAS. Under this reporting, Financial & Non-Financial (Both) factors
are disclosed upon which big investment decisions may be taken by Investors. The
main objective of this report is to explain the following 4 main areas of a Company:-
➢ Strategy of Companies
➢ Governance to apply the strategy
➢ Performance as per Strategy
➢ Perspective of Company

On the basis of above explanation, investors can judge value creation by company in
short, medium or Long term.

The Main Drawback of these Reports is the transparency of Business model of

Entity.

(b) Salient Feature of this Report

(i) Classification of Capital
Capital

Financial Manufactured Intellectual Human Social Nature

Capital Capital Capital Capital Capital Capital

1. Financial Capital: Under this, entity has to explain its source of funds. (i.e; Equity,
Debt, Grant, Income or Investments or Profit from Business operations)

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2. Manufactured Capital: Under this, Entity has to explain its Tangible Assets which
are used in Production of Goods or providing of services. These Assets may be in the
form of Buildings, Plant & Machinery, Equipments, Roads etc.

3. Intellectual Assets: Under this, Entity has to explain its Intangible Assets. These
Assets may be in the form of Patents, Copyrights, Brands, Technical Know how etc.

4. Human Capital (Non Financial): Under this, Entity has to explain the competencies,
capabilities & Experiences, abilities to motivate & understanding about the
organisation of their Key Management Personel.

5. Social & Relationship Capital: Under this, Entity has to explain about their Social
Activities. It may include spending on social programmes etc.

6. Nature Capital: Under this, Entity has to explain about their Natural Assets which
are held in Production of Goods. These Assets may be in the form of Air, Water, Land,
Forest, Minerals etc.

(ii) Supplementary Information

This report can be prepared as Standalone Report or It can be merged with Annual
Report. It indicates that It is flexible Supplementary Report.

(iii) Fit with Local Laws

If any report is already prepared as per Local Laws of Presentation then we can
Slap this information under <IR>

(iv) The main feature of <IR> is that It includes Financial & Non-Financial (Both)
factors.

Discussion of Theoretical Questions

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter14: Operating Segments Ind AS 108

(Important)
*Part 1*

Concept 1: Meaning of Operating Segment

As per the Provisions of Ind AS 108, Operating Segment may be a Product/Service

which is sold rendered by a Company or an Area in which company operates its
Business. There is no specific definition on Business Segment (Product/Service) or
Geographical Segment (Areas) in Ind AS 108 as it is given in AS-17. Under Ind AS 108, A
segment may be an operating segment if the following 3 conditions are satisfied:-

Condition I: It should have capacity to generate Revenues.

Yes
Condition II: It should be reviewed by CODM*
Yes
Condition III: We have Financial Information (Sales, Expenses, Assets, Liab etc) to
Present for Segment
Yes
OPERATING SEGMENT

*CODM (Chief operating Decision Maker):

As per the Provisions of Ind AS 108, CODM mat be a Person or Team of Directors. If
any Segment is to be identified as an Operating Segment then It should be in the
CODM Report for Decision Making. It can also be said that Segment Report is
prepared from Management Eyes.

Explanation on Non Profit Segments in CODM Report (i.e; Headquarter Building, R&D
Decisions etc.)

If any Segment is not related to Revenues Generation then we should not include
such segment in Operating Segments.

Concept 2: Aggregation of Segments

If any Entity wants to Aggregate some Similar Segments to Report as a Single

Segment then we should consider the following factors before Aggregating different
segments:-
(a) Production Process should be same or
(b) Class of Customers should be same or
(c) Method to Distribute the services should be same or
(d) Regulatory Environment should be same.

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Concept 3: Reportable Segments

As per the provisions, All the identified segments are not to be Reported. We will
report only those segments that would satisfy at least one condition out of
following specified conditions:-

Condition I: If Segment Revenue (Internal or External) is 10% or more of total

segment revenue.

Example:
Segments A B C D E Total
Revenues:
External 10,000 20,000 60,000 1,20,000 5,000 2,15,000
Internal - - 25,000 10,000 - 35,000
Total 10,000 20,000 85,000 1,30,000 5,000 2,50,000

% of Rev. 4% 8% 34% 52% 2% 100%

Status UR UR R R UR

Solution: C & D are Reportable on the basis of Revenues

OR

Condition II: If Segment Assets are 10% or more of total Segment Assets

Example:
Segments A B C D E Total
Assets 2,00,000 10,00,000 5,00,000 1,00,000 1,00,000 19,00,000

% of Seg. 10.52% 52.6% 26.32% 5.26% 5.26% 100%

Assets
Status R R R R UR

OR

Condition III: If Segment Results is 10% or more of total Segment Results

(Total Result = Profit or Loss whichever is higher)

Example:
Segments A B C D E Total
Results 10,000 10,000 1,000 (20,000) (25,000) (24,000)

Segment = 21,000 Segment =(45,000)

In profit In loss

Whichever is higher = 45,000

% of Result 22.22% 22.22% 2.22% 44.44% 55.55%
Status R R R R R

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Additional Conditions to be considered:-

1. If any Segment becomes Unreportable in Current year, but it was reportable in

Previous year then we will include such segment in Current year report for
comparison purpose even if It is Un-Reportable.

2. If any Segment becomes Reportable in Current Year, but It was Unreportable in

Previous year then we should revise Previous year segment report by including such
segment for comparison purpose.

3. As per the provisions of Ind AS 108, Reportable Segment should cover 75% or more
of Total External Sales in Segment Report otherwise Additional Segments should be
included in Segment Report. It can also be said that Un-Reportable Segments will
become Reportable to cover 75% sales. (V.V.Imp)

4. As per the Provisions of Ind AS 108, Any segment can be included in Segment
Report upon Management choice but up to Practical Limit.

Q.1
Solution:
In the given case, 3 segments (H, I & J) are reportable on the basis of Quantitate
limits of 10%, but these segments are not covering 75% of Total External Sales. The
Total Revenue which is covered by these 3 segments is 65%. So we need to disclose
more Segment to maintain minimum disclosures of 75%.
It will be choice of Management to report segment out of A,B,C,D,E,F,G.

Q.2
Solution:
Statement showing Reportable Segments

Segment A B C D E Total

Seg Revenue 150 200 200 50 300 900

% of Rev. 16.67% 22.22% 22.22% 5.56% 33.33%

Status R R R UR R
OR
Results 50 (70) 80 10 (25) 45
Total Profits = 50+80+40 = 140 Whichever is Higher = 140
Total Loss = (70)+(25) = (95)

% of Result 35.71% 50% 57.14% 7.14% 17.86%

Status R R R UR R
OR
Assets 40 65 140 20 35 300
% of Asset 13.33% 21.67% 46.67% 6.67% 11.67%
Status R R R UR R

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Verification of Sales:-
(i) Required Reportable Sales (900 x 75%) 675
(ii) Sales covered by Reportable Segments:-
A 150
B 200
C 200
E 300 850

(No Additional Segment is required to be Reported)

Therefore, A, B, C & E are Reportable Segments

*Part 2*

Q.4
Solution:
Statement Showing Reportable Segments
Segment A B C D E F G H Total
Revenue:
External - 510 30 20 30 100 40 70 800
Internal 200 120 60 10 - - 10 - 400
Total 200 630 90 30 30 100 50 70 1200

% of Rev. 16.67% 52.5% 7.5% 2.5% 2.5% 8.33% 4.17% 5.83%

Status R R UR UR UR UR UR UR
OR
Segment
Assets 45 141 15 33 9 15 15 27 300
% of As. 15% 47% 5% 11% 3% 5% 5% 9%
Status R R UR R UR UR UR UR
OR
Segment
Results:
Profits 10 - 30 - 16 - 10 14 80
Loss - (180) - (10) - (10) - - (200)
Whichever is higher = (200)
% of
Result 5% 90% 15% 5% 8% 5% 5% 7%
Status R R R R UR UR UR UR

(i) Reportable Segments = A,B,C,D

(ii) Segment E was a reportable segment in Previous year due to which It should be
included in Current Year report for Comparison purpose.
(iii) Segment D is newly added in Current Year Report & It was not included in
Previous year report. So we need to restate previous year segment report by
including D for Comparison Purpose.
(iv) Verification of 75% of External Sales:-
75% of External Sales (800 x 75%) 600
Reportable Segments:
A Nil

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B 510
C 30
D 20
E 30 590

*Reported Segments are not covering 75% of Total External Sales. So, we need to
identify Additional Segments to cover minimum disclosure of External Sales.

Q.5
Solution:
Statement Showing Reportable Segments
Segment A B C D E F Total

Revenue 150 310 40 30 40 30 600

% of Rev. 25% 51.67% 6.67% 5% 6.67% 5%

Status R R UR UR UR UR
OR
Results:
Profit 25 - 5 5 - 15 50
Loss - (95) - - (5) - (100)
%of Res. 25% 95% 5% 5% 5% 15%

Status R R UR UR UR R
OR
Assets: 20 40 15 10 10 5 100
%of As. 20% 40% 15% 10% 10% 5% 100

Status R R R R R R

Comments:
In the given case, Finance Director is not right because All Segments are reportable
segments.

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Concept 4: Treatment of Un-Reportable Segments

All the Unreportable Segments can be disclosed in Segment Report in Total under the
heading of “OTHERS”. It can also be said that we can Aggregate all Unreportable
Segments under the heading of others.

Concept 5: Disclosures in Segment Report (V.V.Imp)

As per the provisions of Ind AS 108, the following 3 contents should be included in
Segment Report:

I. General Information
II. Measurement of Segment Information
III. Reconciliation of Segment Information with Entity’s Information

I. General Information
i) The Management has to explain basis to organise its different products or service.
ii) The Management has to explain basis to Aggregate the similar products or
services.
iii) Name of all different products/ services.
iv) Name of all different Areas.

II. Measurement of Segment Information

i) Measurement: We will not measure the required segment information separately,
but we will use same measurement as done in “CODM” Report.
ii) Required Segment Information: 1) Segment Revenue External
Internal
2) Segment Result
3) Segment Assets
4) Segment Liab.
5) Other Material Items

Explanation on Other Material Items: (Segment Wise)

a) Interest Income
b) Interest Expenses
c) Net Interest Revenue (a-b)
d) Depreciation & Amortisation Expenses
e) Other Non-Cash Expenses i.e; Impairment Loss etc.
f) Capital Expenditure on Assets during the year

III. Reconciliation

Segment Information Entity Information

+/- Adjustments

As per the Provisions of Ind AS 108, Segment Information should be reconciled with
Entity Information with regard to Results, Assets, Liab.

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Q.6
Solution:
Segment Report for Kristen Ltd.
Particular Alpha Beta Inter Seg. Total
A. Revenues:
External 27,050 3,280 - 30,330
Internal 50 - 50 -
Total 27,100 3,280 50 30,330

B. Results:
Profit/(Loss) 4,640 (197) - 4,443
Dividend Inc. - - - 285
Interest Exp - - - (35)
Tax - - - (1,675)
Entity Profit - - - 3,018

C. Assets:
Segment Assets 19,450 2,700 - 22,150
Un-allocated - - - 6,550
Assets
Entity Assets - - - 28,700

D. Liabilities:
Segment Liab. 3,430 770 - 4,200
Un-allocated
Liab. - - - 2,200
- - - 6,400

E. Material
Items:
i) Depreciation 110 15 - 125
ii) Non Cash Exp 114 16 - 130
iii) Cap. Exp. 1,300 - - 1,316

Q.7
Solution:
Segment Report for V Ltd.
Particular A B C Inter Seg. Total
A. Revenues
External:
Local 60 - - - 60
Export 4,090 200 180 - 4,470
Internal 3,050 30 - 3,080 -
Total 7,200 230 180 3,080 4,530

B. Results
PBT 160 20 (8) - 172

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H.O. Exp. - - - - (96)

Entity Profit - - - - 76

C. Assets
N.C. Assets 200 40 120 - 360
C. Assets 120 40 90 - 250
320 80 210 - 610
H.O. Assets: NCA - - - - 50
CA - - - - 48
Entity Assets - - - - 708

D. Liabilities
Segment 20 10 120 - 150
H.O. Liab - - - - 38
Entity Liab. - - - - 188

E. Material
Items:
Int. Exp. 4 5 1 - 10
4 5 1 - 10
Geographical
Report:
USA (4090+180) 4270 (External)
Europe 200 (Internal)
India
[(3080+4530)-
4270-200] 3140 (External + Internal)

Q.8,10,11,12,13
Solution: Homework

Q.9 (Imp)
Solution:
Segment Report
Particular Food Plastic Health Others Inter Seg. Total
A. Revenue
External * 5595 553 324 155 - 6627
Internal 55 72 21 7 155 -
Total 5650 625 345 162 (155) 6627

Segment
Expenses 3335 425 222 200 (122) 4060
(155-33)
Segment
Results 2315 200 123 (38) (33) 2567

B. Results:
Segment 2315 200 123 (38) (33) 2567
General

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Corp. Exp - - - - - (562)

Int. Exp - - - - - (65)
Int. Inc - - - - - 132
Entity
Profits - - - - - 2072

C. Assets
Segment 7320 1320 1050 665 - 10355
Corporate - - - - - 722
Entity - - - - - 11077
Assets

Q.14
Solution:
Segment Report for X Ltd.
Particular Coating Others Inter Segment Total
A. Revenues:
External 2,00,000 70,000 - 2,70,000
GST (5,000) (3,000) - (8,000)
Net Sales 1,95,000 67,000 - 2,62,000
Direct Inc. 40,000 15,000 - 55,000
Total 2,35,000 82,000 - 3,17,000

B. Results:
Segment 10,000 4,000 - 14,000
Unallocated Inc. - - - 3,000
Interest Exp. - - - (2,000)
Tax - - - (2,000)
Entity Profit - - - 13,000

C. Assets
Segment 50,000 30,000 - 80,000
Corporate
Assets:
Investments - - - 10,000
Unallocated - - - 10,000
Entity Assets - - - 1,00,000

D. Liabilities
Segment 30,000 10,000 - 40,000
Unallocable - - - 20,000
Entity Liab. - - - 60,000

E. Material
Items:
1) Depreciation 1,000 300 - 1,300
2) Cap. Exp. 5,000 2,000 - 7,000

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Geographical Report:-
I. Revenue: India 2,87,000 (3,17,000-30,000)
Foreign 30,000
3,17,000

II. Assets: India 70,000 (80,000-10,000)

Foreign 10,000
80,000

*Part 3*

Common Doubts Session

*Part 4*

Solution of Q.2

i. Calculation of Basis of Reportable Segment

(Profit or Loss whichever is Higher)

Profits = (A+B+E) = (780 + 1500 + 6000) = 8280

Losses = (C + D) = (2300 + 4500) = 6800
Whichever is higher = 8280

Statement showing Reportable Segments

Segment Result % on 8280

A. 780 9.42% Unreportable
B. 1500 18.11% Reportable
C. (2300) 27.78% Reportable
D. (4500) 54.34% Reportable
E. 6000 72.46% Reportable

(All Segments are Reportable Except A because its Revenue share is below 10%)

Solution of Q.7

As per the Provisions of Ind AS 108, Reportable segment should satisfy 10%
Limits either of Revenue, Assets or Profit/Loss. In the Given case, segment share
is not for more than 5% due to which all segments should be considered as un-
reportable.
As per Additional requirements, Reportable segments should cover at least 75%
of External sales in segment Report. On the basis of this requirement, 15 segment
(At least) should be reported covering 75% of External Sales in Report because Each
Segment has 5% share in External Revenue.

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Solution of Q.5

As per the Provisions of Ind AS 108, Geographical segments are based on currency
Risk, Political Boundaries, Economic Environment etc. In the Given case, currency is
same in france, Italy & Germany because all these countries fall in same European
Region. So, these places can be Aggregated in Geographical report, but currency Risk &
Political Boundaries are different in UK & India from others. So, we cannot Aggregate
Uk & India with European Regions.
On the basis of Given Explanation, we can said that Europe, UK & India should
be reported Separately.

Solution of Q.6 *Imp

i. Aggregation of Segment 1 & 2 :-

As per the Provisions of Ind AS 108, Business Segments are identified as
Separate segments if we can identify the following factors :-
a) Nature of Products/ Services
b) Nature of Production/ Services Process
c) Class of Customers
d) Method of Distribution
e) Regulatory Environment

On the basis of above factors, we cannot Aggregate Segment 1 & Segment 2 because
Both segments are different from the Point of view of class of customers &
Regulatory Environment.
In Segment 1, Prices are controlled by Local Authority, but in segment 2, Prices
are decided by company itself according to class of Services. It clearly indicates that
Risks & Reward are Separate for Both Segments due to which Both should be reported
Separately.
ii. The disclosure of Segment Report is very Beneficial for User of statements
Because this report helps users in making their decisions regarding Investments
in company based on Performance of various Products and in various Areas.

Solution of Q.1

As per the Provisions of Ind AS 108, Operating Segment Report should in Line
CoDm Report. If FIFO is applied for stock valuation in CoDm then we will also Apply
FIFO in Segment Report.

Solution of Q.3

As per the Provisions of Ind AS 108, A segment can be classified as an operating

Segment if 3 condition are satisfied as follows :-
I. It has Revenue Generating capacity (yes)
+
II. It is Reviewed by CoDm (yes)
+
III. Its financial information can be Prepared (yes)

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In the Given case, CoDm is analysing Revenues of segments which is Enough for
Identification of segments because all these conditions are satisfied.

Solution of Q.4

coDm will use financial matrix for identifying segments.

Solution of Q.8 (Discussed in class)

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter 15: Ind AS-24 Related Party Disclosures

(V.V.Imp)
*Part 1*

Concept 1: Important Definitions

(a) Meaning of Holding Co. (Parent): If any Entity controls the other entity then
the Controlling Enterprise is known as Holding Co.

(b) Meaning of Subsidiary Co.: If any Entity is controlled by other Entity then such
an Entity is known as Subsidiary Co.

(c) Meaning of Fellow Subsidiary Co.: If any Entity is under Common Control with
other Entity of same parent company then Subsidiary Co. is to be recognised as
fellow subsidiary to other Subsidiary.
[Subsidiaries under Common Control are fellow subsidiaries to each other]

(d) Meaning of Control: Control means Power to govern the decisions of other
entity.

(e) Meaning of Significant Influence: S.I means power to participate in Decision

Making of other Enterprise.

(f) Meaning of Associate Co.: If an Entity enjoys Significant Influence over other
Entity then It will be considered that the other Entity is an Associate of the
Investor Party.

(g) Meaning of Joint Venture: J.V is an Economic Activity which is undertaken by 2

or more enterprises subject to Joint Control.

(h) Meaning of Key Management: A person who is exercising 3 powers at any level in
Company i.e; Planning, Directing & Controlling. It means that Designation of a
person is not important, but exercise of powers is Important. A Non-Executive
Director can also be considered as a Key Management only if he is enjoying the
specified 3 powers.

(i) Meaning of “Close Members to Family of a person”:-

i) Spouse
ii) Person Children
iii) Brother, Sister(person)
iv) Father, Mother(person)
v) Domestic Partner
vi) Domestic Partner Children
vii) Person Dependants
viii) Spouse Dependants
ix) Domestic Partner Dependants

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Concept 2: Identification of Related Parties

As per the Provisions of Ind AS-24, Related Party of an Enterprise may be a person
or an Entity. The following explanation may be relevant:

Unit I: If Related Party is Person

Case I: If a person controls Reporting Enterprise

Result: The Controlling Person & his family shall be reported as “Related Party of
R.E.”

Example:
Mr. Ram X Ltd.
56% Voting Power
Solution- Ram is a Related Party for X Ltd including his family.

Case II: If a Person is enjoying significant influence over Reporting Enterprise

Result: The Investor & his family shall be reported as Related Party of R.E

Example:
Mr. Jindal X Ltd.
40% Voting Power
Solution- Mr. Jindal & his family are related parties for X Ltd.

Case III: If Reporting Enterprise is a Joint Venture of a Person

Result: The venturer & his family shall be reported as Related Parties for J.V.

Example:
Mr. A (Person) Mr. B (person)

C Ltd: R.E
(Joint Venture)
Solution-
1) Mr. A & Mr. B with their families are related parties of C Ltd. because C Ltd. is a
Joint Venture of A & B.
2) There will be no Relationship between Co-Venturers (A & B).

Case IV: If any person is a Key Management in a Company

Result: All the Persons in Key Management & their families shall be reported as
Related parties for R.E.

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Case V: If any person is a Key Management in Parent Company of R.E

Result: Key Management in Parent Co. & his family will be considered as Related Party
for Subsidiary Co.

Example:
KMP
Mr. Ram X Ltd. (Parent)
(K.M)
60%
Y Ltd. (Subsidiary)
R.E
Solution-
Mr. Ram will be a Related Party for Y Ltd. including his family.

Case VI:
(a) If a person enjoys control in one enterprise, but he/she enjoys Significant
Influence in other Enterprise then the Enterprises in which such person is common
shall also be Related Parties to each other. (V.V.Imp)

Example:
Mr. X
60% 40%

X Ltd. Y Ltd.
Solution-
In this case, Both Companies are related parties to each other along with Mr. X.

(b) If a person is controlling 2 companies at one time then Common Companies shall
be considered as Related Parties to each other.

Example:
Mr. X
70% 60%

X Ltd. Y Ltd.
Solution-
X Ltd. & Y Ltd. (both) are related parties to each other along with Mr. Ram.

(c) If a person enjoys control in one company but he is a KMP in other company then
common enterprises will be considered as Related Parties to each other.

Example:
Mr. Ram
60% KMP

X Ltd. Y Ltd.

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Solution-
X Ltd. & Y Ltd. (both) are related parties to each other along with Mr. Ram.

Important Note: We can consider Common Companies as Related Parties only if

Person is enjoying control in at least one company.

Example:
Mr. Ram Mr. Ram
KMP KMP KMP 40%

X Ltd. Y Ltd. X Ltd. Y Ltd.

No Relationship No Relationship

Mr. Ram
40% 45%

X Ltd. Y Ltd.

No Relationship

Solution:
(i) Ram is a Related Party for X & Y in all cases.
(ii) X & Y are not Related Parties to each other in all cases.

Example:
Family
Mr. X Mrs. X
60% KMP

X Ltd. Y Ltd.

Solution:
X is enjoying control in X Ltd but his wife is a KMP in Y Ltd. So, X Ltd & Y Ltd. should
be considered as Related Party to each other.

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*Part 2*

Unit II: Related Parties in the form of “Entity”

(a) All the companies in the “Same Group*” are to be considered as Related Parties to
each other.

*Same Group means Group of Holding & Subsidiary (whether Direct or Indirect)

Example:
A Ltd.

60% = A Ltd. & B Ltd. are Related Parties to each

Other because all the companies are in same
B Ltd. group.

Example:
A Ltd.
70% 80%

B Ltd. C Ltd.
90% 100%

D Ltd. E Ltd.

All the companies are related to each other because all are in same group.

(b) If an Entity has an associate or Joint Venture then they will be considered as
Related parties.

Example:
A Ltd.

40% = Both are Related Parties to each other

B Ltd.
Example:

X Ltd. Y Ltd.

J.V : Z Ltd.

➢ Z Ltd. is a Related Party to X Ltd. & Y Ltd.

➢ X Ltd. & Y Ltd. are not Related Parties because they are Co-venturers.

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(c) If a Member in Same Group has an Associate or J.V then all entities shall be
considered as Related Parties for such an Associate or J.V. (V.V.Imp)

Example:
X Ltd.
80% 90%

Y Ltd. Z Ltd.
40%

A Ltd.

A Ltd. is an Associate of Y Ltd. which is a member of Same Group of X, Y & Z due to

which it will be a Related Party of all members in same group.
A Ltd. is a Related for X Ltd., Y Ltd. & Z Ltd.

Example:
X Ltd.
80% 70%

Y Ltd. Z Ltd.
60% 59%

A Ltd. B Ltd.
35% 38%

L Ltd. M Ltd.

➢ Members in Same Group = X Ltd., Y Ltd., Z Ltd., A Ltd. & B Ltd.

➢ L Ltd. is an Associate of A Ltd. which is a Member of Same group. So, it will be a

Related for all members in Group.

➢ M Ltd. is an Associate of B Ltd. which is a member of Same Group. So, It will also be
related party to all members in Group.

➢ There will be no Relationship between L Ltd & M Ltd. because these companies are
Co-Associates, but not a member in Same Group.

(d) If an Entity is common in Two Joint Ventures then the Joint Ventures will be a
Related Party in which such Entity is Common.

Example:
Common Entity
X Ltd. Y Ltd. X Ltd. Y Ltd.

J.V: Z Ltd. J.V: B Ltd.

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Solution:
X Ltd. is a Common Entity in Z Ltd. & B Ltd. due to which Z Ltd. & B Ltd. are Related
Parties to each other.

1) X Ltd = Z Ltd; B Ltd.

2) Y Ltd = Z Ltd.
3) Z Ltd = X, Y, B Ltd.
4) A Ltd = B Ltd.
5) B Ltd = X, A, Z Ltd.

(e) If an Entity has an Associate & a Joint Venture then Associate & Joint Venture
shall be related parties to each other.

Example:
X Ltd.

Y Ltd Z Ltd.
(Associate) (Joint Venture)

➢ Y Ltd. & Z Ltd. both are Related Parties to each other.

Q.1
Solution:
P Ltd.

SA SB A1 A2

SC

A3

Comments: i) Companies P Ltd., AS Ltd., SB Ltd. & SC Ltd. are related parties to each
other because these companies are working in the same group.
ii) Companies A1, A2 & A3 are related parties of all members in the same
group [i.e; P, SA, SB, SC]
iii) Companies A1, A2 & A3 are not related parties to each other because
these companies are Co-Associates.

Q.6
Solution:
A Ltd.

Joint Venture B C [JV/Associate]

Comments: i) If C Ltd. is a Reporting Entity then A Ltd. & B Ltd. (Both) are Related
Parties
ii) If B Ltd. is Reporting Entity then A Ltd. & C Ltd. (Both) will be
recognised as Related Parties.

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Q.3 (Imp)
Solution:

(a) Control: Mr. X

A Ltd. B Ltd.
If Mr. X is having controlling Interest:-
A Ltd = Mr. X & B Ltd
B Ltd = Mr. X & A Ltd.

(b) Significant Influence: Mr. X

A Ltd. B Ltd.

If Mr. X is having Significant Influence over A Ltd. & B Ltd.:-

A Ltd = Mr. X
B Ltd = Mr. X
[Co- Associates are not Related Parties]

Q.2 (Imp)
Solution:
Mr. X B Ltd.
100%
A Ltd. C Ltd.
(100%) (KMP)
Case I: C Ltd is a Related Party of A Ltd. because Mr. X is common in these 2 Cos.

Mr. X
C Ltd.(100%)

A Ltd. B Ltd.
(100%) (KMP)

Case II: KMP of Holding Co. is considered as Related Party for Subsidiary Co. due to
which Mr. X is still a common person between C Ltd. & A Ltd. So, C Ltd. & A Ltd. are still
Related Parties.

Case III: It will not effect our Relationship as we have specified in Case I & Case II
because Mr. X is still having control on A Ltd.

Case IV: Yes, there will be no relationship between A Ltd. & C Ltd. because Mr. X is not
having control in any of Entity.

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*Part 3*

Unit III: Special Type of Relationship

(a) If an Entity provides Key Management services to other Entity

Example:
X Ltd. Y Ltd.
X provides KMP to Y Ltd.
Solution:
X Ltd. & Y Ltd. (both) are Related Parties to each other.

(b) If an Entity provides Key Management Services to a Member of Same Group then
all Entities in same Group shall be considered Related Parties of the Entity.

Example:
X Ltd. Y Ltd.
X provides KMP to
60% 70%
A Ltd. B Ltd.
90% 100%
L Ltd. M Ltd.
Solution:
X Ltd. is a Related Party to Y Ltd., A Ltd., B Ltd., L Ltd, M Ltd.

(c) If an Entity established other Entity for Post Employment benefits of its
Employee then such an entity will also be considered as a Related Party.

Example:
X Ltd.
Related Parties
Established a Trust
(for employees retirement benefits)

Concept 3: Parties that are not “Related Parties”

The following Entities are not Related Parties even though these Entities may have
influence over the Enterprise:-
(i) Trade Unions
(ii) A Single Customer, Supplier, Franchise or Distributors etc.
(iii) Government Companies
(iv) Co- Venturers
(v) Co- Associates
(vi) Entities having Common KMP etc.

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Concept 4: Nature of Related Party Transactions

As per the Provisions of Ind AS-24, Related Party transaction is a Transaction

whereby Resources are transferred by one entity to other Entity whether Price is
charged or not. The following Transactions can be taken as Related Party
Transaction:-
i) Sale of Goods
ii) Purchase of Goods
iii) Rendering/Receiving of services
iv) Lease Agreements
v) Loan Arrangements
vi) HP Contracts etc.

Note: As per the Provisions, Payment of Remuneration to KMP should also be

considered as Related Party Transaction.

Concept 5: Related Party Disclosures (V.V.Imp)

As per the Provisions of Ind AS-24, the following 2 cases shall be relevant:-

Case I: If Relationship is based on Control then we must prepare Related Party

Disclosure Report whether Transaction between Related Parties has taken
place or not.
[It can also be said that Transaction is not necessary between Holding & Subsidiary
for this Report]

Case II: If Relationship is not based on Control then there must be some
transaction between Reporting Entity & Related Party otherwise this
Report will not be prepared.

Disclosures

If Control exists in If control does not exist in

Relationship Relationship

Transaction between Holding There should be some

& Subsidiary is not must Transaction otherwise they
will not be reported in report

Content of Report

a) Name of Related Party

b) Nature Relationship
c) Nature of Transaction
d) Volume of Transaction (Rs.)
e) Bad Debts (written off)

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f) Provision for Doubtful debts

g) Outstanding Balance with Related Parties
h) Guarantees given on behalf of Related Parties
i) Payment of Remuneration to KMP:-
a) Short Term Benefits
b) Post Retirement Benefits
c) Termination Benefits
d) Share based Payments

Important Note:

As per the provisions of Ind AS-24, Related Parties are to be reported in Disclosures
even if they were in Relationship with Reporting Enterprises for one day during the
Current Year. It means that Related Part Relationships are identified during the
year

Q.5
Solution:
In the given case, Power Ltd should consider transmission Limited as Related Party
for the period between 15.7–21.3. All the transactions between these companies during
15.7-21.3 shall be considered as Related Party Transactions.

Q.4
Solution:
As per the Provisions, Government Company can not be considered as a Related Party
due to which all entities in the same group (i.e; I, II, A, B, C & D) are exempted from
disclosures related with Government Company. All the transactions with Govt. Cos
are also exempted from Reporting. But disclosures related with KMP shall be made.

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*Part 4*
Test Your Knowledge-ICAI

Question 1:
Solution
1. Relationship required from the point of view of A Ltd. to establish related
party Relationship:

a) Mr X: If Mr.X exercises control Joint Control then He & His Relatives can be
Considered as related Parties.

b) IF Mr. X Control A Ltd. & Mr. Y Control or exercises significant Influence over
B Ltd. then A Ltd. & B Ltd. shall be related parties.

Mr. X + Mr. Y

Control A Ltd Control S.I. B Ltd

Related

2. Relationship from the point of view of B Ltd.

i. Mr. Y: IF Mr. Y exercises control, joint control or significant influence Over

B Ltd. then she and her relatives shall be considered as Related Parties.

ii. If Mr. Y controls B Ltd. & Mr. X has control or S.I. in A Ltd then A Ltd &
B Ltd (both) shall be related parties.

3. In the Given case, there will be no relationship between A Ltd. & B Ltd because
Mr X & Mr Y (Both) have significant influence in both companies. At least one
Investment should be controlling interest for common entities relationships.

Mr. X Mr. Y
S.I. S.I.
A Ltd B Ltd

No Relationship between A & B

Question 2:
Solution

1. Relationship from C Point of View

i. A Ltd : C is Joint venture of A
ii. B Ltd : C is under common Joint control with B of A

2. Relationship from B Point of view:

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Homework:

Question 3:
Solution

In the Given case, Relationship between XYZ & ABC Ltd. get started w.e.f. 01.06.20X1
On the specified date director of XYZ acquires controlling interest in ABC through
his wife. So both companies can be considered as common Related Parties.
The company XYZ sold Goods worth Rs. 60 Lakhs after starting Relationship with ABC,
but it also sold Goods of Rs.8 L prior to such Relationship in the current year.
It means that total sales which took place between ABC & XYZ in current year is 68L.
The following disclosures are required in the report:-
i.Sales of Rs.60 lacs only is required to be reported which took place during
Relationship period.

ii.O/S Balance of Rs. 18 Lacs should be disclosed which is still to be reported

from Related party.

Question 4:
Solution
Yes, the Remuneration which has been paid by company to Mr. Atul & Mr. Naveen during
The year should be disclosed as a Related party Transaction for the purposes of
Related party Transaction for the purposes of Related Party disclosure because
These persons are KMP foe the company. So Rs. 17,50,000 (5*2 L +1.5L*5) should be
disclosed in report.

As per the provision of Ind-AS 24 designation of employee is not important but

Their exercise of powers is important. Both are playing vital Role in Management
due to which we will not consider their designation.

*Part 5*
Query Solving
Question -8
Solution:
As per the Provisions of Ind-As 24, Karuna Ltd. will be considered as a related party

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of Arun Ltd. because Related Parties of any member in same Group are to be assumed
as Related party of all Members in same Group. In the Given case, Chandru is an
Associate of Karuna due to which both are related parties. So karuna will also be
assumed a Related party for Arun & Bhasker who are in same group with Chandru.

Conclusion: Transaction with Arun & Karuna shall be disclosed in Related party Report.

Question -1
Solution:
Explained in Lecture

Question -4

Explained in Lecture

*Part 6*

Solution of Q.1

As per the Provisions of Ind AS-24, related Party Relationships and

Transactions should be reported in Related Party Disclosure. If any Transaction has
Taken place between Related Parties then Its disclosure is mandatory whether price
is charged or not. It is also immaterial that Transaction size is significant or
Insignificant.
In the Given case, Mr.Y is a KMP in ABC and he is controlling PQR due to 100%
Holdings. It indicates that Mr.y is common between ABC & PQR Limited. So, these
Companies should be considered as Related parties. Further, one company is
purchasing Goods from other company. It also indicates that Related party
Transaction has taken place.
On the basis of Given Explanation as in above, It can be said that Transaction
(Purchase) shall be reported in Related Party Disclosure even if full Price is charged
and volumn of transaction is insignificant.

Solution of Q.2

i. As per the Provisions of Ind AS-24, Govt companies Transactions are

Exempted from Reporting in Related Party Disclosures. So, Exemption is available
For all company because all companies are controlled by UP Govt.
(All companies i.e. PQR, ABC, P, Q, A, B)
But Transactions with KMP will be reported.
ii. The following disclosures are still required even if exemption from reporting
is available :-
A. Name & Relation with Govt.
B. Nature & Amount of transaction

Solution of Q.3

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As per the Provisions of Ind AS 24, Related Party Transactions, which have taken
Place between Related Parties, shall be reported even if full Price has been charged or
Transaction size is insignificant.
In the Given case, S ltd is a subsidiary of P Ltd which indicates that Both are
Related parties. Further, S ltd is Supplying Electricity to its Holding at Normal price.
It indicates that Related Party Transaction has taken place.
So, sale of Electricity by S to P should be reported in Related party Disclosures.

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter16:Ind AS 33 : Earning Per Share

*Part 1*

Unit I : Objective of Ind AS 33

There are two main objectives for which Ind AS 33 has been formulated which
Are as follows :-
I. The Disclosure of EPS may help the investor to compare the performance of 2
Entities in same Industry
(i.e., Ultratech vs Aditya Birla in Cements, Airtel vs Jio vs Idea in Telecom etc.)
II. The disclosure of EPS may also help An Investor to compare of An Entity
With itself over a Period. It means that we can compare Entity Performance in
Current year with Previous Year Performances.

Note : It can be said that Ind AS on EPS has been formulated for betterment of
Investment decision which are taken by an investor on the basis of operating
Results of an Entity.

Unit II : Types of EPS & other Issues *Imp

As per the Provisions of Ind AS 33, Calculation of EPS can be made under 2
Headings as follows :-
I. Basic EPS
II. Diluted EPS

Additional Points :-

❖ As per the Provisions, Calculation & Presentation of EPS will be made even if
Company has “Negative Earnings” or “NIL Earnings” because main objective of the
Statement is to provide comparison of Performance of the Entity between 2
Financial years.
❖ The calculation & Presentation of Both EPS (Basic & Diluted) is Equally Prominent
It means that we cannot Present EPS on Selective Basis.
❖ The calculation & Presentation of EPS will be made for Stand alone financial
Statements & consolidated financial Statements “Separately”. (*Imp)

Unit III : Explanation on Basic EPS

Basic EPS = Earning Available for Equity Shareholders (EAE)

Weighted Avg. No. of Shares (WANS)

Concept 1 : EAE

EAE = Incomes – Expenses – Tax Exp. – Adjustments relating to Pref. Share capital
❖ OCI Part is not considerable for EPS

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Explanation on Pref. Share Capital

Adjustment 1 : Cumulative/ Non-cumulative Dividends on PSC

Pref. Share Capital

Case I : Redeemable Pref. Share Capital Case II : Irredeemable PSC

There will be no discussion on it regarding As per Section 55 of co. Act 2013, This
Dividends because It is considered as a Kind of PSC cannot be issued in India,
Financial Liability under Ind AS 109. But Discussions have been made in
Ind AS 33 due to which we will have
We would have calculated finance cost on it at to learn its all Aspects. *Refer the
IRR/ Market Rate and such finance cost following Discussions on Dividends
Would have already been included in Expenses. Which is relating to it
(So, There will be No Adjustments in Net
Profits regarding Dividend on PSC)

❖ Explanation on Adjustment of Pref. Dividend :-

Pref. Dividend

If PSC is cumulative in Nature If PSC is Non-Cumulative in Nature

Consider Dividend on *Accrual Basis whether Consider it only if it is declared in

it is declared or not by the Entity. Current year & *Paid in current year

❖ Additional Points :-
1. In case of Cumulative Irredeemable PSC, Dividend on PSC will be deducted out of
Net Profits on Accurual Basis irrespective of Level of Income (NP may +, - or 0,
But cumulative Dividend will be considered on Per Annum Basis)
Comments : It means that Previous year’ Dividend cannot be deducted out of current
Year’ Profits.
2. In Case of Non-cumulative PSC, Pref. Dividend will be deducted only if It is
declared & Paid in current year. It means that It will be considered on cash Basis.
Comments: As we know, Dividend is declared in AGM & AGM in current year is held for
Previous year. It means that Non- Cumulative dividend for Previous
Financial year will be declared & Paid in current Year. While computing EAE
C.Y, we will deduct Non- Cumulative dividend which is paid in C.Y, but related
With Previous year because It would not have been deducted in Previous
Year Reporting.

Example : Find mistakes in following Presentation

Net Profits (2020-21) Current Year xxxx

Pref. Dividend : Non-Cumulative (20-21) (xxxx)
Cumulative (20-21) (xxxx)
EAE xxxx

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Solution :

1. Treatment of Cumulative dividend is correct because It has been taken on Accrual

Basis.
2. Treatment of Non-cumulative dividend is incorrect because It cannot be
Considered on Accrual Basis. We should have considered Actually paid Dividend for
19-20 in 20-21. We cannot consider 20-21 dividend in 20-21.

Example: Net Profits (20-21) xxxx

Dividend : Cumulative (19-20) xxxx
Non-cumulative (19-20) xxxx
❖ Company Could not Provide Cumulative dividend due to Losses

Solution :

Treatment of Cumulative dividend is incorrect because it would have been deducted in

Previous year on Accrual Basis.

Assumptions on PSC

1. If Nature of PSC is not mentioned :

Always Assume it Redeemable
(No Dividend concept will be discussed in Questions)
2. If Nature of Irredeemable PSC is not mentioned :
Always Assume it as cumulative PSC

*Part 2*

Adjustment 2 : Premium/ Loss on Early Redemption of PSC

(Concept related with Redeemable PSC)

As per the Provisions of Ind AS 33, Loss on Early Redemption (if any) of PSC
Will be adjusted while computing EAE for EPS Purpose. It may be Possible that such
Loss has been written off from securities Premium or from other Reserves as per
Law, but for EPS Purpose, It will be routed through P&L A/c. It means that there will
Be no change in Accounting Books, but It will be considered for disclosures Purpose.

Loss on Early Redemption = Consideration Paid for – Carrying Amount of PSC in

Redemption of PSC Books as per Amortisation
Method (Ind AS 109)

Adjustment 3 : Loss on *Early Converstion

As per the Provisions of Ind AS 33, Loss on Early conversion of PSC shall also be
Routed through P&L A/c for the purpose of calculation of EPS.

Loss on Early conversion = Fair value of shares at the – fair value of Shares as
Time of Early conversion Promised

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Adjustment 4 : Increase/ Decrease in Rate of Dividend of PSC *V.V.Imp

It may be Possible that Pref. Share capital is issued at Discount or Premium.

If Pref. Share capital is issued at Discount then It will be a Loss for Entity, but in
Vice versa situation (premium), It will be a Loss for Shareholders. Sometimes Entity
Pays Low Dividend or No Dividend in Initial Year to compensate itself for Loss due to
Discounts or Entity Pays Dividends at higher Rate for some time to compensate
Pref. holders for Payment of Premiums.
In case the Entity has followed above adjustments in Dividends then Discount
Or Premiums shall be Amortised in P&L A/c for Respective Periods in which such
Dividend Adjustment has been followed.
➢ Discount (Amortised Portion) will be deducted from NP
➢ Premiums (Amortised Portion) will be added to NP

Adjustment 5 : Income/ Expenses routed from security Premium/ Other

Reserves

If any Expense, which is required to be written off in P&L A/c as per Ind AS,
Has been written off from other Reserves/ Security Premium them we will deduct all
These Expenses from Net Profits for EPS Purpose.
(i.e., Underwriting Comm., Preliminary Exp. etc)

Solution of Q.3
Statement Showing calculation of EAE

Net Profits (As given in Question) ₹ 1,50,000

Adjustments :
I. Discount to be Amortised (₹ 18,000)
II. Profit on Buy Back of Shares ₹ 1000
III. Loss on Conversion (₹ 300)
EAE ₹ 132,700

Explanation on Adjustment :-

A. We will ignore Any Adjustments on 5% Redeemable PSC because It is a financial

Liability and Finance Cost on it would have already been recorded in P&L under the
Heading of finance cost. There will be no concept of Dividend on this Kind of capital.
B. The Entity has issued Irredeemable PSC at Discount due to which It is not paying
Any dividend from 20x0 till 20x4. It indicates that company has compensated
Discount by adjustment in Dividend Rate. So, Amortisation of Discount has been
routed from P&L A/c.
C. The Entity has bought back Pref. Shares at Profit due to which we have routed it
in P&L A/c. We have ignored dividend on these shares because Pref. Share capital is
Non-cumulative in Nature.
D. We have ignored 7% Dividend on cumulative PSC which has been converted in the
beginning of year because cumulative Dividend is always taken on Accrual basis. The
Company would have recorded it in Previous year on Accrual Basis. We have
Considered Loss on Conversion assuming that Co. has not Provided it yet.

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Solution of Q.2

In the Given case, Company is interested in Early Redemption of PSC.

So, we should calculate Loss on Early Redemption and we should reduce Net Profit due
To Loss on Early Redemption.
For the calculation of Loss on Early Redemption, we require Actual Payment
Which is made for Redemption & Carrying Amount as per Books of A/cs of Such
Liability. In the Given question, Carrying Amount of Liability is mission. We will
Calculate Loss on Early Redemption by the difference of ₹ 12,00,000 which is the
Actual Payment & ₹ 11,00,000 which is the original Promised Amount. So, there is a
Loss of ₹ 100,000 which should be deducted from Net Profit for EPS Purpose.

Solution of Q.4

Calculation of Basic EPS

Net Profits ₹ 33,000

*Underwriting Comm. (₹ 1000)
EAE ₹ 32,000
WANS 1000
EPS ₹ 32

❖ We have routed U. Comm. From P&L for EPS Purpose.

Solution of Q.1

Calculation of Basic EPS

2016 2017
PAT* 750 790
WANS 16 16
EPS 46.875 49.375

❖ In the Given Case, we have ignored Adjustment of finance Cost on Redeemable

PSC from Net Profits because company would have recorded it under Expenses in
P&L A/c.

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*Part 3*

Concept 2 : WANS
(Weighted Avg. No. of Shares)

WANS = No. of Shares O/s during the Period x Time factor (Period of O/s)

Example :

Opening Balance (1.4.2020) = 10,000 shares

New Issue (1.7.2020) = 20,000 Shares)
EAE = ₹ 15,00,000
Calculation of WANS & EPS for the Period

Solution :

BEPS = EAE = ₹ 15,00,000 = ₹ 60

WANS *25,000 shares

*Calculation of WANS :

Alternative I : Date Wise Calculation

1.4.2020 – 30.6.2020 10,000 x 3/12 = 2500 shares

1.7.2020 – 31.3.2021 30,000 x 9/12 = 22500 Shares
WANS 25,000 Shares

Alternative II : Class wise Calculation

Opening Bal. = 10,000 x 12/12 = 10,000 shares

(1.4 – 31.3)
N. issue = 20,000 x 9/12 = 15,000 Shares
(1.7 – 31.3)
WANS 25,000

*Alternative I is Preferable

Adjustment I : Buy Back of Shares

If an Entity Buys Back its Equity Shares then WANS should be reduced from
The date of Such Buy Back. The following Example may be considered :-

Example : (A.Y : 1.4.2020 – 31.3.2021)

Opening Balance (1.4.20) : 200,000 Shares
N. Issue (1.7.20) : 100,000 Shares
Buy Back (1.2.21) : 50,000 Shares
EAE : ₹ 20,00,000

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Calculate WANS & BEPS.

Solution :

BEPS = EAE = ₹ 20,00,000 = 7.50

WANS * 266,667

*WANS :-
1.4.2020 – 30.6.2020 200,000 x 3/12 = 50,000
1.7.2020 – 28.2.2021 300,000 x 7/12 = 175,000
1.3.2021 – 31.3.2021 250,000 x 2/12 = 41,667
WANS 266.667

Solution of Q.7

Calculation of BEPS

BEPS = EAE = ₹ 240 Lacs = 2

WANS *120 Lacs

*Calculation of WANS (Lacs)

1.1.2001 – 30.6.2001 100 x 6/12 = 50
1.7.2001 – 31.10.2001 150 x 4/12 = 50
1.11.2001 – 31.12.2001 120 x 2/12 = 20
120

Solution of Q.6

Calculation of WANS

1.4.x1 – 14.6.x1 100,000 x 75/365 = 20548

15.6.x1 – 7.11.x1 175000 x 146/365 = 70,000
8.11.x1 – 21.2.x2 225,000 x 106/365 = 65342
22.2.x2 – 31.3.x2 205000 x 38/365 = 21342
WANS 177232

Adjustment 2 : If Bonus Shares are issued by Entity *Imp

If Bonus Shares have been Issued by the company during the year then the
Following Points Should be considered while Computing BEPS :-

Impact of B. Issue on Current Year EPS :-

We will ignore Date of Bonus Issue while Computing WANS. We will Add Bonus
Shares directly to WANS without considering any Time factor because there will be no
Change in Resources after Bonus Issue.

BEPS = EAE Direct Addition, No Time factor

WANS + Bonus Shares

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Impact of Bonus Shares on Previous year’ EPS :-

As per the Provisions, The main Objective of Ind AS 33 is to make comparison

Between Operating Results in 2 financial years. So, Previous year’ EPS should be
Re-stated by assuming Bonus Issue in Previous year without considering Time factor.

Solution of Q.10

Calculation of BEPS

BEPS (2001) = ₹ 60,00,000 = 1/-

20,00,000 + (20,0,000/1 x 2)
Shares

BEPS (2000) :
Original BEPS = ₹ 18,00,000 = .90
20,00,000 Shares
Re-Statement = ₹ 18,00,000 = .30
Due to Bonus 60,00,000 Shares

Solution of Q.8

Calculation of BEPS

X1 – X2 X2 –X3
Net Profits ₹ 450,000 ₹ 550,000
Cumulative Pref. Dividend @ 10% (₹ 50,000) (₹ 50,000)
P.a.
EAE ₹ 400,000 ₹ 500,000
WANS (Including Bonus 50,00,000 50,00,000
Issue)
BEPS .08 .1
(8 Paise) (10 Paise)
(Re-stated)

Solution of Q.9

Calculation of WANS

1.1 – 28.2 10,00,000 x 2/12 = 166,667

1.3 – 30.11 12,00,000 x 9/12 = 900,000
1.12 – 31.12 14,50,000 x 1/12 = 120,833
WANS 11,87,500
(Excluding Bonus Shares)
Bonus Shares 400,000
WANS (including Bonus) 15,87,500

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Solution of Q.12

As per the Provisions of Ind AS 33, Re-statement of Basic EPS for Previous
Year is mandatory if Bonus shares have been issued in current Year for comparison
Purpose.
In the Given Case, Company has not re-stated Previous year’ EPS due to
Bonus shares which are issued in current year.
Re-statement = ₹ 8.50 Crore = ₹ 4.25 Per share
1 crore shares (original) + 1 crore shares (Bonus)

So the company should Present 4.25 Per share for Previous year.

*Part 4*

Adjustment 3 : Partly Paid up Shares

As per the Provisions of Ind AS 33, the following steps should be Applied for
The adjustment of Partly Paid up Shares in Weighted Avg. No. Shares :-

Step I : First of all, we should convert all Partly Paid up shares into fully Paid up
Shares before calculating WANS as follows :-
Partly paid up Shares x Paid up Value
Face Value Per Share
Step II : After Completing Step I, We should calculate WANS considering Time factor
Step III : BEPS = EAE
WANS (Step II)

Example : Accounting year : 2020-21

1.4.2020 (OB) : 200,000 Shares of 100 each fully paid up

1.7.2020 (NI) : 100,000 Shares of 100 each, 60 Paid up
1.10.2020 : Entity Received remaining 40 Per share (final Call)
Calculate WANS

Solution :

Calculation of fully Paid up Shares

1.4 200000 x 100 = 200,000

100
1.7 100000 x 60 = 60,000
100
1.10 100000 x 40 = 40,000
100
300,000

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Calculation of WANS

1.4.20 – 30.6.20 200000 x 3/12 = 50,000

1.7.20 – 30.9.20 260000 x 3/12 = 65,000
1.10.20 – 31.3.21 300000 x 6/12 = 150000
WANS 265,000

Solution of Q.18 *Imp

Calculation of fully Paid up Shares

1.4.2020 ₹ 99,00,000 / ₹ 10 = 990,000 Shares

1.6.2020 ₹ 50,000 / ₹ 10 = 5000 Shares
1.10.2020 ₹ 75,00,000 / ₹ 10 = 750,000 Shares
1.3.2021 ₹ 50,000 / ₹ 10 = 5000 Shares
1750000 Shares

Calculation of WANS

1.4.2020 – 31.5.2020 990000 x 2/12 = 165000

1.6.2020 – 30.9.2020 995000 x 4/12 = 331667
1745000 x 5/12 = 7270 83
1750000 x 1/12 = 145833
WANS 1369583

Calculation of EAE

PBT 2,62,00,000
Tax (30,00,000)
PAT 2,32,00,000

❖ We have ignored any adjustment on Pref. share capital because we have considered
it as a financial Liability and Interest on it would already have been recorded by
Company while computing PBT.

BEPS = ₹ 2,32,00,000 = 16.94 Per Share

1369583 Shares

Solution of Q.17

Calculation of No. of Shares for EPS

No. of Shares = 100,000 Shares x 1.75 = 70,000 Shares

2.50

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Adjustment 4 : Shares with Different Dividend Rights *Imp

It may be Possible that company has Promised different Dividend Rights to

Different Shareholders. If any Equityholder has Special Right for higher Dividends in
Compare to other Shareholders then No. of Shares shall be adjusted according to
Normal Shares before computing WANS.

Solutions of Q.19

Calculation of Equal Shares on the basis of “ A Class”

A Class = 100,000 x 1/1 = 100,000 Shares

B Class = 30,000 x 3/2 = 45,000 Shares

C Class = 30,000 x 5/2 = 75,000 Shares

D Class = 40,000 x 3/1 = 120,000 Shares
340,000 Shares

Basic EPS (Normal) = ₹ 800,000 = 2.35 Per Share

340,000 Shares

Calculation of EPS for Each Class of Shares

Class A Class B Class C Class D

2.35 x 1 2.35 x 1.5 2.35 x 2.5 2.35 x 3
1
= 2.35 = 3.525 = 5.875 = 7.05

Adjustment 5 : Shares issued in PC at the time of Business Acquisition

(Acquisition Method : 103)

If an Acquirer Entity issues New Shares in Settlement of Purchase

Consideration to Acquire company then we will consider these Shares in WANS from
“the date of Acquisition of Business”

Solution of Q.22

Calculation of WANS

1.4.2020 – 30.6.2020 6000 x 3/12 = 1500

1.7.2020 – 31.3.2021 10000 x 9/12 = 7500
9000

BEPS = ₹ 500,000 + ₹ 800,000 = 144.44

9000 Shares

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Solution of Q.21

Calculation of BEPS (A ltd)

I. No. of Shares to be = No. of Shares in V. Co. x Value Per Share (V. Co.)
Issued by A Ltd. Issue Price of P. Co.
= 200 x 30
120
= 50 Lacs
II. WANS = 1.4.20 – 30.9.20 500 x 6/12 = 250
1.10.20 – 31.3.21 550 x 6/12 = 275
525
III. BEPS = ₹ 1200 + ₹ 1200 = 4.57 Per Share
525 Shares

Adjustment 6 : Share Split or Share Consolidation/ Reverse Share Split

It may be Possible that company has followed Share Split or Share Consolidation
During the year. The following Steps should be applied in this Case :-
1. We will ignore date of Split/ Reverse Split while computing WANS. We will assume
That company has changed denomination Per Share in the beginning of Year.
2. The entity will also restate EPS for Previous year by Changing No. of Shares in
Denominator assuming such Split/Reverse Split has taken place in Previous year
For comparison Purpose of EPS.

Solution of Q.20

Calculation of BEPS
(After Share Consolidation)

Current year = ₹ 20,00,000 = 250

8000 Shares
Previous Year : These are comparison
Original = ₹ 16,00,000 = 20
80000 Shares
Restated = ₹ 1600,000 = 200
8000 Shares

Adjustment 7 : If “Right Shares” are Issued by Company

(4-6 Marks)
It can be asked in exams

Step I : Calculate Theoritical Ex-Right Price (Avg. MP) after Right Issue by the
following formula

Ex- Right Price = No. of Shares O/s x Market Price per + No. of Shares x Offered
`
Pre Right Share Pre Right in Right Issue Price
Total No. Of Shares

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Step II : Calculate Right Adjustment Factor (RA factor) as follows :-

R.A Factor = Market Price Pre – Right

Ex- Right Price as in Step I

Step III : Consider Adjustment factor on No. of Shares which were o/s Pre- Right
(Original Share) to make them Ex- Right form Pre Right while computing
WANS

Step IV : Re-State the EPS for Previous year by adjusting WANS after Applying R.A
Factor to make EPS comparable on Ex-Right Basis

Solution of Q.14

I. Calculation of Ex- right Price

Ex-Right Price = (18,00,000 x 60) + (450,000 x 30)

22,50,000 Shares
= 54/-

II. Calculation of Adjustment factor

Adjustment factor = Pre Right MP = 60 = 1.11

Ex- Right Price 54

III. Calculation of WANS for 20x2

1.1.x2 – 31.3.x2 18,00,000 x 1.11 x 3/12 = 500,000

1.4.x2 – 31.12.x2 22,50,000 x 9/12 = 16,87,500
21,87,500

IV. Calculation of BEPS

Basic EPS (20x2) = ₹ 875000 =0.40 Paise

21,87,500 Shares

Basic Eps (20x1)

Original = ₹ 630,000 = 0.35 Paise
18,00,000 Shares
Re-Stated EPS = ₹ 630,000 = 0.315 Paise
18,00,000 x 1.11

Solution of Q.14

1. Ex- Right Price = (500,000 x 21) + (100,000 x 15) = 20

600,000 Shares
2. Adjustment factor = 21 = 1.05
20

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3. WANS = 1.1 – 28.2 500,000 x 1.05 x 2/12 = 87500

1.3 – 31.12 600,000 x 10/12 = 500,000
587500
4. Basic EPS (20x1) = ₹ 15,00,000 = 2.55
587500

Basic EPS (20x0)

Original = 1100,000/ 500,000 = 2.2
Re-stated = 11,00,000/ 500,000 x 1.05 = 2.095

Solution of Q.4

1. Ex- Right Price (20x1) = (500 x 11) + (100 x 5) = 10

600
2. Adjustment factor = 11 = 1.1
10
3. WANS (20x1) = 1.1 = 28.2 500 x 1.1 x 2/12 = 91.67
1.3 – 31.12 600 x 10/12 = 500
591.67
4. BEPS (20x1) = 1500/ 591.67 = 2.535
(20x0) = 1100 = 2 (Re stated)
500 x 1.1
(20x2) = 1800 = 3
600

*Part 5*

Unit IV : Explanation on Diluted EPS

Meaning of Diluted EPS : As per the Provisions of Ind AS 33, Diluted EPS means
Reduction in Basic EPS due to Potential Equity Shares.
(Note : If Basic EPS gets increased after considering
Potential shares then It will be considered as “Anti-dillutive”
EPS and It will not be Reported as a matter of Prudence.

Meaning of Potential Equity Share : As per the Provisions of Ind AS 33 Potential

Equity share is a contract which Entitles its holder/May
Entitle its holder Equity shares in future.
(i.e., Convertible Bonds, Convertible PSC, ESOP, Warrants,
Written option contracts etc.)
To be learnt
Diluted EPS = Adjusted EAE
Adjusted WANS

Adjustment I : Convertible Instruments

(Bonds, PSC etc.)

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Conversion

Mandatory conversion Optional Conversion

No Cash can be paid , but It will be the Option/choice of

Payment will be made in holder that Cash or shares
Shares only (Any one) can be Given

Example :
i. 10% Convt. Instruments : ₹ 10,00,000 (10,000 Deb of 100)
ii. Market Rate : 12%

iii. Conversion will be made at the end of 3rd year @ 1:1 (1 Deb = 1 Share) & conversion
Apply Ind AS 109

Solution :
Calculation of Liab. & Equity Component

P.V of cash Outflows : Y1 100,000 x .893 89300

Y2 100,000 x .797 79700
Y3 100,000 x .712 71200
Liability Comp. 240200
(Bal fig.) Equity comp. 759800
10,00,000

Initial Recognition : Bank a/c Dr 10,00,000

To Liab. Comp 240200
To Equity Comp. 759800
(Being Convt. Deb. Issued)

Liab. Component A/c

I
To Bank 100000 By Bank 240200
To Bal C/d 169024 By Interest (12%) 28824
II
To Bank 100000 By Bank 169024
To Bal C/d 89307 By Interest (12%) 20283
III
To Bank 100000 By Bal b/d 89307
By Interest 10693 (Bal)

Equity Component A/c

I
To Bal c/d 759800 By Bank 759800
II
To Bal c/d 759800 By Bal b/d 759800
III
To ESC (converted) 759800 By Bal c/d 759800
(10000 Deb. Converted inti 10,000 Shares)

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Concept of mandatory Conversion in Earning Per share

As per the Provisions of Ind AS 33, Mandatory convertible Bonds/ Shares shall be
Considered in WANS while computing BEPS. These securities do not link with Diluted
EPS. It will be assumed that No. of Shares Promised on conversion have been issued
On the date of Entering the contract.

Example :
i. EAE : 10,00,000
ii. Shares : OB 10000 Shares (1.4.20)
N. Issue 10000 Shares (1.7.20)
iii. On 1.10.20, Company issued mandatory convertible Bonds of 100 each (2000)
Which are convertible into Equity Shares after 3 years @ 1 Deb = 10 Shares
iv. Actual Interest = 10%, Market Rate 11%
Calculate BEPS.

Solution :

Calculation of WANS

1.4.20 – 30.6.20 10000 x 3/12 = 2500

1.7.20 – 30.9.20 20000 x 3/12 = 5000
1.10.20 – 31.3.21 40000 x 6/12 = 20000
27500

BEPS = ₹ 10,00,000 = 36.36

27500 Shares

Example : (optional Conversion under 109)

i. 10,000 Convt. Debentures issued by Company having 10% Interest Rate of 100
Each
ii. Market Rate : 12%
iii. After 3 Years, holder of debentures can demand cash or Equity Shares @ 1 Deb=
10 Shares
Apply Ind AS 109.

Solution :

Calculation of Equity & Liab. Comp.

P.V of Cash Outflow : Y1 100,000 x .893 89300

Y2 100,000 x .797 79700
Y3 11,00,000 x .712 783200
Liab. Component 952200
Equity Comp (Bal) 47800
10,00,000
It does not include Principal Amt

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Liab. Component A/c

I
To Bank 100000 By Bank 952200
To Bal c/d 966464 By Int. (12%) 114264
II
To Bank 100000 By Bal b/d 966464

To Bal c/d 982440 By Int. (12%) 115976

III
To Bank 100000 By Bal b/d 982440
To Bal c/d 1000000 By Int. (Bal) 117560

Concept of Optional Convertible Bonds/ Pref. Shares in EPS

As per the provisions of Ind AS 33, Optional conversion shall be considered while
Computing DEPS because It’s an outstanding Promise by company for future Issue
Of Shares. The following Points should be considered while Adjusting optional
Securities in DEPS :-

I. Adjustment in EAE : Take finance cost on Liability component subject to

Income Tax as saving assuming there is no Liab. Component
Cancel Current Year Interest on Liab. component Subject to Tax Adjust
II. Adjustment in WANS : Take Promised Issuable Shares if conversion Option is
Excercised
WANS + Increase in Shares subject to conversion

Solution of Q.26

Calculation of Current year Finance Cost

I. Equity Component & Liab. Component :-

P.V of Cash Outflow : Y1 120000 x .917 110040
Y2 120000 x .842 101040
Y3 2120000 x .772 1636640
Liab. Comp 1847720
Equity (Bal) 152280
2000000

II. Finance Cost (Ist year) = 1847720 x 9% = 166295

Calculation of EPS

a) BEPS = EAE = ₹ 10,00,000 = .833

WANS 1200,000 Shares

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b) DEPS :-
Step I : Incremental EPS

Incremental Savings = 166295 = .33*

Incremental Shares 500000 Shares
(2000/1 x 250)
❖ It will Give dilutive Result because it is Less than basic EPS

Step II : DEPS = ₹ 10,00,000 + ₹ 166295 = .69

1200,000 Shares + 500,000 Shares
If Debholders avail conversion option then BEPS will decline from .833 to .69.

Note on Incremental EPS

As per the Provisions of Ind AS 33, Calculation of Incremental EPS is mandatory for
Each Potential share before its adjustment in DEPS.

Incremental EPS

Case I Case II
If it becomes Less than Basic EPS If It becomes more than Basic EPS
Then it should be taken as Dillutive then It will be considered as Anti-
Dillutive

Calculate DEPS by Adjusting BEPS No Need to Adjust these shares

For Potential Shares because we do not calculate Anti-
Dilutive EPS
(Step I & Step II : Both are mandatory) (We will not Go for Step II)

Additional Points to be considered for Adjustment I

Point I : If market Rate is not Given in question *Imp

In the absence of Market Rate, we will consider saving in Interest at Actual Rate
While computing Incremental EPS & DEPS.

Solution of Q.24

Calculation of BEPS & DEPS

BEPS = ₹ 500000 (EAE) = .50 Paise Per Share

10,00,000 Shares

DEPS :
Step I : Incremental EPS
₹ 100000 x 10% x 79% = ₹ 7900 = .395*
1000 Deb x 20 2000 Shares
1
❖ It is Less than Basic EPS due to which It will give dilutive Effect.

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Step II : DEPS = ₹ 500000 + ₹ 7900 = ₹ 507900 = .497

10,00,000 + 20,000 1020000 Shares

❖ We could not split off the Given instrument into Liability Component because
Market Rate is not Given.

Solution of Q.23

Calculation of Adjustment in EAE for Diluted EPS

Profit before Tax 80,000

(+) Saving in Interest if Deb. Are converted 1000
(₹ 25000 x 4%)
(-) Increase in Management Bonus (1000 x 1%) (10)
Adjusted PBT 80990
Tax @ 20% (16198)
Adjusted EAE 64792

❖ We have taken saving at Actual Rate because market rate is not Given.

Incremental EPS = (1000 x 80%) – (10 x 80%) = ₹ 792 = .031

25000 x 1 25000
1

Point 2 : If convertible Bonds/Shares have been Issued in Current Year V..Imp

In Case Potential Equity Shares in the form of Convertible Debentures/ Pref. Shares
Have been issued in current year, but not in the beginning of year then we will
Consider Time factor on Savings and shares while computing DEPS on Such convertible
Instruments.

Example :
1. EAE = ₹ 25,00,000
2. WANS = 10,00,000
3. BEPS = 2.5
During the current year (1.10.2020), Company had issued 10% convt. Deb. (No.10000 0f
100 each) which can be converted after 5 years @ 1 Deb = 100 Shares. Conversion is
Optional. Calculate DEPS.

Solution :

Incremental EPS = 10,000 x 100 x 10% x 6/12

10000 x 100 x 6/12
1
= ₹ 50,000
500000 Shares
= .10 (Dillutive) (Less than BEPS)

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DEPS = ₹ 25,00,000 + ₹ 50,000 = 1.70

10,00,000 + 500,000

Point 3 : If conversion has been made during the year V.V.Imp

If any conversion of Convert. Debentures/ Pref. Shares has taken Place during
The year then the following Points should be considered :-

1.4 31.3

Time period before conversion Time Period after conversion

It is considerable for DEPS & It is considerable for Basic EPS

Incremental EPS with Time factor While Computing WANS

Note : It can also be said that we will consider the Convertible Securities in Basic EPS
as well as Diluted EPS if conversion has taken Place during the current year.

Solution of Q.2 *V.V.Imp

Calculation of Basic EPS & Diluted EPS

A. Basic EPS

BEPS = EAE = ₹ 200,000 = .195

WANS * 1022500

*WANS
1.1 – 31.3 10,00,000 x 3/12 = 250,000
1.4 – 31.12 10,00,000 + 25000 x 120 x 9/12 = 772,500
100 10,22,500
Converted

B. DEPS

I. Incremental EPS :
a) Savings (25000 x 5% x 70% x 3/12) = 218.75
(75000 x 5% x 70%) = 2625.00
2843.75
b) Shares
25000 x 120 x 3/12 = 7500
100
75000 x 120 = 90000
100 97500
c) Incremental = 2843.75 = 0.29 (Dillutive)
97500

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II. DEPS = ₹ 200,000 + ₹ 2843.75 = 0.18 (Dillutive)

1022500 + 97500

*Part 6*
Adjustment 2 : ESOP’
(Employees Stock Option Plans)

If an Entity has Promised ESOP to its Employees at concessional Rates them

These shares shall be considered Dillutive to the Extent % of Concession in Average
Market Price. We should not focus on Expected collection from ESOP’, but we should
Consider concessional Portion for which No Consideration is Expected. The following
Steps should be Applied while computing Dillutive EPS for Adjustment of ESOP’ :-

Step I : Calculate No. of Free/ Concessional Shares/ Shares without Consideration

Average Market Price – Exercise Price x ESOP
Average Market Price

Step II : Incremental EPS

Savings from ESOP = 0 =0
Free Shares free Shares

Step III : Diluted EPS

EAE + 0 = It will be Less than BEPS
WANS + Free Shares

Example :
EAE = ₹ 50,00,000
WANS = 50,000
BEPS = 100

ESOP
i. Exercise Price = 60,
ii. Avg. MP (B/S) = 120
iii. ESOP = 100,000 Shares
iv. MP on Grant Date = 110
Calculate Diluted EPS

Solution :-
Step I : Calculation of Shares for No Consideration
120 – 60 x 100,000 Shares = 50,000 Shares
120

Step II : Incremental EPS = 0 =0

50000

Step III : Diluted EPS

₹ 50,00,000 + 0 = 50 Per share
50,000 + 50,000
(WANS)

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Solution of Q.31

Calculation of EPS

I. BEPS : EAE = ₹ 12,00,000 = 2.4

WANS 500,000

I. DEPS :
a) Free Shares = 20 – 15 x 100,000 = 25000 Shares
20
b) Incremental EPS = 0 =0
25000
c) DEPS = ₹ 12,00,000 + 0 =2.28
500000 shares + 25000

Solution of Q.3

Calculation of DEPS

1) Free shares = 8 – 6 x 200000 Options = 50,000 Options

8
2) Incremental EPS = 0 =0
50,000
3) DEPS = ₹ 100,000 + 0 = .09
10,00,000 + 50,000

Adjustment 3 : Option Contracts for Own Shares V.V.Imp

(Company has written options on Own shares)

Cases

If company is an Option Buyer If company is an Option Seller

Company has bought Rights for Company has bought obligation to

Purchasing/ Selling its Own Shares buy/ Sell its own shares in
Unfavourable conditions
Ignore this case because option Buyer
Never bears Losses in future This situation may be dilutive in
Following different cases :
It will be Anti-dillutive situation - Call Option
(Rights are Excercised only in favourable - Put Option
Situation)

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Explanation on Call Option

Example :
1) Company has sold a Call Option to Mr. x for 500 Shares @ 160 Per share after 3
Months

2) Market Price on B/s date :-

a) If it is 180
b) If it is 120
Calculate its Dilutive impact.

Solution :
a) If MP is 180 at B/S date
In this case, MP is higher on B/s date than Exercise Price which indicates
that option Buyer will Exercise option. It also indicates that company has issue its
Own shares at concessional Rate. We will follow same steps as we discussed in ESOP.

Free shares = 180 – 160 x 500 Shares = 56 Shares (Approx.)

180
DEPS = EAE + 0 =
Wans + 56 shares

b) If MP is 120 on B/s date

Mr. A will not Exercise the call option because market is not favourable for him.
So No Adjustment in Diluted EPS will be required.

Notes on Concept

Case I : If market Price on B/s date becomes higher than Exercise Price/ Contract
Price then company will calculate free share which are Expected to be issued
For No Consideration Like ESOP/
1) Free Shares = MP (B/s) – Exercise Price x Shares Promised
MP
2) DEPS = EAE + 0
WANS + free shares

Case II : If MP on B/s date becomes Less than Exercise Price then It will be Anti-
Dilutive case for company and It will be ignores while computing

Summary : Call option

Company is an Option Seller

``
`
MP is higher than EP on B/s MP is Lower than EP on B/s

MP – EP x Options = Free Shares - No calculation is required

MP (Just ignore it)

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Solution of Q.33

Calculation of EPS

1) BEPS = ₹ 20,00,000 = 5 Per Share

400,000 Shares
2) DEPS :
A. Free Shares = 120 – 100 x 6000 Shares = 1000
120
B. Incremental EPS = 0 = 0
1000
C. DEPS = ₹ 20,00,000 + 0 = 4.98
400,000 + 1000

Solution of Q.32

Calculation of BEPS

20x7 20x8
EAE 500,000 600,000
WANS 40,00,000 40,00,000
BEPS 0.125 0.15

Calculation of DEPS

20x7 20x8
A. Free shares 120 – 70 x 630,000 160 – 70 x 630,000
120 160
= 262500 Shares 354375 Shares
B. DEPS 500,000 600,000
40,00,000 + 262,500 40,00,000 + 354375
= 0.11 = 0.13

Explanation on Put Option

Example :

Mr. A will sell 500 shares of X Ltd. To X Ltd under a Put option after 3 months @ 160
Per share. MP on B/s date : 1) 110 2) 170
Calculate Dilutive impact of this transaction.

Solution :
If MP is 110
In the Given case, MP is Low at B/s date which indicates that Mr. A will
Exercise Put Option because he can sell shares @ 160.
Step I : company will calculate No. of shares to be issued for arrangement of funds
which are required for Buy Back as follows :-
No. of shares to be issued = 500 x 160 = 80,000 = 728 Shares (Approx.)
110
Free shares to be issued = 728 – 500 = 228

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Step II : DEPS = EAE + 0 =

WANS + 228

If MP is 170

➢ Ignore this situation because Mr. A will not Exercise the Option and there will be
no Buy Back by company

Notes on Concept

Case I : If MP on B/s becomes Less than Exercise Price then the following Points
May be considered :-
1) The company has to buy back its own shares from option holder
2) It will be assumed that company will Arrange the funds for buy back by way of New
Issue
3) N. Issue = No. of Shares under B. Back x Exercise Price
Market Price
4) Free Shares = N. Issue – B. Back
5) DEPS = EAE + 0
WANS + Free shares

Case II : If MP becomes higher than Exercise Price then there will be no calculation
Because there will be no Buy Back.

Summary

Company is an Option seller under Put Option

If MP is Less than EP on B/s If MP is higher than EP on B/s

(ignore this case)
1) N. Issue to be made = B. Back x EP
MP
2) Free shares = N. Issue – B. Back
3) DEPS = EAE + 0
WANS + Free shares

Solution of Q.34 *V.V.Imp

Calculation of EPS

1) BEPS = ₹ 76,42,000 = 10.92

700,000 Shares
2) DEPS :
A. Put Options
N. Issue to be made for Arrangement of Funds = 20000 x 400 = 32000
250
Free Shares = 32000 – 20000 = 12000

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B. DEPS = 7642000 + 0 = 10.73

700,000 + 12000

*Part 7*

Adjustment 4 : Share Warrants

If any Entity has Promised Equity Shares in Lieu of share warrants then we will
Calculate free shares at each B/s date for the purpose of Diluted EPS. The calculation
Of free shares will be same as in ESOP. The following calculation may be relevant :-

Free shares = Avg. Market Price at B/s date – Exercise Price x Promised Shares
Avg. MP on B/s date

Example : Share warrants = 10,000

Exercise Price = 60
Avg. MP at B/s = 100
1 warrant = 1 Share
Calculate Incremental EPS for share warrants.

Solution :

Free Shares = 100 – 60 x 10,000 = 4000 Shares

100
Incremental EPS = 0 = 0
4000
DEPS = EAE + 0 = Less than BEPS
WANS + 4000

Adjustment 5 : Contingently Issuable Shares *V.V.Imp

If any Purchasing Company has Promised Additional shares to vendor company in

Business combination Transaction which is subject to fulfilment of any contingency
in future. These Promises can be Classified into 2 headings as follows :-

Contingencies

If contingently Issuable shares If contingently Issuable Shares

are subject to Target of Turnover/ are subject to Other Events
Profits/ MP by the End of year (It is relevant for BEPS & DEPS
(It is relevant for Diluted EPS only if conditions have been met)
if conditions have been met on B/s date

❖ If conditions do not met then ignore all cases for Adjustments. (No Adjustment
will be made in BEPS or DEPS)

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Contingencies other than Sales/ Profits/ MP

If contingently issuable shares are based on contingency other than Profit/

Sales/ MP then following Points should be considered if conditions have been met
During the year :-
1) We will consider contingently issuable shares in BEPS from the date of fulfilment
Of conditions as follows :-
WANS (Normal Calculation) xxxx
Add : Contingently Issuable shares
X time factor xxxx
WANS (final) xxxx
2) If the above shares are still issuable on B/s date then we will consider these
Shares in diluted EPS as well but without Time factor as follows :-
WANS (Normal Calculation) xxxx
Add : Contingently Issuable Shares (fully) xxxx
Adjusted WANS xxxx

Important Notes :-

1) If conditions do not met during the year then Ignore the Specified contingently
Issuable shares in BEPS as well as in DEPS.
2) If contingently Issuable Shares are issued by company immediately after meeting
the conditions then we will not make any Adjustment in DEPS.

Summary : Contingently Issuable Shares (Other contingency)

Conditions met Conditions do not met

Issuable Issued Ignore everywhere

Consider it in Consider it in
BEPS with TF DEPS only
and in DEPS
Without TF

Contingency related with Sales/ Profit/ MP

(Target to be Satisfied till year End)

These type of contingencies can be tested at year End only. So, there will be
no Adjustment for these contingencies in Basic EPS. These contingencies are
relevant for Diluted EPS only. The following flow chart may be referred :-

Conditions for contingencies

Conditions have been met on B/s date Conditions have not been met on B/s date

Consider these contingencies in DEPS Ignore Any Adjustment in DEPS

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Solution of Q.29 *V.V.Imp

Calculation of BEPS
(Qtrly & Annually)

Particulars Ist Q IInd IIIrd IVth Total

J–M A–J J–S O–D J-D
Profits (A) 11,00,000 12,00,000 (400,000) 10,00,000 29,00,000
WANS (B) :-
OB 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Add : Contingently NIL 3333 6667 10000
Issuable shares for 5000 x 2 (5000 + 5000 (5000 + (5000 x
Retail Outlets 3 x 1/3) 5000) 8/12 + 5000
X 4/12)
(B) 10,00,000 10,03,333 10,06,667 10,10,000 10,05,000
BEPS (A/B) 1.1 1.196 (0.397) 0.990 2.885

Calculation of DEPS

I II III IV Total
Profits (A) 11,00,000 12,00,000 (400,000) 10,00,000 29,00,000
Adjusted Shares :
OB 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Retail Site - 5000 10,000 10,000 *10,000
Profit Target NIL 300,000 NIL 900,000 900,000
(23L – 20L) (29-20)
(B) 10,00,000 13,05,000 10,10,000 19,10,000 19,10,000
DEPS (A/B) 1.1 0.919 (0.396) 0.523 = 1.52

Solution of Q.30

In the Given question, company has issued contingently issuable shares on the basis
Of Target of Turnover for which condition will be verified at the end of year. So these
Shares are relevant for DEPS if conditions are met. It is clearly Specified that
Conditions have been met due to which Adjustment is required in DEPS.

Exception to Contingently Issuable Shares *Imp

If any future Issue is linked with Passage of Time then It will not be treated as
Contingently Issuable Shares. The following Points may be considered :-
I. Treat it as a Normal Convertible Bond/ Share
II. Consider maximum offered shares at any time in DEPS

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Solution of Q.25

Calculation of BEPS

X1 – X2 X2 – X3
EBIT 825,000 895,000
Interest (75,000) (100,000)
(1250000 x 8% x 9/12) (12,50,000 x 8%)
Loss on Derivative (2500) (2650)
PBT 747500 792350
Tax Exp. (247500) (262350)
(825000 – 75000) 33% (895000 – 100000) 33%
EAE 500,000 530,000
WANS 15,00,000 15,00,000
BEPS .33 .353

Calculation of DEPS
X1 – X2 X2 – X3
EAE 500,000 530,000
Savings in Int. 50250 67000
(75000 x 67%) (100000 x 67%)
Derivative Loss Saving 2500 2650
Adjusted EAE 552750 599650
Adjusted Shares 2765625 3187500
(1500000 + *1687500 x 9/12) (1500000 + *1687500)
DEPS 0.199 0.188

❖ We have assumed Max. Conversion Ratio

Unit 5 : Other various concepts to be Discussed

Concept 1 : Adjustment of Participating Preference Shares *V.V.Imp

It may be possible that company has Participating Pref. Shares (It is Possible only in
case of Irredeemable PSC) then Share of Pref. holders in Undistributed Profits will be
Computed in addition to fixed Pref. Dividend. It means that BEPS for Equity
Shareholders will get declined due to Participation in Profits by Pref. holders.

Statement Showing Distribution of Net Profits

Net Profits xxxx

(Pref. Dividend (fixed %) (xxxx)
Dividend Prescribed in AOA for Equity holders (xxxx)
Undistributed Profits xxxx

Share of Pref. holders * Share of Equity holders

As per AOA
*BEPS will be computed on the basis of share of Equity holders in Distributed +
Undistributed Earnings.

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Solution of Q.27 *Imp

Statement Showing calculation of distribution of Earnings

Net Profits ₹ 100,000

Distributions as per AOA :-
Pref. Shares (5000 x 5) (₹ 25,000)
Equity Shares (10,000 x 2) (₹ 20,000)
Undistributed Profits ₹ 55,000

Allocation of undistributed Profits :-

Equity Shareholder Participation Per Share = x

Pref. Shareholder Participation Per Share = 50% of x
= .5x
(10000 X x) + (5000 X 0.5x) = 55,000
10000x + 2500x = 55000
X = 55000 = 4.4
12500
Participation of Pref. Shares = 4.4. x 50%
= 2.20

Calculation of EAE (BEPS)

Net Profit ₹ 100,000

Share of Pref. holders in NP :
i. Pref. Dividend (5000 x 5) (25,000)
ii. Undistributed Profit share (5000 x 2.2) (11,000)
EAE 64,000
[(2 + 4.4) x 1000]

Solution of Q.28

Calculation of Share of Pref. Shareholders in Undistributed Profits

Net Profits ₹ 100,000

Pref. Dividend (6000 x 5.5) (33,000)
Equity Dividend (10000 x 2.1) (21,000)
Undistributed Profits 46,000

(10000 x X) + (6000 x 2.5x) = 46000

10000x + 1500x = 46000
11500x = 46000
X=4
Share in Undistributed Profit of Pref. holders = 4 x 25% = 1 Per Share

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Calculation of EAE

Net Profit 100,000

Pref. Dividend (33,000)
Share in Undistributed Profits (6000)
(6000 x 1)
EAE 61,000
[(10000 x 2.1) + (10000 x 4)]

Concept 2 : BEPS & DEPS in Consolidated financial statements *V.V.Imp

If we are calculating EPS for the purpose of CFS then holding co. will compute its
Consolidated EPS on the basis of Consolidated Profits. The following formulas may be
Considered :-

A. Consolidated BEPS

CBEPS = Holding Company own + Share of holding in Profits of Subsidiary on the

EAE Basis of % of Invest.
Holding Co. WANS

Example :

Holding Co. Subsidiary Co.

Net Profits ₹ 10,00,000 ₹ 500,000
WANS 10,000 2000 Shares

Additional Information :-

I. Holding Co. Own 80% in Equity Share capital of Subsidiary .

II. Subsidiary Co. has irredeemable PSC on which ₹ 80,000 cumulative Pref. Dividend
is required to be Provided
III. Holding co. also have 50% Investment in PSC of Subsidiary company.

Solution :
Calculation of BEPS for Subsidiary company
Net Profit ₹ 500,000
Pref. Dividend (₹ 80,000)
EAE ₹ 420,000
WANS 2000
BEPS 210

Calculation of BEPS for Holding company

Stand Alone EPS :-

BEPS = ₹ 10,00,000 = 100 Per Share
10,000

Consolidated BEPS :-

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Share in Pref. Earning

CBEPS = ₹ 10,00,000 + (1600 shares x 210) + (80,000 x 50%)
10,000 Shares
EPS Disclosed by subsidiary
= ₹ 1376000
10000 Shares
= 137.60

Consolidated Diluted EPS

CDEPS = Holding Co. Own Adjusted + *Share of Holding in Adjusted EAE of

EAE Subsidiary Co
Adjusted WANS of Holding company

Example :
Holding Subsidiary
NP ₹ 10 Lacs ₹ 5 Lacs
WANS 1L .1 L
BEPS 1 /- 50/-

Additional Information :

I. Holding company own 80% shares in sub. Co.

II. Subsidiary company has share warrants :
Warrants 10,000
Exercise Price 60
Average Price 120
Calculate consolidated BEPS & DEPS.

Solution :-
Calculation of DEPS for Subsidiary

DEPS = ₹ 500,000 + 0 = 500000

10,000 + 120 – 60 x 10000 15000 Shares
120
= 33.33

Calculation of consolidated EPS

Consolidated BEPS = ₹ 10,00,000 + (8000 x 500

100,000 Shares
= 14

Consolidated DEPS = ₹ 10,00,000 + (8000 x 33.33)

100000 Shares
= ₹ 12,66,667
100000 Shares
= 12.67

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Example :

With the help of Given information in above Example, Calculate DEPS for consolidated
Statements if holding has 50% warrants in subsidiary

Solution :

Cons. DEPS = ₹ 10,00,000 + (8000 x 33.33) + (2500 x 33.33)

100,000 Shares
= ₹ 1350,000
100,000 Shares
= 13.5

Solution of Q.36

Calculation of Standalone BEPS for M & H

M Ltd. H Ltd.
NP 700,000 200,000
Shares 25,000 10,000
BEPS 28 20

Calculation of consolidated BEPS

CBEPS = ₹ 700,000 + (8000 x 20) = 34.40

25,000 Shares

Solution of Q.37 *V.V.Imp

Calculation of EPS for subsidiary company

A. BEPS
Net Profit ₹ 5400
Pref. Dividend (₹ 400) (400 x 1)
EAE ₹ 5000
Shares 1000
BEPS 5 Per share

B. DEPS
DEPS = Adjusted EAE
Adjusted WANS

= ₹ 5000 + 400 + 0
(EAE) (Savings in Dividend (Savings in Warrants)
1000 Shares + 400 Shares + 20 – 10 x 150
20
= ₹ 5400
1475 Shares
= 3.66 Per share

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Calculation of consolidated EPS

Consolidated BEPS :-
Earning from subsidiary
= ₹ 12000 + (800 x 5) + (300 x 1)
10000 Shares
= 16300 = 1.63
10000

Consolidated DEPS :-

= ₹ 12,000 + (800 x 3.66) + (300 x 3.66) + (15 x 3.66)

10000 Shares
= 16080.90 = 1.60
10000

Concept 3 : Break up of EPS

As per the Provisions of Ind AS 33, Disclosure of EPS should be made under 3 headings
as follows :-
I. Continuing Operations
II. Discontinued Operations
III. EPS from continuing & Discontinued Operations

Solution of Q.6

Calculation of EPS

1) Basic EPS

Continuing Operations Discontinuing Operations Total

Profits 40,000 (30,000) 10,000
WANS 20,000 20,000 20,000
EPS 2 (1.5) .50

2) Diluted EPS

Profits 40,000 (30,000) 10,000

WANS 20500 20500 20500
EPS 1.95 (1.46) .49

Concept 4 : Dillutive EPS for Loss making company

If Loss Per Share becomes Less than Basic Loss Per Share after adjusting Potential
Shares then It will be considered as Anti-dillutive and its disclosure will not be made.

Solution of Q.5

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BEPS = (12,00,000) = (600)

2000 Shares
DEPS = (12,00,000) + 0 = (555.56)
2000 + 100 – 60 x 2000 Its anti-dilutive
100

Concept 5 : If any company does not have Potential Shares

If any company does not have Potential Equity share then BEPS and DEPS shall
become equal. In this case, company will disclose Both the EPS in same Line/ Single
Line. It means that Separate disclosure will not be allowed.

*Part 8*

New Questions

Explanation of Disclosure of Dillutive EPS if Entity has Discontinued Operations

As per the Provisions of Ind AS 33, Disclosure of Diluted EPS will be made on the
Basis of Results from the continued operations. The following Points should be
Considered in relation to this :-
A. If continuing Operations have positive Results then Disclosure of Dillutive EPS
Will be made even if It is Anti-dillutive due to effect of Discontinued operations on
Overall Results. It can be said that Disclosure of Overall Anti- dilutive EPS will be
Made if EPS is Dillutive in case of continuing Operations.

Comments : Disclosure of Overall EPS will depend if continuing operations are showing
Dilutive Results.
Controlling factor
Controlling factor
B. If EPS for continuing Operations becomes Anti- dilutive then we will not disclose
Diluted EPS for company on overall Basis even if It is dilutive due to Effect of
Results from Discontinued Operations.

Solution of Q.1

Case I

A. Calculation of BEPS

Continuing Operations Discontinued Operations Total (Overall)

Profits 30,00,000 (36,00,000) (600,000)
WANS 10,00,000 10,00,000 10,00,000
BEPS 3 (3.6) (.6)

B. Calculation of DEPS

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Continuing Discontinued Total

Profits 30,00,000 (36,00,000) (600,000)
WANS + Potential 12,00,000 12,00,000 12,00,000
DEPS 2.5 (3) (.5)
(Dillutive) (Anti- dilutive) (Anti- dilutive)

Comments : In the Given case, continuing Operations are showing Dilusion in BEPS
Due to which we will disclose Dillutive EPS for Discontinued operations as
Well as for company even if overall EPS is showing Anti-dillution.

Case II :

I. Calculation of BEPS

Continuing Discontinued Total

Profits (10,00,000) 36,00,000 26,00,000
WANS 10,00,000 10,00,000 10,00,000
BEPS (1) 3.6 2.6

II. Calculation of DEPS

Continuing Discontinued Total

Profits (10,00,000) 36,00,000 26,00,000
WANS + Potential 12,00,000 12,00,000 12,00,000
DEPS (.83) (3) 2.16
(Anti- dilutive) (Dilutive) (Dilutive)

Comments : In the Given case, continuing Operations are showing Anti-dilutive EPS
Due to which we will show Dilutive EPS in any case even if overall EPS is
Dilutive.

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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Chapter 17: Schedule III: Division II

Ind-AS Rules Format
*Part 1*

Concept 1: General Instructions:

As per the provisions the following General Instructions are required to considered
before starting discussion on format in relation to schedule III Division II:-
A. The provisions specified in schedule III, Division II are relevant only for those
Entities which are applying Ind-AS as per Ind AS Rules 2015.

B. The formats provided in schedule III Division II for B/s, P&L or Notes are
Flexible. It means that the given formats can be changed if there is any
Contradiction on any presentation between schedule III &Ind-AS Rules.
Any heading can be changed or substituted in B/S or PL according to requirements
Given in Ind-AS Rules.

Comments: We can also say that Ind-AS Rules are more powerful than Schedule III
For presentation requirements.

C. As per the provisions of schedule III Division II, the entity shall give cross
reference by suitable notes for each consolidated Amount which is presented in
B/S or P&L.

D. As per the provisions of schedule III Division II, formats of cash follows
Statements shall not be discussed here. The cash flow format can be referred
from Ind-AS 7 ( we will discuss B/S, PL, Changes in equity & Notes in Division II).

E. The figures can be rounded off in financial statements on the basis of following
Rules:-

Level of Company Rounded off (Allowed)

I. If Turnover is less than Nearest : Hundreds, Thousands, Lacs or
100 crores Millions.

II. If Turnover is 100 crores Nearest: Lacs, Millions, crores.

Or more

Concept 2: Coverage of Schedule III Division II

Coverage

B/S P&L Changes in Equity Notes to A/cs

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Unit I: Explanation on Balance Sheet

(Format, Concepts & Notes on B/S)
Format: Balance Sheet Comparison
Name of Company……………
B/S as at…………………………..

Particulars Current F.Y. Previous F.Y.

Assets:
Non Current Assets:
A. Property, Plant & Equipment xxxx xxxx
B. Capital WIP xxxx xxxx
C. Investment Property xxxx xxxx
D. Goodwill xxxx xxxx
E. Other Intangible xxxx xxxx
F. Biological Assets other than Bearer Plants xxxx xxxx
G. Financial Assets
a) Investments xxxx xxxx
b) Loans & Advances xxxx xxxx
c) Trade Receivables xxxx xxxx
d) Others xxxx xxxx

H. Deferred Tax Assets (Ind AS 12) xxxx xxxx

I. Other Non-Current Assets xxxx xxxx

Current Assets:- xxxx xxxx

A. Inventories xxxx xxxx
B. Financial Assets:-
1. Investments xxxx xxxx
2. Cash & Cash Equivalents xxxx xxxx
3. Trade Receivables xxxx xxxx
4. Bank Balance other than covered in point 3 xxxx xxxx
5. Loans xxxx xxxx
6. Other Financial Assets xxxx xxxx
C. Current Tax Assets xxxx xxxx
D. Other Current Tax Assets xxxx xxxx
Total (A) xxxx xxxx

Equity & Liabilities:

Equity:
i) Equity Share Capital
ii) Other Equity (Reserves & Surplus)

Non Current Liabilities:

A. Financial Liabilities
1. Borrowings xxxx xxxx
2. Trade Payables
a) Payables to Micro, small or medium xxxx xxxx
enterprise
b) Other Payables xxxx xxxx

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3. Other Financial Liabilities xxxx xxxx

B. Provisions (Long Term) xxxx xxxx
C. Deferred Tax Liability xxxx xxxx
D. Other Non-Current Liabilities xxxx xxxx

A. Current Liabilities:
A. Financial Liabilities
1. Borrowings xxxx xxxx
2. Trade Payables
a) Payables to Micro, small or medium xxxx xxxx
enterprise
b) Other Payables xxxx xxxx
3. Other Financial Liabilities xxxx xxxx
B. Provisions xxxx xxxx
C. Other Current Liabilities xxxx xxxx
D. Current Tax (Net) xxxx xxxx
Total (B) xxxx xxxx

Concept of Important Definitions:

Concept 1: Meaning of Operating cycle

RM Avg. Holding Period For Consumption

Drs RM [Processing] Time Taken for

Processing

Time taken by FG
Debtors for Avg. Holding Period In warehouse
payment
[Avg. collection Period]

1) Under operating cycle, we calculate Total time which is taken by an entity

Form purchase of Raw Material till its collection from customers after sales.
It can be calculated as follows:-
Avg. Period for consumption of RM XXXX
Avg. Period for Processing (WIP Period) XXXX
Avg. Period for Holding FG before Sale XXXX
Avg. Collection period from Debtors XXXX
OC XXXX

It can vary according to nature of business

[may be less than 12 m or more than 12m]

2) While computing operating cycle, we will not deduct any credit period which is
provided by suppliers for Raw material. It means that we will calculate Gross
operating cycle period.

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Concept 2: Meaning of Non-Current Asset

A Non-Current Asset is an Asset which is not a “Current Asset”.

Concept 3: Meaning of Current Asset*Imp

As per the provisions of schedule III, Any Asset can be classified as a current
Asset if any one condition is satisfied out of following 4 conditions:-

I. If any Asset is expected to be realised within 12 months from B/S Date or

within operating cycle of company.
(i.e. Investments, Trade Receivables, Loans etc.)
Conclusion: On the basis of above explanation ,we will consider collection within
12 m or operating cycle whichever is higher. It can also be said that
Classification of current Assets on the basis of collection will be
made according to o. cycle if it becomes more than 12 months.

II. If any Asset is expected to be sold or to be consumed within operating cycle

(i.e. Finished goods, Raw Material, WIP, Stores, Loose Tools etc.)

III. If any asset is held foe Trading

(i.e. Derivatives held in favourable portion at B/s date: Options, futures,
Forward etc.)

IV. If any Asset is held in the form of cash & cash equivalents

Concept 4 : Meaning of Non-Current Liabilities:

If any Liability can not be considered as “Current Liability then it will be

Assumed as Non-Current Liabilities.

Concept 5: Meaning of Current Liabilities:

If any one conditions out of following conditions is satisfied then liability will
Be considered as a current Liability:-

1. If it is expected to be settled within 12 months form B/s date or within

Operating cycle then it will be a current Liability [12 m or OC, whichever is
higher, will be considered as settlement period]
(i.e. short term Borrowings Trade Payables, Short Term Provisions, current
Tax Liability etc.)

2. If any Liability is held for Trading.

(unfavourable position of Derivative: Option, future, forward etc.)

3. If any Liability can not be deferred for which payment is expected within 12
Months from B/S date (Finance Lease Payment, Redeemable Bonds or PSC which
are due in next year for Redemptions, Instalments on Loan to be paid in next
year.

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Question 1, 2,3,4,5,6,7,8 &9

Discussed at class

Question 14, 15 & 16

Homework.

Explanation on Notes to A/cs related with B/S

Part I : Notes on Assets

Concept 1 : Notes on PPE

1) The entity shall disclose PPE under separate headings on the basis of
Nature of Assets as follows:-
Land, Building, Vehicles, Furniture & Fixtures ,P&M, Bearer Plants etc.

2) If entity has acquired any PPE on finance lease then ROU Assets shall be
disclosed separately under relevant heading according to nature of Asset.

3) A reconciliation statement between opening Balances & Closing Balance

Shall be prepared & disclosed to provide Reasoning of changes in Balances.
The following Reasons may be considered:-
i) Additions ii) Disposals iii) Acquired in Business combination
iv)Impairment v) Reversal of Impairment vi) Depreciation Adjust.

Reconciliation statement on PPE

Particulars Land Building P&M Bearer Vehicles Furniture Etc.
Plants
O. Balance XXX XXX XXX XXX XXX XXX XXX
Addition XXX XXX XXX XXX XXX XXX XXX
Deposals (XXX) (XXX) (XXX) (XXX) (XXX) (XXX) (XXX)
Business XXX XXX XXX XXX XXX XXX XXX
Combination
Impairment (XXX) (XXX) (XXX) (XXX) (XXX) (XXX) (XXX)
Reversal of XXX XXX XXX XXX XXX XXX XXX
Impairment
Depreciation N.A. (XXX). (XXX). (XXX). (XXX). (XXX). (XXX).
C.Balance XXX XXX XXX XXX XXX XXX XXX

Concept 2 : Note on Capital WIP

All the Assets which are is their construction or installation phase then such Assets
shall be disclosed capital WIP. These Assets may be in the form of Building WIP, power
plant WIP or P&M during installation phase etc. A reconciliation phase etc.
A reconciliation statement shall also be given for differences between opening WIP &
closing WIP.

Note: if any capital Advances gas been made during the year for construction
commencement then it will be disclosed other Non-current Assets until work
is not commenced.

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Concept 3: Investment Property, GW & Biological Assets

If entity shall prepare a Reconciliation statement in same format as we have

discussed in PPE.

Concept 4: Intangible Assets

1) As per the Rules, Intangible Assets shall be disclosed under separate headings
according to nature of Assets as follows:-
i)Trademarks, ii) Patents, iii) Copyrights, iv) software, v) Franchises, vi) Mining
rights etc.

2) If any Intangible has been taken on lease then it will be disclosed separately
under relevant headings.

3) A Reconciliation statement shall also be provided for changes in O.Balances &

Closing Balances in Intangible exactly in same way as in case of PPE.

Concept 5: Non-Current & Current Investments

1) The entity will classify its Investments under the following headings:-
a) Investment in equity shares
b) Investment in Preference shares
c) Investment in Debentures shares
d) Investment in Govt. Securities
e) Investment in Mutual Funds
f) others

2) If any investment has been made in subsidiaries, Associates or J.V. then the
The names of such companies shall also be reported.

3) The classification of investments shall also be reported under following headings

→ Investments in Listed Co. (Quoted)
→ Investments in Unlisted Co. (Unquoted)
→ Other

Concept 6: Notes on Trade Receivables (Current or Non-Current)

As per the provisions, the following presentation is required to be given in relation

to Trade Receivables in notes to A/cs:-

Trade Receivables (Good) : Secured XXXX

Unsecured XXXX

Trade Receivables : Increase in Credit Risk XXXX

Trade Receivables : Credit Impaired XXXX
XXXX
Provision for Doubtful/ Bad debtors (XXXX)
B/S XXXX

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Notes:
If Goods were Sold to a director of entity or to a firm in which director is a partner
or to a company in which he has control then Recovery from director should be disclosed
Separately.

Concept 7: Loans (Current or Non-Current)

If entity has given Loans to other parties then Loans should be disclosed under
Following headings:-
I) Loan to Related Parties
(i.e., Subsidiaries, Associate, JV, Director etc.)

II) Securities Deposits

III) Others (i.e. Loan to employees etc.)

For additional Disclosures, we will refer notes mentioned in Trade Receivables.

Concept 8: Inventories

All Inventories should be disclosed under separate headings of : Raw Material

: WIP
: Finished goods
: Loose Tools
: Stores & Spares etc.

*Mode of Valuation should also be reported

Concept 9: Cash & cash Equivalents (V.V. Imp)

Cash on Hand XXXX

Drafts in Hand XXXX
Changes in hand XXXX
Balances with Banks XXXX
Cash Equivalents XXXX
(i.e Investments upto 90 days Marketable Securities
XXXX

*If entity has Bank Deposit which is expected to be matured after 3 months but within
12 months then it will be disclosed separately in current Assets.

**If any FD is made for more than 12 months then it will be disclosed under Non-
current Assets :Other Financial Assets.

Concept 10: Deferred Tax Assets (Net)

We cannot disclose DTL and DTA separately in B/S. We will calculate Net Amt after
Cancelling these Balances in Contra. If DTA becomes higher than DTL then Net DTA
Will be disclosed under Non-current Assets.

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Concept 11: Current Tax Assets

If Advance Tax exceeds current Tax after cancelling these Balances in contra then
Net Advance tax will be reported as current Tax Assets under Current Assets.

*Part 2*
Explanation on Liabilities side

Concept 1: Equity Share capital

As per the Provisions, the following Disclosures in notes to A/cs are mandatory
in relation to ESC:-
I) Authorised Share capital (No & Amt)
II) Issued & Subscribed share capital (No. Amt)
III) Paid up capital:-
Fully Paid Up XXXX
Partly Paid up XXXX
Calls in Arrear XXXX
Share Forfeiture A/c XXXX
IV) If any shareholder has 5% or more shares in company then details should be
provided for such shareholders.
V) Reconciliation statement should be provided between opening ESC and closing
for reasoning in change in capital.
(i.e. Right issue, Bonus Issue, Buy Back, Issue for PC in Business combination
VI) Shares Reserved for ESOP or convertible Debnt. Or convertible Preference
Share capital or for other promises.
VII) % of shares should also be disclosed which are held by holding company.
VIII) A statement should be prepared additionally for a period of 5 years preceding
The current financial having following disclosures:-
a) Bonus Issue
b) Buy Back
c) Issue for Non-cash consideration

Concept 2: Other Equity

-Refer statement showing-

Changes in equity
(Discussed after P&L statement)

Concept 3: Non-Current Liabilities

A. Borrowings (Long term)

As per the Provisions, Borrowings should be classified under the following headings;-
I) Debenture/Bonds From Banks
II) Term Loans
From other
III) Deposits

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IV) Loan from Related Party

V) Finance lease obligations (Other than Current Maturity)
VI) Liability components in compound financial Instruments.
VII) Others

Additional Disclosures:-
a) All the Borrowings should also be classified form the point of view of secured &
Unsecured.
b) If any borrowings have been made on director personal Guarantee then it should
also be reported.
c) If company has made any default in payment of principal or interest on due date
then such default should also be reported.

B. Trade Payables (Creditors for Goods)

If any amount is payable after 12 months from B/S date (if O.Cycle is more than 12
months then it will replace 12 months) then such payable Amt to trade payable will be
classified under Non-current financial Liabilities. The following classification is
required in relation to Trade Payables in Notes to A/cs:-

Trade Payables: Due to MSME* XXXX

Others XXXX
XXXX

*Due to MSEM:- 1) The Unpaid Amount at B/S date

2) The Unpaid matured Amt including interest at B/s date

Enterprise Micro Small Medium

I. Investment in P&M upto 1 upto 10 crore upto 50 crore
Crore

II. Turnover upto 5 upto 50 crore upto 250 crore

Crore

Definitions Amended in July 2020 MSEM Development Act 2006

C. Provisions (Non-Current) – [Expected to be paid after 12 m]

I) Provisions for De-Commissioning Cost XXXX

II) Others (Constructive/ Legal) XXXX
XXXX

D. Deferred Tax Liabilities:-

If balance in DTL A/c exceeds balances in DTA A/c then net Amount will be
reported under DTL.

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Concept 4: Current Liabilities

A. Borrowings (Short Term) Expected to be paid within 12 months from B/S date
These Loans shall be classified under following headings:-

Banks (Overdraft CC etc.)

I) Repayable on Demand
Others
II) Deposits
III) Loans from Related Parties
IV) Others

Additional Disclosures:-

-----Same as we notes in-----

Non-Current Borrowings

B. Trade Payables (Short Term)

-----Same Notes as we noted-----

In Non-Current Trade Payables

C. Other Financial Liabilities

If any contractual obligation, which is expected to be settled within 12 months from

B/S date will be disclosed under this headings:-

Redeemable Debentures
I) Current Maturities Redeemable PSC
Others Loans

II) Current maturities of finance lease obligations

III) Unpaid Dividends/ Inters t or other Exp.

IV) Unpaid maturities of Deb/PSC/Loans

V) Share Application Money pending for allotment which is Refundable etc.

D. Provision (short Term):-

Leave, Bonus etc.

Provision for short term emp. Benefit XXX
Warranty provisions XXX
Others XXX

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E. Current Tax Liabilities :-

If current Tax on Taxable Income becomes higher than Advance Tax Paid
During the year then Net Amount will be disclosed under Current Tax Liab.

Special Point on NCA Held for Sale

As per the Provisions, there is no discussion on NCA Held for sale in Schedule III. So we
Will Apply Ind AS 105 for these Assets.

Unit II : Format of Profit & Loss Statement

Statement of Profit & Loss Comparison Purpose

Current Previous
F.Y F.Y
A. Incomes :-
1. Revenues from Operations xxxx xxxx
2. Other Incomes Interest Income xxxx xxxx

Others Rental Income Dividend Income

Total (A) xxxx xxxx
B. Expenses
1. Cost of Material consumed xxxx xxxx
2. Purchase of Stocks (FG) xxxx xxxx
3. Changes in Inventories (CS – OS) + xxxx + xxxx
4. Employees Cost = Salaries, Wages, P.F, Welfare, xxxx xxxx
Share Based Exp. etc.
5. Finance Cost = Int. on Deb, Int. Redeemable PSC xxxx xxxx
Int. on Loans etc.
6. Depreciation & Amortisation xxxx xxxx

PPE, IP etc. Intangibles

7. Other Expenses Xxxx xxxx
Total (B) Xxxx xxxx
C. Profit before Tax before Exceptional Items (A- B) Xxxx xxxx
+ Exceptional Items (Irregular) + xxxx + xxxx
D. Profit before tax xxxx xxxx
Tax Expense : Current Tax (xxxx) (xxxx)
Deferred Tax (Ind AS 12) (xxxx) (xxxx)
E. Profits from continuing Operations Xxxx xxxx
F. Profit (Loss) from Discontinued Operations :-
Profit before Tax xxxx xxxx
Tax Expense : Current Tax (xxxx) (xxxx)
Deferred Tax (xxxx) (xxxx)
Profit (Loss) from Discontinued Operations Xxxx xxxx

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G. Profit (Loss) for the Entity (E + F) xxxx xxxx

H. Other Comprehensive Income (OCI) *Imp

I. Items which will not be Reclassified to P&L xxxx xxxx
II. Items which will be classified to P&L xxxx xxxx
Total OCI xxxx xxxx
I. Total comprehensive Income (G + H) xxxx xxxx
It is not considerable for EPS calculation

J. Earning Per share from continuing Operations :

Basic EPS xxxx xxxx
Diluted EPS xxxx xxxx

K. Earning Per share from Discontinuing Operations :

Basic EPS xxxx xxxx
Diluted EPS xxxx xxxx
L. Total EPS (Continuing + Discontinuing) :
Basic EPS xxxx xxxx
Diluted EPS xxxx xxxx

Concept I : Important Disclosure

If any Income/ Expense is 1% or more of its Revenue from Operation or It is 10,00,000

Or more in Amount then It will be Reported Separately in Notes to A/c’s.

Concept II : Explanation on OCI

OCI

Items which can be Classified in P&L Items which cannot be classified in P&L

Adjustment in Other Income/ Other Adjustment in Retained Earning in

Exp. is Allowed Statement of other Equity is only allowed

As per the Provisions, other comprehensive Income is Generated from fair value
Measurements of Assets & Liabilities at B/s date. If any Reserve is created during the
Year or changes take place in Previous Balance due to fair value measurements then It
Will be reported in P&L under “OCI”. It will be classified under 2 different headings as
follows:-
I. Transferrable to P&L on Disposal of Related Asset or Liab.
II. Non-Transferrable to P&L in any case, but It can be taken to R.E only

Examples

Transferrable Non Transferrable

(P&L) (Retained Earnings)
1) Debt Instruments under OCI option 1) Revaluation Res.
2) Foreign Currency Translation 2) Defined Benefit obligations for

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Reserve on Foreign Operations Employees : Re-measurement

3) Equity Invest. With OCI option

*For Presentation, “Refer Statement showing changes in Equity”

Unit III : Statement showing Changes in Equity *V.V.Imp

A. Share Capital

Opening Balance Changes during the year Closing Balances

Reconciliation
N.I/ R.I/ Bonus/ B. Comb./ conversions/ ESOP etc.

B. Changes in Other Equity *V.V.Imp

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Particulars Share Money Reserve & Surplus Equity Other Comprehensive Income
Application Received Capital CRR DRR Sec. G. Retained Other Component Revaluation Debt Equity FCTR Others
Money which Against Res. Premium Res. Earning Res in Res. Inst: Invest.
is Not Share Compound OCI OCI
Refundable Capital Financial
Inst.
Opening
Balance in
the
beginning
Of year xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
Change in
Policy/
Prior
Period
Items N.A N.A N.A N.A N.A N.A N.A + xxxx N.A N.A + xxxx N.A N.A N.A N.A
Re-Stated
Opening
Balance xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx
Current
Year
Total
Comprehe-
nsive
Income N.A N.A N.A N.A N.A N.A N.A + xxx N.A N.A + xxx + xxx + xxx +xxx + xxx
Dividends - - - - - - - (xxx) - - - - - - -

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Transfer
From R.E - - - xxx xxx - xxx (xxx) - - - - - - -
Transfer
To R.E - - - - - - (xx) xxx - - (xxx) - (xxx) - -
Transfer
To P&L - - - - - - - - - - - (xxx) - (xxx) -
Closing
Balances xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

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Unit IV : Consolidated financial Statements under Schedule III

➢ We will understand CFS in Ind AS 110

*Part 3*

Solution of Q.11

Balance sheet

Name of Company : A Ltd.

B/s as at 31.3.2017

Notes Rs.
Assets

Non Current Assets :-

A. Property, Plant & Equipment 1 706

Current Assets :-
A. Inventory 2 85
B. Financial Assets :-
Trade Receivables - 233
Cash & cash Equivalents - 3
Total (A) 1027
Equity & liabilities

Equity :
1) Share Capital - 270
2) Other Equity Refer SOCE 465
Non Current Liab.
A. Financial Liab.
1) Borrowings 3 100

Current Liabilities :
A. Financial Liabilities
1) Trade Payables 4
B. Current Tax Liab. - 165
Total B 1027

Statement of P&L

Name of Company : A Ltd.

P&L for the year 2016 – 2017

Notes Rs.
Revenues :
A. Revenue from Operations - 2165

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B. Other Income 5 16
Total (A) 2181

Expenses :
A. Purchase of Stock - 1260
B. Changes in Inventories 6 45
C. Finance Cost - 25
D. Depreciation 7 74
E. Other Expenses 8 555
Total B 1959
I (A-B) Profit before Tax 222
Tax Expense (165)
II Profit After Tax 57

III Other Comprehensive Income :-

a) Items Non transferrable to P&L :
Revaluation Res on Land - 100
b) Items transferrable to P&L - -
Total 100

Total Comprehensive Income (I + II) - 157

Notes to A/cs :-
1) PPE
Land Building P&M Total
Opening balance (Cost) 380 100 400 880
Accumulated Dep. (OB) - (30) (170) (200)
Dep. For Current year - (5) (69) (74)
(100 x 5%) (230 x 30%)
Upward Revaluation 100 - - 100
WDV 480 65 161 706

2) Inventories :

Stock at Cost 95,000

Valuation Loss (15,000 – 5000) (10000)
85000

3) Borrowings (Non current)

Bank Loan 100

100

4) Trade Payables (Current)

Payable to MSME -
Payable to Others 27
27

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5) Other Income
Dividend Received 15
Interest Received 1
16

6) Changes in Stock
Opening Stock 140
Closing Stock (95)
Changes 45

7) Depreciation & Amort.

Dep. On Building (100 x 5%) 5
Dep. On P&M (230 x 30%) 69
74

8) Other Expenses
Adm. Exp. 295
Distribution Cost 250
Valuation Loss on Inventories 10
555

Statement Showing changes in Equity

Part I : Share Capital

Opening Bal. Changes during the year Closing

Bal.
Equity share capital 270 - 270
270 - 270

Part II : other Equity

Particulars Reserve & Surplus Other comprehensive Total

Securities Retained Income
Premium Earnings Revaluation Res.

Opening Balance 80 235 20 335

Total comprehensive
Income : CY - ? =PL ? =Pl
Dividend Paid - (27) - (27)
Total 80 265 120 465

Solution of Q.12

Balance Sheet
Name of Company : B Ltd
B/s as at 31.3.2017

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Notes Rs.
Assets

Non Current Assets :-

A. Property, Plant & Equipment - 4250

Current Assets :
A. Inventories - 114
B. Financial Assets :
Current Investments - 2700
Trade Receivables - 418
Cash & Cash Equivalents - 12
C. Other Current Assets (Prepayments) - 25
Total (A) 7519

Equity & Liabilities

Equity :
A. Equity Share Capital - 1500
B. Other Equity SOCE 4213

Non Current Liabilities :

A. Financial Liabilities
Borrowings - 1200

Current Liabilities :
A. Financial Liabilities
Trade Payables - 136
B. Current Tax Liability - 470
Total (B) 7519

Statement Showing Changes in Equity

A. Changes in Share Capital

Opening Balance Changes during the year Closing Balance

S. Capital 1500 - 1500

B. Changes in Other Equity

Reserve & Surplus OCI Total

Share Premium R.E
Opening Balance 800 1163 - 1963
Total Comprehensive Income : CY - 2640 - 2640
Dividend Paid - (390) - (390)
Total 800 3413 - 4213

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Statement of P&L
Name of company : B Ltd.
SOPL for the Period 2016 -17

Notes Rs.
Revenues
Revenue from Operation - 530
Other Income - 210
Total (A) 5510

Expenses :
Cost of Sales - 1350
Finance Cost - 190
Other Exp. - 860
Total (B) 2400
Profit before Tax 3110
Tax Exp. (470)
Profit after Tax 2640

Solution of Q.13

Notes on Mistakes

1) In the Given case, Company has disclosed Long Term Loan including Accrued
Interest which is wrong because Accrued Interest should be disclosed under current
Liab : Other financial Liabilities. So, we will show Rs.5000 under LTB and Rs.555 under
Other financial Liabilities.
2) The company has disclosed DTL/DTA separately, but Schedule III requires
Disclosure of Net Amount. So, we will disclose Net Amount of Rs.300 as DTA under Non
Current Assets.
3) The company has disclosed unclaimed dividend under other current Liab, but It will be
Covered under other financial Liab.
4) In Notes to A/cs, Presentation of Trade Receivables is required to be corrected as
Per Ind AS requirement.
5) The company has disclosed Reserve for forseable future under the heading of R&S,
but It is a short Term Provision.

Re-Stated Balance sheet

Notes Rs.
Assets

Non Current Assets :

A. Property, Plant & Equipment - 5655
B. Deferred Tax Assets - 300

Current Assets :
A. Inventory - 1000

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B. Financial Assets :-
Trade Receivables 1 1100
Cash & cash Equivalents - 1200
Total 9255
Equity & Liabilities

Equity :
A. Share Capital SOCE
B. Other Equity SOCE

Non Current Liabilities :

A. Long Term Borrowings - 5000

Current Liabilities :
A. Financial Liabilities
1) Trade Payable - 300
2) Other Financial Liab. 2 558
B. Other Current Liabilities - 147
C. Provisions 3 600
D. Current Tax Liabilities - 150
Total (B) 9255

Statement Showing Changes in Equity

A. Equity Share Capital

Opening Balance Changes during the year Closing Balance
Equity S. Capital 1000 - 1000
(100 million shares
Of Rs.10 each)

B. Other Equity

R&S OCI Total

Capital Res. PL
Opening Balance 500 49 - 549
Total Comprehensive Income : CY - 951 - 951
Total 500 1000 - 1500
Notes to A/c s :
1) Trade Receivables :
A. Good : Secured 1065
Unsecured -
B. Increase in Credit Risk 40
C. Credit Impaired -
1105
D. Provision for Doubtful/
Bad debts (5)
Net Amount 1100

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2) Other Financial Liab. (Current) :

A. Unpaid Dividend 3
B. Interest Accrued 555
558

3) Provisions (Short Term)

Provisions Given in B/s 250
Tax Provision (150)
Forseable Loss 500
600

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal

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