FR A

FINANCIAL INSTRUMENTS: SCOPE AND DEFINITIONS
Illustration 1: Trade receivables

A Ltd. makes sale of goods to customers on credit of 45 days. The customers are entitled to earn a cash
discount @ 2% per annum if payment is made before 45 days and an interest @ 10% per annum is
charged for any payments made after 45 days. Evaluate whether such trade receivable are financial
assets or not.
Illustration 2: Deposits
Z Ltd. (the ‘Company’) makes sale of goods to customers on credit. Goods are carried in large
containers for delivery to the dealers’ destinations. All dealers are required to deposit a fixed amount of
Rs.10,000 as security for the containers, which is returned only when the contract with company
terminates. The deposits carry 8% per annum which is payable only when the contract terminates.
If the containers are returned by the dealers in broken condition or any damage caused, then
appropriate adjustments shall be made from the deposits at the time of settlement. How would such
deposits be treated in books of the dealers?
Illustration 3: Perpetual debt instruments

A Ltd. issues a bond at principal amount of CU 1000 per bond. The terms of bond require annual
payments in perpetuity at a stated interest rate of 8 per cent applied to the principal amount of CU
1000. Assuming 8 per cent to be the market rate of interest for the instrument when it was issued, the
issuer assumes a contractual obligation to make a stream of future interest payments having a fair
value (present value) of CU1,000 on initial recognition. Evaluate the financial instrument in the hands
of both the holder and the issuer.
Illustration 4: Creditors for sale of goods

A Ltd. (the ‘Company’) makes purchase of steel for its consumption in normal course of business. The
purchase terms provide for payment of goods at 30 days credit and interest payable @ 12% per annum
for any delays beyond the credit period. Analyse whether the transaction leads to any financial
instruments and if yes, that what is the nature of that financial instrument.
Illustration 5: Contract for exchange on unfavorable conditions (MTP APR 2021)
A Ltd. (the ‘Company’) makes a borrowing for INR 10 lacs from RBC Bank, with bullet repayment of
INR 10 lacs and an annual interest rate of 12% per annum. Now, Company defaults at the end of 5 th
year and consequently, a rescheduling of the payment schedule is made beginning 6th year onwards.
The Company is required to pay INR 1,300,000 at the end of 6th year for one time settlement, in
lieu of defaults in payments made earlier.
(a) Does the above instrument meet definition of financial liability? Please explain.
(b) Analyse the differential amount to be exchanged for one-time settlement.
Illustration 6 :Preference shares with non-cumulative dividend

Silver Ltd. issued irredeemable preference shares with face value of ₹ 10 each and premium of ₹ 90.
These shares carry dividend @ 8% per annum, however dividend is paid only when Silver Ltd declares
dividend on equity shares. Analyse the nature of this instrument.
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Illustration 7: Non-derivative contract to be settled in own equity instruments
A Ltd. invests in compulsorily convertible preference shares (CCPS) issued by its subsidiary – B Ltd. at ₹
1,000 each (₹ 10 face value + ₹ 990 premium). Under the terms of the instrument each CCPS is
compulsorily convertible into one equity share of B Ltd at the end of 5 years. Such CCPS carry dividend
@ 12% per annum, payable only when declared at the discretion of B Ltd. Evaluate this under definition
of financial instrument.
Illustration 8 Settlement in variable number of shares

Target Ltd. took a borrowing from Z Ltd. for ₹ 10,00,000. Z Ltd. enters into an arrangement with Target
Ltd. for settlement of the loan against issue of a certain number of equity shares of Target Ltd. whose
value equals ₹ 10,00,000. For this purpose, fair value per share (to determine total number of equity
shares to be issued) shall be determined based on the market price of the shares of Target Ltd. at a
future date, upon settlement of the contract.
Evaluate this under definition of financial instrument.
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CLASSIFICATION AND MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Illustration 1
An entity holds investments to collect their contractual cash flows. The funding needs of the entity are
predictable and the maturity of its financial assets is matched to the entity's estimated funding needs.
The entity performs credit risk management activities with the objective of minimizing credit losses. In
the past, sales have typically occurred when the financial assets' credit risk has increased such that the
assets no longer meet the credit criteria specified in the entity's documented investment policy. In
addition, infrequent sales have occurred as a result of unanticipated funding needs.
Reports to key management personnel focus on the credit quality of the financial assets and the
contractual return. The entity also monitors fair values of the financial assets, among other information.
Evaluate the business model.
Illustration 2
An entity's business model is to purchase portfolios of financial assets, such as loans. Those portfolios
may or may not include financial assets that are credit impaired.
If payment on the loans is not made on a timely basis, the entity attempts to realise the contractual
cash flows through various means—for example, by contacting the debtor by mail, telephone or other
methods. The entity's objective is to collect the contractual cash flows and the entity does not manage
any of the loans in this portfolio with an objective of realizing cash flows by selling them.
In some cases, the entity enters into interest rate swaps to change the interest rate on particular
financial assets in a portfolio from a floating interest rate to a fixed interest rate.
Illustration 3
Entity B sells goods to customers on credit. Entity B typically offers customers up to 60 days following
the delivery of goods to make payment in full entity B collects cash in accordance with the contractual
cash flows of trade receivables and has no intention to dispose of the receivables. Evaluate the business
model.
Illustration 4
An entity anticipates capital expenditure in a few years. The entity invests its excess cash in short and
long- term financial assets so that it can fund the expenditure when the need arises. Many of the
financial assets have contractual lives that exceed the entity's anticipated investment period.
The entity will hold financial assets to collect the contractual cash flows and, when an opportunity
arises, it will sell financial assets to re-invest the cash in financial assets with a higher return. The
managers responsible for the portfolio are remunerated based on the overall return generated by the
portfolio Evaluate the business model.
Illustration 5
An entity has a business model with the objective of originating loans to customers and subsequently
selling those loans to a securitization vehicle. The securitization vehicle issues instruments to investors.
The originating entity controls the securitization vehicle and thus consolidates it.
The securitization vehicle collects the contractual cash flows from the loans and passes them on to its
investors. In the consolidated balance sheet, loans continue to be recognized because they are not
derecognize by the securitization vehicle.
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Illustration 6
A financial institution holds financial assets to meet liquidity needs in a 'stress case' scenario (eg, a run
on the bank's deposits). The entity does not anticipate selling these assets except in such scenarios.
The entity monitors the credit quality of the financial assets and its objective in managing the financial
assets is to collect the contractual cash flows.The entity evaluates the performance of the assets on the
basis of intererevenue earned and credit losses realised
However, the entity also monitors the fair value of the financial assets from a liquidity perspective to
ensure that the cash amount that would be realised if the entity needed to sell the assets in a stress
case scenario would be sufficient to meet the entity's liquidity needs. Periodically, the entity makes
sales that are insignificant in value to demonstrate liquidity Evaluate the business model.
Illustration 7
Instrument A is a bond with a stated maturity date. Payments of principal and interest on the principal
amount outstanding are linked to an inflation index of the currency in which the instrument is issued.
The inflation link is not leveraged and the principal is protected.
Evaluate the Contractual cash flows characteristics test
Illustration 8
Instrument F is a bond that is convertible into a fixed number of equity instruments of the issuer. Analyse
the nature of cash flows.
Illustration 9
Instrument H is a perpetual instrument but the issuer may call the instrument at any point and pay the
holder the par amount plus accrued interest due. Instrument H pays a market interest rate but payment
of interest cannot be made unless the issuer is able to remain solvent immediately afterwards. Deferred
interest does not accrue additional interest. Analyse the nature of cash flows.
Illustration 10
Instrument D is loan with recourse and is secured by collateral. Does the collateral affect the nature of
contractual cash flows?
Illustration 11
Instrument G is a loan that pays an inverse floating interest rate (i.e., the interest rate has an
inverse relationship to market interest rates). Analyse the nature of cash flows.
Illustration12: Hold-to-collect’ business model test

An entity purchased a debt instrument for 1,00,000.
The instrument pays interest of 6,000 annually and has 10 years to maturity when purchased. The
entity intends to hold the asset to collect the contractual cash flows.
Evaluate the business model test.
Illustration 13 Hold-to-collect’ business model test

An entity purchased a debt instrument for 1,00,000.
The instrument pays interest of 6,000 annually and has 10 years to maturity when purchased. The
entity intends to hold the asset to collect the contractual cash flows.
Six years have passed and the entity is suffering a liquidity crisis and needs to sell the asset to raise funds.
Evaluate the business model test.
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Illustration 14: SPPI or contractual cash flow test
SPPI test for loan with zero interest and no fixed repayment terms
Parent H Ltd. provides a loan to its Subsidiary S Ltd. The loan is classified as a current liability in
Subsidiary S’s financial statements and has the following terms:
– Interest free loan.
– No fixed repayment terms
– Repayable on demand of Parent H Ltd.
Does the loan meet the ‘SPPI’ or contractual cash flows characteristic test?
Illustration 15 SPPI Test for loan with zero interest repayable in ten years
Parent H Ltd. provides a loan of INR 100 million to Subsidiary B. The loan has the following terms:
– No interest
– Repayable in ten years.
Illustration 16 : SPPI Test for loan with interest rate

Entity A Ltd. lends Entity B Ltd. INR 5 million for ten years, subject to the following terms:
– Interest is based on the prevailing variable market interest rate.
– Variable interest rate is capped at 10%.
– Repayable in ten years.
Illustration 17: Trade receivables – Amortised cost

H Ltd. makes sale of goods to customers on credit of 60 days. The customers are entitled to earn a cash
discount @ 5% per annum if payment is made before 60 days and an interest @ 12% per annum is
charged for any payments made after 60 days. Company does not have a policy of selling its debtors
and holds them to collect contractual cash flows. Evaluate the financial instrument.
Illustration 18: : Security Deposits – Amortized Costs

A Ltd. (the ‘Company’) has obtained the premises from B Ltd. on lease to carry on its business. The
lease contract period is 5 years. As per the lease agreement, A Ltd. has paid security deposits to B Ltd.
amounting to ₹ 10 Lac which is refundable after the expiry of lease agreement. How would such deposits
be treated in books of the A Ltd.?
Illustration 19: Hold-to-collect’ or ‘hold-to-collect & sell’ business model test

Entity A has surplus funds – INR 50 million
A has not yet found suitable investment opportunity so it buys medium dated (5-year maturity) high
quality government bonds in order to generate interest income.
If a suitable investment opportunity arises before the maturity date, the entity will sell the bonds and
use the proceeds for the acquisition of a business operation. It is likely that a suitable business
opportunity will be found before maturity date.
Whether the investment opportunity will meet the ‘hold-to-collect’ or ‘hold-to-collect & sell business
model test?
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Illustration 20 :
ABC Bank gave loans to a customer – Target Ltd. that carry fixed interest rate @ 10% per annum for a
5- year term and 12% per annum for a 3-year term. Additionally, the bank charges processing fees
@1% of the principal amount borrowed. Target Ltd borrowed loans as follows:
- 10 lacs for a term of 5 years
- 8 lacs for a term of 3 years.
Compute the fair value upon initial recognition of the loan in books of Target Ltd. and how will loan
processing fee be accounted?
Illustration 21: Deposits carrying off-market rate of interest:

Containers Ltd provides containers for use by customers for multiple purposes. The containers are
returnable at the end of the service contract period (3 years) between Containers Ltd and its customers.
In addition to the monthly charge, there is a security deposit that each customer makes with Containers
Ltd for ₹ 10,000 per container and such deposit is
refundable when the service contract terminates. Deposits do not carry any interest. Analyse the fair
value upon initial recognition in books of customers leasing containers. Market rate of interest for 3 year
loan is 7% per annum.
Illustration 22: Accounting for transaction costs on initial and subsequent measurement of a
financial asset measured at fair value with changes through other comprehensive income:
An entity acquires a financial asset for CU100 plus a purchase commission of CU2. Initially, the entity
recognizes the asset at CU102. The reporting period ends one day later, when the quoted market price
of the asset is CU100
If the asset were sold, a commission of CU3 would be paid. How would transaction costs be accounted
in books of the entity?
Illustration 23: Determining fair value upon initial measurement

The shareholders of Company C provide C with financing in the form of loan notes to enable it to
acquire investments in subsidiaries. The loan notes will be redeemed solely out of dividends received
from these subsidiaries and become redeemable only when C has sufficient funds to do so. In this
context, 'sufficient funds' refers only to dividend receipts from subsidiaries. Analyse the initial
measurement of loan notes.
Illustration 24 : Use of cost v/s fair value determination for equity instruments
Silver Ltd. has made an investment in optionally convertible preference shares (OCPS) of a Company –
Bronze Ltd. at ₹ 100 per share (face value ₹ 100 per share). Silver Ltd. has an option to convert these
OCPS into equity shares in the ratio of 1:1 and if such option not exercised till end of 9 years, then the
shares shall be redeemable at the end of 10 years at a premium of 20%.
Analyse the measurement of this investment in books of Silver Ltd.
Illustration 25 : Accounting for assets at amortised cost (SIMILAR PP NOV’19)

A Ltd has made a security deposit whose details are described below. Make necessary journal entries for
accounting of the deposit in the first year and last year. Assume market interest rate for a deposit for
similar period to be 12% per annum.
Particulars Details
Date of Security Deposit (Starting Date) 1-Apr-20X1
Date of Security Deposit (Finishing Date) 31-Mar-20X6
Description Lease
Total Lease Period 5 years
Discount rate 12.00%
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Security deposit (A) 10,00,000
Present value factor at the 5th year 0.567427
Illustration 26: Accounting for assets at FVTPL

A Ltd. invested in equity shares of C Ltd. on 15th March for ₹ 10,000. Transaction costs were ₹ 500 in
addition to the basic cost of ₹ 10,000. On 31 March, the fair value of the equity shares was ₹ 11,200
and market rate of interest is 10% per annum for a 10-year loan. Pass necessary journal entries.
Analyse the measurement principle and pass necessary journal entries.
Illustration 27: Accounting for assets at FVOCI

Metallics Ltd. has made an investment in equity instrument of a company – Castor Ltd. for 19% equity
stake. Significant influence not exercised. The investment was made for₹ 5,00,000 for 10,000 equity
shares on 01 April 20X1. On 30 June 20X1 the fair value per equity share is ₹ 45. The Company has
taken an irrevocable option to measure such investment at fair value through other comprehensive
income.
Illustration 28: Accounting for assets at FVOCI (SIMILAR RTP MAY’19 & MTP OCT’20)
XYZ Ltd. is a company incorporated in India. It provides INR 10,00,000 interest free loan to its wholly
owned Indian subsidiary (ABC). There are no transaction costs.
How should the loan be accounted for, in the Ind AS financial statements of XYZ, ABC and consolidated
financial statements of the group?
Consider the following scenarios:
– The loan is repayable on demand.
– The loan is repayable after 3 years. The current market rate of interest for similar loan is 10% p.a. for
both holding and subsidiary.
– The loan is repayable when ABC has funds to repay the loan.
Illustration 29 : Trade creditors at market terms

A Company purchases its raw materials from a vendor at a fixed price of ₹ 1,000 per tonne of steel. The
payment terms provide for 45 days of credit period, after which an interest of 18% per annum shall be
charged. How would the creditors be classified in books of the Company?
Illustration 30
An entity is about to purchase a portfolio of fixed rate assets that will be financed by fixed rate
debentures. Both financial assets and financial liabilities are subject to the same interest rate risk that
gives rise to opposite changes in fair value that tend to offset each other. Provide your comments.
Illustration 31: Issue of borrowings with fixed rate of interest

A Ltd has made a borrowing from RBC Bank for ₹ 10,000 at a fixed interest of 10% per annum. Loan
processing fees were additionally paid for ₹ 500 and loan is payable after 5 years in bullet repayment of
principal. Details are as follows:
Particulars Details
Loan amount ₹ 10,000
Date of loan (Starting Date) 1-Apr-20X1
Date of repayment of principal amount (Finishing Date) 31-March-20X6
Interest rate 10.00%
Interest charge Interest to be charged and paid yearly
Upfront fees ₹ 500
How would loan be accounted in books of A Ltd?
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Illustration 32: Issue of borrowings with fixed rate of interest
A Ltd has made a borrowing from RBC Bank for ₹ 10,000 at a fixed interest of 12% per annum. Loan
processing fees were additionally paid for ₹ 500 and loan is payable 4 half-yearly installments of ₹
2,500 each. Details are as follows:
Particulars Details
Loan amount ₹ 10,000
Date of loan (Starting Date) 1-Apr-20X1
Date of loan (Finishing Date) 31-March-20X3
Description of repayment Repayment of loan starts from 30-Sept-20X1 (To be
paid half yearly)
Installment amount ₹ 2,500

Interest rate 12.00%
Interest charge Interest to be charged quarterly
Upfront fees ₹ 500
How would loan be accounted in books
of A Ltd? Consider IRR is 16.60% p.a.
Illustration 33(Old SM 34) : Accounting treatment of processing fees belonging to undisbursed

loan Amount
X Ltd. had taken 6-year term loan in April 20X0 from bank and paid processing fees at the time of
sanction of loan. The term loan is disbursed in different tranches from April 20X0 to April 20X6. On the
date of transition to Ind AS, i.e. 1.4.20X5, it has calculated the net present value of term loan disbursed
upto 31.03.20X5 by using effective interest rate and proportionate processing fees has been adjusted in
disbursed amount while calculating net present value.
What will be the accounting treatment of processing fees belonging to undisbursed term loan amount?
Illustration 34(OLD SM 35) Accounting treatment of prepayment premium and processing fees
for obtaining new loan to prepay old loan
PQR Limited had obtained term loan from Bank A in 20X1-20X2 and paid loan processing fees and
commitment charges.
In May 20X5, PQR Ltd. has availed fresh loan from Bank B as take-over of facility i.e. the new loan is
sanctioned to pay off the old loan taken from Bank A. The company paid prepayment premium to Bank
A to clear the old term loan and paid processing fees to Bank B for the new term loan.
Whether the prepayment premium and the processing fees both will be treated as transaction cost (as
per Ind AS 109, Financial Instruments) of obtaining the new loan, in the financial statements of PQR
Ltd?
Illustration 35(OLD SM ILL 36) Accounting treatment of share held as stock in trade
A share broking company is dealing in sale/purchase of shares for its own account and therefore is
having inventory of shares purchased by it for trading.
How will these instruments be accounted for in the financial statements?
Illustration 36(OLD SM 37)

Bonds for ₹ 1,00,000 reclassified as FVTPL. Fair value on reclassification is ₹ 90,000. Pass the required
journal entry.

Bonds for ₹ 1,00,000 reclassified as FVOCI. Fair value on reclassification is ₹ 90,000. Pass the required
journal entry.
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Illustration 38(OLD SM ILL 39)
Bonds for ₹ 100,000 reclassified as Amortised cost. Fair value on reclassification is 90,000. Pass the
required journal entry.
Illustration 39 (OLD SM 40)

Bonds for ₹ 100,000 reclassified as FVOCI. Fair value on reclassification is ₹ 90,000. Pass the required
journal entry
Illustration 40(OLD SM ILL 41)

Bonds for ₹ 100,000 reclassified as Amortised cost. Fair value on reclassification is
₹ 90,000 and ₹ 10,000 loss was recognised in OCI till date of reclassification.
Pass required journal entry.

Bonds for ₹ 100,000 reclassified as FVTPL. Fair value on reclassification is ₹ 90,000.Pass the required
journal entry.
Illustration 42(OLD SM ILL 43):12 month expected credit loss – Probability of default
approach
Entity A originates a single 10- year amortising loan for CU1 million. Taking into consideration the
expectations for instruments with similar credit risk (using reasonable and supportable information that
is available without undue cost or effort), the credit risk of the borrower, and the economic outlook for
the next 12 months, Entity A estimates that the loan at initial recognition has a probability of default
(PoD) of 0.5 per cent over the next 12 months. Entity A also determines that changes in the 12-month
PoD are a reasonable approximation of the changes in the lifetime PoD for determining whether there
has been a significant increase in credit risk since initial recognition. Loss given default (LGD) is
estimated as 25% of the balance outstanding. Calculate loss allowance.
Illustration 43(OLD SM ILL 44): 12 month expected credit loss – Loss rate approach
Bank A originates 2,000 bullet loans with a total gross carrying amount of CU 500,000. Bank A
segments its portfolio into borrower groups (Groups X and Y) on the basis of shared credit risk
characteristics at initial recognition. Group X comprises 1,000 loans with a gross carrying amount per
client of CU 200, for a total gross carrying amount of CU 200,000. Group Y comprises 1,000 loans with
a gross carrying amount per client of CU 300, for a total gross carrying amount of CU 300,000. There
are no transaction costs and the loan contracts include no options (for example, prepayment or call
options), premiums or discounts, points paid, or other fees. Calculate loss rate when
Group Historic per annum average Present value of observed loss

defaults assumed
X 4 CU 600
Y 2 CU 450
Illustration 43(OLD SM ILL 44): 12 month expected credit loss – Loss rate approach
Bank A originates 2,000 bullet loans with a total gross carrying amount of CU 500,000. Bank A
segments its portfolio into borrower groups (Groups X and Y) on the basis of shared credit risk
characteristics at initial recognition. Group X comprises 1,000 loans with a gross carrying amount per
client of CU 200, for a total gross carrying amount of CU 200,000. Group Y comprises 1,000 loans with
a gross carrying amount per client of CU 300, for a total gross carrying amount of CU 300,000. There
are no transaction costs and the loan contracts include no options (for example, prepayment or call
options), premiums or discounts, points paid, or other fees. Calculate loss rate when
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Group Historic per annum average Present value of observed loss
defaults assumed
X 4 CU 600
Y 2 CU 450
Illustration 44(OLD SM 45) Life time expected credit losses (provision matrix for short term
receivables) Company M, a manufacturer, has a portfolio of trade receivables of CU 30 million in
20X1and operates only in one geographical region. The customer base consists of a large number of
small clients and the trade receivables are categorised by common risk characteristics that are
representative of the customers' abilities to pay all amounts due in accordance with the contractual
terms. The trade receivables do not have a significant financing component in accordance with Ind AS
115. In accordance with paragraph 5.5.15 of Ind AS 109 the loss allowance for such trade receivables
is always measured at an amount equal to lifetime expected credit losses.
Please use the following information of debtors outstanding:
Gross carrying amount
Current CU 15,000,000
1–30 days past due CU 7,500,000
More than 90 days past due CU 1,000,000
CU 30,000,000
Company M uses following default rates for making provisions:

Current 1–30 31–60 days 61–90 More than 90
dayspast past due dayspast due days past due
due
Default rate 0.3% 1.6% 3.6% 6.6% 10.6%
Determine the expected credit losses for the portfolio
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UNIT 3: FINANCIAL INSTRUMENTS: EQUITY AND FINANCIAL LIABILITIES
Illustration 1: Redeemable preference shares with mandatory dividend
A Ltd. (issuer) issues preference shares to B Ltd (holder). Those preference shares are redeemable at
the end of 10 years from the date of issue and entitle the holder to a cumulative dividend of 15% p.a.
The rate of dividend is commensurate with the credit risk profile of the issuer.
Examine the nature of the financial instrument.
Illustration 2 : Redeemable debentures with discretionary dividend

X Co. Ltd. (issuer) issues debentures to Y Co. Ltd. (holder). Those debentures are redeemable at the
end of 10 years from the date of issue. Interest of 15% p.a. is payable at the discretion of the issuer.
The rate of interest is commensurate with the credit risk profile of the issuer. Examine the nature of
the financial instrument.
Illustration 3: Perpetual loan with mandatory interest

P Co. Ltd. (issuer) takes a loan from Q Co. Ltd. (holder). The loan is perpetual and entitles the holder
to fixed interest of 8% p.a. Examine the nature of the financial instrument.
Illustration 4: Restriction on the ability of an entity to satisfy a contractual obligation

Does the lack of access to foreign currency or the need to obtain approval for payment from a regulatory
authority, will lead to contractual obligation?
Illustration 5: Optionally convertible redeemable preference shares (MTP MAY 2020)

D Ltd. issues preference shares to G Ltd. The holder has an option to convert these preference shares to
equity instruments of the issuer anytime up to a period of 10 years. If the option is not exercised by
the holder, the preference shares are redeemed at the end of 10 years. Examine the nature of the financial
instrument.
Illustration 6: Settlement alternative is non-financial obligation

LMN Ltd. issues preference shares to PQR Ltd. These preference shares are redeemable at the end of 5 years
from the date of issue. The instrument also provides a settlement alternative to the issuer whereby it can
transfer a particular commercial building to the holder, whose value is estimated to be significantly higher
than the cash settlement amount. Examine the nature of the financial instrument.
Illustration 7: Cap on amount payable on liquidation

ABC Ltd. has two classes of puttable shares – Class A shares and Class B shares. On liquidation, Class B
shareholders are entitled to a pro rata share of the entity’s residual assets up to a maximum of ₹
10,000,000.
There is no limit to the rights of the Class A shareholders to sh are in the residual assets on liquidation.
Examine the nature of the financial instrument
Illustration 8: Investment manager’s share in a mutual fund

Mutual Fund X has an Investment Manager Y. At the inception of the fund, Y had invested a nominal or toke n
amount in units of X. Such units rank last for repayment in the event of liquidation. Accordingly, they
constitute the most subordinate class of instruments. Examine the nature of the financial instrument.
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Illustration 9: Differential voting rights
T Motors Ltd. has issued puttable ordinary shares and puttable ‘A’ ordinary shares whereby holders of
ordinary shares are entitled to one vote per share whereas holders of ‘A’ ordinary shares are not entitled to
any voting rights. The holders of two classes of shares are equally entitled to receive share in net assets
upon liquidation. Examine whether the financial instrument will be classified as equity
Illustration 10: Conversion into a variable number of equity instruments

S Ltd. has issued a class of puttable ordinary shares to T Ltd. Besides the put option (which is consistent
with other classes of ordinary shares), T Ltd. is also entitled to convert the class of ordinary shares held by it
into equity instruments of S Ltd. whose number will vary as per the market value of S Ltd. Examine whether
the financial instrument will be classified as equity.
Illustration 11: Management fee contract between issuer and puttable instrument holder
P Ltd. has issued puttable ordinary shares to Q Ltd. Q Ltd. has also entered into an asset management
contract with P Ltd. whereby Q Ltd. is entitled to 50% of the profit of P Ltd. .Normal commercial terms for
similar contracts will entitle the service provider to only 4%-6% of the net profits. Examine whether the
financial instrument will be classified as equity.
llustration 12(OLD SM UNIT 2 ILL 33) : Issue of variable number of shares against issue of CCPS
A Ltd. issued compulsorily convertible preference shares (CCPS) at ₹ 100 each (₹ 10 face value+ ₹ 90
premium per share) for ₹ 10,00,000. These are convertible into equity shares at the end of 10 years, where
the number of equity shares to be issued shall be determined based on fair value per equity share to be
determined at the time of conversion.
Evaluate if this is financial liability or equity? What if the conversion ratio was fixed at the time of issue of
such preference shares?
Illustration 13(OLD SM ILL 12) (MTP AUG’18) Written put option on own equity instruments
On 1 January 20X1, Entity X writes a put option for 1,00,000 of its own equity shares for which it receives a
premium of ₹ 5,00,000.
Under the terms of the option, Entity X may be obliged to take delivery of 1,00,000 of its own shares in one
year’s time and to pay the option exercise price of ₹ 22,000,000. The option can only be settled through
physical delivery of the shares (gross physical settlement). Examine the nature of the financial instrument
and how it will be accounted.
Illustration 14(OLD SM ILL 13): Written put option over non-controlling interests
Parent P holds a 70% controlling interest in Subsidiary S. The remaining 30% is held by Entity Z.On 1
January 20X1, P writes an option to Z which grants Z the right to sell its shares to Parent P on 31 December
20X2 for ₹ 1,000. Parent P receives a payment of ₹ 100 for the option. The applicable discount rate for the
put liability is determined to be 12%. State by which amount the financial instrument will be recognised and
under which category.
Illustration 15(OLD SM 14): Conversion into a number of equity instruments equivalent to a

fixed value
CBA Ltd. issues convertible debentures to RQP Ltd. for a subscription amount of ₹ 100 crores. Those
debentures are convertible after 5 years into equity shares of CBA Ltd. using a pre - determined formula.
The formula is:
100 crores X (1 +10%) ^ 5
Fair value on date of conversion
Examine the nature of the financial
instrument.
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Illustration 16(OLD SM 15): Conversion into a fixed number of equity instruments
DF Ltd. issues convertible debentures to JL Ltd. for a subscription amount of ₹ 100 crores. Those debentures
are convertible after 5 years into 15 crore equity shares of ₹ 10 each.
Illustration 17(OLD SM 16): Written option for a fixed or variable number of equity
instruments
ST Ltd. purchases an option from AT Ltd. entitling the holder to subscribe to fixed number of equity shares of
issuer at a fixed exercise price of ₹ 50 per share at any time during a period of 3 months. Holder paid an
initial premium of ₹ 2 per option. Examine whether the financial instrument will be classified as equity.
Illustration 18(OLD SM 17): Written option with multiple exercise prices

WC Ltd. writes an option in favour of GT Ltd. wherein the holder can purchase issuer ’s equity instruments at
prices that fluctuate in response to the share price of issuer.
As per the terms, if the share price of issuer is less than ₹ 50 per share, option can be exercised at ₹ 40 per
share. If the share price is equal to or more than ₹ 50 per share, option can be exercised at ₹ 60 per share.
Explain the nature of the financial instrument
Illustration 19(OLD SM ILL 18): Share swap arrangements

Acquirer Ltd. enters into an arrangement with shareholders of Target Ltd. wherein Acquirer Ltd. will purchase
shares of Target Ltd. in a share swap arrangement against a variable amount of cash i.e. market value of
Target Ltd.’s equity shares. The share swap ratio is agreed as 1:5 i.e. 1 equity share of Acquirer Ltd. for
every 5 equity shares held in Target Ltd. Examine whether the financial instrument will be classified as
equity.
Illustration 20(OLD SM ILL 19): Conversion ratio changes with time

On 1 January 20X1, NKT Ltd. subscribes to convertible preference shares of VT Ltd. The conversion ratio varies as
below:
Conversion upto 31 March 20X1: 1 equity share of VT Ltd. for each preference share held
Conversion upto 30 June 20X1: 1.5 equity shareof VTLtd. foreach preference share held
Conversion upto 31 December 20X1: 2 equity share of VT Ltd. for each preference share held.
Examine whether the financial instrument will be classified as equity
Illustration 21(OLD SM ILL 20): Conversion ratio changes to protect rights of convertible
instrument holders
On 1 January 20X1, HT Ltd. subscribes to convertible preference shares of RT Ltd. The preference shares are
convertible in the ratio of 1:1.
The terms of the instrument entitle HT Ltd. to proportionately more equity shares of RT Ltd. in case of a stock
split or bonus issue. Examine whether the financial instrument will be classified as equity
Illustration 22(OLD SM 21): Conversion ratio changes if issuer subsequently issues shares to
others at a lower price
On 1 January 20X1, PG Ltd. subscribes to convertible preference shares of BG Ltd. at ₹ 100 per preference
share. The preference shares are convertible in the ratio of 10:1 i.e. 10 equity shares for each preference
share held. On a fully diluted basis, PG Ltd. is entitled to 30% stake in BG Ltd.
If subsequent to the issuance of these convertible preference shares, BG Ltd. issues any equity instruments
at a price lower than ₹ 10 per share, conversion ratio will be changed to compensate
PG Ltd. for dilution in its stake below the expected dilution at a price of ₹ 10 per share. Examine the nature
of the financial instrument.
13
Illustration 23(OLD SM ILL 22) Conversion ratio is variable in a narrow range
On 1 January 20X1, NG Ltd. subscribes to convertible preference shares of AG Ltd. at ₹ 100 per preference
share. On a fully diluted basis, NG Ltd. is entitled to 30% stake in AG Ltd.
The preference shares are convertible at fair value, subject to, NG Ltd.’s stake not going below 15% and not
going above 40%. Examine the nature of the financial instrument
Illustration 24: Conversion ratio changes under independent scenarios

On 1 January 20X1, STAL Ltd. subscribes to convertible preference shares of ATAL Ltd. The preference shares
are convertible as below:
Convertible 1:1 if another strategic investor invests in the issuer within one year
Convertible 1.5:1: if an IPO is successfully completed within 2 years
Convertible 2:1: if a binding agreement for sale of majority stake by equity shareholders is entered into
within 3 years
Convertible 3:1: if none of these events occur in 3 years’ time. Examine whether the financial instrument
will be classified as equity.
Illustration 25: Conversion ratio changes under inter-dependent scenarios

On 1 January 20X1, RHT Ltd. subscribes to convertible preference shares of RDT Ltd.The preference shares
are convertible as below:
Convertible 1:1 if another strategic investor invests at an enterprise valuation (EV) of USD 100 million.
Convertible 1.5:1: if another strategic investor invests at EV of USD 150 million
Convertible 2:1: if another strategic investor invests at EV of USD 200 million.
Convertible 3:1: if no strategic investment is made within a period of 3 years
Illustration 26: Foreign currency convertible bond

Entity A issues a bond with face value of USD 100 and carrying a fixed coupon rate of 6% p.a. Each bond is
convertible into 1,000 equity shares of the issuer. Examine the nature of the financial instrument .
Illustration 27: Redeemable debentures with discretionary dividend (continued from

Illustration 2)
X Co. Ltd. (issuer) issues debentures to Y Co. Ltd. (holder). Those debentures are redeemable at the end of
10 years from the date of issue. Interest of 15% p.a. is payable at the discretion of the issuer. The rate of
interest is commensurate with the credit risk profile of the issuer. Examine the nature of the financial
instrument.
Illustration 28: Perpetual loan with mandatory interest (continued from Illustration 3)
P Co. Ltd. (issuer) takes a loan from Q Co. Ltd. (holder). The loan is perpetual and entitles the holder to
fixed interest of 8% p.a. Examine the nature of the financial instrument
Illustration 29: Optionally convertible redeemable preference shares (continued from Illustration
5)
D Ltd. issues preference shares to G Ltd. The holder has an option to convert these preference shares to
equity instruments of the issuer anytime up to a period of 10 years. If the option is not exercised by the
holder, the preference shares are redeemed at the end of 10 years. Examine the nature of the financial
instrument.
Illustration 30: Perpetual loan with mandatory interest (continued from Illustration 3)
P Co. Ltd. (issuer) takes a loan from Q Co. Ltd. (holder) for ₹ 12 lakhs. The loan is perpetual and entitles the
holder to fixed interest of 8% p.a. The rate of interest commensurate with credit risk profile of the issuer is
12% p.a. Calculate the value of the liability and equity components.
14
Illustration 31: Optionally convertible redeemable preference shares (continued from Illustration
29)
On 1 July 20X1, D Ltd. issues preference shares to G Ltd. for a consideration of ₹ 10 lakhs. The holder has an
option to convert these preference shares to a fixed number of equity instruments of the issuer anytime up to
a period of 3 years. If the option is not exercised by the holder, the preference shares are redeemed at the
end of 3 years. The preference shares carry a fixed coupon of 6% p.a. and is payable every year. The
prevailing market rate for similar preference shares, without the conversion feature, is 9% p.a.
Calculate the value of the liability and equity components.
Illustration 32: Optionally convertible preference shares with issuer’s redemption option
D Ltd. issues preference shares to G Ltd. for a consideration of ₹ 10 lakhs. The holder has an option to
convert these preference shares to a fixed number of equity instruments of the issuer anytime up to a period
of 3 years. If the option is not exercised by the holder, the preference shares are redeem ed at the end of 3
years. The preference shares carry a coupon of RBI base rate plus 1% p.a. and is payable at the end of every
year.
The prevailing market rate for similar preference shares, without the conversion feature or issuer’s
redemption option, is RBI base rate plus 4% p.a. On the date of contract, RBI base rate is 9% p.a.
Calculate the value of the liability and equity components.
Illustration 33 (OLD SM ILL 23) Instrument convertible only at the option of issuer
XYZ Ltd. issues optionally convertible debentures with the following terms: The debentures carry interest at
the rate of 7% p.a.
Issuer has option to either
Convert the instrument into a fixed number of its own shares at any time, or redeem the instrument in cash
at any time. The redemption price is the fair value of the fixed number of shares into which the instrument
would have converted if it had been converted.
The holder has no conversion or redemption options.
Debentures have a tenor of 12 years and, if not converted or redeemed earlier, will be repaid in cash at
maturity, including accrued interest, if any
Illustration 34 (OLD SM 33) Optionally convertible redeemable preference shares (continued

from Illustration 31)
The amortisation schedule of the instrument is set out below:
Dates Cash flows Finance cost at effective interest Liability Equity
rate
1July 20X1 1,000,000 - 9,24,061 75,939
30 June 20X2 (60,000) 83,165 9,47,226 75,939
30 June 20X3 (60,000) 85,250 9,72,476 75,939
30 June 20X4 (10,60,000) 87,524 - 75,939
Assume that D Ltd. has an early redemption option to prepay the instrument at ₹ 11 lakhs and on 30 June
20X3, it exercises that option. At 30 June 20X3, the interest rate has changed. At that time, D Ltd. could
have issued a one- year (i.e. maturity 30 June 20X4) non-convertible instrument at 5%. Calculate the value
of the liability and equity components.
15
UNIT 4: DERIVATIVES AND EMBEDDED DERIVATIVES
Illustration 1: Prepaid interest rate swap (fixed rate payment obligation prepaid at inception)
Entity S enters into a ₹ 100 crores notional amount five-year pay-fixed, receive-variable interest rate swap
with Counterparty C.
 The interest rate of the variable part of the swap is reset on a quarterly basis to three- month Mumbai
Interbank Offer Rate (MIBOR).
 The interest rate of the fixed part of the swap is 10% p.a.
 Entity S prepays its fixed obligation under the swap of ₹ 50 crores (₹ 100 crores × 10 × 5 years) at
inception, discounted using market interest rates
 Entity S retains the right to receive interest payments on the ₹ 100 crores reset quarterly based on
three- month MIBOR over the life of the swap. Analyse.
Illustration 2: Prepaid pay-variable, receive-fixed interest rate swap

 Entity S enters into a ₹ 100 crores notional amount five-year pay-variable, receive-fixed interest rate
swap with Counterparty C.
 The variable leg of the swap is reset on a quarterly basis to three-month MIBOR.
 The fixed interest payments under the swap are calculated as 10% of the swap's notional amount, i.e. ₹
10 crores p.a.
 Entity S prepays its obligation under the variable leg of the swap at inception at current market rates.
Say, that amount is ₹ 36 crores.
 It retains the right to receive fixed interest payments of 10% on ₹ 100 crores every year. Analyse.
Illustration 3: Prepaid forward

Entity XYZ enters into a forward contract to purchase 1 million ordinary shares of Entity T in one year
 The current market price of T is ₹ 50 per share
 The one-year forward price of T is ₹ 55 per share
 XYZ is required to prepay the forward contract at inception with a ₹ 50 million payment. Analyse.
Illustration 4:
Entity ABC Ltd., whose functional currency is Indian Rupees, sells products in France denominated in Euro.
ABC enters into a contract with an investment bank to convert Euro to Indian Rupees at a fixed exchange
rate. The contract requires ABC to remit Euro based on its sales volume in France in exchange for Indian
Rupees at a fixed exchange r ate of 80.00. Is that contract a derivative?
Illustration 5:
The definition of a derivative requires that the instrument “is settled at a future date”. Is this criterion met
even if an option is expected not to be exercised, for example, because it is out of the money?
Illustration 6 (SIMILAR ASKED IN PP JAN’21)

Silver Ltd. has purchased 100 ounces of gold on 10 March 20X1. The transaction provides for a price payable
which is equal to market value of 100 ounces of gold on 10 April 20X1 and shall be settled by issue of such
number of equity shares as is required to settle the aforementioned transaction price at ₹ 10 per share on 10
April 20X1.Whether this is classified as liability or equity? Own use exemption does not apply.
Illustration 7 : Derivative contract:

Entity – B Ltd writes an option contract for sale of shares of Target Ltd. at a fixed price of 100 per share to C
Ltd. This option is exercisable anytime for a period of 90 days (‘American option’). Evaluate this under the
definition of financial instrument.
16
Illustration 8: Derivative contract to be settled in own equity instruments
A Ltd. issues warrants to all existing shareholders entitling them to purchase additional equity shares of A
Ltd. (with face value of ₹ 100 per share) at an issue price of ₹ 150 per share. Evaluate whether this
constitutes an equity instrument or a financial liability?
Illustration 9
A lease contract contains a provision that rentals increase each year by ₹ 3 million. Is there an embedded
derivative in this contract?
Illustration 10: Debt instrument with indexed repayments

Entity X issues a redeemable fixed interest rate debenture to Entity Y. Amount of interest and principal is
indexed to the value of equity instruments of Entity X. Analyse
Illustration 11: Lease contracts dependent on inflation index

A lease contract, between two Indian companies of an asset in India, includes contingent lease rentals that
are dependent upon an US inflation index. Can the entity treat inflation linked feat ures as closely related?
Illustration 12: Lease contracts dependent on inflation index

As per the contract entered between lease and lessor, lease rentals will increase by 3 million, if profit after
tax is over ₹ 200 million. Can the entity treat inflation linked features as closely related?
Illustration 13: Debt instrument with prepayment option

Entity PQR borrows ₹ 100 crores from CFDH Bank on 1 April 20X1.
Interest is payable at 12% p.a. and there is a bullet repayment of principal at the end of the term . Term of
the loan is 6 years.
The loan includes an option to prepay the loan at 1st April each year with a prepayment penalty of 3%. There
are no transaction costs.
Without the prepayment option, the interest rate quoted by bank is 11% p.a. Analyse
Illustration 14:(REMOVED FROM SM) Purchase contract settled in a foreign currency (MTP APR
2018)
On 1 January 20X1, ABG Pvt. Ltd., a company incorporated in India enters into a contract to buy solar panels
from A&A Associates, a firm domiciled in UAE, for which delivery is due after 6 months i.e., on 30 June 20X1
The purchase price for solar panels is US$ 50 million.
The functional currency of ABG is Indian Rupees (₹) and of A&A is Dirhams.
The obligation to settle the contract in US Dollars has been evalu ated to be an embedded derivative which is
not closely related to the host purchase contract.
Exchange rates:
Spot rate on 1 January 20X1: USD 1 = ₹ 60
Six-month forward rate on 1 January 20X1: USD 1 = ₹ 65
Spot rate on 30 June 20X1: USD 1 = ₹ 66Analyse
Ilustration 14(OLD SM ILL 15)

Contracts for purchase or sale of non-financial item Key terms of contracts to buy/sell non- financial items
Company Z is engaged in the business of importing oil seeds for further processing as well as trading
purposes. It enters into the following types of contracts as on 1 October 20X1:
17
Particulars Contract 1 Contract 2 Contract 3
Nature Import of oil seeds from a Purchase of oil seeds Contract to sell oilseeds
of foreign supplier from a domestic on the commodity exchange
Contract producer /
supplier
Quantity 100 MT at USD 400 per MT to 50 MT at ₹ 30,000 per 50 MT at USD 450 per MT,
and rate be delivered as on 31March MT to be delivered as maturing as on 15
20X2 on 31 January 20X2
January 20X2
Net settlement
clause included in Yes Yes Yes
the contract
There have also been several Yes – company Z has net Yes – these contracts are
Net settlement instances of the oil seeds settled some of the required to be net settled
in practice for being sold prior to or shortly domestic purchase with the exchange on the
similar after taking delivery. These contracts. maturity date.
contracts instances of net settlement
constitute approximately 30 However, these instances Company Z enters into
per cent of the value of constitute only 1 per cent these types of derivative
total import contracts. of the total contracts to hedge the risks
domestic purchase on its domestic oil seeds
contracts in value. The purchase contracts
remaining contracts are
settled by taking delivery
of
oil seeds which are
used for further
processing.
Company Z is required to determine if the contracts entered into for purchase and sale of oil seeds are
derivatives within the scope of lnd AS 109 or are executory contracts outside the scope of lnd AS 109.
Illustration 15(OLD SM ILL 16) Foreign currency embedded derivatives

Company A, an Indian company whose functional currency is ₹, enters into a contract to purchase machinery
from an unrelated local supplier, company B. The functional currency of company B is also ₹. However, the
contract is denominated in USD, since the machinery is sourced by company B from a US based supplier.
Payment is due to company B on delivery of the machinery.
Key terms of the contract:

Contractual features Details
Contract/order date 9 September 20X1
Delivery/payment date 31 December 20X1
Purchase price USD 1,000,000
USD/₹ Forward rate on 9 September 20X1 for 31 December 20X1 67.8
maturity
USD/₹ Spot rate on 9 September 20X1 66.4
USD/₹ Forward rates for 31 December, on:
30 September 67.5
31 December (spot rate) 67.0
Company A is required to analyse if the contract for purchase of machinery (a capital asset) from company B
contains an embedded derivative and whether this should be separately accounted for on the basis of the
guidance in Ind AS
109. Also give necessary journal entries for accounting the same.
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UNIT 5: RECOGNITION AND DERECOGNITION OF FINANCIAL INSTRUMENTS
Illustration 1: Regular way contracts: forward contracts

ST Ltd. enters into a forward contract to purchase 10 lakh shares of ABC Ltd. in a month’s time for 50 per
share. This contract is entered into with a broker, Mr. AG and not through regular trading mode in a stock
exchange. The contract requires Mr. AG to deliver the shares to ST Ltd. upon payment of agreed
consideration. Shares of ABC Ltd. are traded on a stock exchange. Regular way delivery is two days. Assess
the forward contract.
Illustration 2: Regular way contracts: option contracts

NKT Ltd. purchases a call option in a public market permitting it to purchase 100 shares of VT Ltd.at any time
over the next one month at a price of 1,000 per share. If NKT Ltd. exercises its option, it has 7 days to settle
the transaction according to regulation or convention in the options market. VT Ltd.’s shares are traded in an
active public market that requires two-day settlement.
Illustration 3: Regular way purchase of financial asset

On 1 January 20X1, X Ltd. enters into a contract to purchase a financial asset for 10 lakhs, which is its fair
value on trade date. On 4 January 20X1 (settlement date), the fair value of the asset is 10.5lakhs. The
amounts to be recorded for the financial asset will depend on how it is classified and whether trade date or
settlement date accounting is used. Pass necessary journal entries.
Illustration 4: Part of a financial asset

State whether the de recognition principles will be applied or not.
i. Interest strip of an interest-bearing financial asset i.e. the part entitles its holder to interest cash flows of a
financial asset
ii. Dividend strip of an equity share i.e. the part entitles its holder to only dividends arising from an equity
share
iii. Cash flows (principal and asset) upto a certain tenure or first right on a proportion of cash flows of an
amortising financial asset. Say, the part entitles its holder to first 80% of the cash flows or cash flows for
first 4 of the 6 years’ tenure.
Illustration 5: Part of a financial asset

State whether the derecognition principles will be applied or not.
i) Entity Y transfers the rights to the first or the last 90 per cent of cash collections from a financial asset (or a
group of financial assets)
ii) Entity Z transfers the rights to 90 per cent of the cash flows from a group of receivables, but provides a
guarantee to compensate the buyer for any credit losses up to 8 per cent of the principal amount of the
receivables.
Illustration 6: Proportionate “pass through” arrangement

Entity A makes a five-year interest-bearing loan (the 'original asset') of ₹ 100 crores to Entity B. Entity A
settles a Trust and transfers the loan to that Trust. The Trust issues part icipatory notes to an investor, Entity
C that entitle the investor to the cash flows from the asset.
As per Trust’s agreement with Entity C, in exchange for a cash payment of 90 crores, Trust will pass to Entity
C 90% of all principal and interest payments collected from Entity B (as, when and if collected). Trust accepts
no obligation to make any payments to Entity C other than 90% of exactly what has been received from
Entity B. Trust provides no guarantee to Entity C about the performance of the loan an d has no rights to
retain 90% of the cash collected from Entity B nor any obligation to pay cash to Entity C if cash has not been
received from Entity B. Compute the amount to be dercognised.
19
Illustration 7: Repurchase agreements
A financial asset is sold under repurchase agreement. The repurchase price as per that agreement is
(a) fixed price or (b) sale price plus a lender's return. Let’s look at three alternate scenarios:
i. Repurchase agreement is for the same financial asset.
ii. Repurchase agreement is for substantially the same asset
iii. Repurchase agreement provides the transferee a right to substitute assets that are similar and of equal
fair value to the transferred asset at the repurchase date.
Illustration 8: Put options on transferred financial assets

A financial asset is sold and the transferee has a put option. Let’s look at some alternate scenarios:
i. Put option is deeply in the money
ii. Put option is deeply out of the money.
State whether th derecognition principles will be applied or not.
Illustration 9: Call options on transferred financial assets

A financial asset is sold and the transferor has a call option. Let’s look at some alternate scenarios :
i. Call option is deeply in the money
ii. Call option is deeply out of the money.
What it the transferor holds a call option on an asset that is readily obtainable in the market?
iii. Call option is neither deeply in the money nor deeply out of the
money
Illustration 10: Amortising interest rate swaps

An entity may transfer to a transferee a fixed rate financial asset that is paid off over time, and enter into an
amortising interest rate swap with the transferee to receive a fixed interest rate and pay a variable interest
rate based on a notional amount.
Scenarios:
i. Notional amount of the swap amortises so that it equals the principal amount of the transferred financial
asset outstanding at any point in time.
ii. Amortisation of the notional amount of the swap is not linked to the principal amount outstanding of the
transferred asset.
Illustration 11: Assignment of receivables

ST Ltd. assigns its trade receivables to AT Ltd. The carrying amount of the receivables is 10,00,000. The
consideration received in exchange of this assignment is ₹ 9,00,000. Customers have been instructed to
deposit the amounts directly in a bank account for the benefit of AT Ltd. AT Ltd. has no recourse to ST Ltd. in
case of any shortfalls in collections.
Illustration 12A: Debt factoring with recourse – continuing involvement asset

Entity C agrees with factoring company D to enter into a debt factoring arrangement. Under the terms of the
arrangement, the factoring company D agrees to pay ₹ 91.5 crores, less a servicing charge of ₹ 1.5 crores
(net proceeds of ₹ 90 crores), in exchange for 100% of the cash flows from short-term receivables.
20
The receivables have a face value of ₹ 100 crores and carrying amount of ₹ 95 crores.
The customers will be instructed to pay the amounts owed into a bank account of the factoring company.
Entity C also writes a guarantee to the factoring company under which it will reimburse any credit losses upto
₹ 5 crores, over and above the expected credit losses of ₹ 5 crores. The guarantee is estimated to have a fair
value of ₹ 0.5 crores.
Calculate the amount of continuing involvement asset.
Illustration 12B: Debt factoring with recourse – associated liability.

Continuing illustration 12A, calculate the amount of associated liability.
Illustration 12C: Debt factoring with recourse – gain or loss on

derecognition
Continuing illustration 12A and 12B, pass the necessary Journal Entry.
Illustration 13: Renegotiation of terms of (defaulted) borrowings subsequent to the year-end

Ind AS 109, Financial Instruments requires recognition of renegotiation gain/loss subject to fulfillment of
certain conditions as mentioned in the standard. If there has been a renegotiation of terms of (defaulted)
borrowings subsequent to the year end, but before the date of approval of financial statements, then should
such modification gain/loss be recognised in the current year financial statements itself or in the next year
when the terms of (defaulted) borrowings have been renegotiated in accordance with Ind AS 109?
21
COMPREHENSIVE ILLUSTRATIONS
Illustration 1 (SIMILAR ASKED IN PP MAY’18)

A Ltd. issued redeemable preference shares to a Holding Company – Z Ltd. The terms of the instrument
have been summarized below. Account for this in the books of Z Ltd.
Nature Non-cumulative redeemable preference shares
Repayment: Redeemable after 5 years
Date of Allotment: 1-Apr-20X1
Date of repayment: 31-Mar-20X6
Total period: 5.00 years
Value of preference shares issued: 100,000,000
Dividend rate 0.0001%
Market rate of interest 12% per annum
Present value factor 0.56743
Illustration 2(SIMILAR ASKED IN PP NOV’18)

A Limited issues ₹ 1 crore convertible bonds on 1 July 20X1. The bonds have a life of eight years and a face
value of 10 each, and they offer interest, payable at the end of each financial year, at a rate of 6 per cent
annum. The bonds are issued at their face value and each bond can be converted into one ordinary share in
A Limited at any time in the next eight years. Companies of a similar risk profile have recently issued debt
with similar terms, without the option for conversion, at a rate of 8 per cent per annum.
Required:
(a) Provide the appropriate accounting entries for initial recognition.
(b) Calculate the stream of interest expenses across the eight years of the life of the bonds.
(c) Provide the accounting entries if the holders of the bonds elect to convert the bonds to ordinary shares
at the end of the third year.
Illustration 3(SIMILAR ASKED IN PP MAY’18)

On 1st January 20X1, SamCo. Ltd. agreed to purchase USD ($) 20,000 from JT Bank in future on 31st
December 20X1 for a rate equal to ₹ 68 per USD. SamCo. Ltd. did not pay any amount upon entering into
the contract. SamCo Ltd. is a listed company in India and prepares its financial statements on a quarterly
basis.
Following the principles of recognition and measurement as laid down in Ind AS 109, you are required to
record the entries for each quarter ended till the date of actual purchase of USD.
For the purposes of accounting, please use the following information representing marked to market fair
value of forward contracts at each reporting date:
As at 31st March 20X1 – ₹ (25,000)
As at 30th June 20X1 - ₹ (15,000) As at
30th September 20X1 -₹ 12,000
Spot rate of USD on 31st December 20X1 - ₹ 66 per USD
22
Illustration 4
Entity A (an ₹ functional currency entity) enters into a USD 1,000,000 sale contract on 1 January 20X1 with
Entity B (an ₹
functional currency entity) to sell equipment on 30 June 20X1.
Spot rate on 1 January 20X1: ₹/USD 45
Spot rate on 31 March 20X1: ₹/USD 57
Three-month forward rate on 31 March 20X1: ₹/USD 45
Six-month forward rate on 1 January 20X1: ₹/USD 55
Spot rate on 30 June 20X1: ₹/USD 60
Assume that this contract has an embedded derivative that is not closely related and requires separation.
Please provide detailed journal entries in the books of Entity A for accounting of such embedded derivative
until sale is actually made.
Illustration 5
On 1st January 20X1, SamCo. Ltd. entered into a written put option for USD ($) 20,000 with JT Corp to be
settled in future on 31st December 20X1 for a rate equal to ₹ 68 per USD at the option of JT Corp. SamCo.
Ltd. did not receive any amount upon entering into the contract. SamCo Ltd. is a listed company in India and
prepares its financial statements on a quarterly basis.
Following the classification principles of recognition and measurement as laid down in Ind AS 109, you are
required to record the entries for each quarter ended till the date of actual purchase of USD.
For the purposes of accounting, please use the following information representing marked to market fair
value of put option contracts at each reporting date:
As at 31st March 20X1 – ₹ (25,000)
As at 30th June 20X1 - ₹ (15,000)
As at 30th September 20X1 - ₹ NIL
Spot rate of USD on 31st December 20X1 - ₹ 66 per USD
Illustration 6 (SIMILAR MTP OCT’21, SIMILAR ASKED PP MAY’19)

ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as on 1 April
20X1 @ 150 each. The rate of dividend is 10% payable every year. The preference shares are convertible
into 5,000 equity shares of the company at the end of 5th year from the date of allotment. When the CCCPS
are issued, the prevailing market interest rate for similar debt without conversion options is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the proceeds.
Date of Allotment 01-Apr-20X1

Date of Conversion 01-Apr-20X6
Number of Preference Shares 10,000
Face Value of Preference Shares 150
Total Proceeds 15,00,000
Rate of dividend 10%
Market Rate for Similar Instrument 15%
Transaction Cost 30,000
Face value of equity share after conversion 10
Number of equity shares to be issued 5,000
Effective interest rate 15.86%
You are required to compute the liability and equity component and pass journal entries for entire term of
arrangement i.e. from the issue of preference shares till their conversion into equity shares keeping in view
the provisions of relevant Ind AS.
23
TEST YOUR KNOWLEDGE
QUESTION 1
As part of staff welfare measures, Y Co Ltd. has contracted to lend to its employees sums of mo ney at 5%
per annum rate of interest. The amounts lent are to be repaid in five equal instalments for principle along
with the interest. The market rate of interest is 10% per annum for comparable loans. Y lent 1,600,000 to its
employees on 1st January 20X1. Following the principles of recognition and measurement as laid down in Ind
AS 109, you are required to record the entries for the year ended 31 December 20X1, for the transaction
and also compute the value of loan initially to be recognised and amortised cost for all subsequent years.
For the purpose of calculation, following discount factors at interest rate of 10% per annum may be adopted At
the end of year
–
Year Present value
factor
1 .909
2 .827
3 .751
4 .683
5 .620
QUESTION 2 (SIMILAR ASKED IN PP JAN’21)

Wheel Co. Limited has a policy of providing subsidized loans to its employees for the purpose of buying or
building houses. Mr. X, who’s executive assistant to the CEO of Wheel Co. Limited, took a loan from the
Company on the following terms:
 Principal amount: 1,000,000
 Interest rate: 4% for the first 400,000 and 7% for the next 600,000
 Start date: 1 January 20X1
 Tenure: 5 years
 Pre-payment: Full or partial pre-payment at the option of the employee
 The principal amount of loan shall be recovered in 5 equal annual instalments and will be first applied to 7%
interest bearing principal
 The accrued interest shall be paid on an annual basis
 Mr. X must remain in service till the term of the loan ends
The market rate of a comparable loan available to Mr. X, is 12% per annum.
Following table shows the contractually expected cash flows from the loan given to Mr. X:
Inflows
Date Outflows Principal Interest Interest Principal outstanding
income income 4%
7%
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 200,000 28,000 16,000 600,000
31-Dec-20X3 200,000 14,000 16,000 400,000
24
31-Dec-20X4 200,000 - 16,000 200,000
31-Dec-20X5 200,000 - 8,000 -
Mr. S, pre-pays ₹ 200,000 on 31 December 20X2, reducing the outstanding principal as at that date to ₹ 400,000.
Following table shows the actual cash flows from the loan given to Mr. X, considering the pre -payment event
on31 December 20X2:(amount in ₹)
Inflows
Date Outflows Principal Interest Interest Principal
income income outstanding
7% 4%
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 400,000 28,000 16,000 400,000
31-Dec-20X3 200,000 - 16,000 200,000
31-Dec-20X4 200,000 - 8,000 -
31-Dec-20X5 - - - -
Record journal entries in the books of Wheel Co. Limited considering the requirements of Ind AS 109.
QUESTION 3
Wheel Co. Limited borrowed 500,000,000 from a bank on 1 January 20X1. The original terms of the loan were as
follows:
 Interest rate: 11%
 Repayment of principal in 5 equal instalments
 Payment of interest annually on accrual basis
 Upfront processing fee: ₹ 5,870,096
 Effective interest rate on loan: 11.50%
On 31 December 20X2, Wheel Co. Limited approached the bank citing liquidity issues in meeting the cash flows
required for immediate instalments and re-negotiated the terms of the loan with banks as follows:
 Interest rate 15%
 Repayment of outstanding principal in 10 equal instalments starting 31 December 20X3
 Payment of interest on an annual basis
Record journal entries in the books of Wheel Co. Limited till 31 December 20X3, after giving effect of the changes
in the terms of the loan on 31 December 20X2
QUESTION 4 (SIMILAR ASKED IN PP NOV’19)

K ltd. issued 500,000, 6% convertible debentures @ ₹ 10 each on 01 April 20X1. The debentures are due for
redemption on 31 March 20X5 at a premium of 10%, convertible into equity shares to the extent of 50% and
balance to be settled in cash to the debenture holders. The interest rate on equivalent debentures without
conversion rights was 10%.
You are required to separate the debt and equity components at the time of issue and show the accounting entries
in Company’s books at initial recognition. The following present values of Re 1 at 6% and at 10% are provided:
Interest rate Year 1 Year 2 Year 3 Year 4

6% 0.94 0.89 0.84 0.79
10% 0.91 0.83 0.75 0.68
25
QUESTION 5 (MTP MAR 2019)
On 1 April 20X1, an 8% convertible loan with a nominal value of ₹ 6,00,000 was issued at par. It is redeemable
on 31 March 20X5 also at par. Alternatively, it may be converted into equity shares on the basis of 100 new
shares for each ₹ 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10%. Interest of ₹ 48,000 has
already been paid and included as a finance cost. Present value rates are as follows:
Year End @ 8% @ 10%

1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68
Explain how will the Company account for the above loan notes in the financial statements for the year ended 31
March 20X2?
QUESTION 6 (RTP MAY 2021, MTP NOV’21)

On 1 April 20X1, Sun Limited guarantees a ₹ 10,00,000 loan of Subsidiary – Moon Limited, which Bank STDK has
provided to Moon Limited for three years at 8%.
Interest payments are made at the end of each year and the principal is repaid at the end of the loan term.
If Sun Limited had not issued a guarantee, Bank STDK would have charged Moon Limited an interest rate of 11%.
Sun Limited does not charge Moon Limited for providing the guarantee.
On 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in the next 12 months. If
Moon Limited defaults on the loan, Sun Limited does not expect to recover any amount from Moon Limited.
On 31 March 20X3, there is 3% probability that Moon Limited may default on the loan in the next 12 months. If
Moon Limited defaults on the loan, Sun Limited does not expect to recover any amount from Moon Limited.
Provide the accounting treatment of financial guarantee as per Ind AS 109 in the books of Sun Ltd., on initial
recognition and in subsequent periods till 31 March 20X3.
26
RTP/MTP QUESTIONS
QUESTION 1 (RTP MAY 2018/MTP AUG 2018) :

On 1st April, 20X4, Shelter Ltd. issued 5,000, 8% convertible debentures with a face value of ₹ 100 each maturing
on 31st March, 20X9. The debentures are convertible into equity shares of Shelter Ltd. at a conversion price of ₹
105 per share. Interest is payable annually in cash.
At the date of issue, Shelter Ltd. could have issued non-convertible debenture with a 5 year term bearing a coupon
interest rate of 12%. On 1st April, 20X7, the convertible debentures have a fair value of ₹ 5,25,000. Shelter Ltd.
makes a tender offer to debenture holders to repurchase the debentures for ₹ 5,25,000, which the holders
accepted.
At the date of repurchase, Shelter Ltd. could have issued non- convertible debt with a 2 year term bearing a coupon
interest rate of 9%. Show accounting entries in the books of Shelter Ltd. for recording of equity and liability
component:
(i) At the time of initial recognition and

ii) At the time of repurchase of the convertible debentures.
The following present values of ₹ 1 at 8%, 9% & 12% are supplied to you:
Interest Year Year Year Year Year
Rate 1 2 3 4 5
8% 0.926 0.857 0.794 0.735 0.681
9% 0.917 0.842 0.772 0.708 0.650
10% 0.893 0.797 0.712 0.636 0.567
QUESTION 2 (RTP NOV 2018)

On 1st April 2017, A Ltd. lent ₹ 2 crores to a supplier in order to assist them with their expansion plans. The
arrangement of the loan cost the company ₹ 10 lakhs. The company has agreed not to charge interest on this loan
to help the supplier's short-term cash flow but expected the supplier to repay ₹ 2.40 crores on 31st March 2019. As
calculated by the finance team of the company, the effective annual rate of interest on this loan is 6.9% On 28th
February 2018, the company received the information that poor economic climate has caused the supplier
significant problems and in order to help them, the company agreed to reduce the amount repayable by them on
31st March 2019 to ₹ 2.20 crores. Suggest the accounting entries as per applicable Ind AS.
QUESTION 3 (RTP NOV 2019/MTP MAR 2021)

An entity purchases a debt instrument with a fair value of ₹ 1,000 on 15th March, 20X1 and measures the debt
instrument at fair value through other comprehensive income. The instrument has an interest rate of 5% over the
contractual term of 10 years, and has a 5% effective interest rate. At initial recognition, the entity determines that
the asset is not a purchased or original credit- impaired asset.
On 31st March 20X1 (the reporting date), the fair value of the debt instrument has decreased to ₹ 950 as a result
of changes in market interest rates. The entity determines that there has not been a significant increase in credit
risk since initial recognition and that ECL should be measured at an amount equal to 12 month ECL, which amounts
to ₹ 30.
On 1st April 20X1, the entity decides to sell the debt instrument for ₹ 950, which is its fair value at that date.
Pass journal entries for recognition, impairment and sale of debt instruments as per Ind AS 109. Entries relating to
interest income are not to be provided.
QUESTION 4 (RTP MAY 2020/MTP MAR 2021)

XYZ issued ₹ 4,80,000 4% redeemable preference shares on 1st April 20X5 at par. Interest is paid annually in
arrears, the first payment of interest amounting ₹ 19,200 was made on 31st March 20X6 and it is debited directly
to retained earnings by accountant. The preference shares are redeemable for a cash amount of ₹ 7,20,000 on 31st
March 20X8. The effective rate of interest on the redeemable preference shares is 18% per annum. The proceeds of
the issue have been recorded within equity by accountant as this reflects the legal nature of the shares. Board of
directors intends to issue new equity shares over the next two years to build up cash resources to redeem the
preference shares.
Mukesh, Accounts manager of XYZ has been told to review the accounting of aforesaid issue. CFO has asked from
27
Mukesh the closing balance of preference shares at the year end. If you were Mukesh, then how much balance you
would have shown to CFO on analysis of the stated issue. Prepare necessary adju sting journal entry in the books of
account, if required.
QUESTION 5(MTP MAR 2018)

X Ltd. is engaged in manufacturing and selling of designer furniture. It sells goods on extended credit. X Ltd. sold
furniture for ₹ 40,00,000 to a customer, the payment against which was receivable after 12 months with interest at
the rate of 3% per annum. The market interest rate on the date of transaction was 8% per annum.
Calculate the revenue to be recognised by X Ltd. for the above transactions
QUESTION 6 (MTP APR 2021 ) HEDGE ACCOUNTING:

Besides construction activity, Buildings & Co. Limited is also engaged in the trading of Copper. On 1st April, 20X1, it
had 100 kg of copper costing Rs. 70 per kg - totalling Rs. 7000. The Company has a scheduled delivery of these
100 kgs of copper to its customer on 30th September, 20X1 at the rate of USD 100 on that date. To protect itself
from decline in currency exchange rate (USD to Rs.), the entity hedges its position by entering into currency futures
contract for equivalent currency units at Rs. 76 / USD. The future contract mature on 30th September, 20X1. The
management performed an assessment of hedge effectiveness and concluded that the hedging relationship qualifies
for cash flow hedge accounting. The entity determines and documents that changes in fair value of the currency
futures contract will be highly effective in offsetting variability in cash flow of currency exchange. On 30th
September, 20X1, the entity closes out its currency futures contract. On the same day, it a lso sells its inventory of
copper at USD 100 when the spot rate is Rs. 72 / USD.
You are required to prepare detailed working and pass necessary journal entries for the sale of copper and the
corresponding hedge instrument taken by the company. Pass the journal entries as on the initial date (i.e. 1st April
20X1), first quarter end reporting (i.e. 30th June 20X1) and date of sale of copper and settlement of forward
contract (i.e. 30th September 20X1).
Assume the exchange rates as follows and yield @ 6% per annum.
Date Future price for 30th September 20X1

delivery (Rs. / USD)
1 st April, 20X1 7
6
30th June, 20X1 7
4
30th September, 20X1 7
1
QUESTION 7 (MTP OCT 2018)

Discuss the need of hedge accounting and types of various hedges?

Croton Limited is engaged in the business of trading commodities. The company’s main asset are investments in
equity shares,
preference shares, bonds, non-convertible debenture (NCD) and mutual funds.
The Company collects the periodical income (i.e. interest, dividend, etc.) from the investments and regularly sells
the investment in case of favouable market conditions. Such investments have been classified as non -current
investments in the financial statements.
Also, the company buys and sells equity shares of companies for earning short term profits from the stock market.
The CFO of company classified all the non-current investments as Fair Value Through Other Comprehensive Income
(FVTOCI) and all the current investment as Fair value Through Profit an d Loss (FVTPL).
Croton Limited raised the following queries:
(a) Can the Company classify the equity shares previously held under current investment as FVTOCI if the
company decides to hold them for more than one-year (i.e. classify it as non- current)?
(b) The Company had classified NCDs with a maturity period of less than twelve months from the reporting
period as current. This has been classified as FVTPL by the CFO of the company. The Company wants to
know whether these NCDs can be recognized as FVTOCI? (8 marks)
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PAST QUESTION PAPERS
QUESTION 09: (PP MAY 2018)

Ruby Ltd. has incurred USD ($) 2,00,000 in CERs registration, certification and other related costs during financial
year 2015~16. This entitles the company to 1,80,000 CERs The CERs are being traded at USD 1.2 per CER in MCX
at the year end.
Pass journal entries for recognition of CERs, year-end value to be appeared in the financial statements and on the
sale of CERs in thenext year @ USD 1.2 per CER.
QUESTION 10: (PP NOVEMBER 2018) (4 Marks)

NAV Limited granted a loan of ₹ 120 lakh to OLD Limited for 5 years @ 10% p.a. which is Treasury bond yield of
equivalent maturity. But the incremental borrowing rate of OLD Limited is 12%. In this case, the loan is granted to
OLD Limited at below market rate of interest. Ind AS 109 requires that a financial asset or financial liability is to be
measured at fair value at the initial recognition. Should the transaction price be treated as fair value? If not, find
out the fair value. What is the accounting treatment of the difference between the transaction price and the fair
value on initial recognition in the book of NAV Ltd.? Present value factors at 12%:
Year 1 2 3 4 5
PVF 0.892 0.797 0.712 0.636 0.56
7
QUESTION 11: (PP NOVEMBER 2020) (6 Marks)

On 1 April 2019, 8% convertible loan with a nominal value of ₹ 12,00,000 was issued at par by Cargo Ltd. It is
redeemable on 31 March 2023 also at par. Alternatively, it may be converted into equity shares on the basis of 100
new shares for each ₹ 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10%. Interest of ₹ 96,000 has
already been paid
and included as a finance cost.
Present Value (PV) rates are as follows:

Year End @ 8% @
10%
1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68
How will the Company present the above loan notes in the financial statements for the year ended 31 March 2020?
Question 12 (PP July 21)

On 1st October, 2017 Axe Limited issues preference shares to B Limited for a consideration of ₹ 18 lakh. The holder
has an option to convert these preference shares to a fixed number of equity instruments of the issuer any time up
to a period of 4 years. If the holder does not exercise the option, the preference shares are redeemable at the end
of 4 years. The preference shares carry a fixed coupon of 5.5% per annum and is payable every year. The
prevailing market rate for similar preference shares without the conversion feature is 8% per annum.
Axe Limited has an early redemption option to prepay the instrument at ₹ 20 lakh and on 30th September, 2020, it
exercised that option. The interest rate has changed on that date.
At that time, Axe Limited could have issued a 1 year (that is maturity 30th September, 2021) non -convertible
instrument at 6%.
Calculate the value of liability and equity components at the date of initial recognition. Also give amortization
schedule. (Limit discounting factor to 3 decimal places for calculation
29
IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS
Illustration 1: Exception to prepare consolidated financial statements
Scenario A:
Following is the structure of a group headed by Company
X: COMPANY X
100%
COMPANY A
100% 100%
COMPANY B COMPANY C
Company X is a listed entity in India and prepares consolidated financial statements as per the
requirements of Ind AS. Company A is an unlisted entity and it is not in the process of listing any of its
instruments in public market. Company X does not object to Company A not preparing consolidated
financial statements. Whether Company A is required to prepare consolidated financial statements as per
the requirements of Ind AS 110?
Scenario B:
Assume the same facts as per Scenario A except, Company X is a foreign entity and is listed in stock
exchange of a foreign country and it prepares its financial statements as per the generally accepted
accounting principles (GAAP) applicable to that country. Will your answer be different in this case?
Scenario C:
Assume the same facts as per Scenario A except, 100% of the investment in Company A is held by Mr. X
(an individual) instead of Company X. Will your answer be different in this case?
Illustration 2: Exception to prepare consolidated financial statements
Scenario A:
Following is the structure of a group headed by Company A.

COMPANY A
100% 60%
COMPANY B COMPANY C
100%
COMPANY X
Company A is a listed entity in India and prepares consolidated financial statements as per the
requirements of Ind AS. Company C is an unlisted entity and it is not in the process of listing any of its
instruments in public market. 60% of the equity share capital of Company C is held by Company A and
balance 40% equity share capital is held by other outside investors. Company A does not object to
Company C not preparing consolidated financial statements. Whether Company C is required to prepare
consolidated financial statements as per the requirements of Ind AS 110?
Scenario B:
Assume the same facts as per Scenario A except, the balance 40% of the equity share capital of
Company C is held by Company B.
30
State whether C Limited is required to inform its other owner B Limited (owning 40%) of its intention to
not prepare consolidated financial statements as mentioned in paragraph 4(a)(i)?
Illustration 3: Different investors have ability to direct different relevant activities

A Ltd. and B Ltd. have formed a new entity AB Ltd. for constructing and selling a scheme of residential
units consisting of 100 units. Construction of the residential units will be done by A Ltd. and it will take all
the necessary decision related to the construction activity. B Ltd. will do the marketing and selling related
activities for the units and it will take all the necessary decisions related to marketing and selling. Based
on above, who has the power over AB Ltd.?
Illustration 4: Determining the relevant activities

A Ltd. is an asset manager of a venture capital fund i.e., Fund X. Out of the total outstanding units of the
fund, 10% units are held by A Ltd. and balance 90% units are held by other investors.
Majority of the unit holders of the fund have right to appoint a committee which will manage the day- to-
day administrative activities of the fund. However, the decisions related to the investments /
divestments to be done by Fund X is taken by asset manager i.e. A Ltd. Based on above, who has power
over Fund X?
Illustration 5(i): Current ability to direct the relevant activities

An investment vehicle (the investee) is created and financed with a debt instrument held by an investor
(the debt investor) and equity instruments held by a number of other investors. The equity tranche is
designed to absorb the first losses and to receive any residual return from the investee. One of the equity
investors who holds 30 per cent of the equity is also the asset manager.
The investee uses its proceeds to purchase a portfolio of financial assets, exposing the investee to the
credit risk associated with the possible default of principal and interest payments of the assets. The
transaction is marketed to the debt investor as an investment with minimal exposure to the credit risk
associated with the possible default of the assets in the portfolio because of the nature of these assets
and because the equity tranche is designed to absorb the first losses of the investee.
The returns of the investee are significantly affected by the management of the investee’s asset portfolio,
which includes decisions about the selection, acquisition and disposal of the assets within portfolio
guidelines and the management upon default of any portfolio assets. All those activities are managed by
the asset manager until defaults reach a specified proportion of the portfolio value (ie when the value of
the portfolio is such that the equity tranche of the investee has been consumed). From that time, a third-
party trustee manages the assets according to the instructions of the debt investor.
Based on the above, who has power over the investment vehicle?
Illustration 5(ii): Voting rights are substantive or not

Scenario A:
Following is the voting power holding pattern of B Ltd.
 10% voting power held by A Ltd.
 90% voting power held by 9 other investor each holding 10%
All the investors have entered into a management agreement whereby they have granted the decision-
making powers related to the relevant activities of B Ltd. to A Ltd. for a period of 5 years.
After 2 years of the agreement, the investors holding 90% of the voting powers have some disputes with
A Ltd. and they want to take back the decision-making rights from A Ltd. This can be done by passing a
resolution with majority of the investors voting in favour of the removal of rights from A Ltd. However, as
per the termination clause of the management agreement, B Ltd. will have to pay a huge penalty to A Ltd.
for terminating the agreement before its stated term.
Whether the rights held by investors holding 90% voting power are substantive?
31
Scenario B:
Assume the same facts as per Scenario A except, there is no penalty required to be paid by B Ltd. for
termination of agreement before its stated term. However, instead of all other investors, there are only 4
investors holding total 40% voting power that have disputes with A Ltd. and want to take back
decision-making rights from A Ltd.
Whether the rights held by investors holding 40% voting power are substantive?
Illustration 6:Potential voting rights are substantive or not

Scenario A:
An investor is holding 30% of the voting power in ABC Ltd. The investor has been granted an option to
purchase 30% more voting power from other investors. However, the exercise price of the option is too
high compared to the current market price of ABC Ltd. because ABC Ltd. is incurring losses since last 2
years and it is expected to continue to incur losses in future period as well. Whether the right held by the
investor to exercise purchase option is substantive?
Scenario B:
Assume the same facts as per Scenario A except, the option price is in line with the current market price
of ABC Ltd. and ABC Ltd. is making profits. However, the option can be exercised in next 1 month only
and the investor is not in a position to arrange for the require amount in 1 months’ time to exercise the
option. Whether the right held by the investor to exercise purchase option is substantive?
Scenario C:
Assume the same facts as per Scenario A except, ABC Ltd. is making profits. However, the current market
price of ABC Ltd. is not known since the ABC Ltd. is a relatively new company, business of the company is
unique and there are no other companies in the market doing similar business. Hence the investor is not
sure whether to exercise the purchase option. Whether the right held by the investor to exercise purchase
option is substantive?
Illustration 7: Removal rights are substantive or not

A venture capital fund is managed by an asset manager who has right to take the investment and
divestments decisions related to the fund corpus. The asset manager is also holding some stake in the
fund. The other investors of the fund have right to remove the asset manager.
However, in the present scenario, there is absence of other managers who are willing or able to provide
specialised services that the current asset manager is providing and purchase the stake that the current
asset manager is holding in the fund. Whether the removal rights available with other investors are
substantive?
Illustration 8: Protective rights of a franchisor

ABC Ltd. is a manufacturer of branded garments and is the owner of Brand X. PQR Ltd. has entered
into a franchise agreement with ABC Ltd. to allow PQR Ltd. to set up a retail outlet to sell the products of
Brand X. As per the agreement, PQR Ltd. will set up the retail outlet from its own funds, decide the
capital structure of the entity, hire employees and their remuneration, select vendors for acquiring
capital items, etc. However, ABC Ltd. will give certain operating guidelines like the interior of the retail
outlet, uniform of the employees and other such guidelines to protect the brand name of ABC Ltd.
Whether the rights held by ABC Ltd. protective or substantive?
Illustration 9: Voting rights of investor are sufficient to give it power

An investor holds 45% of the voting rights of an investee. The remaining voting rights are held by
thousands of shareholders, none individually holding more than 1% of the voting rights. None of the
shareholders has any arrangements to consult any of the others or make collective decisions. Whether the
investor holding 45% voting right have power over the investee?
32
Illustration 10: Voting rights of investor are sufficient to give it power
ABC Ltd. holds 40% of the voting rights of XYZ Ltd. The remaining voting rights are held by 6 other
shareholders, each individually holding 10% each. Whether the investor holding 40% voting right have
power over the investee?
Illustration 11: Voting patterns at previous shareholders’ meetings

An investor holds 35% of the voting rights of an investee. Three other shareholders each hold 5% of the
voting rights of the investee. The remaining voting rights are held by numerous other shareholders, none
individually holding more than 1% of the voting rights. None of the shareholders has arrangements to
consult any of the others or make collective decisions. Decisions about the relevant activities of the
investee require the approval of a majority of votes cast at relevant shareholders’ meetings—75% of the
voting rights of the investee have been cast at recent relevant shareholders’ meetings.
Whether the investor’s voting rights are sufficient to give it power to direct the relevant activities of the
investee?
Illustration 12: Potential voting rights

Investor A and two other investors each hold a third of the voting rights of an investee. The investee’s
business activity is closely related to investor A. In addition to its equity instruments, investor A also
holds debt instruments that are convertible into ordinary shares of the investee at any time for a fixed
price. The conversion rights are substantive. If the debt were converted, investor A would hold 60% of
the voting rights of the investee. Investor A would benefit from realising synergies if the debt instruments
were converted into ordinary shares. Whether investor A has power over the investee?
Illustration 13: Purpose and design of the investee

PQR Ltd. has entered into a contract with a state government to construct a power plant and distribute
the electricity generated from the plant to the households of the state. For this, PQR Ltd. has set up a new
entity XYZ Ltd. PQR Ltd. was involved in the design of XYZ Ltd. The decisions related to the relevant
activities of XYZ Ltd. i.e., how much electricity to generate or the price at which units of electricity to be
sold to customers, etc. are not determined by the voting rights. Whether PQR Ltd. has power over XYZ
Ltd.?
Illustration 14: Rights contingent upon future events

An investee’s only business activity, as specified in its founding documents, is to purchase receivables and
service them on a day-to-day basis for its investors.
Following is the relevant fact pattern:
 The servicing on a day-to-day basis includes the collection and passing on of principal and
interest payments as they fall due.
 Upon default of a receivable the investee automatically puts the receivable to an investor as
agreed separately in an agreement between the investee and the investor.
 The only relevant activity is managing the receivables upon default because it is the only activity
that can significantly affect the investee’s returns.
 Managing the receivables before default is not a relevant activity because the activities before default
are predetermined and amount only to collecting cash flows as they fall due and passing them on to
investors.
Whether the investor has power over the investee?
Illustration 15: Commitment to ensure that an investee operates as designed

A Ltd. is a manufacturer of pharmaceutical products. A Ltd. has invested in share capital of B Ltd. which is
a manufacturer of packing material for pharmaceutical products. A Ltd.’s requirements of packing
materials for its products are entirely supplied by B Ltd. A Ltd. is not purchasing the packing materials
33
from any other vendors because the materials supplied by other vendors are of inferior quality. Whether A
Ltd. has power over B Ltd.?
Illustration 16: Link between power and returns

A decision maker (fund manager) establishes, markets and manages a publicly traded, regulated fund
according to narrowly defined parameters set out in the investment mandate as required by its local laws
and regulations. The fund was marketed to investors as an investment in a diversified portfolio of equity
securities of publicly traded entities. Following is the relevant fact pattern related to fund manager:
 Within the defined parameters, the fund manager has discretion about the assets in which to invest.
 The fund manager has made a 10% pro rata investment in the fund and receives a market- based
fee for its services equal to 1% of the net asset value of the fund.
 The fees are commensurate with the services provided.
 The fund manager does not have any obligation to fund losses beyond its 10% investment. The
fund is not required to establish, and has not established, an independent board of directors. The
investors do not hold any substantive rights that would affect the decision-making authority of the
fund manager but can redeem their interests within particular limits set by the fund.
Whether the fund manager controls the fund?

A decision maker establishes, markets and manages a fund that provides investment opportunities to a
number of investors. The decision maker (fund manager) must make decisions in the best interests of all
investors and in accordance with the fund’s governing agreements. Nonetheless, the fund manager has
wide decision-making discretion. The fund manager receives a market- based fee for its services equal to
1% of assets under management and 20% of all the fund’s profits if a specified profit level is achieved.
The fees are commensurate with the services provided.
Although it must make decisions in the best interests of all investors, the fund manager has extensive
decision- making authority to direct the relevant activities of the fund. The fund manager is paid fixed and
performance- related fees that are commensurate with the services provided. In addition, the
remuneration aligns the interests of the fund manager with those of the other investors to increase the
value of the fund, without creating exposure to variability of returns from the activities of the fund that is
of such significance that the remuneration, when considered in isolation, indicates that the fund manager
is a principal.
The above fact pattern and analysis applies to various scenarios described below. Each scenario is
considered in isolation. Determine whether the fund manager control the fund?
Scenario A
The fund manager also has a 2% investment in the fund that aligns its interests with those of the other
investors. The fund manager does not have any obligation to fund losses beyond its 2% investment. The
investors can remove the fund manager by a simple majority vote, but only for breach of contract.
Scenario B
The fund manager has a more substantial pro rata investment in the fund but does not have any
obligation to fund losses beyond that investment. The investors can remove the fund manager by a
simple majority vote, but only for breach of contract.
Scenario C
The fund manager has a 20% pro rata investment in the fund but does not have any obligation to fund
losses beyond its 20% investment. The fund has a board of directors, all of whose members are
independent of the fund manager and are appointed by the other investors. The board appoints the fund
manager annually. If the board decided not to renew the fund manager’s contract, the services
performed by the fund manager could be performed by other managers in the industry.
34
An investee is created to purchase a portfolio of fixed rate asset-backed securities, funded by fixed rate
debt instruments and equity instruments. The equity instruments are designed to provide first loss
protection to the debt investors and receive any residual returns of the investee.
The transaction was marketed to potential debt investors as an investment in a portfolio of asset- backed
securities with exposure to the credit risk associated with the possible default of the issuers of the asset-
backed securities in the portfolio and to the interest rate risk associated with the management of the
portfolio.
On formation, the equity instruments represent 10% of the value of the assets purchased. A decision
maker (the asset manager) manages the active asset portfolio by making investment decisions within the
parameters set out in the investee’s prospectus. For those services, the asset manager receives a market-
based fixed fee (i.e. 1% of assets under management) and performance-related fees (i.e. 10% of
profits) if the investee’s profits exceed a specified level. The fees are commensurate with the services
provided. The asset manager holds 35% of the equity in the investee. The remaining 65% of the
equity, and all the debt instruments, are held by a large number of widely dispersed unrelated third-party
investors. The asset manager can be removed, without cause, by a simple majority decision of the other
investors.
Does the asset manager control the investee?
A decision maker (the sponsor) sponsors a fund, which issues short-term debt instruments to unrelated
third- party investors. The transaction was marketed to potential investors as an investment in a portfolio
of highly rated medium-term assets with minimal exposure to the credit risk associated with the possible
default by the issuers of the assets in the portfolio. Various transferors sell high quality medium-term
asset portfolios to the fund. Each transferor services the portfolio of assets that it sells to the fund and
manages receivables on default for a market-based servicing fee. Each transferor also provides first loss
protection against credit losses from its asset portfolio through over- collateralisation of the assets
transferred to the fund. The sponsor establishes the terms of the fund and manages the operations of the
fund for a market- based fee. The fee is commensurate with the services provided. The sponsor approves
the sellers permitted to sell to the fund, approves the assets to be purchased by the fund and makes
decisions about the funding of the fund. The sponsor must act in the best interests of all investors.
The sponsor is entitled to any residual return of the fund and also provides credit enhancement and
liquidity facilities to the fund. The credit enhancement provided by the sponsor absorbs losses of up to 5%
of all of the fund’s assets, after losses are absorbed by the transferors. The liquidity facilities are not
advanced against defaulted assets. The investors do not hold substantive rights that could affect the
decision-making authority ofthe sponsor. Whether the sponsor has control over the fund?
35
INVESTMENT ENTITIES - QUESTIONS
Illustration 20: Business purpose of an investment entity

An asset manager has set up and investment fund for the purpose of acquiring capital contributions from
various investors (by issuing them units in the fund) and investing those contributions in the equity
share capital of various entities for the purpose of earning capital appreciation on those investments.
Following is the existing structure of the fund.
Various Investors
Investment Fund
Strategic Advisory
Services and Financial
Support
Investment in equity shares of various entities
Apart from the investments in various entities, the investment fund also provides its investee the strategic
advisory services so that it can result in increase in the capital appreciation from investments in those
investees. It also provides its investees financial support in the form of loan to provide them with funds
for acquiring capital assets. The investment fund does not hold such investments for a period longer than
5 years. The investment fund measures and evaluate the performance of the investments on fair value
basis.
Whether the investment fund can be treated as an investment entity?
Illustration 21: Exit strategies of an investment entity

ABC Ltd. Is established with primary objective of investing in the equity shares of various entities across
various industries based on the detailed research about each industry and entities within that industry
being done by the investment manager of the company.
The investment manager decides the timing as to when the investments should be made considering the
current market situation. Sometimes, the investment manager decides to invest the idle funds into
short-term to medium-term debt instruments with fixed maturity. The exit strategies are in place for the
investments done in equity shares but the same is not there for investments done in debt instruments.
Determine whether the entity fulfils the exit strategy condition of being classified as investment entity?
Illustration 22: Earnings from investments of an investment entity

PQR Ltd. Is established with primary objective of investing in the equity shares of various pharmaceutical
companies which are involved in the research and development of medicine for a critical illness. DEF Ltd.
Is a follow subsidiary of PQR Ltd. And DEF Ltd. Has entered into contractual arrangements with all the
investees of PQR Ltd. That in case they are successful in developing the medicine then they will transfer
the patent and distribution rights for that medicine to DEF Ltd. At less then market price. This
arrangement is explained in following diagram:
Fellow Subsidiaries
PQR Ltd. DEF Ltd.
Contractual arrangements
Investment in equity shares
of pharmaceutical
Determine whether PQR Ltd. Can be classified as investment entity?
36
Illustration 23
HTF Ltd. Was formed by T Ltd. To invest in technology start-up companies for capital appreciation. T Ltd.
Holds a 70 percent interest in HTF Ltd. And controls HTF Ltd. The other 30 percent ownership interest in
HTF Ltd. Is owned by 10 unrelated investors. T Ltd. Holds options to acquire investments held by HTF
Ltd., at their fair value, which would be exercised if the technology developed by the investees would
benefit the operations of T Ltd. No plans for exiting the investments have been identified by HTF Ltd. HTF
Ltd. Is managed by an investment adviser that acts as agent for the investors in HTF Ltd.
Determine whether HTF Ltd. Is an investment entity or not.
37
CONSOLIDATION PROCEDURE FOR SUBSIDIARIES
Illustration 1: Determination of goodwill

A Limited acquires 80% of B Limited by paying cash consideration of ₹ 120 crore. The fair value of non-
controlling interest on the date of acquisition is ₹ 30 crore. The value of subsidiary’s identifiable net assets
as per Ind AS 103 is ₹ 130 crore. Determine the value of goodwill and pass the journal entry.
Illustration 2: Determination of goodwill

Ram Ltd. Acquires 60% of Raja Ltd. By paying cash consideration of ₹ 750 lakh (including control
premium). The fair value of non-controlling interest on the date of acquisition is ₹ 480 lakh. The value of
subsidiary’s identifiable net assets as per Ind AS 103 is ₹ 1,000 lakh. Determine the value of goodwill and
pass the journal entry.
Illustration 3: Determination of Bargain Purchase
X Ltd. Acquires 80% of Y Ltd. By paying cash consideration of ₹ 400 lakh. The fair value of non-
controlling interest on the date of acquisition is ₹ 100 lakh. The value of subsidiary’s identifiable net
assets as per Ind AS 103 is ₹ 520 lakh. Determine the value of gain on bargain purchase and pass the
journal entry.
Illustration 4: Determination of goodwill when there is no non-controlling interest

M Ltd. Acquires 100% of N Ltd. By paying cash consideration of ₹ 100 lakh. The value of subsidiary’s
identifiable net assets as per Ind AS 103 is ₹ 80 lakh. Determine the value of goodwill.
Illustration 5: Step acquisition

RS Ltd. Holds 30% stake in PQ Ltd. This investment in PQ Ltd. Is accounted as an investment in associate
in accordance with Ind AS 28 and the carrying value of such investment in ₹ 100 lakh. RS Ltd. Purchases
the remaining 70% stake for a cash consideration of ₹ 700 lakh. The fair value of previously held 30%
stake is measured to be ₹ 300 lakh on the date of acquisition of 70% stake. The value of PQ Ltd.’s
identifiable net assets as per Ind AS 103 on that date is ₹ 800 lakh. How should RS Ltd. Account for the
business combination?
Illustration 6: Uniform accounting policies

PQR Ltd. Is the subsidiary company of MNC Ltd. In the individual financial statements prepared in
accordance with Ind AS, PQR Ltd. Has adopted Straight-line method (SLM) of depreciation and MNC Ltd.
Has adopted Written-down value method (WDV) for depreciating its property, plant and equipment. As
per Ind AS 110, Consolidated Financial Statements, a parent shall prepare consolidated financial
statements using uniform accounting policies for like transactions and other events in similar
circumstances.
How will these property, plant and equipment be depreciated in the consolidated financial statements of
MNC Ltd. Prepared as per lnd AS?
Illustration 7: Uniform accounting policies

H Limited has a subsidiary, S Limited and an associate, A Limited. The three companies are engaged
indifferent lines of business.
These companies are using the following cost formulas for their valuation in accordance with Ind AS
2‘Inventories’.
Name of the Company Cost formula used
H Limited FIFO
S Limited, A Limited Weighted average cost
Whether H Limited is required to value inventories of S Limited and A Limited also using FIFO formula in
preparing its consolidated financial statements?
38
Illustration 8: Different reporting dates
How should assets and liabilities be classified into current or non-current in consolidated financial
statements when parent and subsidiary have different reporting dates?
Illustration 9: Different reporting dates

A Limited, an Indian Company has a foreign subsidiary, B Inc. Subsidiary B Inc. has taken a long- term
loan from a foreign bank, which is repayable after the year 20X9. However, during the year ended 31st
March, 20X2, it breached one of the conditions of the loan, as a consequence of which the loan became
repayable on demand on the reporting date. Subsequent to year end but before the approval of the
financial statements, B Inc. rectified the breach and the bank agreed not to demand repayment and to let
the loan run for its remaining period to maturity as per the original loan terms. While preparing its
standalone financial statements as per IFRS, B Inc. has classified this loan as a current liability in
accordance with IAS 1‘Presentation of Financial Statements’.
Whether A limited is required to classify such loan as current while preparing its consolidated financial
statement under Ind AS?
Illustration 10: Dividend proposed by subsidiary

XYZ Ltd. Purchased 80% shares of ABC Ltd. On 1st April, 20X1 for ₹ 1,40,000. The issued capital of ABC
Ltd., on 1st April, 20X1 was ₹ 1,00,000 and the balance in the Statement of Profit and Loss was ₹ 60,000.
For the year ending on 31st March, 20X2 ABC Ltd. Has earned a profit of ₹ 20,000 and later on it declared
and paid a dividend of ₹ 30,000.
Assume, the fair value of non-controlling interest is same as the fair value on a per-share basis of the
purchased interest#. All net assets are identifiable net assets, there are no non-identifiable assets. The
fair value of identifiable net assets is ₹ 1,50,000.
I. Show by an entry how the dividend should be recorded in the books of XYZ Ltd. Whenever it is
received after approval in the ensuing annual general meeting.
II. What is the amount of non-controlling interest as on 1st April, 20X1 (using Fair value Method) and
31st
March, 20X2? Also pass a journal entry on the acquisition date.
(This assumption is only for illustration purpose. However, in practical scenarios the fair value of
NCI will be different than the fair value of the controlling interest.)

From the facts given in the above illustration, calculate the amount of non-controlling interest as on 1st
April, 20X1 (Using NCI’s proportionate share method) and 31st March, 20X2. Also pass a journal entry on
the acquisition date.

The facts are same as in the above illustration except that the fair value of net identifiable asset is ₹
1,60,000. Calculate NCI and Pass Journal Entry on the acquisition date. Note: Use fair value method for
31st March 20X1.
Illustration 13:Dividend proposed by subsidiary

The facts are same as in the above illustration except that the fair value of net identifiable asset is ₹
1,60,000. Calculate NCI and Pass Journal Entry on the acquisition date. Use NCI’s proportionate share
method for 31st March 20X1.
39
Illustration 14: Elimination of intra-group profit on sale of assets by a subsidiary to ts parent
A parent owns 60% of a subsidiary. The subsidiary sells some inventory to the parent for ₹ 35,000 and
makes a profit of ₹ 15,000 on the sale. The inventory is in the parent’s balance sheet at the year end.
Examine the treatment of intra-group transaction and pass the necessary journal entry.
Illustration 15: Elimination of intra-group profit on sale of assets by a parent to its subsidiary
In the above illustration, assume that it is the parent that makes the sale. The parent owns 60%
of a subsidiary. The parent sells some inventory to the subsidiary for ₹ 35,000 and makes a profit of ₹
15,000. On the sale the inventory is in the subsidiary’s balance sheet at the year end. Examine the
treatment of intra- group transaction and pass the necessary journal entry.
Illustration 16 - Inventories of subsidiary out of purchases from the parent

A Ltd, a parent company sold goods costing ₹ ‘200 lakh to its 80% subsidiary B Ltd. At ₹ 240 lakh. 50% of
these goods are lying at its stock. B Ltd. Has measured this inventory at cost i.e., at ₹ 120 lakh. Show the
necessary adjustment in the consolidated financial statements (CFS). Assume 30% tax rate.
Illustration 17: Inventories of parent out of purchases from the subsidiary

Ram Ltd., a parent company purchased goods costing ₹ 100 lakh from its 80% subsidiary Shyam Ltd. At ₹
120 lakh. 50% of these goods are lying at the godown. Ram Ltd. Has measured this inventory at cost i.e.,
at ₹ 60 lakh. Show the necessary adjustment in the consolidated financial statements (CFS). Assume 30%
tax rate.
Illustration 18: Property, plant and equipment (PPE) sold by parent to subsidiary
A Ltd. (which is involved in the business of selling capital equipment) a parent company sold a capital
equipment costing ₹ 100 lakh to its 80% subsidiary B Ltd. At ₹ 120 lakh. The capital equipment is recorded
as PPE by B Ltd. The useful life of the PPE on the date of transfer was 10 years. Show the necessary
adjustment in the consolidated financial statements (CFS)
Illustration 19: Attribution of profit / loss to non-controlling interest

A Ltd. Acquired 70% equity shares of B Ltd. On 1.4.20X1 at cost of ₹ 10,00,000 when B Ltd. Had an
equity share capital of ₹ 10,00,000 and other equity of ₹ 80,000. In the four consecutive years B Ltd. Fared
badly and suffered losses of ₹ 2,50,000, ₹ 4,00,000, ₹ 5,00,000 and ₹ 1,20,000 respectively. Thereafter in
20X5-20X6, B Ltd. Experienced turnaround and registered an annual profit of ₹ 50,000. In the next two
years i.e., 20X6-20X7 and 20X7-20X8, B Ltd. Recorded annual profits of ₹ 1,00,000, and ₹ 1,50,000
respectively.
Show the non- controlling interests and goodwill at the end of each year for the purpose of consolidation.
Assume that the assets are at fair value.
Illustration 20: Non-controlling interest and goodwill

From the following data, determine in each case:
 Non-controlling interest at the date of acquisition (using proportionate share method) and at the
date of consolidation
 Goodwill or Gain on bargain purchase.
 Amount of holding company’s share of profit in the consolidated Balance Sheet assuming holding
Company retain earnings to be Rs.2,00,000 in each case
40
Case Subsidiary % of Cost Date of Acquisition Consolidation date
Company shares 1.04.20X1 31.03.20X2
owned
Share Retained Share Retained
Capit earnings Capital earning
al [A] [B] [C] s [D]
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,00 70,000
0
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,00 20,000
0
Case 3 C 80% 56,000 50,000 20,000 50,000 20,000
Case 4 D 100% 1,00,000 50,000 40,000 50,000 56,000
The company has adopted an accounting policy to measure non-controlling interest at NCI’s proportionate
share of the acquiree’s identifiable net assets. It may be assumed that the fair value of acquiree’s net
identifiable assets is equal to their book values.
Illustration 21: Sale of 20% interest in a wholly- owned subsidiary

Entity P sells a 20% interest in a wholly owned subsidiary to outside investors for ₹ 100 lakh in cash. The
carrying value of the subsidiary’s net assets is ₹ 300 lakh, including goodwill of ₹ 65 lakh from the
subsidiary’s initial acquisition. Pass journal entries to record the transaction.
Illustration 22: Acquisition of additional stake in a subsidiary

Entity A acquired 60% of entity B two years ago for ₹ 6,000. At that time, entity B’s fair value was ₹
10,000. Lt had net assets with a fair value of ₹ 6,000 (which is assumed same as book value). Goodwill of
₹ 2,400 was recorded (being ₹ 6,000 – (60% x ₹ 6,000). On 1 October 20X0, entity A acquires a further
20% interest in entity B, taking its holding to 80%. At that time the fair value of entity B is ₹ 20,000 and
entity A pays ₹ 4,000 for the 20% interest. At the time of the purchase the fair value of entity B’s net
assets is ₹ 12,000 and the carrying amount of the non- controlling interest is ₹ 4,000.
Pass journal entries to record the transaction.

A Ltd. Acquired 10% additional shares of its 70% subsidiary. The following relevant information is
available in respect of the change in non-controlling interest on the basis of Balance Sheet finalized as on
1.4.20X0:
₹ in thousand
Separate financial statements As on
31.3.20X0
Investment in subsidiary (70% interest) – at cost 14,000
Purchase price for additional 10% interest 2,600
Consolidated financial statements

Non-controlling interests (30%) 6,600
Consolidated profit & loss account balance 2,000
Goodwill 600
The reporting date of the subsidiary and the parent is 31 March 20X0. Prepare note showing adjustment
for change of non-controlling interest. Should goodwill be adjusted for the change?
41
A Ltd. Acquired 70% shares of B Ltd. On 1.4.20X0 when the fair value of net assets of B Ltd. Was ₹ 200
lakh. During 20X0-20X1, B Ltd. Made profit of ₹ 100 lakh. Individual and consolidated balance sheets as
on 31.3.20X1 are as follows:
₹ lakh
A B Group
Assets
Goodwill 10
PPE 627 200 827
Financial assets:
Investments 150
Cash 200 30 230
Other current assets 23 70 93
1,000 300 1160
Equity and liability
Share capital 200 100 200
Other equity 800 200 870
Non-controlling interest 90
1,000 300 1160
A Ltd. Acquired another 10% stake in B Ltd. On 1.4.20X1 at ₹ 32 lakh. The proportionate carrying amount
of the non-controlling interest is ₹ 30 lakh. Show the individual and consolidated balance sheet of the
group immediately after the change in non-controlling interest
Illustration 25: Reduction in interest in subsidiary

Amla Ltd. Purchased a 100% subsidiary for ₹ 10,00,000 at the end of 20X1 when the fair value of the
subsidiary Lal Ltd.’s net asset was ₹ 8,00, 000.
The parent sold 40% of its investment in the subsidiary in March 20X4 to outside investors for ₹ 9,00,000.
The parent still maintains a 60% controlling interest in the subsidiary. The carrying value of the
subsidiary’s net assets is ₹ 18,00,000 (including net assets of ₹ 16,00,000 & goodwill of ₹ 2,00,000).
Calculate gain / loss on sale of interest in subsidiary as on 31st March 20X4.
Illustration 26: Reduction in interest in subsidiary

Entity A sells 30% interest in its wholly-owned subsidiary to outside investors in an arm’s length transaction
for
₹ 500 crore in cash and retains a 70% controlling interest in the subsidiary. At the time of the sale, the
carrying value of the subsidiary’s net assets in the consolidated financial statements of Entity A is ₹ 1,300
crore, additionally, there is a goodwill of ₹ 200 crore that arose on the subsidiary’s acquisition. Entity A
initially accounted for NCI representing present ownership interests in the subsidiary at fair value and it
recognises subsequent changes in NCI in the subsidiary at NCI’s proportionate share in aggregate of net
identifiable assets and associated goodwill. How should Entity A account for the transaction?
Illustration 27: Treatment of goodwill and non-controlling interest where a parent holds an indirect
interest in a subsidiary
A parent company (entity A) has an 80% owned subsidiary (entity B). Entity B makes an acquisition for
cash of a third company (entity C), which it then wholly owns. Goodwill of ₹ 1,00,000 arises on the
acquisition of entity C.
a) How should that goodwill be reflected in consolidated financial statement of entity A? Should
it be reflected as 100% of the goodwill with 20% then being allocated to the non- controlling
interest, or
b) 80% of the goodwill that arises?
42
Illustration 28: Preparation of consolidated financial statements
Given below are the financial statements of P Ltd and Q Ltd as on 31.3.20X1:
Balance Sheets (₹ in Lakhs)
P Ltd. Q Ltd.
Assets
Non-current assets
Property Plant Equipment 1,07,000 44,000
Financial Assets:
Non-Current Investments 5,000 1,000
Loans 10,000
Current Assets
Inventories 20,000 10,000
Financial Assets:
Trade Receivables 8,000 10,000
Cash and Cash Equivalents 38,000 1,000
Total Assets 1,88,000 66,000
Equity and Liabilities
Shareholders Fund
Share Capital 20,000 10,000
Other equity 1,20,000 40,000
Non-Current Liabilities
Financial Liabilities
Long term liabilities 30,000 10,000
Deferred tax liabilities 5,000 1,000
Long term provisions 5,000 1,000
Current Liabilities
Trade Payables 6,000 2,000
Short term Provisions 2,000 2,000
Total Equity & Liabilities 1,88,000 66,000
P Ltd. Q Ltd
Notes to Financial Statements

Reserve & Surplus
General Reserve 1,00,000 30,000
Retained earnings 20,000 10,000
1,20,000 40,000
Inventories
Raw Material 10,000 5,000
Finished Goods 10,000 5,000
20,000 10,000
(₹ in Lakhs)
43
Statement of Profit and Loss
For the year ended on 31st March,
20X2
Notes P Ltd. Q Ltd.
i. Statement of Profit and Loss for the year ended on 31st March 20X2
Sales 1 2,00,000 80,000
Other Income 2 3,000
Total Revenue (A) 2,03,000 80,000
Expenses
Raw Material Consumed 3 1,10,000 48,000
Change in inventories finished stock 4 (5,000) (3,000)
Employee benefit expenses 30,000 10,000
Finance Costs 5 2,700 1,000
Depreciation 7,000 4,000
Other Expenses 6 10,350 6,040
Total Expenses (B) 1,55,050 66,040
Profit Before Tax (A-B) 47,950 13,960

Tax Expense:
Current Tax 11 15,000 4,000
Deferred Tax 2,000 1,000
17,000 5,000
Profit after Tax 30,950 8,960

ii. Statement of Other Comprehensive
Income
Fair Value gain on investment in subsidiary 8 1,000 0
Fair Value gain on other non-current 8 500 250
investments*
1,500 250
* Note: Statement of Other Comprehensive Income shall present items that will not be reclassified to
profit or loss’ and ‘items that will be reclassified to profit and loss’. However, such bifurcations had not
been made above.
Statement of changes in Equity For the year ended in 31

March 20X2
SC General P&L FVReserve Total
P Ltd. Reserve
Balance as on 1.4.20X1 20,000 1,00,000 20,000 1,40,000

Dividend for the year 20X1- 20X2 (8,000) (8,000)
Dividend distribution tax (1,350) (1,350)
Dividend received from Subsidiary 1,680 1,680
Profit for the year 20X1-20X2 30,950 30,950
Fair value gain on 1,000

investment in subsidiary See 1,000
Note 7
500
Fair value gain on other non- 500
current investments in subsidiary
See Note 7
44
Transfer to reserve 20,000 (20,000)
Balance as on 31.3.20X2 20,000 1,20,000 23,280 1,500 1,64,780
Q Ltd.
Balance as on 1.4.20X1 10,000 30,000 10,000 50,000
Dividend for the year 20X1- (2,400) (2,400)
20X2 Dividend distribution tax (400) (400)
Profit for the year 20X1-20X2 8,960 8,960
Fair value gain on other non- 250
Current investments in subsidiary 250
See Note 7
Transfer to reserve 5,000 (5,000)

Balance as on 31.3.20X2 10,000 35,000 11,160 250 56,410
Balance Sheet as on 31st March, 20X2 Note P Ltd Q Ltd.

Assets
Non-current assets
Property Plant Equipment 7 1,17,000 45,000
Financial Assets:
Non-Current Investments 8 42,500 1,250
Long Term Loans 10,000
Current Assets
Inventories 35,000 15,000
Financial Assets:
Trade Receivables 10,000 8,000
Cash and Cash Equivalents 930 4200
(See Statement of Cash Flows)
Total Assets 2,15,430 73,450
Share Capital 20,000 10,000
Other equity (See Statement of changes in Equity) 1,44,780 46,410
1,64,780 56,410
Borrowings 30,000 10,000
Deferred tax liabilities 7,000 2,000
Long term provisions 9 4,600 930
41,600 12,930
Current Liabilities
Short term Provisions 10 1,050 110
9,050 4,110
Total Liabilities 50,650 17,040

Total Equity & Liabilities 2,15,430 73,450
45
Statement of Cash Flows
For the year ended on 31 March 20X2
P. Ltd. Q. Ltd
i. Cash Flows from operating activities
Profit after Tax 30,950 8,960
Add Back:
Current Tax 15,000 4,000
Deferred Tax 2,000 1,000
Depreciation 7,000 4,000
Finance Costs 2,700 1,000
Change In Provisions (1,350) (1,960)
Reversal of Interest Income (1000) 0
Working Capital Adjustments
Inventories (15,000) (5,000)
Trade Receivables (2,000) 2,000
40,300 16,000
Less: Advance Tax (15,000) (4,000)
25,300 12,000
ii. Cash flows from investment activities
Purchase of Property Plant Equipment (17,000) (5,000)
Acquisition of subsidiary (36,000) 0
Interest Income 1,000
Dividend Income 1,680

(50,320) (5,000)
iii. Cash Flow from financing activities
Dividend Payment (8,000) (2,400)
Dividend distribution tax (1,350) (400)
Interest payment (2,700) (1,000)
(12,050) (3,800)
Net Changes in Cash Flows (I + ii + iii) (37,070) 3,200
Balance of Cash and Cash Equivalents as on 38,000 1,000
1.4.20X1
Balance of Cash and Cash Equivalents as on 930 4,200
31.3.20X2
Notes P Ltd. Q Ltd.

Note 1 – Sales
Sales to Q Ltd. 20,000
Other Sales 1,80,000 80,000

2,00,000 80,000
Note 2 – Other Income
Interest from Q Ltd. 1,000
Royalty from Q Ltd. 2,000
3,000
46
Note 3 – Raw Material Consumed
Opening Stock 10,000 5,000
Purchases from P Ltd. 20,000
Other Purchases 1,20,000 30,000
Closing Stock 20,000 7,000
1,10,000 48,000
Note 4 – Change in inventories of finished stock
Opening Stock 10,000 5,000
Closing Stock 15,000 8,000
(5,000) (3,000)
Note 5 – Finance Costs
Interest 2,700
Interest to P Ltd. 1,000

2,700 1,000
Note 6 – Other Expenses
Long term provisions 100 30
Short Term provisions 50 10
Royalty to P Ltd. 2,000
Others 10,000 4,000
Acquisition Expenses 200 __ _
10,350 6,040
Note 7 – Property Plant Equipment
New Purchases 17,000 5,000
Note 8 – Fair value of non-current investments
Investments in subsidiary 37,000
1,250
Other Investments 5,500
42,500 1,250
Fair Value Gain
Investments in subsidiary 1,000 0
Other investments 500 250
1,500 250
Note 9 – Long term provisions
Balance as on 1.4.20X1 5,000 1,000
Transfer to short term provisions (500) (100)
New Provision 100 30
Balance as on 31.3.20X2 4,600 930
Note 10 – Short term provisions
Balance as on 1.4.20X1 2,000 2,000
Transfer from long term provisions 500 100
Payment (1,500) (2,000)
New 50 10
Balance as on 31.3.20X2 1,050 110
Note 11 – Provisions for Tax & Advance Tax
Tax Provision 15,000 4,000
Less: Advance Tax 15,000 4,000
47
0 0
On 1.4.20X1, P Ltd. Acquired 70% of equity shares (700 lakhs out of 1,000 lakhs shares) of Q Ltd. At
₹36,000 lakhs.
The company has adopted an accounting policy to measure Non-controlling interest at fair value (quoted
market price) applying Ind AS 103. Accordingly, the company computed full goodwill on the date of
acquisition. Shares of both the companies are of face value ₹ 10 each. Market price per share of Q Ltd. As
on 1.4.20X1 is
₹ 55. Entire long-term borrowings of Q Ltd. Is from P Ltd. The fair value of net identifiable assets is at ₹
50,000 lakhs.
P Ltd. Has decided to account for investment in subsidiary at fair value through other comprehensive
income as per Ind AS 27. Other non-current investments are classified as financial assets at fair value
other comprehensive income by irrevocable choice as per Ind AS 109. There is no tax capital gains.
The group has paid dividend for the year 20X0-20X1 and transferred to reserve out of profit for 20X1-
20X2 as follows: (₹in
lakhs)
P Ltd .Q
Ltd.
Share of P Non - Total
Dividend for the year 20X1-20X2 Ltd. controlling
interest
Dividend 8,000 1,680 720 2,400
Dividend distribution tax 1,350 280 120 400
9,350 1,960 840 2,800
Transfer to reserve out of profit for the 20,000
year 20X1-20X2
Trade receivables of P Ltd, include ₹ 3,000 Lakhs due from Q Ltd.
Based on the above financial statements for the year ended on 31 March, 20X2 and information given,
prepare Consolidated Financial Statements.
48
Illustration 29: Chain holding (NOV 2018)
Prepare the consolidated Balance Sheet as on 31st March, 20X2 of a group of companies comprising P
Limited, S Limited and SS Limited. Their balance sheets on that date are given below:
₹ in lakhs
P Ltd. S Ltd. SS Ltd.
Assets
Non-Current Assets
Property, Plant and Equipment Investment: 320 360 300
Investment:
32 lakh shares in S Ltd. 340
24 lakh shares in SS Ltd. 280
Current Assets
Inventories 220 70 50
Financial Assets
Trade Receivables 260 100 220
Bills Receivables 72 30
Cash in hand and at Bank 228 40 40
1440 850 640
Shareholder’s Equity
Share Capital (₹ 10 per share) 600 400 320
Other Equity
Reserves 180 100 80
Retained earnings 160 50 60
Current Liabilities
Trade Payables 470 230 180
Bills Payable
P Ltd. 70
SS Ltd. 30
1440 850 640
The following additional information is available:

I. P Ltd. Holds 80% shares in S Ltd. And S Ltd. Holds 75% shares in SS Ltd. Their holdings
were acquired on 30th September, 20X1.
II. The business activities of all the companies are not seasonal in nature and therefore, it can
be assumed that profits are earned evenly throughout the year.
III. On 1st April, 20X1 the following balances stood in the books of S Ltd. And SS Ltd. ₹ in Lakhs
S Limited SS Limited
Reverse 80 60
Retained Earnings 20 30
IV. ₹ 10 lakhs included in the inventory figure of S ltd, is inventory which has been purchased from
SS Ltd at cost plus 25%.
V. The parent company has adopted an accounting policy to measure non-controlling interest at fair
value (quoted market price) applying Ind AS 103. Assume market prices of S Ltd and SS Ltd are
the same as respective face values.
49
Illustration 30: Subsidiary issues shares to a third party and parent loses control
In March 20X1 a group had a 60% interest in subsidiary with share capital of 50,000 ordinary shares. The
carrying amount of goodwill is ₹ 20,000 at March 20X1 calculated using the partial goodwill method. On
31 March 20X1, an option held by the minority shareholders exercised the option to subscribe for a
further 25,000 ordinary shares in the subsidiary at ₹ 12 per share, raising ₹ 3,00,000.
The net assets of the subsidiary in the consolidated balance sheet prior to the option’s exercise were ₹
4,50,000, excluding goodwill. Calculate gain or loss on loss of interest in subsidiary due to option
exercised by minority shareholder.
Illustration 31: Calculation of gain on outright sale of subsidiary
A parent purchased 80% interest in a subsidiary for ₹ 1,60,000 on 1 April 20X1 when the fair value of the
subsidiary’s net assets was ₹ 1,75,000. Goodwill of ₹ 20,000 arose on consolidation under the partial
goodwill method. An impairment of goodwill of ₹ 8,000 was charged in the consolidated financial
statements for year ended 31 March 20X3. No other impairment charges have been recorded. The
parent sold its investment in the subsidiary on 31 March 20X4 for ₹ 2,00,000. The book value of the
subsidiary’s net assets in the consolidated financial statements on the date of the sale was ₹ 2,25,000 (not
including goodwill of ₹ 12,000).
When the subsidiary met the criteria to be classified as held for sale under Ind AS 105, no write off was
required because the expected fair value less cost to sell (of 100% of the subsidiary) was greater than the
carrying value.
The parent carried the investment in the subsidiary in its separate financial statements at cost, as
permitted by Ind AS 27.
Calculate gain or loss on disposal of subsidiary in parent’s separate and consolidated financial statements
as on 31st March 20X4.
Illustration 32: Partial disposal when subsidiary becomes an associate

AT Ltd. Purchased a 100% subsidiary for ₹ 50,00,000 on 31st March 20X1 when the fair value of the net
assets of BT Ltd. Was ₹ 40,00,000. Therefore, goodwill is ₹ 10,00,000. AT Ltd. Sold 60% of its investment
in BT Ltd. On 31st March 20X3 for ₹ 67,50,000, leaving the AT Ltd. With 40% and significant influence. At
the date of disposal, the carrying value of net assets of BT Ltd. Excluding goodwill is ₹ 80,00,000. Assume
the fair value of the investment in associate BT Ltd. Retained is proportionate to the fair value of the
60% sold, that is
₹ 45,00 000.
Calculate gain or loss on sale of proportion of BT Ltd. In AT Ltd.’s separate and consolidated financial
statements as on 31st March 20X3.
Illustration 33: Partial disposal when 10% investment in former subsidiary is retained
The facts of this illustration are same per the above Illustration, except the group AT Ltd. Disposes of a
90% interest for ₹ 85,50,000 leaving the AT Ltd. With a 10% investment. The fair value of the remaining
interest is ₹ 9,50,000 (assumed for simplicity to be pro rata to the fair value of the 90% sold)
Calculate gain or loss on sale of proportion of BT Ltd. In AT Ltd.’s separate and consolidated financial
statements as on 31st March 20X3.
50
Illustration 34: Loss control of a subsidiary in two transactions
MN Ltd. was holding 80% stake in UV Ltd. Now, MN Ltd. has disposed of the entire stake in UV Ltd. in two
different transactions as follows:
 Transaction 1: Sale of 25% stake for a cash consideration of ₹ 2,50,000
 Transaction 2: Sale of 55% stake for a cash consideration of ₹ 5,50,000
Both the transactions have happened within a period of one month. In accordance with the guidance
given in Ind AS 110, both the transactions have to be accounted as a single transaction.
The net assets of UV Ltd. and non-controlling interest on the date of both the transactions was ₹ 9,00,000 and
₹ 1,80,000 respectively (assuming there were no earnings between the period of two
transactions). How MN Ltd. should account the transaction?
Illustration 35: An entity ceases to be an investment entity

A Limited ceased to be in investment entity from 1st April 20X1 on which date it was holding 80% of B
Limited. The carrying value of such investment in B Limited (which was measured at fair value through
profit or loss) was ₹ 4,00,000. The fair value of non-controlling interest on the date of change in status
was ₹ 1,00,000. The value of subsidiary's identifiable net assets as per Ind AS 103 was ₹ 4,50,000 on the
date of change in status. Determine the value of goodwill and pass the journal entry on the date of change
in status f investment entity. (Assume that non-controlling interest is measured at fair value method)
Illustration 36: An entity becomes an investment entity

CD Ltd. purchased a 100% subsidiary for ₹ 20,00,000 on 31st March 20X1 when the fair value of the net
assets of KL Ltd. was ₹ 16,00,000. Therefore, goodwill was ₹ 4,00,000. CD Ltd. becomes an investment
entity on 31st March 20X3 when the carrying value of its investment in KL Ltd. (measured at fair value
through profit or loss) was ₹ 25,00,000. At the date of change in status, the carrying value of net assets
of KL Ltd. excluding goodwill was ₹ 19,00,000.
Calculate gain or loss with respect to investment in KL Ltd. on the date of change in investment entity
status of CD Ltd.
51
IND AS 111–JOINT ARRANGEMENTS
Illustration 1: Joint control

ABC Ltd. and DEF Ltd. have entered into a contractual arrangement to manufacture a product and sell
that in retail market. As per the terms of the arrangement, decisions about the relevant activities require
consent of both the parties. The parties share the returns of the arrangement equally amongst them.
Whether the arrangement can be treated as joint arrangement?
Illustration 2: Implicit joint control

PQR Ltd. and XYZ Ltd. established an arrangement in which each has 50% of the voting rights and the
contractual arrangement between them specifies that at least 51% of the voting rights are required to
make decisions about the relevant activities. Whether the arrangement can be treated as joint
arrangement?
Illustration 3: Implicit joint control

A Ltd., B Ltd. and C Ltd. established an arrangement whereby A Ltd. has 50% of the voting rights in the
arrangement, B Ltd. has 30% and C has 20%. The contractual arrangement between A Ltd., B Ltd. and
C Ltd. specifies that at least 75% of the voting rights are required to make decisions about the relevant
activities of the arrangement. Whether the arrangement can be treated as joint arrangement?
Illustration 4: Explicit joint control

An arrangement has three parties: X Ltd. has 50% of the voting rights in the arrangement and Y Ltd. and
Z Ltd. each have 25%. The contractual arrangement between them specifies that at least 75% of the
voting rights are required to make decisions about the relevant activities of the arrangement. Whether the
arrangement can be treated as joint arrangement?
Illustration 5: Explicit joint control

An arrangement has A Ltd. and B Ltd. each having 35% of the voting rights in the arrangement with the
remaining 30% being widely dispersed. Decisions about the relevant activities require approval by a
majority of the voting rights. Whether the arrangement can be treated as joint arrangement?
Illustration 6: Joint control through board representation

Electronics Ltd. is established by two investors R Ltd. and S Ltd. The investors are holding 60% and
40%of the voting power of the investee respectively.
As per the articles of association of Electronics Ltd., both the investors have right to appoint 2 directors
each on the board of Electronics Ltd. The directors appointed by each investor will act in accordance with
the directions of the investor who has appointed such director. Further, articles of association provides
that the decision about relevant activities of the entity will be taken by board of directors through simple
majority.
Illustration 7: Chairman with casting vote

MN Software Ltd. is established by two investors M Ltd. and N Ltd. Both the investors are holding 50% of the
voting power each of the investee.
As per the articles of association of MN Software Ltd., both the investors have right to appoint 2 directors
each on the board of the company. The directors appointed by each investor will act in accordance
with the directions of the investor who has appointed such director. The decision about relevant activities
of the entity will be taken by board of directors through simple majority. Articles of association also provides
that M Ltd. has right to appoint the chairman of the board who will have right of a casting vote in case of a
deadlock situation. Determine whether MN Software Ltd. is jointly controlled by both the investors.
52
Illustration 8: Equal voting rights but no joint control
ABC Ltd. is established by two investors AB Ltd. and BC Ltd. Each investor is holding 50% of the voting
power of the investee.
As per the articles of association of ABC Ltd., AB Ltd. and BC Ltd. have right to appoint 3 directors and 2
directors respectively on the board of ABC Ltd. The directors appointed by each investor will act in
accordance with the directions of the investor who has appointed such director. Further, articles of
association provides that the decision about relevant activities of the entity will be taken by board of
directors through simple majority.
Determine whether ABC Ltd. is jointly controlled by both the investors.
Illustration 9: Joint control over specific asset

X Ltd. and Y Ltd. entered into a contractual arrangement to buy a piece of land to construct residential
units on the said land and sell to customers.
As per the arrangement, the land will be further divided into three equal parts. Out of the three parts,
both the parties will be responsible to construct residential units on one part each by taking decision
about relevant activities independently and they will entitled for the returns generated from their own part
of land. The third part of the land will be jointing managed by both the parties requiring unanimous
consent of both the parties for all the decision making.
Determine whether the arrangement is a joint arrangement or not.
Illustration 10: Multiple relevant activities directed by different investors

Entity R and entity S established a new entity RS Ltd. to construct a national highway and operate the
same for a period of 30 years as per the contract given by government authorities.
As per the articles of association of RS Ltd, construction of the highway will be done by entity R and all
the decisions related to construction will be taken by entity R independently. After the construction is
over, entity S will operate the highway for the period of 30 years and all the decisions related to operating
of highway will be taken by entity S independently. However, decisions related to funding and capital
structure of RS Ltd. will be taken by both the parties with unanimous consent.
Determine whether RS Ltd. is a joint arrangement between entity R and entity S?
Illustration 11: Informal agreement for sharing of control

An entity has four investors A, B, C and D holding 10%, 20%, 30% and 40% voting power respectively.
The articles of association requires decisions about relevant activities to be taken by majority voting
rights. However, investor A, B and C have informally agreed to vote together. This informal agreement has
been effective in recent meetings of the investors to take decisions about relevant activities. Whether A, B
and C have joint control over the entity?
Illustration 12: Party with protective rights

D Ltd., E Ltd. and F Ltd. have established a new entity DEF Ltd. As per the arrangement, unanimous
consent of all three parties is required only with respect to decisions related to change of name of the
entity, amendment to constitutional documents of the entity to enter into a new business, change in the
registered office of the entity, etc. Decisions about other relevant activities require consent of only D Ltd.
and E Ltd. Whether F Ltd. is a party with joint control of the arrangement?
Illustration 13: Resolution of disputes without unanimous consent

Entity A and Entity B established a contractual arrangement whereby the decision related to relevant
activities are required to be taken by unanimous consent of both the parties. However, in case of any
dispute with any vendor or customer of the arrangement, entity A has right to take necessary decisions
for the resolution of disputes including decisions of going for the arbitration or filing a suit in court of law.
Whether the arrangement is a joint arrangement?
53
Illustration 14: Joint operation
P Ltd. and Q Ltd. are two construction entities and they have entered into a contractual arrangement to
jointly construct a metro rail projec
The construction of metro rail project involves various activities such as construction of infrastructure (like
metro station, control room, pillars at the centre of the road, etc.) for the metro, laying of the tracks,
acquiring of the coaches of the metro, etc. The total length of the metro line to be constructed is 50 kms.
As per the arrangement, both the parties are responsible to construct 25 kms each. Each party is required
to incur its own cost, use its own assets, incur the liability and has right to the revenue from their own part
of the work.
Determine whether the arrangement is a joint operation or not?
Illustration 15: Joint operation by sharing an asset

RS Ltd. and MN Ltd. entered into a contractual arrangement to run a business of providing cars of hire.
The cars will be owned by both the parties jointly. The expenses to run the car (like driver salary, petrol,
maintenance, insurance, etc.) and revenues from the business will be shared between both the parties as
agreed in the contractual arrangement. Determine whether the arrangement is a joint operation or not?
Illustration 16: Legal form indicates the arrangement to be a joint venture

Entity X and Entity Y are engaged in the business of Engineering, Procurement and Construction (EPC) for
its customers. Both the parties have jointly won a contract from a customer for executing an EPC contract
and for that the parties have established a new entity XY Ltd. The contract will be executed through XY
Ltd.
All the assets required for the execution of the contract will be acquired and liabilities relating to the
execution will be incurred by XY Ltd. in its own name. Entity X and entity Y will have share in the net
profits of XY Ltd. in the ratio of their shareholding i.e. 50% each. Assuming that the arrangement meets
the definition of a joint arrangement, determine whether the joint arrangement is a joint operation or a
joint venture?
Illustration 17: Legal form indicates the arrangement to be a joint operation

Two entities have established a partnership firm with each party having 50% share in the net profits of
the firm. Assuming that the arrangement meets the definition of a joint arrangement, determine whether
the joint arrangement is a joint operation or a joint venture?
Illustration 18: Assessing the terms of the contractual arrangement

Continuing with the illustration 16 above, assume that Entity X and Entity Y have entered into a separate
agreement whereby they have agreed that each party has an interest in the assets of the XY Ltd. and
each party is liable for the liabilities of XY Ltd. in a specified proportion. Determine whether the joint
arrangement is a joint operation or a joint venture?
Illustration 19: Assessing other facts and circumstances

Two parties structure a joint arrangement in an incorporated entity i.e. Entity A in which each party has a
50% ownership interest. The purpose of the arrangement is to manufacture materials required by the
parties for their own, individual manufacturing processes. The arrangement ensures that the parties
operate the facility that produces the materials to the quantity and quality specifications of the parties.
The legal form of Entity A (an incorporated entity) through which the activities are conducted initially
indicates that the assets and liabilities held in Entity A are the assets and liabilities of Entity A. The
contractual arrangement between the parties does not specify that the parties have rights to the assets or
obligations for the liabilities of Entity A. There are following other relevant facts and circumstances
applicable in this case:
54
 The parties agreed to purchase all the output produced by Entity A in a ratio of 50:50. Entity A
cannot sell any of the output to third parties, unless this is approved by the two parties to the
arrangement. Because the purpose of the arrangement is to provide the parties with output they
require, such sales to third parties are expected to be uncommon and not material.
 The price of the output sold to the parties is set by both parties at a level that is designed to cover
the costs of production and administrative expenses incurred by Entity A. On the basis of this
operating model, the arrangement is intended to operate at a break-even level.
Based on the above fact pattern, determine whether the arrangement is a joint operation or a joint venture?
Illustration 20: Multiple joint arrangements under single framework agreement

AB Ltd. and CD Ltd. have entered into a framework agreement to manufacture and distribute a new
product i.e., Product X. The two activities to be performed as per the framework agreement are
Manufacture of Product X and ii) Distribution of Product X. The manufacturing of the product will not be
done through a separate vehicle. The parties will purchase the necessary machinery in their joint name.
For the distribution of the product, the parties have established a new entity ABCD Ltd. All the goods
manufactured will be sold to ABCD Ltd. as per price mutually agreed by the parties. Then ABCD Ltd. will
do the marketing and distribution of the product. Both the parties will have joint control over ABCD Ltd.
The legal form of ABCD Ltd. causes it to be considered in its own right (ie the assets and liabilities
held in ACD Ltd. are the assets and liabilities of ABC Ltd. and not the assets and liabilities of the parties).
Further, the contractual arrangement and other relevant facts and circumstances also do not indicate
otherwise.
Determine whether various arrangements under the framework agreement are joint operation or joint
venture?
Illustration 21: Accounting of interest in joint operation

P and Q form a joint arrangement PQ using a separate vehicle. P and Q each own 50% of the capital of
PQ. However, the contractual terms of the joint arrangement states that P has the rights to all of
Machinery and the obligation to pay Bank Loan in PQ. P and Q have rights to all other assets in PQ and
obligations for all other liabilities in PQ in proportion to their share of capital (i.e. 50% each). PQ’s balance
sheet is as follows:
Balance Sheet
Liabilities ₹ Assets ₹
Capital 1,50,000 Machinery 2,50,000
Bank Loan 75,000 Cash 50,000
Other Loan 75,000
3,00,000 3,00,000
How should P record in its financial statements its rights and obligations in PQ?
Illustration 22: Accounting of interest in joint operation (RTP MAY’20)
AB Ltd. and BC Ltd. have established a joint arrangement through a separate vehicle PQR. The legal form
of the separate vehicle does not confer separation between the parties and the separate vehicle itself.
Thus, both the parties have rights to the assets and obligations for the liabilities of PQR. As neither the
contractual terms nor the other facts and circumstances indicate otherwise, it is concluded that the
arrangement is a joint operation and not a joint venture.
Both the parties own 50% each of the equity interest in PQR. However, the contractual terms of the joint
arrangement state that AB Ltd. has the rights to all of Building No. 1 owned by PQR and the obligation to
55
pay all of the debt owned by PQR to a lender XYZ. AB Ltd. and BC Ltd. have rights to all other assets of
PQR and obligations for all other liabilities of PQR in proportion of their equity interests (i.e. 50% each)
PQR’s balance sheet is as follows:

Balance sheet
Liabilities ₹ Assets ₹
Debt owed to XYZ 240 Cash 40
Employee benefit plan obligation 100 Building 1 240
Equity 140 Building 2 200
480 480
How should AB Ltd. record in its financial statements its rights and obligations in PQR?
Illustration 23: Accounting for sales or contributions of assets to a joint operation

A Ltd. is one of the parties to a joint operation holding 60% interest in a joint operation and the balance
40% interest is held by another joint operator. A Ltd. has contributed an asset held by it to the joint
operation for the activities to be conducted in joint operation. The carrying value of the asset sold was ₹
100 and the asset was actually sold for ₹ 80 i.e. at a loss of ₹ 20. How should A Ltd. account for the sale
of asset to joint operation in its books?
Illustration 24: Accounting for purchases of assets from a joint operation

A Ltd. is one of the parties to a joint operation holding 60% interest in the joint operation and the balance
40% interest is held by another joint operator. A Ltd. has purchased an asset from the joint operation.
The carrying value of the asset in the books of joint operation was ₹ 100 and the asset was actually
purchased for ₹ 80 i.e. at a loss of ₹ 20. How should A Ltd. account for the purchase of asset from joint
operation in its books?
56
IND AS 28–INVESTMENT IN ASSOCIATES & JOINTVENTURES
Illustration 1: Significant influence

E Ltd. holds 25% of the voting power of an investee. The balance 75% of the voting power is held by
three other investors each holding 25%.
The decisions about the financing and operating policies of the investee are taken by investors holding
majority of the voting power. Since, the other three investors together hold majority voting power, they
generally take the decisions without taking the consent of E Ltd. Even if E Ltd. proposes any changes to
the financing and operating policies of the investee, the other three investors do not vote in favour of
those changes. So, in effect the suggestions of E Ltd. are not considered while taking decisions related to
financing and operating policies. Determine whether E Ltd. has significant influence over the investee?
Illustration 2 : Representation on board

Kuku Ltd. holds 12% of the voting shares in Boho Ltd. Boho Ltd.'s board comprise of eight members and
two of these members are appointed by Kuku Ltd. Each board member has one vote at meeting. is Boho
Ltd an associate of Kuku Ltd?
Illustration 3: Participation in policy-making processes

M Ltd. holds 10% of the voting power an investee. The balance 90% voting power is held by nine other
investors each holding 10%.
The decisions about the relevant activities (except decision about taking borrowings) of the investee are
taken by the members holding majority of the voting power. The decisions about taking borrowings are
required to be taken by unanimous consent of all the investors. Further, decisions about taking borrowing
are not the decisions that most significantly affect the returns of the investee.
Determine whether M Ltd. has significant influence over the investee?
Illustration 4: Material transactions between the entity and its investee

RS Ltd. is an entity engaged in the business of pharmaceuticals. It has invested in the share capital of an
investee XY Ltd. and is holding 15% of XY Ltd.’s total voting power. XY Ltd. is engaged in the business of
producing packing materials for pharmaceutical entities. One of the incentives for RS Ltd. to invest in XY
Ltd.
was the fact that XY Ltd. is engaged in the business of producing packing materials which is also useful for
RS Ltd. Since last many years, XY Ltd.’s almost 90% of the output is procured by RS Ltd.
Determine whether RS Ltd. has significant influence over XY Ltd.?
Illustration 5: Interchange of managerial personnel

Entity X and entity Y operate in the same industry, but in different geographical regions. Entity X acquires
a 10% shareholding in entity Y as a part of a strategic agreement. A new production process is key to
serve a fundamental change in the strategic direction of entity Y. The terms of agreement provide for
entity Y to start a new production process under the supervision of two managers from entity X. The
managers seconded from entity X, one of whom is on entity X's board, will oversee the selection and
recruitment of new staff, the purchase of new equipment, the training of the workforce and the
negotiation of new purchase contracts for raw materials. The two managers will report directly to entity
Y's board and as well as to entity X. Analyse.
Illustration 6: Provision of essential technical information

R Ltd. is a tyre manufacturing entity. The entity has entered into a technology transfer agreement with
another entity Y Ltd. which is also involved in the business of tyre manufacturing. R Ltd. is an established
entity in this business whereas Y Ltd. is a relatively new entity.
As per the agreement, R Ltd. has granted to Y Ltd. a license to use its the technical information and
57
know- how which are related to the processes for the manufacture of tyres. Y Ltd. is dependent on the
technical information and know-how supplied by R Ltd. because of its lack of expertise and experience in
this business. Further, R Ltd. has also invested in 10% of the equity share capital of Y Ltd.
Determine whether R Ltd. has significant influence over Y Ltd.?

An entity which is currently holding 10% of the voting power of an entity has an option of purchase
additional 15% voting power of the investee from other investors. However, the entity currently does not
have financial ability to purchase additional 15% voting power of the investee. Determine whether the
entity has significant influence over the investee?
Illustration 8: Accounting entries related investment in associate / joint venture

On the first day of a financial year, A Ltd. invested in the equity share capital of B Ltd. at a cost of ₹
1,00,000 to acquire 25% share in the voting power of B Ltd. A Ltd. has concluded that B Ltd. is an
associate of A Ltd. At the end of the year, B Ltd. earned profit of ₹ 10,000 and other comprehensive
income of ₹ 2,000. In that year, B Ltd. also declared dividend to the extent of ₹ 4,000. Pass necessary
entries in the books of A Ltd. to account for the investment in associate.
Illustration 9: Exemption from applying equity method

MNO Ltd. holds 15% of the voting power of DEF Ltd. PQR Mutual Fund (which is a subsidiary of MNO Ltd.)
also holds 10% voting power of DEF Ltd. Hence, MNO Ltd. holds total 25% voting power of DEF Ltd. (15%
held by own and 10% held by subsidiary) and accordingly has significant influence over DEF Ltd. How
should MNO Ltd. account for investment in DEF Ltd. in its consolidated financial statements?
Illustration 10: Acquisition of interest in an associate

Blue Ltd. acquired 25% of the equity share capital of Green Ltd. on the first day of the financial year for ₹
1,25,000. As of that date, the carrying value of the net assets of Green Ltd. was ₹ 3,00,000 and the fair
value was ₹ 4,00,000. The excess of fair value over the carrying value was attributable to one of the
buildings owned by Green Ltd. having a remaining useful life of 20 years. Green Ltd. earned profit of ₹
40,000 and other comprehensive income of ₹ 10,000 during the year. Calculate the goodwill / capital
reserve on the date of acquisition, Blue Ltd.’s share in the profit and other comprehensive income for the
year and closing balance of investment at the end of the year.
Illustration 11: Cumulative preference shas issued by associate or joint venture

KL Ltd. has invested in 50% voting power of a joint venture MN Ltd. MN Ltd. has also issued 10%
cumulative preference shares to other investors worth ₹ 10,00,000. During the year, MN Ltd. earned
profit of ₹ 4,00,000. Also, MN Ltd. has not declared any dividend on the preference shares for current
year. Calculate KL Ltd.’s share in the net profit of MN Ltd. for the year.
Illustration 12: Share in the consolidated financial statements of associate (ASKED IN PP

NOV’20)
Entity A holds a 20% equity interest in Entity B (as associate) that in turn has a 100% equity interest in
Entity
C. Entity B recognised net assets relating to Entity C of ₹ 1,000 in its consolidated financial statements.
Entity B sells 20% of its interest in Entity C to a third party (a non-controlling shareholder) for ₹ 300 and
recognises this transaction as an equity transaction in accordance with paragraph 23 of Ind AS 110,
resulting in a credit in Entity B’s equity of ₹ 100.
The financial statements of Entity A and Entity B are summarised as follows before and after the transaction:
58
Before
A’s consolidated financial statements
Assets Total Liabilities Total
Investment in B 200 Equity 200
Total 200 Total 200
B’s consolidated financial statements

Assets Total Liabilities Total
Assets (from C) 1,000 Equity 1,000
Total 1,000 Total 1,000
The financial statements of B after the transaction are summarised below:

After
B’s consolidated financial statements
Assets ₹ Liabilities ₹
Assets (from C) 1,000 Equity 1,000
Cash 300 Equity transaction with non-controlling interest 100
Equity attributable to owners 1100
Total 1300 Total 1300
Although Entity A did not participate in the transaction, Entity A's share of net assets in Entity B increased
as a result of the sale of B's 20% interest in C. Effectively, A's share in B's net assets is now ₹ 220 (20% of
₹ 1,100)i.e., ₹ 20 in addition to its previous share.
How is an equity transaction that is recognised in the financial statements of Entity B reflected in the
consolidated financial statements of Entity A that uses the equity method to account for its investment in
Entity B?
Illustration 13: Upstream and downstream transaction between an entity and its associate
Scenario A
M Ltd. has invested in 40% share capital of N Ltd. and hence N Ltd. is an associate of M Ltd. During the
year, N Ltd. sold inventory to M Ltd. for a value of ₹ 10,00,000. This included profit of 10% on the
transaction price
i.e. profit of ₹ 1,00,000. Out the above inventory, M Ltd. sold inventory of ₹ 6,00,000 to outside
customers. Hence, the inventory of ₹ 4,00,000 purchased from N Ltd. is still lying with M Ltd. Determine
the unrealised profit to be eliminated on above transaction.
Scenario B
Assume the same facts as per Scenario A except that the inventory is sold by M Ltd. to N Ltd. instead
of N Ltd. selling to M Ltd. Determine the unrealised profit to be eliminated on above transaction.
Illustration 14: Impairment loss on downstream and upstream transaction between an entity
and its joint venture
Scenario A
X Ltd. has invested in a joint venture Y Ltd. by holding 50% of its equity share capital. During the year, X
Ltd. sold an asset to Y Ltd. at its market value of ₹ 8,00,000. The asset’s carrying value in X Ltd.’s books
was ₹ 10,00,000. Determine how should X Ltd. account for the sale transaction in its books.
Scenario B
Assume the same facts as per Scenario A except that the asset is sold by Y Ltd. to X Ltd. Instead of X Ltd.
selling to Y Ltd. Determine how should X Ltd. account for the above transaction in its books.
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Illustration 15: Loss making associate and long-term interests
An entity has following three type interests in an associate:
 Equity shares: 25% of the equity shares to which equity method of accounting is applied
 Preference shares: Non-cumulative preference shares that form part of net investment in the
associate. Such preference shares are measured at fair value as per Ind AS 109.
 Long-term loan: The loan carrying interest of 10% p.a. The interest income is received at the end
of each year. The long-term loan is accounted as per amortised cost as per Ind AS 109. This loan
also forms part of net investment in the associate.
At the start of year 1, the carrying value of each of the above interests is as follows:
 Equity shares – ₹ 10,00,000
 Preference shares – ₹ 5,00,000
 Long-term loan – ₹ 3,00,000
Following table summarises the changes in the fair value of preference shares as per Ind AS 109,
impairment loss on long-term loan as per Ind AS 109 and entity’s share in profit / loss of associate for
year 1-5.
End of Increase / (Decrease) in fair value Impairment loss / (reversal) Entity’s share in
Year of preference shares as per Ind on long-term loan as per Ind profit / (loss) of
AS 109 AS 109 associate
1 (50,000) (50,000) (16,00,000)
2 (50,000) - (2,00,000)
3 1,00,000 50,000 -
4 50,000 - 10,00,000
5 30,000 - 10,00,000
Throughout year 1 to 5, there has been no objective evidence of impairment in the net investment in the
associate. The entity does not have any legal or constructive obligation to share the losses of the
associate beyond its interest in the associate.
Based on above, determine the closing balance of each of the above interests at the end of each year.
Illustration 16: Recording in profit or loss of the gain / loss on discontinuation of equity
method
CD Ltd. held 50% of the voting power of RS Ltd. which is a joint venture of CD Ltd. The carrying value of
the investment in RS Ltd. is ₹ 1,00,000. Now out of the 50% stake, CD Ltd. has sold 20% stake in RS Ltd.
to a third party for a consideration of ₹ 80,000. The fair value of the retained 30% interest is ₹ 1,20,000.
Determine how much gain / loss should be recorded in profit or loss of CD Ltd.
Illustration 17: Investment in joint venture held for sale

Ram Ltd. holds 50% of the equity share capital of Shyam Ltd. The balance 50% equity share capital is
held by another investor. Ram Ltd. has joint control over Shyam Ltd. and it is a joint venture of Ram Ltd.,
accounted using equity method. Now Ram Ltd. is planning to sell 10% of the equity share capital of
Shyam Ltd. to a third party. Such 10% investment meets the criteria of an asset held for sale and has
been measured and disclosed accordingly. Now determine how should Ram Ltd. account 40% interest
retained in Shyam Ltd.
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IND AS 27– SEPARATE FINANCIAL STATEMENTS
Illustration 1: Reorganisation of the group structure

Following is the existing and proposed group structure of an original parent A Ltd.
Existing structure Proposed structure

Owners Owners
100%
New Co. 100%
100%
Company A
Company
100% 100%
A
Company B Company C
100% 100%
Company B Company C
As per the above structure, the Owners of Company A will transfer all their shareholding in Company A to
New Co. In exchange of such shares, New Co. will issue its equity shares to the Owners. New Co. will issue
the shares to the owners in the same ratio of their existing holding in Company A so that they have same
absolute and relative interests in the net assets of the group immediately before and after the
reorganisation. The assets and liabilities of the group immediately before the and after the proposed
restructuring will also be the same.
The cost of the investment in Company A in the books of the Owners is ₹ 10 lakh. Total equity of
Company A (i.e. equity share capital and other equity attributable to the owners) as per its separate
financial statements on the date of proposed restructuring is ₹ 15 lakh.
After the proposed restructuring, New Co. wants to record its investment in Company A at cost.
Determine how it should measure the cost of investment in Company A?
TEST YOUR KNOWLEDGE QUESTIONS

Question 1
X Limited was holding 100% of the equity share capital of Y Limited and Y Limited was treated as a
subsidiary by X Limited. Now, Y Limited issues convertible preference shares to Z Limited. As per the
issue document of convertible preference shares, Z Limited also gets the rights to participate in the
relevant activities of Y Limited whereby Z Limited’s consent is also necessary to pass any decision by
the equity shareholder of Y Limited (i.e. X Limited). Determine how should X Limited account for its
investment in Y Limited in its consolidated financial statements after the issue of convertible preference
shares by Y Limited to Z Limited?
Question 2
M Limited holds 90% interest in subsidiary N Limited. N Limited holds 25% interest in an associate O
Limited. As at 31 March 20X1, the net assets of O Limited was 300 lakhs including profit of ₹ 40 lakhs for
the year ended 31 March 20X1. Calculate how the investment in O Limited will be accounted in the
consolidated financial statements of M Limited?
Question 3
AB Limited holds 30% interest in an associate which it has acquired for a cost of ₹ 300 lakhs. On the date
of acquisition of that stake, the fair value of net assets of the associate was ₹ 900 lakh. The value of
goodwill on acquisition was ₹ 30 lakhs. After the acquisition, AB Limited accounted for the investment in
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the associate as per equity method of accounting and now the carrying value of such investment in the
consolidated financial statements of AB Limited is ₹ 360 lakhs. The associate has now issued equity
shares to some investors other
than AB Limited for a consideration of ₹ 800 lakhs. This has effectively reduced the holding of AB Limited to
20%. Determine how AB Limited should account for such reduction in interest in the associate?
Question 4 (MTP MAR 2021)

DEF Ltd. acquired 100% ordinary shares of ₹ 100 each of XYZ Ltd. on 1st October 20X1. On March 31,
20X2 the summarised Balance Sheets of the two companies were as given below:
DEF Ltd. XYZ Ltd.
Assets
Property Plant Equipment
Land & Buildings 15,00,000 18,00,000
Plant & Machinery 24,00,000 13,50,000
Investment in XYZ Ltd. 34,00,000 -
Inventory 12,00,000 3,64,000
Financial Assets
Trade Receivable 5,98,000 4,00,000
Cash 1,45,000 80,000
Total 92,43,000 39,94,000
Equity & Liabilities
Equity Capital (Shares of ₹ 100 each fully paid) 50,00,000 20,00,000
Other Equity
Other reserves 24,00,000 10,00,000
Retained Earnings 5,72,000 8,20,000
Bank Overdraft 8,00,000 -
Trade Payable 4,71,000 1,74,000
Total 92,43,000 39,94,000
The retained earnings of XYZ Ltd. showed a credit balance of ₹ 3,00,000 on 1st April 20X1 out of which a
dividend of 10% was paid on 1st November; DEF Ltd. has recognised the dividend received to profit or
loss account; Fair Value of P&M as on 1st October 20X1 was ₹ 20,00,000. The rate of depreciation on
plant & machinery is 10%.
Following are the increases on comparison of Fair value as per respective Ind AS with Book value as on
1st October 20X1 which are to be considered while consolidating the Balance Sheets.
Liabilities Amount Assets Amount
Trade Payables 1,00,000 Land & Buildings 10,00,000
Inventories 1,50,000
Notes:
 It may be assumed that the inventory is still unsold on balance sheet date and the Trade Payables
are also not yet settled.
 Also assume that the Other Reserves of both the companies as on 31st March 20X2are the same
as was on 1st April 20X1.
 All fair value adjustments have not yet started impacting consolidated post-acquisition
profits. Prepare consolidated Balance Sheet as on March 31, 20X2.
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Question 5
Ram Ltd. acquired 60% ordinary shares of ₹ 100 each of Krishan Ltd. on 1st October 20X1. On March 31,
20X2 the summarised Balance Sheets of the two companies were as given below:
Ram Ltd. Krishan Ltd.
Assets
Property, Plant and Equipment
Land & Buildings 3,00,000 3,60,000
Plant & Machinery 4,80,000 2,70,000
Investment in Krishan Ltd. 8,00,000 -
Inventory 2,40,000 72,800
Financial Assets
Trade Receivables 1,19,600 80,000
Cash 29,000 16,000
Total 19,68,600 7,98,800
Equity Capital (Shares of ₹ 100 each fully paid) 10,00,000 4,00,000
Other Equity
Other Reserves 6,00,000 2,00,000
Retained earnings 1,14,400 1,64,000
Bank Overdraft 1,60,000 -
Trade Payable 94,200 34,800
Total 19,68,600 7,98,800
The Retained earnings of Krishan Ltd. showed a credit balance of ₹ 60,000 on 1st April 20X1 out of which
a dividend of 10% was paid on 1st November; Ram Ltd. has credited the dividend received to its Retained
earnings; Fair Value of P&M as on 1st October 20X1 was ₹ 4,00,000; The rate of depreciation on plant &
machinery is 10%. .
Following are the increases on comparison of Fair value as per respective Ind AS with book value as on
1st October 20X1 which are to be considered while consolidating the Balance Sheets.
Liabilities Amount Assets Amount

Trade Payables 20,000 Land & Buildings 2,00,000
Inventories 30,000
Notes:
 It may be assumed that the inventory is still unsold on balance sheet date and theTrade Payables
are also not yet settled.
 Also assume that the Other Reserves as on 31st March 20X2 are the same as was on1st April 20X1.
Prepare consolidated Balance Sheet as on March 31, 20X2.
QUESTION 6
On 31 March 20X2, Blue Heavens Ltd. acquired 100% ordinary shares carrying voting rights of Orange
County Ltd. for ₹ 6,000 lakh in cash and it controlled Orange County Ltd. from that date. The acquisition-
date statements of financial position of Blue Heavens Ltd. and Orange County Ltd. and the fair values of
the assets and liabilities recognised on Orange County Ltd. balance sheet were:
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Blue Heavens Ltd. Orange County Ltd.
Carrying Amount Carrying Amount Fair Value (₹ inlakh)
(₹ in lakh) (₹ in lakh)
Assets
Non-current assets
Building and other PPE 7,000 3,000 3,300
Investment in Orange County Ltd. 6,000
Current assets
Inventories 700 500 600
Trade receivables 300 250 250
Cash 1,500 700 700
Total assets 15,500 4,450
Equity and liabilities
Equity
Share capital 5,000 2,000
Current liabilities
Trade payables 300 150
150
Total liabilities and 15,500 4,450
equity
Prepare the Consolidated Balance Sheet as on March 31, 20X2 of group of entities BlueHeavens Ltd. and
Orange County Ltd.
QUESTION 7
The facts are the same as in Question 6 above. However, Blue Heavens Ltd. acquires only 75% of the
ordinary shares, to which voting rights are attached of Orange County Ltd. Blue Heavens Ltd. pays ₹
4,500 lakhs for the shares. Prepare the Consolidated Balance Sheet as on March 31, 20X2 of group of
entities Blue Heavens Ltd. and Orange County Ltd. Heavens Ltd. pays ₹ 4,500 lakhs for the shares.
Prepare the Consolidated Balance Sheet as on March 31, 20X2 of group of entities Blue Heavens Ltd. and
Orange County Ltd.
QUESTION 8
Facts are same as in Question 6 &7, Blue Heavens Ltd. acquires 75% of Orange County Ltd. Blue Heavens
Ltd. pays ₹ 4,500 lakhs for the shares. At 31 March 20X3, i.e one year after Blue Heavens Ltd. acquired
Orange County Ltd., the individual statements of financial position and statements of comprehensive
income of Blue Heavens Ltd. and Orange County Ltd. are
Blue Heavens Ltd. Orange County Ltd

Carrying Amount Carrying Amount (₹ in
(₹ in lakh) lakh)
Assets
Non-current assets
PPE (Building and others) 6,500 2,750
Investment in Orange County Ltd. 4,500
11,000 2,750
Current assets
Inventories 800 550
Financial Asset - Trade receivables 380 300
Cash 4,170 1,420
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5,350 2,270

Equity and liabilities
Equity
Share capital 5,000 2,000
16,000 4,850
Current liabilities
Financial Liabilities-Trade payables 350 170
Total liabilities and equity 16,350 5,020
Statements of Profit and Loss for the year ended 31 March 20X3:
Blue Heavens Ltd Orange County Ltd.

Carrying Amount Carrying Amount (₹
(₹ in lakh) in lakh)
Revenue 3,000 1,900
Cost of sales (1,800) (1,000)
Administrative expenses (400) (350)
Profit for the year 800 550
Note: Blue Heavens Ltd. estimates that goodwill has impaired by 98. The fair value adjustment to
buildings and other PPE is in respect of a building; all buildings have an estimated remaining useful life of
20 years from 31 March 20X2 and estimated residual values of zero. Blue Heavens Ltd. uses the straight-
line method for depreciation of PPE. All the inventory held by Orange County Ltd. at 31 March 20X2 was
sold during 20X3.
Prepare the Consolidated Balance Sheet as on March 31, 20X3 of group of entities Blue Heavens Ltd. and
Orange County Ltd.
QUESTION 9
P Pvt. Ltd. has a number of wholly-owned subsidiaries including S Pvt. Ltd. at 31st March 20X2. P Pvt.
Ltd.’s consolidated balance sheet and the group carrying amount ofS Pvt. Ltd.’s assets and liabilities (ie
the amount included in the consolidated balance sheetin respect of S Pvt. Ltd.’s assets and liabilities) at
31st March 20X2 are as follows:
Particulars Consolidated (₹ in Group carrying amount of S Pvt. Ltd.

millions) asset and liabilities Ltd.(₹ in
millions)
Assets
Non-Current Assets
Goodwill 380 180
Buildings 3,240 1,340
Current Assets
Inventories 140 40
Trade Receivables 1,700 900
Cash 3,100 1000
Total Assets 8,560 3,460
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Equities & Liabilities
Equity
Share Capital 1600
Other Equity
Retained Earnings 4,260
Current liabilities
Trade Payables 2,700 900
Total Equity & Liabilities 8,560 900
Prepare consolidated Balance Sheet after disposal as on 31st March, 20X2 when P Pvt. Ltd. group sold
100% shares of S Pvt. Ltd. to independent party for ₹ 3,000 millions.
Reliance Ltd. has a number of wholly-owned subsidiaries including Reliance Jio Info comm Ltd. at 31st
March 20X2.
Reliance Ltd.’s consolidated balance sheet and the group carrying amount of Reliance Jio Info comm Ltd.
assets and liabilities (i.e., the amount included in that consolidated balance sheet in respect of Reliance
Jio Info comm Ltd. assets and liabilities) at 31st March 20X2 are as follows:
Particulars Consolidated (₹ In ‘000) Group carrying amount of
Reliance Jio Infocomm Ltd. asset
and liabilities Ltd. (₹ In ‘000)
Assets
Non-current Assets
Goodwill 190 90
Buildings 1,620 670
Current Assets
Inventories 70 20
Financial Assets
Trade Receivables 850 450
Cash 1,550 500
Total Assets 4,280 1,730
Equity
Share Capital 800
Other Equity
Retained Earnings 2,130
2,930
Current liabilities
Financial liabilities
Trade Payables 1,350 450
Total Equity & Liabilities 4,280 450
Prepare consolidated Balance Sheet after disposal as on 31st March, 20X2 when RelianceLtd. group sold 90%
shares of Reliance Jio Infocomm Ltd. to independent party for ₹ 1000 thousand.
QUESTION 11
Airtel Telecommunications Ltd. owns 100% share capital of Airtel Infrastructures Pvt. Ltd. On 1 April 20X1
Airtel Telecommunications Ltd. acquired a building from Airtel Infrastructures Pvt. Ltd., for ₹ 11,00,000
that the group plans to use it as its new headquarters office.
Airtel Infrastructures Pvt. Ltd. had purchased the building from a third party on 1 April 20X0for ₹
10,25,000. At that time the building was assessed to have a useful life of 21 years and a residual value of
₹ 5,00,000. On 1 April 20X1 the carrying amount of the building was ₹ 10,00,000 in Airtel Infrastructures
66
Pvt. Ltd.’s individual accounting records.
The estimated remaining useful life of the building measured from 1 April 20X1 is 20 years and the
residual value of the building is now estimated at ₹ 3,50,000. The method of depreciation is straight-line.
Pass necessary accounting entries in individual and consolidation situations
QUESTION 12
As at the beginning of its current financial year, AB Limited holds 90% equity interest in BC Limited.
During the financial year, AB Limited sells 70% of its equity interest in BC Limited to PQR Limited for a
total consideration of ₹ 56 crore and consequently loses control of BC Limited. At the date of disposal, fair
value of the 20% interest retained by AB Limited is ₹ 16 crore and the net assets of BC Limited are carry
valued at ₹ 60 crore.
These net assets include the following:

 Debt investments classified as fair value through other comprehensive income (FVOCI) of ₹ 12
crore and related FVOCI reserve of ₹ 6 crore.
 Net defined benefit liability of ₹ 6 crore that has resulted in a reserve relating to net measurement
losses of ₹ 3 crore.
 Equity investments (considered not held for trading) of ₹ 10 crore for which irrevocable option of
recognising the changes in fair value in OCI has been availed and related FVOCI reserve of ₹ 4
crore.
 Net assets of a foreign operation of ₹ 20 crore and related foreign currency translation reserve of
₹8 crore. In consolidated financial statements of AB Limited, 90% of the above reserves were
included in equivalent equity reserve balances, with the 10% attributable to the non-controlling
interest included as part of the carrying amount of the non- controlling interest.
What would be the accounting treatment on loss of control in the consolidated financial statements of AB
Limited?
QUESTION 13 :(RTP NOV’20) – IND AS 28

On 1st April 2019, Investor Ltd. acquires 35% interest in another entity, XYZ Ltd. Investor Ltd.
determines that it is able to exercise significant influence over XYZ Ltd. Investor Ltd. has paid total
consideration of ₹ 47,50,000 for acquisition of its interest in XYZ Ltd. At the date of acquisition, the book
value of XYZ Ltd.’s net assets was ₹ 90,00,000 and their fair value was ₹ 1,10,00,000. Investor Ltd. has
determined that the difference of ₹ 20,00,000 pertains to an item of property, plant and equipment (PPE)
which has remaining useful life of 10 years.
During the year, XYZ Ltd. made a profit of ₹ 8,00,000. XYZ Ltd. paid a dividend of ₹ 12,00,000 on 31st
March, 2020. XYZ Ltd. also holds a long-term investment in equity securities. Under Ind AS, investment is
classified as at FVTOCI in accordance with Ind AS 109 and XYZ Ltd. recognized an increase in value of
investment by ₹ 2,00,000 in OCI during the year. Ignore deferred tax implications, if any.
Calculate the closing balance of Investor Ltd.’s investment in XYZ Ltd. as at 31st March, 2020 as per
the relevant Ind AS.
QUESTION 14 : (RTP NOV’18)

On 1st April 20X1 Alpha Ltd. commenced joint construction of a property with Gama Ltd. For this purpose,
an agreement has been entered into that provides for joint operation and ownership of the property. All
the ongoing expenditure, comprising maintenance plus borrowing costs, is to be shared equally. The
construction was completed on 30th September 20X1 and utilisation of the property started on 1st
January 20X2 at which time the estimated useful life of the same was estimated to be 20 years.
Total cost of the construction of the property was ₹ 40 crores. Besides internal accruals, the cost was partly
funded by way of loan of
₹ 10 crores taken on 1st January 20X1. The loan carries interest at an annual rate of 10% with interest
67
payable at the end of year on 31st December each year. The company has spent ₹ 4,00,000 on the
maintenance of such property.
The company has recorded the entire amount paid as investment in Joint Venture in the books of
accounts. Suggest the suitable accounting treatment of the above transaction as per applicable Ind AS.
QUESTION 15 : (RTP MAY’20)

Gamma Limited, a parent company, is engaged in manufacturing and retail activities. The group holds
investments in different entities as follows:
 Gamma Limited holds 100% Investment in G Limited and D Limited;
 G Limited and D Limited hold 60% and 40% in GD Limited respectively;
 Delta Limited is a 100% subsidiary of GD Limited
Firstly, Gamma Limited wants you to suggest whether GD Limited can avail the exemption from the
preparation and presentation of consolidated financial statements as per applicable Ind AS?
Secondly, if all other facts remain the same as above except that G Limited and D Limited are both owned by
an Individual (say, Mr. X) instead of Gamma Limited, then explain whether GD Limited can avail the
exemption from the preparation and presentation of consolidated financial statements.
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RTP / MTP QUESTIONS
QUESTION 1 – RTP MAY 2019 (IND AS 110/ IND AS 28 )

Angel Ltd. has adopted Ind AS with a transition date of 1st April, 2017. Prior to Ind AS adoption, it
followed Accounting Standards notified under Companies (Accounting Standards) Rules, 2006
(hereinafter referred to as "IGAAP").
It has made investments in equity shares of Pharma Ltd., a listed company engaged in the business of
pharmaceuticals. The shareholding pattern of Pharma Ltd. is given below:
Shareholders (refer Note 1) Percentage shareholding
as
on 1st April, 2017
Angel Ltd. 21%
Little Angel Ltd. (refer Note 2) 24%
Wealth Master Mutual Fund (refer Note 3) 3%
Individual public shareholders (refer Note 4) 52%
Notes:
 None of the shareholders have entered into any shareholders' agreement.
 Little Angel Ltd. is a subsidiary of Angel Ltd. (under Ind AS) in which Angel Ltd. holds
51% voting power.
 Wealth Master Mutual Fund is not related party of either Little Angel Ltd. or Pharma Ltd.
 Individual public shareholders represent 17,455 individuals. None of the individual
shareholders hold more than 1% of voting power in Pharma Ltd.
All commercial decisions of Pharma Ltd. are taken by its directors who are appointed by a simple
majority vote of the shareholders in the annual general meetings ("AGM”). The following table shows
the voting pattern of past AGMs of Pharma Ltd.:
Shareholders AGM for the financial
year
2013-14 2014-15 2015-16
Angel Ltd. Attended and voted in Attended and voted in Attended and voted in favour
favour of all the resolutions favour of all the resolutions of all the resolutions
Little Angel Attended and voted as per Attended and voted as per Attended and voted as per
Ltd. directions of Angel Ltd directions of Angel Ltd directions of Angel Ltd
Wealth Master Attended and voted in Attended and voted in Attended and voted in favo
Mutual Fund favour of all the resolutions favour of all the resolutions of all the resolutions exce
except for the except for the for the reappointment of t
reappointment of the reappointment of the retiring directors
retiring directors retiring directors
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Individuals 7% of the individual 8% of the individual 6% of the individual
shareholders attended shareholders attended the shareholders attended the
theAGM. Allthe AGM. All the AGM . All the individual
individual individual shareholders voted in favour
shareholders voted in shareholders voted in all the resolutions, except th
favour of all the favour of all the 50% of the individual
resolutions,except that 50% resolutions, except that Shareholders voted against th
of the individual 50% of the individual resolution to appoint the
Shareholders voted against Shareholders voted against retiring directors.
the resolution to appoint the resolution to appoint
the the
retiring directors. retiring directors.
Pharma Ltd. has obtained substantial long term borrowings from a bank. The loan is payable in
20 years from 1st April, 2017. As per the terms of the borrowing, following actions by Pharma
Ltd. will require prior
approval of the bank:
 Payment of dividends to the shareholders in cash or kind;
 Buyback of its own equity shares;
 Issue of bonus equity shares;
 Amalgamation of Pharma Ltd. with any other entity; and
 Obtaining additional loans from any entity.
Recently, the Board of Directors of Pharma Ltd. proposed a dividend of ₹ 5 per share. However,
when the CFO of Pharma Ltd. approached the bank for obtaining their approval, the bank
rejected the proposal citing concerns over the short-term cash liquidity of Pharma Ltd. Having
learned about the developments, the Directors of Angel Ltd. along with the Directors of Little
Angel Ltd. approached the bank with a request to re-consider its decision. The Directors of
Angel Ltd. and Little Angel Ltd. urged the bank to approve a reduced dividend of at least ₹ 2
per share. However, the bank categorically refused to approve any payout of dividend.
Under IGAAP, Angel Ltd. has classified Pharma Ltd. as its associate. As the CFO of Angel Ltd.,
you are required to comment on the correct classification of Pharma Ltd. on transition to Ind
AS.
Question 2 - RTP : NOVEMBER, 2019 IND AS 110

What will be the accounting treatment of dividend distribution tax in the consolidated financial
statements in case of partly-owned subsidiary in the following scenarios:
Scenario 1: H Limited (holding company) holds 12,000 equity shares in S Limited (Subsidiary
of H Limited) with 60% holding. Accordingly, S Limited is a partly -owned subsidiary of H
Limited. During the year 20X1, S Limited paid a dividend @ ₹ 10 per share and DDT @ 20% on
it.
Should the share of H Limited in DDT paid by S Limited amounting to ₹ 24,000 (60% x ₹
40,000) be charged as expense in the consolidated profit and loss of H Limited?
Scenario 2 (A): Extending the situation given in scenario 1, H Limited also pays dividend of ₹
300,000 to its shareholders and DDT liability @ 20% thereon amounts to ₹ 60,000. As per the
tax laws, DDT paid by S Ltd. of ₹ 24,000 is allowed as set off against the DDT liability of H Ltd.,
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resulting in H Ltd. paying ₹ 36,000 (₹ 60,000 – ₹ 24,000) as DDT to tax authorities.
Scenario 2(B): If in (A) above, H Limited pays dividend amounting to ₹ 100,000 with DDT
liability @ 20% amounting to ₹20,000.
Scenario (3): Will the answer be different for the treatment of dividend distribution tax paid
by associate in the consolidated financial statement of investor, if as per tax laws the DDT paid
by associate is not allowed set-off against the DDT liability of the investor?
QUESTION 3 - RTP MAY 2020 - Ind AS 28

An entity P (parent) has two wholly-owned subsidiaries - X and Y, each of which has an ownership
interest in an 'associate', entity Z. Subsidiary X is a venture capital organisation. Neither of the
investments held in associate Z by subsidiaries X and Y i s held for trading. Subsidiary X and Y account
for their investment in associate Z at fair value through profit or loss in accordance with Ind AS 109
and using the equity method in accordance with Ind AS 28 respectively.
How should P account for the investment in associate Z in the following scenarios:
Scenario 1: Where both investments in the associate result in significant influence on a stand-alone
basis
- Subsidiary X and Y ownership interest in associate Z is 25% and 20% respectively.
Scenario 2: When neither of the investments in the associate results in significant influence on
a stand- alone basis, but do provide the parent with significant influence on a combined basis -
Subsidiary X and Y ownership interest in associate Z is 10% each.
Scenario 3: When one of the investments in the associate results in significant influence on a
stand-alone basis and the other investment in the associate does not result in significant
influence on a stand-alone basis - Subsidiary X and Y ownership interest in associate Z is 30%
and 10% respectively.
Assume there is significant influence if the entity has 20% or more voting rights.
QUESTION 4 - IND AS 27
A company, AB Ltd. holds investments in subsidiaries and associates. In its separate financial
statements, AB Ltd. wants to elect to account its investments in subsidiaries at cost and the
investments in associates as financial assets at fair value through profit or loss (FVTPL) in accordance
with Ind AS 109, Financial Instruments. Whether AB Limited can carry investments in subsidiaries at
cost and investments in associates in accordance with Ind AS 109 in its separate financial statements?
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PAST PAPER QUESTIONS
QUESTION 6 – PAST PAPER NOV’20 - SIMILAR TO IND AS 28 ICAI SM ILL 12
Entity H holds a 20% equity interest in Entity S (an associate) that in turn has a 100% equity interest
in Entity T. Entity S recognised net assets relating to Entity T of ₹ 10,000 in its consolidated financial
statements. Entity S sells 20% of its interest in Entity T to a third party (a non-controlling shareholder)
for ₹ 3,000 and recognises this transaction as an equity transaction in accordance with the provisions
of Ind AS 110, resulting in a credit in Entity S's equity of ₹ 1,000. The financial statements of Entity H
and Entity S are summarised as follows before and after the transaction:
Before
H's consolidated financial statements
Assets (₹) Liabilities (₹)
Investment in S 2,000 Equity 2,000
S's consolidated financial statements

Assets (from T) 10,000 Equity 10,000
The financial statements of S after the transaction are summarised below

After
S's consolidated financial statements
Assets (from T) 10,000 Equity 10,000
Cash 3000 Equity transaction Impact with non-
controlling interest 1000
Equity attributable to owners 11000

Total 13000 Total 13000
Although Entity H did not participate in the transaction, Entity H's share of net assets in Entity
S increased as a result of the sale of S's 20% interest in T. Effectively, H's share in S's net
assets is now ₹ 2,200 (20% of ₹ 11,000) i.e., ₹ 200 in addition to its previous share. How this
equity transaction that is recognised in the financial statements of Entity S reflected in the
consolidated financial statements of Entity H that uses the equity method to account for its
investment in Entity S?
QUESTION 7 - MAY 2019 (MTP OCT 2020) IND AS 110

Summarised Balance Sheets of PN Ltd. and SR Ltd. as on 31st March, 2020 were given
as below: (Amount in ₹)
Particulars PN Ltd. SR Ltd
Assets
Land & building 4,68,000 5,61,600
Plant & Machinery 7,48,800 4,21,200
Investment in SR Ltd. 12,48,000 -
Inventories 3,74,400 1,13,600
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Trade Receivables 1,86,500 1,24,800
Cash & Cash equivalents 45,200 24,900
TOTAL 30,70,900 12,46,100
Equity Share Capital (Shares of ₹ 100 each fully paid) 15,60,000 6,24,000
Other Reserves 9,36,000 3,12,000
Retained Earnings 1,78,400 2,55,800
Trade Payables 1,46,900 34,300
Short-term borrowings 2,49,600 20,000
Total Equity & Liabilities 30,70,900 12,46,100
1. PN Ltd. acquired 70% equity shares of ₹ 100 each of SR Ltd. on 1st October, 2019.
2. The Retained Earnings of SR Ltd. showed a credit balance of ₹ 93,600 on 1st April, 2019
out of which a dividend of 12% was paid on 15th December, 2019.
3. PN Ltd. has credited the dividend received to its Retained Earnings.
4. Fair value of Plant & Machinery of SR Ltd. as on 1st October, 2019 was ₹ 6,24,000. The
rate of depreciation on Plant & Machinery was 10% p.a.
5. Following are the increases on comparison of Fair Value as per respective Ind AS with
book value as on 1st October, 2019 of SR Ltd. which are to be considered while
consolidating the Balance Sheets:
Land & Buildings ₹
3,12,000
Inventories ₹
46,800
Trade Payables ₹
31,200.
6. The inventory is still unsold on Balance Sheet date and the Trade Payables are not yet settled.
7. Other Reserves as on 31st March, 2020 are the same as was on 1st April, 2019.
8. The business activities of both the company are not seasonal in nature and therefore, it
can be assumed that profits are earned evenly throughout the year.
Prepare the Consolidated Balance Sheet as on 31st March, 2020 of the group of entities PN Ltd.
and SR Ltd. as per Ind AS.
QUESTION 8 – PAST PAPER JAN 2021 - SIMILAR QUESTION IN MTP OCT’21

On 1st April 2017, A Limited acquired 80% of the share capital of S Limited. On acquisition date
the share capital and reserves of S Ltd. stood at ₹ 5,00,000 and ₹ 1,25,000 respectively. A
Limited paid initial cash consideration of ₹ 10,00,000. Additionally, A Limited issued 2,00,000
equity shares with a nominal value of
₹ 1 per share at current market value of ₹ 1.80 per share. It was also agreed that A Limited
would pay a further sum of ₹ 5,00,000 after three years. A Limited's cost of capital is 10%.
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The appropriate discount factor for ₹ 1 @ 10% receivable at the end of
 1st year: 0.91
 2nd year: 0.83
 3rd year: 0.75
The shares and deferred consideration have not yet been recorded by A limited. Below are the
Balance Sheet of A Limited and S Limited as at 31st March, 2019:
A Limited (₹ S Limited (₹
000) 000)
Non-current assets:
Property, plant & equipment 5500 1500
Investment in S Limited at cost 1000
Current assets:
Inventory 550 100
Receivables 400 200
Cash 200 50
7650 1850
Equity:
Share capital 2000 500
Retained earnings 1400 300
Non-current liabilities 3000 400

Current liabilities 1250 650
7650 1850
Further information:
On the date of acquisition the fair values of S Limited's plant exceeded its book value by ₹
2,00,000. The plant had a remaining useful life of five years at this date;
The consolidated goodwill has been impaired by ₹ 2,58,000; and
The A Limited Group, values the non-controlling interest using the fair value method. At the
date of acquisition, the fair value of the 20% non-controlling interest was ₹ 3,80,000.
You are required to prepare Consolidated Balance Sheet of A Limited as at 31st March, 2019.
(Notes to Account on Consolidated Balance Sheet is not required).
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IND AS 115 REVENUE FROM CONTRACTS WITH CUSTOMERS
Illustration 1
New way limited decides to enter a new market that is currently experiencing economic difficulty and
expects that in future economy will improve. New way enters into an arrangement with a customer in
the new region for networking products for promised consideration of ₹ 1,250,000. At contract
inception, New way expects that it may not be able to collect the full amount from the customer.
Determine how New way will recognise this transaction?
Illustration 2
A gymnasium enters into a contract with a new member to provide access to its gym for a 12-month
period at ₹ 4,500 per month. The member can cancel his or her membership without penalty after
three months. Specify the contract term.
Illustration 3:
Contractor P enters into a manufacturing contract to produce 100 specialised CCTV Cameras for
Customer Q for a fixed price of ₹ 1,000 per sensor. Customer Q can cancel the contract without a
penalty after receiving 10 CCTV Cameras. Specify the contract units.
Illustration 4
Manufacturer of airplanes for the air force negotiates a contract to design and manufacture new fighter
planes for a Kashmir air base. At the same meeting, the manufacturer enters into a separate contract
to supply parts for existing planes at other bases. Would these contracts be combined?
Illustration 5
Software Company S enters into a contract to license its customer relationship management software
to Customer B. Three days later, in a separate contract, S agrees to provide consulting services to
significantly customise the licensed software to function in B’s IT environment. B is unable to use the
software until the customisation services are complete. Would these contracts be combined?
Illustration 6
Manufacturer M enters into a contract to manufacture and sell a cyber security system to Government-
related Entity P. One week later, in a separate contract, M enters into a contract to sell the same
system to Government- related Entity Q. Both entities are controlled by the same government. During
the negotiations, M agrees to sell the systems at a deep discount if both P and Q purchases the
security system.
Should these contracts be combined or separately accounted?
Illustration 7:
An entity promises to sell 120 products to a customer for ₹ 120,000 (₹ 1,000 per product). The
products are transferred to the customer over a six-month period. The entity transfers control of each
product at a point in time. After the entity has transferred control of 60 products to the customer, the
contract is modified to require the delivery of an additional 30 products (a total of 150 identical
products) to the customer at a price of ₹ 950 per product which is the standalone selling price for such
additional products at the time of placing this additional order. The additional 30 products were not
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included in the initial contract. It is assumed that additional products are contracted for a price that
reflects the stand - alone selling price.
Determine the accounting for the modified contract?
Illustration 8
On 1st April, 20X1, KLC Ltd. enters into a contract with Mr. K to provide
- A machine for ₹ 2.5 million
- One year of maintenance services for ₹ 55,000 per month
On 1st October, 20X1, KLC Ltd. and Mr. K agree to modify the contract to reduce the amount of
services from
₹ 55,000 per month to ₹45,000 per
month. Determine the effect of change
in the contract?
Illustration 9 (MTP OCT’21)

Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal.
Based on its experience, Growth Ltd determines that customising the infrastructure will take
approximately 200 hours in total to complete the project and charges ₹ 150 per hour.
After incurring 100 hours of time, Growth Ltd and the customer agree to change an aspect of
the project and increases the estimate of labour hours by 50 hours at the rate of ₹ 100 per
hour.
Determine how contract modification will be accounted as per Ind AS 115?
:
Illustration 10: (MTP APR 2021)

A construction services company enters into a contract with a customer to build a water purification
plant. The company is responsible for all aspects of the plant including overall project management,
engineering and design services, site preparation, physical construction of the plant, procurement of
pumps and equipment for measuring
and testing flow volumes and water quality, and the integration of all components.
Determine whether the company has a single or multiple performance obligations under the contract?
Illustration 11:
An entity provides broadband services to its customers along with voice call services.
Customer buys modem from the entity. However, customer can also get the connection from the entity
and modem from any other vendor. The installation activity requires limited effort and the cost
involved is almost insignificant. It has various plans where it provides either broadband services or
voice call service or both.
Are the performance obligations under the contract distinct?
Illustration 12:
An entity enters into a contract to build a power plant for a customer. The entity will be responsible for
the overall management of the project including services to be provided like engineering, site
clearance, foundation, procurement, construction of the structure, piping and wiring, installation of
equipment and finishing.
Determine how many performance obligations does the entity have?
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Illustration 13
Could the series requirement apply to hotel management services where day to day activities vary,
involve employee management, procurement, accounting, etc.?
Illustration 14
Entity A, a specialty construction firm, enters into a contract with Entity B to design and construct a
multi- level shopping centre with a customer car parking facility located in sub-levels underneath the
shopping centre. Entity B solicited bids from multiple firms on both phases of the project — design and
construction.
The design and construction of the shopping centre and parking facility involves multiple goods and
services from architectural consultation and engineering through procurement and installation of all of
the materials. Several of these goods and services could be considered separate performance
obligations because Entity A frequently sells the services, such as architectural consulting and
engineering services, as well as standalone construction services based on third party design,
separately. Entity A may require to continually alter the design of the shopping centre and parking
facility during construction as well as continually assess the propriety of the materials initially selected
for the project.
Determine how many performance obligations does the entity A have?
Illustration 15:
An entity, a software developer, enters into a contract with a customer to transfer a software license,
perform an installation service and provide unspecified software updates and technical support (online
and telephone) for a two- year period. The entity sells the license, installation service and technical
support separately. The installation service includes changing the web screen for each type of user (for
example, marketing, inventory management and information technology). The installation service is
routinely performed by other entities and does not significantly modify the software. The software
remains functional without the updates and the technical support.
Illustration 16: Significant customisation

The promised goods and services are the same as in the above Illustration, except that the contract
specifies that, as part of the installation service, the software is to be substantially customised to add
significant new functionality to enable the software to interface with other customised software
applications used by the customer. The customised installation service can be provided by other
entities.
Illustration 17 (MTP OCT’21)

Telco T Ltd. enters into a two-year contract for internet services with Customer C. C also buys a
modem and a router from T Ltd. and obtains title to the equipment. T Ltd. does not require customers
to purchase its modems and routers and will provide internet services to customers using other
equipment that is compatible with T Ltd.’s network. There is a secondary market in which modems and
routers can be bought or sold for amounts Greater than scrap value
Determine how many performance obligations does the entity T Ltd. have?
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Illustration 18:
V Ltd. grants Customer C a three-year license for anti-virus software. Under the contract, V Ltd.
promises to provide C with when-and-if-available updates to that software during the license period.
The updates are critical to the continued use of the anti- virus software.
Illustration 19:
Media Company P Ltd. offers magazine subscriptions to customers. When customers subscribe, they
receive a printed copy of the magazine each month and access to the magazine’s online content.
Illustration 20-Implied promise to reseller’s customers

Software Company K Ltd. enters into a contract with reseller D, which then sells software products to
end users. K Ltd. has a customary business practice of providing free telephone support to end users
without involving the reseller, and both reseller and the customer expect K Ltd. to continue to provide
this support.
Determine how many performance obligations does the entity K Ltd. have?
Illustration 21-Implied performance obligation

Carmaker N Ltd. has a historical practice of offering free maintenance services – e.g. oil changes and
tyre rotation for two years to the end customers of dealers who buy its vehicles. However, the two
years’ free maintenance is not explicitly stated in the contract with its dealers, but it is typically stated
in N’s advertisements for the vehicles.
Illustration 22
Entity sells gym memberships for ₹ 7,500 per year to 100 customers, with an option to renew at a
discount in 2nd and 3rd years at ₹ 6,000 per year. Entity estimates an annual attrition rate of 50%
each year.
Determine the amount of revenue to be recognised in the first year and the amount of contract liability
against the option given to the customer for renewing the membership at discount
Illustration 23
An entity enters into a contract for the sale of Product A for ₹ 1,000. As part of the contract, the entity
gives the customer a 40% discount voucher for any future purchases up to ₹ 1,000 in the next 30
days. The entity intends to offer a 10% discount on all sales during the next 30 days as part of a
seasonal promotion. The 10% discount cannot be used in addition to the 40% discount voucher.
The entity believes there is 80% likelihood that a customer will redeem the voucher and, on an
average, a customer will purchase ₹ 500 of additional products.
Determine how many performance obligations does the entity have and their stand-alone selling price
and allocated transaction price?
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Illustration 24
A cable company provides television services for a fixed rate fee of ₹ 800 per month for a period of 3
years. Cable services is satisfied overtime because customer consumes and receives benefit from
services as it is
provided i.e. customer generally benefits each day that they have access to cable service. Determine
how many performance obligations does the cable company have?
Illustration 25
Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to Retailer A’s stores.
Retailer A is obligated to pay Manufacturer M ₹ 20 per dress when the dress is sold to an end
customer.
During the consignment period, Manufacturer M has the contractual right to require Retailer A to either
return the dresses or transfer them to another retailer. Manufacturer M is also required to accept the
return of the inventory. State when the control is transferred.
Illustration 26 (PAST PAPER NOV’20)

An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of
tickets sold directly by the airlines to the public. The entity agrees to buy a specific number of tickets
and will pay for those tickets even if it is not able to resell them. The reduced rate paid by the entity
for each ticket purchased is negotiated and agreed in advance. The entity determines the prices at
which the airline tickets will be sold to its customers. The entity sells the tickets and collects the
consideration from customers when the tickets are sold ; therefore, there is no credit risk.
The entity also assists the customers in resolving complaints with the service provided by airlines.
However,each airline is responsible for fulfilling obligations associated with the ticket, including
remedies to a customer for dissatisfaction with the service.
Determine whether the entity is a principal or an agent.
Illustration 27:
Company D Ltd. provides advertising services to customers. D Ltd. enters into a sub-contract with a
multinational online video sharing company, F Ltd. Under the sub-contract, F Ltd. places all of D Ltd.’s
customers’ adverts.
D Ltd. notes the following:
- D Ltd. works directly with customers to understand their advertising needs before placing
adverts.
- D Ltd. is responsible for ensuring that the advert meets the customer’s needs after the advert
is placed.
- D Ltd. directs F Ltd. over which advert to place and when to place it.
- D Ltd. does not bear inventory risk because there is no minimum purchase requirement with F
Ltd.
- D Ltd. does not have discretion in setting the price because fees are charged based on F Ltd.’s
scheduled rates
D is Principal or an agent?
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Illustration 28
Customer buy a new data connection from the telecom entity. It pays one-time registration and
activation fees at the time of purchase of new connection. The customer will be charged based on the
usage of the data services of the connection on monthly basis.
Are the performance obligations under the contract distinct?
Illustration 29: Estimating variable consideration

XYZ Limited enters into a contract with a customer to build a sophisticated machinery. The promise to
transfer the asset is a performance obligation that is satisfied over time. The promised consideration is
₹ 2.5 crore, but that amount will be reduced or increased depending on the timing of completion of the
asset. Specifically, for each day after 31 st March, 20X1 that the asset is incomplete, the promised
consideration is reduced by ₹ 1 lakh. For each day before 31st March, 20X1 that the asset is complete,
the promised consideration increases by ₹ 1 lakh.
In addition, upon completion of the asset, a third party will inspect the asset and assign a rating based
on metrics that are defined in the contract. If the asset receives a specified rating, the entity will be
entitled to an incentive bonus of ₹ 15 lakh.
Determine the transaction price.
Illustration 30: Estimating variable consideration (MTP APR 2021)

AST Limited enters into a contract with a customer to build a manufacturing facility. The entity
determines that the contract contains one performance obligation satisfied over time.
Construction is scheduled to be completed by the end of the 36 th month for an agreed-upon price of ₹
25 crore. The entity has the opportunity to earn a performance bonus for early completion as follows:
 15 percent bonus of the contract price if completed by the 30th month (25% likelihood)
 10 percent bonus if completed by the 32nd month (40% likelihood)
 5 percent bonus if completed by the 34th month (15% likelihood):
In addition to the potential performance bonus for early completion, AST Limited is entitled to a quality
bonus of ₹2 crore if a health and safety inspector assigns the facility a gold star rating as defined by
the agency in the terms of the contract. AST Limited concludes that it is 60% likely that it will receive
the quality bonus.
Determine the transaction price
Illustration 31: Volume discount incentive

HT Limited enters into a contract with a customer on 1st April, 20X1 to sell Product X for ₹
1,000 per unit. If the customer purchases more than 100 units of Product A in a financial year,
the contract specifies that the price per unit is retrospectively reduced to ₹ 900 per unit.
Consequently, the consideration in the contract is variable.
For the first quarter ended 30th June, 20X1, the entity sells 10 units of Product A to the
customer. The entity estimates that the customer's purchases will not exceed the 100-unit
threshold required for the volume discount in the financial year. HT Limited determines that it
has significant experience with this product and with the purchasing pattern of the customer.
Thus, HT Limited concludes that it is highly 80 probable that a significant reversal in the
cumulative amount of revenue recognised (i.e., ₹ 1,000 per unit) will not occur when the
uncertainty is resolved (i.e. when the total amount of purchases is known).
Further, in May, 20X1, the customer acquires another company and in the second quarter
ended 30th September, 20X1 the entity sells an additional 50 units of Product A to the
customer. In the light of the new fact, the entity estimates that the customer's purchases will
exceed the 100-unit threshold for the financial year and therefore it will be required to
retrospectively reduce the price per unit to ₹ 900.
Determine the amount of revenue to be recognise by HT Ltd. for the quarter ended 30th June,
20X1 and 30th September, 20X1
Illustration 32: Measurement of variable consideration

An entity has a fixed fee contract for ₹ 1 million to develop a product that meets specified
performance criteria. Estimated cost to complete the contract is ₹ 9,50,000. The entity will
transfer control of the product over five years, and the entity uses the cost-to-cost input
method to measure progress on the contract. An incentive award is available if the product
meets the following weight criteria:
Weight Award % of fixed fee Incentiv

(kg) e fee
951 or 0% —
greater
701–950 10% ₹
100,000
700 or less 25% ₹
250,000
The entity has extensive experience creating products that meet the specific performance
criteria. Based on its experience, the entity has identified five engineering alternatives that will
achieve the 10 percent incentive and two that will achieve the 25 percent incentive. In this
case, the entity determined that it has 95 percent confidence that it will achieve the 10 percent
incentive and 20 percent confidence that it will achieve the 25 percent incentive.
Based on this analysis, the entity believes 10 percent to be the most likely amount when
estimating the transaction price. Therefore, the entity includes only the 10 percent award in
the transaction price when calculating revenue because the entity has concluded it is probable
that a significant reversal in the amount of cumulative revenue recognized will not occur when
the uncertainty associated with the variable consideration is subsequently resolved due to its
95 percent confidence in achieving the 10 percent award.
The entity reassesses its production status quarterly to determine whether it is on track to
meet the criteria for the incentive award. At the end of the year four, it becomes apparent that
this contract will fully achieve the weight- based criterion. Therefore, the entity revises its
estimate of variable consideration to include the entire 25 percent incentive fee in the year four
because, at this point, it is probable that a significant reversal in the amount of cumulative
revenue recognized will not occur when including the entire variable consideration in the
transaction period
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Evaluate the impact of changes in variable consideration when cost incurred is as follows:
Year ₹
1 50,000
2 1,75,000
3 4,00,000
4 2,75,000
5 50,000
Illustration 33 : Management fees subject to the constraint

On 1st April, 20X1, an entity enters into a contract with a client to provide asset management services
for five years. The entity receives a two per cent quarterly management fee based on the client's
assets under management at the end of each quarter. At 31st March, 20X2, the client's assets under
management are ₹ 100 crore. In addition, the entity receives a performance-based incentive fee of 20
per cent of the fund's return in excess of the return of an observable market index over the five-year
period. Consequently, both the management fee and the performance fee in the contract are variable
consideration.
Analyse the revenue to be recognised on 31st March, 20X2.
Illustration 34: Right of return (MTP APR’19)

An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for
₹ 50 (1,000 total products × ₹ 50 = ₹ 50,000 total consideration). Cash is received when control of a
product transfers. The entity's customary business practice is to allow a customer to return any unused
product within 30 days and receive a full refund. The entity's cost of each product is ₹ 30.
The entity applies the requirements in Ind AS 115 to the portfolio of 1,000 contracts because it
reasonably expects that, in accordance with paragraph 4, the effects on the financial statements from
applying these requirements to the portfolio would not differ materially from applying the requirements
to the individual contracts within the portfolio. Since the contract allows a customer to return the
products, the consideration received from the customer is variable. To estimate the variable
consideration to which the entity will be entitled, the entity decides to use the expected value method
(see paragraph 53(a) of Ind AS 115) because it is the method that the entity expects to better predict
the amount of consideration to which it will be entitled. Using the expected value method, the entity
estimates that 970 products will not be returned.
The entity estimates that the costs of recovering the products will be immaterial and expects that the
returned products can be resold at a profit.
Determine the amount of revenue, refund liability and the asset to be recognised by the entity for the
said contracts.
Illustration 35: Warranty

An entity manufactures and sells computers that include an assurance-type warranty for the first 90
days. The entity offers an optional ‘extended coverage’ plan under which it will repair or replace any
defective part for three years from the expiration of the assurance-type warranty. Since the optional
‘extended coverage’ plan is sold separately, the entity determines that the three years of extended
coverage represent a separate performance obligation (i.e., a service-type warranty). The total
transaction price for the sale of a computer and the extended warranty is ₹ 36,000. The entity
determines that the stand-alone selling prices of the computer and the extended warranty are ₹
32,000 and ₹ 4,000, respectively. The inventory value of the computer is ₹ 14,400. Furthermore, the
entity estimates that, based on its experience, it will incur ₹ 2,000 in costs to repair defects that arise
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within the 90-day coverage period for the assurance-type warranty.
Pass required journal entries.
Illustration 36: Warranty

Entity sells 100 ultra-life batteries for ₹ 2,000 each and provides the customer with a five-year
guarantee that the batteries will withstand the elements and continue to perform to specifications. The
entity, which normally provides a one-year guarantee to customer purchasing ultra-life batteries,
determines that years two through five represent a separate performance obligation. The entity
determines that ₹ 1,70,000 of the ₹ 2,00,000 transaction price should be allocated to the batteries and
₹ 30,000 to the service warranty (based on estimated stand-alone selling prices and a relative selling
price allocation). The entity’s normal one- year warranty cost is ₹ 100 per battery.
Pass required journal entries.
Illustration 37: Financing component: significant orinsignificant?

A commercial airplane component supplier enters into a contract with a customer for promised
consideration of ₹ 70,00,000. Based on an evaluation of the facts and circumstances, the supplier
concluded that ₹ 1,40,000 represented an insignificant financing component because of an advance
payment received in excess of a year before the transfer of control of the product.
State whether company needs to make any adjustment in determining the transaction price.
What if the advance payment was larger and received further in advance, such that the entity
concluded that ₹ 14,00,000 represented the financing component based on an analysis of the facts and
circumstances.
Illustration 38: Accounting for significant financing component (MTP OCT’21)

NKT Limited sells a product to a customer for ₹ 1,21,000 that is payable 24 months after delivery. The
customer obtains control of the product at contract inception. The contract permits the customer to
return the product within 90 days. The product is new and the entity has no relevant historical
evidence of product returns or other available market evidence.
The cash selling price of the product is ₹ 1,00,000 which represents the amount that the customer
would pay upon delivery for the same product sold under otherwise identical terms and conditions as at
contract inception. The entity's cost of the product is ₹ 80,000. The contract includes an implicit
interest rate of 10 per cent (i.e. the interest rate that over 24 months discounts the promised
consideration of ₹ 1,21,000 to the cash selling price
of ₹ 1,00,000). Analyse the above transaction with respect to its financing component.
Illustration 39: Determining the discount rate

VT Limited enters into a contract with a customer to sell equipment. Control of the equipment transfers
to the customer when the contract is signed. The price stated in the contract is ₹ 1 crore plus a 10%
contractual rate of interest, payable in 60 monthly instalments of ₹ 212,470.
Determine the discounting rate and the transaction price when

Case A—Contractual discount rate reflects the rate in a separate financing transaction
Case B—Contractual discount rate does not reflect the rate in a separate financing transaction i.e.,
14%.
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Illustration 40: Advance payment and assessment of discount rate
ST Limited enters into a contract with a customer to sell an asset. Control of the asset will
transfer to the customer in two years (i.e., the performance obligation will be satisfied at a
point in time). The contract includes two alternative payment options:
1) Payment of ₹ 5,000 in two years when the customer obtains control of the asset or
2) Payment of ₹ 4,000 when the contract is signed. The customer elects to pay ₹ 4,000 when the
contract is signed.
ST Limited concludes that the contract contains a significant financing component because of
the length of time between when the customer pays for the asset and when the entity transfers
the asset to the customer, as well as the prevailing interest rates in the market.
The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate
necessary to make the two alternative payment options economically equivalent. However, the
entity determines that, the rate that should be used in adjusting the promised consideration is
6%, which is the entity's incremental borrowing rate.
Pass journal entries showing how the entity would account for the significant financing
component
Illustration 41: Withheld payments on a long-term contract

ABC Limited enters into a contract for the construction of a power plant that includes scheduled
milestone payments for the performance by ABC Limited throughout the contract term of three
years. The performance obligation will be satisfied over time and the milestone payments are
scheduled to coincide with the expected performance by ABC Limited. The contract provides
that a specified percentage of each milestone payment is to be withheld as retention money by
the customer throughout the arrangement and paid to the entity only when the building is
complete.
Analyse whether the contract contains any financing component.
Illustration 42: Advance payment

XYZ Limited, a personal computer (PC) manufacturer, enters into a contract with a customer to
provide global PC support and repair coverage for three years along with its PC. The customer
purchases this support service at the time of buying the product. Consideration for the service
is an additional ₹ 3,000. Customers electing to buythis service must pay for it upfront (i.e., a
monthly payment option is not available).
Analyse whether there is any significant financing component in the contract or not.
Illustration 43: Advance payment

A computer hardware vendor enters into a three-year arrangement with a customer to provide
support services. For customers with low credit ratings, the vendor requires the customer to
pay for the entire arrangement in advance of the provision of service. Other customers pay
over time.
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Illustration 44: Sales based royalty
A software vendor enters into a contract with a customer to provide a license solely in
exchange for a sales-base royalty.
Illustration 45: Payment in arrears

An EPC contractor enters into a two-year contract to develop customized machine for a customer. The
contractor concludes that the goods and services in this contract constitute a single performance
obligation.
Based on the terms of the contract, the contractor determines that it transfers control over time, and
recognizes revenue based on an input method best reflecting the transfer of control to the customer.
The customer agrees to provide the contractor monthly progress payments, with the final 25 percent
payment (holdback payment) due upon contract completion. As a result of the holdback payment,
there is a gap between when control transfers and when consideration is received, creating a financing
component.
Illustration 46: Payment in arrears

Company Z is a developer and manufacturer of defense systems that is primarily a Tier -II supplier of
parts and integrated systems to original equipment manufacturers (OEMs) in the commercial markets.
Company Z enters into a contract with Company X for the development and delivery of 5,000 highly
technical, specialized missiles for use in one of Company X’s platforms.
As a part of the contract, Company X has agreed to pay Company Z for their cost plus an award fee up
to ₹ 100 crore. The consideration will be paid by the customer related to costs incurred near the time
Company Z incurs such costs. However, the ₹ 100 crore award fee is awarded upon successful
completion of the development and test fire of a missile to occur in 16 months from the time the
contract is executed.
The contract specifies Company Z will earn up to ₹ 100 crore based on Company X’s assessment of
Company Z’s ability to develop and manufacture a missile that achieves multiple factors, including final
weight, velocity, and accuracy. Partial award fees may be awarded based on a pre-determined scale
based on their success.
Assume Company Z has assessed the contract under Ind AS 115 and determined the award fee
represents variable consideration. Based on their assessment, Company Z has estimated a total of ₹ 80
crore in the transaction price related to the variable consideration pursuant to guidance within Ind AS
115. Further, the entity has concluded it should recognize revenue over time for a single performance
obligation using a cost- to-cost input method.
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Illustration 47: Applying practical expedient
Company H enters into a two-year contract to develop customized software for Company C. Company
H concludes that the goods and services in this contract constitute a single performance obligation.
Based on the terms of the contract, Company H determines that it transfers control over time, and
recognizes revenue based on an input method best reflecting the transfer of control to Company C.
Company C agrees to provide Company H monthly progress payments. Based on the expectation of the
timing of costs to be incurred, Company H concludes that progress payments are being made such that
the timing between the transfer of control and payment is never expected to exceed one year.
Illustration 48: Entitlement to non-cash consideration

An entity enters into a contract with a customer to provide a weekly service for one year. The contract
is signed on 1st April, 20X1 and work begins immediately. The entity concludes that the service is a
single performance obligation. This is because the entity is providing a series of distinct services that
are substantially the same and have the same pattern of transfer (the services transfer to the
customer over time and use the same method to measure progress — that is, a time-based measure of
progress).
In exchange for the service, the customer promises its 100 equity shares per week of service (a total
of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon
the successful completion of each week of service.
How should the entity decide the transaction price?
Illustration 49: Fair value of non-cash consideration varies for reasons other than the
form of the consideration
RT Limited enters into a contract to build an office building for AT Limited over an 18 -month period. AT
Limited agrees to pay the construction entity ₹ 350 crore for the project. RT Limited will receive a
bonus of 10 lakh equity shares of AT Limited if it completes construction of the office building within
one year. Assume a fair value of ₹ 100 per share at contract inception.
Illustration 50: Non-cash consideration - Free advertising

Production Company Y sells a television show to Television Company X. The consideration under the
arrangement is a fixed amount of ₹ 1,000 and 100 advertising slots. Y determines that the stand-alone
selling price of the show would be ₹ 1,500. Based on market rates, Y determines that the fair value of
the advertising slots is ₹ 600.
Illustration 51: Customer-provided goods or services

MS Limited is a manufacturer of cars. It has a supplier of steering systems – SK Limited. MS Limited
places an order of 10,000 steering systems on SK Limited. It also agrees to pay ₹ 25,000 per steering
system and contributes tooling to be used in SK’s production process.
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The tooling has a fair value of ₹ 2 crore at contract inception. SK Limited determines that each steering
system represents a single performance obligation and that control of the steering system transfers to
MS Limited upon delivery.
SK Limited may use the tooling for other projects and determines that it obtains control of the tooling.
Determine the transaction price?
Illustration 52: Consideration payable to a customer

An entity that manufactures consumer goods enters into a one-year contract to sell goods to a
customer that is a large global chain of retail stores. The customer commits to buy at least ₹ 15 crore
of products during the year. The contract also requires the entity to make a non- refundable payment
of ₹ 1.5 crore to the customer at the inception of the contract. The ₹ 1.5 crore payment will
compensate the customer for the changes it needs to make to its shelving to accommodate the entity's
products. The entity does not obtain control of any rights to the customer's shelves.
Determine the transaction price.The entity applies the requirements in paragraph 72 of Ind AS 115 and
concludes that the consideration payable is accounted for as a reduction in the transaction price when
the entity recognises revenue for the transfer of the goods. Consequently, as the entity transfers goods
to the customer, the entity reduces the transaction price for each good by 10 per cent [(₹ 1.5 crore ÷
₹ 15 crore) x 100]. Therefore, in the first month in which the entity transfers goods to the customer,
the entity recognises revenue of ₹ 1.125 crore (₹ 1.25 crore invoiced amount less ₹ 0.125 crore of
consideration payable to the customer).
Illustration 53: Credits to a new customer

Customer C is in the middle of a two-year contract with Telco B Ltd., its current wireless service
provider, and would be required to pay an early termination penalty if it terminated the contract today.
If C cancels the existing contract with B Ltd. and signs a two-year contract with Telco DLtd. for ₹ 800
per month, then D Ltd. promises at contract inception to give C a one- time credit of ₹ 2,000 (referred
to as a ‘port-in credit’). The amount of the port-in credit does not depend on the volume of service
subsequently purchased by C during the two- year contract.
Illustration 54: Allocation methodology (SIMILAR ASKED IN PP JULY’21)

An entity enters into a contract with a customer to sell Products A, B and C in exchange for ₹ 10,000.
The entity will satisfy the performance obligations for each of the products at different points in time.
The entity regularly sells Product A separately and therefore the stand-alone selling price is directly
observable. The stand- alone selling prices of Products B and C are not directly observable.
Because the stand-alone selling prices for Products B and C are not directly observable, the entity must
estimate them. To estimate the stand-alone selling prices, the entity uses the adjusted market
assessment approach for Product B and the expected cost plus a margin approach for Product C. In
making those estimates, the entity maximises the use of observable inputs.
The entity estimates the stand-alone selling prices as follows:
Product Stand-alone selling price Method

Product A 5,000 Directly observable
Product B 2,500 Adjusted market assessment approach
Product C 7,500 Expected cost plus a margin approach
Total 15,000
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Illustration 55 : Allocating a discount
An entity regularly sells Products X, Y and Z individually, thereby establishing the following stand-alone
selling prices:
Product Stand-alone selling

price
₹
Product X 50,000
Product Y 25,000
Product Z 45,000
Total 1,20,000
In addition, the entity regularly sells Products Y and Z together for ₹ 50,000.
Case A—Allocating a discount to one or more performance obligations

The entity enters into a contract with a customer to sell Products X, Y and Z in exchange for ₹ 100,000.
The entity will satisfy the performance obligations for each of the products at different points in time;
or Product Y and Z at same point of time. Determine the allocation of transaction price to Product Y
and Z
Case B—Residual approach is appropriate

The entity enters into a contract with a customer to sell Products X, Y and Z as described in Case A.
The contract also includes a promise to transfer Product Alpha. Total consideration in the contract is ₹
130,000. The stand- alone selling price for Product Alpha is highly variable because the entity sells
Product Alpha to different customers for a broad range of amounts (₹ 15,000 – ₹ 45,000). Determine
the stand-alone selling price of Products, X, Y, Z and Alpha using the residual approach.
Case C—Residual approach is inappropriate

The same facts as in Case B apply to Case C except the transaction price is ₹ 1,05,000 instead of ₹
130,000.
Illustration 56: Allocation of variable consideration (MTP: MARCH, 2019)

An entity enters into a contract with a customer for two intellectual property licences (Licences A and
B), which the entity determines to represent two performance obligations each satisfied at a point in
time. The stand-alone selling prices of Licenses A and B are ₹ 1,600,000 and ₹ 2,000,000,
respectively. The entity transfers Licence B at inception of the contract and transfers Licence A one
month later.
Case A—Variable consideration allocated entirely to one performance obligation

The price stated in the contract for License A is a fixed amount of ₹ 1,600,000 and for Licence B the
consideration is three per cent of the customer's future sales of products that use Licence B. For
purposes of allocation, the entity estimates its sales- based royalties (i.e., the variable consideration)
to be ₹ 2,000,000. Allocate the transaction price.
Case B—Variable consideration allocated on the basis of stand-alone selling prices

The price stated in the contract for License A is a fixed amount of ₹ 600,000 and for Licence B the
consideration is five per cent of the customer's future sales of products that use Licence B. The entity's
estimate of the sales- based royalties (i.e., the variable consideration) is ₹ 3,000,000. Here, Licence A
is transferred 3 months later. The royalty due from the customer’s first month of sale is ₹ 4,00,000.
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Allocate the transaction price and determine the revenue to be recognised for each license and the
contract liability, if any.
Illustration 57: Allocating a change in transaction price

On 1st April, 20X0, a consultant enters into an arrangement to provide due diligence, valuation, and
software implementation services to a customer for ₹ 2 crore. The consultant can earn ₹ 20 lakh bonus
if it completes the software implementation by 30 th September, 20X0 or ₹ 10 lakh bonus if it
completes the software implementation by 31st December, 20X0.
The due diligence, valuation, and software implementation services are distinct and therefore
are accounted for as separate performance obligations. The consultant allocates the transaction
price, disregarding the potential bonus, on a relative stand-alone selling price basis as follows:
• Due diligence – ₹ 80 lakh
• Valuation – ₹ 20 lakh
• Software implementation – ₹ 1 crore
At contract inception, the consultant believes it will complete the software implementation by
30th January, 20X1. After considering the factors in Ind AS 115, the consultant cannot
conclude that a significant reversal in the cumulative amount of revenue recognized would not
occur when the uncertainty is resolved since the consultant lacks experience in completing
similar projects. As a result, the consultant does not include the amount of the early completion
bonus in its estimated transaction price at contract inception.
On 1st July, 20X0, the consultant notes that the project has progressed better than expected
and believes that implementation will be completed by 30th September, 20X0 based on a
revised forecast. As a result, the consultant updates its estimated transaction price to reflect a
bonus of ₹ 20 lakh.
After reviewing its progress as of 1st July, 20X0, the consultant determines that it is 100
percent complete in satisfying its performance obligations for due diligence and valuation and
60 percent complete in satisfying its performance obligation for software implementation.
Illustration 58 : Discretionary credit

Telco G Ltd. grants a one-time credit of ₹ 50 to a customer in Month 14 of a two-year contract.
The credit is discretionary and is granted as a commercial gesture, not in response to prior
service issues (often referred to as a ‘retention credit’). The contract includes a subsidised
handset and a voice and data plan. G Ltd. does not regularly provide these credits and
therefore customers do not expect them to be granted.
How this will be accounted for under Ind AS 115?
Illustration 59:
Minitek Ltd. is a payroll processing company. Minitek Ltd. enters into a contract to provide
monthly payroll processing services to ABC limited for one year. Determine how entity will
recognise the revenue?
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Illustration 60
T&L Limited (‘T&L’) is a logistics company that provides inland and sea transportation services. A
customer
– Horizon Limited (‘Horizon’) enters into a contract with T&L for transportation of its goods
from India to Sri Lanka through sea. The voyage is expected to take 20 days from Mumbai to
Colombo. T&L is responsible for shipping the goods from Mumbai port to Colombo port.
Whether T&L’s performance obligation is met over period of time?
Illustration 61
AFS Ltd. is a risk advisory firm and enters into a contract with a company – WBC Ltd to provide
audit services that results in AFS issuing an audit opinion to the Company. The professional
opinion relates to facts and circumstances that are specific to the company. If the Company
was to terminate the consulting contract for reasons other than the entity's failure to perform
as promised, the contract requires the Company to compensate the risk advisory firm for its
costs incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit
margin that the entity earns from similar contracts.
Whether risk advisory firm’s performance obligation is met over period of time?
Illustration 62
Space Ltd. enters into an arrangement with a government agency for construction of a space
satellite. Although Space Ltd is in this business for building such satellites for various
customers across the world, however the specifications for each satellite may vary based on
technology that is incorporated in the satellite. In the event of termination, Company has right
to enforce payment for work completed to date.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
Illustration 63
ABC enters into a contract with a customer to build an item of equipment. The customer pays
10% advance and then 80% in instalments of 10% each over the period of construction with
balance 10% payable at the end of construction period. The payments are non-refundable
unless the company fails to perform as per the contract. Further, if the customer terminates
the contract, then entity is entitled to retain payments made. The company will have no further
right to compensation from the customer. Evaluate if contract will qualify for satisfaction of
performance obligation over a period of time.
Illustration 64: Measuring progress on straight line basis

An entity, an owner and manager of health clubs, enters into a contract with a customer for
one year of access to any of its health clubs. The customer has unlimited use of the health
clubs and promises to pay CU100 per month. The entity’s promise to the customer is to provide
a service of making the health clubs available for the customer to use as and when the
customer wishes.
Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
If yes, how should an entity measure its progress of service provided?
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Illustration 65 : Uninstalled materials (SIMILAR ASKED IN PP MAY’19)
On 1st January, 20X1, an entity contracts to renovate a building including the installation of
new elevators. The entity estimates the following with respect to the contract:
Particulars Amount (₹)
Transaction price 5,000,000
Expected costs:
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000
The entity purchases the elevators and they are delivered to the site six months before they
will be installed. The entity uses an input method based on cost to measure progress towards
completion. The entity has incurred actual other costs of 500,000 by 31st March, 20X1.
How will the Company recognize revenue, if performance obligation is met over a period of
time.
Illustration 66
An entity enters into a contract with a customer for the sale of a tangible asset on1st January,
20X1 for ₹ 1 million. The contract includes a call option that gives the entity the right
torepurchase the asset for₹1.1 million on or before 31st December, 20X1. How would the
entity account for this transaction?
Illustration 67
An entity enters into a contract with a customer for the sale of a tangible asset on1st January,
20X1 for ₹ 1,000,000. The contract includes a put option that gives the customer the right to
sell the asset for ₹ 900,000 on or before 31st December, 20X1. The market price for such
goods is expected to be ₹ 750,000
How would the entity account for this transaction?
Illustration 68
An entity enters into a contract with a customer on 1st April, 20X1 for the sale of a machine
and spare parts. The manufacturing lead time for the machine and spare parts is two years.
Upon completion of manufacturing, the entity demonstrates that the machine and spare parts
meet the agreed- upon specifications in the contract. The promises to transfer the machine and
spare parts are distinct and result in two performance obligations that each will be satisfied at
a point in time. On 31st March, 20X3, the customer pays for the machine and spare parts, but
only takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity's warehouse
because of its close proximity to the customer's factory. The customer has legal title to the
spare parts and the parts can be identified as belonging to the customer. Furthermore, the
entity stores the spare parts in a separate section of its warehouse and the parts are ready for
immediate shipment at the customer's request. The entity expects to hold the spare parts for
two to four years and the entity does not have the ability to use the spare parts or direct them
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to another customer.
How will the Company recognise revenue for sale of machine and spare parts? Is there any
other performance obligation attached to this sale of goods?
llustration 69
An entity, a music record label, licenses to a customer a 1975 recording of a classical
symphony by a noted orchestra. The customer, a consumer products company, has the right to
use the recorded symphony in all commercials, including television, radio and online
advertisements for two years in Country
A. In exchange for providing the licence, the entity receives fixed consideration of ₹ 50,000 per
month. The contract does not include any other goods or services to be provided by the entity.
The contract is non-cancellable. Determine how the revenue will be recognised?
Illustration 70: Assessing the nature of a software licence with unspecified upgrades
Software Company X licenses its software application to Customer Y. Under the agreement, X
will provide updates or upgrades on a when-and-if-available basis; Y can choose whether to
install them. Y expects that X will undertake no other activities that will change the
functionality of the software.
Determine the nature of license.
Illustration 71: Assessing the nature of a film licence and the effect of marketing
activities
Film Studio C grants a licence to Customer D to show a completed film. C plans to undertake
significant marketing activities that it expects will affect box office receipts for the film. The
marketing activities will not change the functionality of the film, but they could affect its value.
Determine the nature of license.
Illustration 72 : Assessing the nature of a team name and logo

Sports Team D enters into a three-year agreement to license its team name and logo to
Apparel Maker M. The licence permits M to use the team name and logo on its products,
including display products, and in its advertising or marketing materials.
(i) Determine the nature of license in the above case.
(ii) Modifying above facts that, Sports Team D has not played games in many years and the
licensor is Brand Collector B, an entity that acquires IP such as old team or brand names and
logos from defunct entities or those in financial distress. B’s business model is to license the
IP, or obtain settlements from entities that use the IP without permission, without
undertaking any ongoing activities to promote or support the IP
Would the answer be different in this situation?
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Illustration 73:
Customer outsources its information technology data centre Term = 5 years plus two 1-yr
renewal options Average customer relationship is 7 years
Entity spends ₹ 400,000 designing and building the technology platform needed to
accommodate outsourcing contract:
Design services ₹ 50,000
Hardware ₹ 140,000
Software ₹ 100,000
Migration and testing of data centre ₹ 110,000
TOTAL ₹ 400,000
Illustration 74 : Amortisation
An entity enters into a service contract with a customer and incurs incremental costs to obtain
the contract and costs to fulfil the contract. These costs are capitalised as assets in accordance
with Ind AS 115. The initial term of the contract is five years but it can be renewed for
subsequent one- year periods up to a maximum of 10 years. The average contract term for
similar contracts entered into by entity is seven years. Determine appropriate method of
amortisation?
Illustration 75:
A Ltd. is in the business of the infrastructure and has two divisions under the same; (I) Toll
Roads and (II) Wind Power. The brief details of these business and underlying project details
are as follows:
i. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the
project in the current year and has incurred total expenses aggregating to ₹ 50 crore as on
31st December, 20X1. Under IGAAP, the Company has 'recorded such expenses as
Intangible Assets in the books of account. The brief details of the Concession Agreement
are as follows:
• Total Expenses estimated to be incurred on the project ₹ 100 crore;
• Fair Value of the construction services is ₹ 110 crore;
• Total Cash Flow guaranteed by the Government under the concession agreement is ₹
200 crore;
• Finance revenue over the period of operation phase is ₹ 15 crore:
• Other income relates to the services provided during the operation phase.
ii. Kolhapur- Nagpur Expressway - The Company has also entered into another concession
agreement with Government of Maharashtra in the current year. The construction cost for
the said project will be ₹ 110 crore. The fair value of such construction cost is
approximately ₹ 200 crore. The said concession agreement is Toll based project and the
Company needs to collect the toll from the users of the expressway. Under IGAAP, UK Ltd.
has recorded the expenses incurred on the said project as an Intangible Asset.
(i) What would be the classification of Bhilwara - Jabalpur Toll Project as per applicable
Ind AS? Give brief reasoning for your choice.
(ii) What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per
applicable Ind AS? Give brief reasoning for your choice.
(iii) Also, suggest suitable accounting treatment for preparation of financial statements as
per Ind AS for the above 2 projects.
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TEST YOUR KNOWLEDGE
Question 01:
Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for the
same, Q TV allowed Deshabandhu a free advertisement spot, which was duly utilised by
Deshabandu. How revenue for these non-monetary transactions in the area of advertising will
be recognised and measured?
Question 02:
A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is engaged
in generation and supply of power. The agreement provided that A Ltd. will provide 1,00,000
minutes of talk time to employees of B Ltd. in exchange for getting power equivalent to 20,000
units. A Ltd. normally charges ₹ 0.50 per minute and B Ltd. charges ₹ 2.5 per unit. How should
revenue be measured in this case?
Question 03:
Company X enters into an agreement on 1st January, 20X1 with a customer for renovation of
hospital and install new air- conditioners for total consideration of ₹ 50,00,000. The promised
renovation service, including the installation of new air- conditioners is a single performance
obligation satisfied over time. Total expected costs are ₹ 40,00,000 including ₹ 10,00,000 for
the air conditioners.
Company X determines that it acts as a principal in accordance with paragraphs B34-B38 of Ind
AS 115 because it obtains control of the air conditioners before they are transferred to the
customer. The customer obtains control of the air conditioners when they are delivered to the
hospital premises.
Company X uses an input method based on costs incurred to measure its progress towards
complete satisfaction of the performance obligation.
As at 31st March, 20X1, other costs incurred excluding the air conditioners are ₹ 6,00,000.
Whether Company X should include cost of the air conditioners in measure of its progress of
performance obligation? How should revenue be recognised for the year ended March 20X1?
Question 04: (RTP: NOVEMBER, 2019)

An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for ₹
20,00,000. P Ltd. intends to use the said machinery to start a food processing unit. The food
processing industry is highly competitive and P Ltd. has very little experience in the said
industry.
P Ltd. pays a non-refundable deposit of ₹1,00,000 at inception of the contract and enters into a
long-term financing agreement with G Ltd. for the remaining 95 per cent of the agreed
consideration which it intends to pay primarily from income derived from its food processing
unit as it lacks any other major source of income. The financing arrangement is provided on a
non- recourse basis, which means that if P Ltd. defaults, then G Ltd. can repossess the
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machinery but cannot seek further compensation from P Ltd., even if the full value of the
amount owed is not recovered from the machinery. The cost of the machinery for G Ltd. Is ₹
12,00,000. P Ltd. obtains control of the machinery at contract inception.
When should G Ltd. recognise revenue from sale of machinery to P Ltd. in accordance with Ind
AS 115?
Question 05 (RTP MAY’20)

Entity I sell a piece of machinery to the customer for ₹ 2 million, payable in 90 days. Entity I is
aware at contract inception that the customer might not pay the full contract price. Entity I
estimates that the customer will pay at least ₹1.75 million, which is sufficient to cover entity I's
cost of sales (₹ 1.5 million) and which entity I is willing to accept because it wants to grow its
presence in this market. Entity I have granted similar price concessions in comparable
contracts.
Entity I conclude that it is highly probable that it will collect ₹ 1.75 million, and such amount is
not constrained under the variable consideration guidance.
What is the transaction price in this arrangement?
Question 06: (RTP MAY’20)

On 1 January 20X8, entity J enters into a one-year contract with a customer to deliver water
treatment chemicals. The contract stipulates that the price per container will be adjusted
retroactively once the customer reaches certain sales volume, defined, as follows:
Price per container Cumulative sales volume
₹100 1 - 1,000,000 containers
₹ 90 1,000,001 - 3,000,000 containers
₹ 85 3,000,001 containers and above
Volume is determined based on sales during the calendar year. There are no minimum
purchase requirements. Entity J estimates that the total sales volume for the year will be 2.8
million containers, based on its experience with similar contracts and forecasted sales to the
customer.
Entity J sells 700,000 containers to the customer during the first quarter ended 31st March
20X8 for a contract price of ₹100 per container.
How should entity J determine the transaction price?

Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included inside the
electric razor package that can be redeemed by the end consumers for C 10 per unit.
Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on its
experience with similar programmes and rebate redemption rates available in the market for
similar programmes. Entity K concludes that the transaction price should incorporate an
assumption of 25% rebate redemption, as this is the amount for which it is highly probable
that a significant reversal of cumulative revenue will not occur if estimates of the rebates
change. How should entity K determine the transaction price?
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A manufacturer enters into a contract to sell goods to a retailer for ₹ 1,000. The manufacturer
also offers price protection, whereby it will reimburse the retailer for any difference between
the sale price and the lowest price offered to any customer during the following six months.
This clause is consistent with other price protection clauses offered in the past, and the
manufacturer believes that it has experience which is predictive for this contract.
Management expects that it will offer a price decrease of 5% during the price protection period.
Management concludes that it is highly probable that a significant reversal of cumulative
revenue will not occur if estimates change. How should the manufacturer determine the
transaction price?
Question 09:
Electronics Manufacturer M sells 1,000 televisions to Retailer R for ₹ 50,00,000 (₹ 5,000 per
television). M provides price protection to R by agreeing to reimburse R for the difference
between this price and the lowest price that it offers for that television during the following six
months. Based on M‘s extensive experience with similar arrangements, it estimates the
following outcomes.
Question10:
Construction Company C enters into a contract with Customer E to build an asset. Depending
on when the asset is completed, C will receive either ₹ 1,10,000 or ₹ 1,30,000.
Outcome Consideration (₹) Probability

Project completes on time 1,30,000 90%
Project is delayed 1,10,000 10%
Question 11:
Franchisor Y Ltd. licenses the right to operate a store in a specified location to Franchisee F.
The store bears Y Ltd.‘s trade name and F will have a right to sell Y Ltd.‘s products for 10
years. F pays an up -front fixed fee. The franchise contract also requires Y Ltd. to maintain the
brand through product improvements, marketing campaigns etc. Determine the nature of
license.
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RTP / MTP Questions
Question 01: (MTP OCT, 2020 / MTP OCT, 2019 / RTP: MAY, 2019) (10 Marks)
KK Ltd. runs a departmental store which awards 10 points for every purchase of ₹ 500 which
can be discounted by the customers for further shopping with the same merchant. Unutilised
points will lapse on expiry of two years from the date of credit. Value of each point is ₹ 0.50.
During the accounting period 2019-2020, the entity awarded 1,00,00,000 points to various
customers of which 18,00,000 points remained undiscounted. The management expects only
80% will be discounted in future of which normally 60-70% are redeemed during the next
year.
The Company has approached your firm with the following queries and has asked you to
suggest the accounting treatment (Journal Entries) under the applicable Ind AS for these award
points:
a. How should the recognition be done for the sale of goods worth ₹ 10,00,000 on a particular day?
b. How should the redemption transaction be recorded in the year 2019-2020? The Company
has requested you to present the sale of goods and redemption as independent transaction.
Total sales of the entity is₹ 5,000 lakhs.
c. How much of the deferred revenue should be recognized at the year-end (2019-2020)
because of the estimation that only 80% of the outstanding points will be redeemed?
d. In the next year 2020-2021, 60% of the outstanding points were discounted. Balance
40% of the outstanding points of 2019-2020 still remained outstanding. How much of the
deferred revenue should the merchant recognize in the year 2020-2021 and what will be
the amount of balance deferred revenue?
e. How much revenue will the merchant recognized in the year 2021-2022, if 3,00,000 points
are redeemed in the year 2021-2022?
Question 2:(RTP:MAY,2021)
A property sale contract includes the following:
a. Common areas
b. Construction services and building material
c. Property management services
d. Golf membership
e. Car Park
f. Land entitlement
Analyse whether the above items can be considered as separate performance obligations as
per the requirements of Ind AS 115?
QUESTION 3 (MTP APR 2021)

Entity AB Ltd. enters into a three-year service contract with a customer CD Ltd. for Rs.
4,50,000 (Rs.1,50,000 per year). The standalone selling price for one year of service at
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inception of the contract is Rs.1,50,000 per year. AB Ltd. accounts for the contract as a series
of distinct services.
At the beginning of the third year, the parties agree to modify the contract as follows:
i. the fee for the third year is reduced to Rs.1,20,000; and
ii. CD Ltd. agrees to extend the contract for another three years for Rs.3,00,000 (Rs.1,00,000
per year). The standalone selling price for one year of service at the time of modification is
Rs. 1,20,000. How should AB Ltd. account for the modification? Analyze.
Question 4 (RTP NOV 2021)

Prime Ltd. is a technology company and regularly sells Software S, Hardware H and Accessory
A. The stand-alone selling prices for these items are stated below:
Software S – ₹ 50,000
Hardware H – ₹1,00,000
Accessory A – ₹ 20,000.
Since the demand for Hardware H and Accessory A is low, Prime Ltd. sells H and A together at
₹ 100,000. Prime Ltd. enters into a contract with Zeta Ltd. to sell all the three items for a
consideration of ₹1,50,000.
What will be the accounting treatment for the discount in the financial statements of Prime Ltd.,
considering that the three items are three different performance obligations which are satisfied
at different points in time? Further, what will be the accounting treatment if Prime Ltd. would
have transferred the control of Hardware H and Accessory A at the same point in time.
Question 5 (MTP NOV 21 & PAST PAPER NOV’19)

Nivaan Limited commenced work on two long-term contracts during the financial year ended on
31st March, 20X2.
The first contract with A & Co. commences on 1st June, 20X1 and had a total sales value of ₹
40 lakh. It was envisaged that the contract would run for two years and that the total expected
costs would be ₹ 32 lakh. On 31st March, 20X2, Nivaan Limited revised its estimate of the total
expected cost to ₹ 34 lakh on the basis of the additional rectification cost of ₹ 2 lakh incurred
on the contract during the current financial year. An independent surveyor has estimated at
31st March, 20X2 that the contract is 30% complete. Nivaan Limited has incurred costs up to
31st March, 20X2 of ₹ 16 lakh and has received payments on account of ₹ 13 lakh.
The second contract with B & Co. commenced on 1st September, 20X1 and was for 18 months.
The total sales value of contract was ₹ 30 lakh and the total expected cost is ₹ 24 lakh.
Payments on account already received were ₹ 9.50 lakh and total costs incurred to date were ₹
8 lakh. Nivaan Limited has insisted on a large deposit from B & Co. because the companies had
not traded together prior to the contract. The independent surveyor estimated that on 31st
March, 20X2 the contract was 20% complete.
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The two contracts meet the requirement of Ind AS 115 ‘Revenue from Contracts with
Customers’ to recognize revenue over time as the performance obligations are satisfied over
time.
The company also has several other contracts of between twelve and eighteen months in
duration. Some of these contracts fall into two accounting periods and were not completed as at
31st March, 20X2. In absence of any financial date relating to the other contracts, you are
advised to ignore these other contracts while preparing the financial statements of the company
for the year ended 31st March, 20X2.
Prepare financial statement extracts for Nivaan Limited in respect of the two construction
contracts for the year ending 31st March, 20X2.
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QUESTION 6: (PP MAY 2019) – SIMILAR TO ICAI SM ILLUSTRATION 65
Orange Ltd. contracts to renovate a five-star hotel including the installation of new elevators on
01.10.2017. Orange Ltd. estimates the transaction price of ₹ 480 lakh. The expected cost of elevators
is ₹ 144 lakh and expected other costs is ₹ 240 lakh. Orange Ltd. purchases elevators and they are
delivered to the site six months before they will be installed. Orange Ltd. uses an input method based
on cost to measure progress towards completion. The entity has incurred actual other costs of ₹ 48
lakh by 31.03.2018.
How much revenue will be recognised as per relevant Ind AS 115 for the year ended 31st March,
2018, if performance obligation is met over a period of time? (5 Marks)
QUESTION 7: (PP NOVEMBER 2020)

ABC Limited supplies plastic buckets to wholesaler customers. As per the contract entered into
between ABC Limited and a customer for the financial year 2019 -2020, the price per plastic bucket
will decrease retrospectively as sales volume increases within the stipulated time of one year. The
price applicable for the entire sale will be based, on sales volume bracket during the year.
Price per unit (INR) Sales volume

90 0 - 10,000 units
80 10,001 - 35,000 units
70 35,001 units & above
All transactions are made in cash.
i. Suggest how revenue is to be recognised in the books of accounts of ABC Limited as per expected
value method, considering a probability of 15%, 75% and 10% for sales volumes of 9,000 units,
28,000 units and 36,000 units respectively. For workings, assume that ABC Limited achieved the
same number of units of sales to the customer during the year as initially estimated under
expected value method for the financial year 2019-2020.
ii. In case ABC Limited decides to measure revenue, based on most likely method instead of
expected value method, how will be the revenue recognised in the books of accounts of ABC
Limited based on above available information? For workings, assume that ABC Limited
achieved the same number of units of sales to the customer during the year as initially estimated
under most likely value method for the financial year 2019-2020.
iii. You are required to pass Journal entries in the books of ABC Limited if the revenue is accounted
for as per expected value method for financial year 2019-2020. (14 Marks)
Question 8 (JULY 2021) – SIMILAR TO ICAI SM ILLUSTRATION 54

GTM Limited has provided the following 4 independent scenarios. You are advised to respond to the
queries mentioned at the end of each scenario. Support your answer with the relevant extracts of
the applicable Ind AS.
Scenario 1
GTM Limited enters into a contract with a customer to sell product G, T and M in exchange for ₹
1,90,000. GTM Limited will satisfy the performance obligations for each of the product at different
points in time. GTM Limited regularly sells product G separately and therefore the stand-alone
selling price is directly observable. The stand- alone selling prices of product T and M are not
directly observable.
Because the stand-alone selling prices for Product T and M are not directly observable, the Company
has to estimate them. To estimate the stand-alone selling prices, the Company uses the adjusted
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market assessment approach for product T and the expected cost plus a margin approach for
product M. In making these estimates, the Company maximizes the use of observable inputs.
The entity estimated the stand -alone selling prices as follows:
Product Stand-alone selling price (₹)

Product G 90,000
Product T 44,000
Product M 66,000
Total 2,00,000
Determine the transaction price allocated to each Product.
Scenario 2
GTM Limited regularly sells Products G, T and M individually. The standalone selling prices are as
under:
Product Stand-alone selling price (₹)

Product G 90,000
Product T 44,000
Product M 66,000
Total 2,00,000
In addition, the Company regularly sells Products T and M together for ₹ 1,00,000.
The Company enters into a contract with another customer to sell Products G, T and M in exchange
for ₹ 1,90,000. GTM Limited will satisfy the performance obligations for each of the products at
different points in time; or Product T and M at same point in time.
Determine the allocation of transaction price to Product T and M.
Scenario 3
GTM Limited enters into a contract with a customer to sell products G, T and M as described in
scenario 2. The contract also includes a promise to transfer product 'Hope'. Total consideration in
the contract is ₹ 2,40,000. The stand-alone selling price for product 'Hope' is highly variable
because the company sells Product 'Hope' to different customers for a broad range of amounts (₹
40,000 to ₹ 65,000).
Determine the selling price of Products G, T, M and Hope using the residual approach.
Scenario 4
The same facts as in scenario 3 applies to scenario 4 except that the transaction price is ₹ 2,25,000
instead of ₹ 2,40,000.
Discuss how the transaction price should be allocated.
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IND AS 116 - LEASES
Illustration 1 - Short-term lease

Scenario A:
A lessee enters into a lease with a nine-month non-cancellable term with an option to extend the
lease for four months. The lease does not have a purchase option. At the lease commencement
date, the lessee is reasonably certain to exercise the extension option because the monthly lease
payments during the extension period are significantly below market rates. Whether the lessee can
take a short-term exemption in accordance with Ind AS 116?
Scenario B:
Assume the same facts as Scenario A except, at the lease commencement date, the lessee is not
reasonably certain to exercise the extension option because the monthly lease payments during the
optional extension period are at what the lessee expects to be market rates and there are no other
factors that would make exercise of the renewal option reasonably certain. Will your answer be
different in this case?
Illustration 2 - Asset implicitly specified in a contract

Customer XYZ enters into a ten-year contract with Supplier ABC for the use of rolling stock
specifically designed for Customer XYZ.
The rolling stock is designed to transport materials used in Customer XYZ’s production process and
is not suitable for use by other customers. The rolling stock is not explicitly specified in the contract
but, Supplier ABC owns only one rolling stock that is suitable for Customer XYZ’s use. If the rolling
stock does not operate properly, the contract requires Supplier ABC to repair or replace the rolling
stock. Whether there is an identified asset?
Illustration 3 (Asset implicitly specified in a contract):

Customer XYZ enters into a ten-year contract with Supplier ABC for the use of a car. The
specification of the car is specified in the contract (i.e., brand, type, colour, options, etc.). At
inception of the contract, the car is not yet built.
Whether there is an identified asset?
Illustration 4 - Substantive Substitution Rights
Scenario A:
An electronic data storage provider (supplier) provides services through a centralised data centre
that involve the use of a specified server (Server No. 10). The supplier maintains many identical
servers in a single accessible location and determines, at inception of the contract, that it is
permitted to and can easily substitute another server without the customer’s consent throughout
the period of use.
Further, the supplier would benefit economically from substituting an alternative asset, because
doing this would allow the supplier to optimise the performance of its network at only a nominal
cost. In addition, the supplier has made clear that it has negotiated this right of substitution as an
important right in the arrangement, and the substitution right affected the pricing of the
arrangement.
Whether the substitution rights are substantive and whether there is an identified asset?
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Scenario B:
Assume the same facts as in Scenario A except that Server No. 10 is customised, and the supplier
does not have the practical ability to substitute the customised asset throughout the period of use.
Additionally, it is unclear whether the supplier would benefit economically from sourcing a similar
alternative asset.
Whether the substitution rights are substantive and whether there is an identified asset?
Illustration 5 (Identified Asset – Physically Distinct):

Customer XYZ enters into a 15-year contract with Supplier ABC for the right to use five fibres within
a fibre optic cable between Mumbai and Pune. The contract identifies five of the cable’s 25 fibres for
use by Customer XYZ. The five fibres are dedicated solely to Customer XYZ’s data for the duration
of the contract term. Assume that Supplier ABC does not have a substantive substitution right.
Whether there is an identified asset?
Illustration 6 (Identified Asset – Not Physically Distinct):
Scenario A:
Customer XYZ enters into a ten-year contract with Supplier ABC for the right to transport oil from
India to Bangladesh through Supplier ABC’s pipeline. The contract provides that Customer XYZ will
have the right to use of 95% of the pipeline’s capacity throughout the term of the arrangement.
Whether there is an identified asset
Scenario B:
Assume the same facts as in Scenario A, except that Customer XYZ has the right to use 65% of the
pipeline’s capacity throughout the term of the arrangement. Whether there is an identified asset?
Illustration 7 (Right to use for a portion of the term of contract):

ABC Ltd enters into a contract with XYZ Ltd, which grants ABC Ltd exclusive rights to use a specific
grain storage facility over a five-year period in the months of May and June. During these months,
ABC Ltd has the right to decide which crops are placed in storage and when to remove them. XYZ
Ltd provides the loading and unloading services for the warehouse activities. During the other ten
months each year, XYZ Ltd has the right to determine how the warehouse will be used.
Which party has the right to control the use of the identified asset during the period of use?
Illustration 8 (Right to obtain substantially all of the economic benefits):
Company MNO enters into a 15-year contract with Power Company PQR to purchase all of the
electricity produced by a new solar farm. PQR owns the solar farm and will receive tax credits
relating to the construction and ownership of the solar farm, and MNO will receive renewable energy
credits that accrue from use of the solar farm.). Who has the right to substantial benefits from the
solar farm?
Illustration 9 - Right to direct the use of an asset

Customer X enters into a contract with Supplier Y to use a vehicle for a five-year period. The vehicle
is identified in the contract. Supplier Y cannot substitute another vehicle unless the specified vehicle
is not operational (for e.g., if it breaks down). Under the contract:
• Customer X operates the vehicle (i.e., drives the vehicle) or directs others to operate the vehicle
(for e.g., hires a driver).
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• Customer X decides how to use the vehicle (within contractual limitations). For example, throughout
the period of use, Customer X decides where the vehicle goes, as well as when or whether it is used
and what it is used for. Customer X can also change these decisions throughout the period of use.
• Supplier Y prohibits certain uses of the vehicle (for e.g., moving it overseas) and modifications to
the vehicle to protect its interest in the asset.
Whether Customer X has the right to direct the use of the vehicle throughout the period of lease?
Entity A contracts with Supplier H to manufacture parts in a facility. Entity A designed the facility
and provided its specifications. Supplier H owns the facility and the land. Entity A specifies how
many parts it needs and when it needs the parts to be available. Supplier H operates the machinery
and makes all operating decisions including how and when the parts are to be produced, as long as
it meets the contractual requirements to deliver the specified number on the specified date.
Assuming supplier H cannot substitute the facility and hence is an identified asset.
Which party has the right to control the use of the identified asset (i.e., equipment) during the
period of use?

Entity L enters into a five—year contract with Company A, a ship owner, for the use of an identified
ship. Entity L decides whether and what cargo will be transported, and when and to which ports the
ship will sail throughout the period of use, subject to restrictions specified in the contract. These
restrictions prevent Entity L from sailing the ship into waters at a high risk of piracy or carrying
explosive materials as cargo. Company A operates and maintains the ship, and is responsible for
safe passage.
Who has the right to direct the use of the ship during the period of use?
Illustration 12 - Identifying and separating lease components
Scenario A:
A lessee enters a lease of an excavator and the related accessories (for e.g., excavator attachments)
that are used for mining purposes. The lessee is a local mining company that intends to use the
excavator at a copper mine. How many lease and non-lease components are there?
Scenario B:
Assume the same facts as in Scenario A, except that the contract also conveys the right to us an
additional loading truck. This loading truck could be deployed by the lessee for other uses (for e.g., to
transport iron ores at another mine).
Illustration 13 - Identifying different components in the contract

Entity L rents an office building from Landlord M for a term of 10 years. The rental contract stipulates
that the office is fully furnished and has a newly installed and tailored HVAC system. It also requires
Landlord M to perform all common area maintenance (CAM) during the term of the arrangement. Entity
L makes single monthly rental payment and does not pay for the maintenance separately. The office
building has a useful life of 40 years and the HVAC system and office furniture each has a life of 15
years.
What are the units of account in the lease?
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Illustration 14 - Activities which are not components of a lease contract
Scenario A:
A lessee enters into a five-year lease of equipment, with fixed annual payments of ₹ 10,000. The
contract contains fixed annual payments as follows: ₹ 8,000 for rent, ₹ 1,500 for maintenance and ₹
500 of administrative tasks. How the consideration would be allocated?
Scenario B:
Assume the fact pattern as in scenario A except that, in addition, the contract requires the lessee to pay
for the restoration of the equipment to its original condition. How the consideration would be allocated?
Illustration 15 - Allocating contract consideration to lease and non-lease components – Lessees

A lessee enters into a lease of an equipment. The contract stipulates the lessor will perform
maintenance of the leased equipment and receive consideration for that maintenance service. The
contract includes the following fixed prices for the lease and non-lease component:
Lease ₹ 80,000
Maintenance ₹ 10,000
Total ₹ 90,000
Assume the stand-alone prices cannot be readily observed, so the lessee makes estimates, maximising
the use of observable information, of the lease and non-lease components, as follows:
Lease ₹ 85,000
Maintenance ₹ 15,000
Total ₹ 1,00,000
In the given scenario, assuming lessee has not opted the practical expedient, how will the lessee
allocate the consideration to lease and non-lease component?
Illustration 16 - Determining the lease term
Scenario A:
Entity ABC enters into a lease for equipment that includes a non-cancellable term of six years and a
two- year fixed-priced renewal option with future lease payments that are intended to approximate
market rates at lease inception. There are no termination penalties or other factors indicating that
Entity ABC is reasonably certain to exercise the renewal option. What is the lease term?
Scenario B:
Entity XYZ enters into a lease for a building that includes a non-cancellable term of eight years and a
two- year, market-priced renewal option. Before it takes possession of the building, Entity XYZ pays for
leasehold improvements. The leasehold improvements are expected to have significant value at the end
of eight years, and that value can only be realised through continued occupancy of the leased property.
What is the lease term?
Scenario C:
Entity PQR enters into a lease for an identified retail space in a shopping centre. The retail space will be
available to Entity PQR for only the months of October, November and December during a non-
cancellable term of seven years. The lessor agrees to provide the same retail space for each of the
seven years. What is the lease term?
Illustration 17 - Re-assessment of exercise of lease extension option

Retailer M enters into a five-year lease for a building floor, followed by two successive five-year renewal
options. On the commencement date, Retailer M is not reasonably certain to exercise the extension
option. At the end of third year, Retailer M extended to include another floor from year 4 due to a
business acquisition. For this purpose, the lessee concludes a separate seven-year lease for an
additional floor in the building already leased. Is Retailer M required to reassess the lease term in this
case?
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Illustration 18 - Re-assessment of non-cancellable period of lease
Company N has taken 10 vehicles on lease for an initial period of 5 years with an extension option at
the option of the lessee for a further period of 5 years at the same rental amount. The remaining useful
life of the vehicles as on the commencement date of the lease is 15 years. Company N has determined
at the commencement date that it is reasonably certain to exercise the extension option and hence it
has taken a
period of 10 years for the lease. At the end of 4th year, there is an announcement by the government
that all the cars of this particular model have to be discontinued from the road within 1 year due to the
change in the pollution norms in the country. Will the lease term be reassessed in this case?
Illustration 19 - Determining the fixed payments

Entity M and Lessor A enter into a 10-year lease of an office building for fixed annual lease payments of
₹ 200,000. Per the terms of the lease agreement, annual fixed lease payments comprise ₹ 170,000 for
rent and ₹ 30,000 for real estate taxes. What are the fixed lease payments for purposes of classifying
the lease?
Illustration 20 - In substance fixed lease payments

Entity Q enters into a seven-year lease for a piece of machinery. The contract sets out the lease
payments as follows.
– If Q uses the machinery within a given month, then an amount of 2,000 accrues for that month.
– If Q does not use the machinery within a given month, then an amount of 1,000 accrues for
that month. What is considered
as lease payment in this case?
Illustration 21 - In-substance fixed lease payment

Entity P enters into a five-year lease for office space with Entity Q. The initial base rent is ₹ 1 lakh per
month. Rents increase by the greater of 1% of Entity P’s generated sales or 2% of the previous rental
rate on each anniversary of the lease commencement date. What are the lease payments for purposes
of measuring lease liability?
Illustration 22 - In substance fixed lease payments

Company N leases a production line. The lease payments depend on the number of operating hours of
the production line – i.e., N has to pay ₹ 1,000 per hour of use. The annual minimum payment is ₹
10,00,000. The expected usage per year is 1,500 hours
Illustration 23 - Variable lease payments that depend on an index or rate

An entity enters into a 10-year lease of property. The lease payment for the first year is ₹ 1,000. The
lease payments are linked to the consumer price index (CPI), i.e., not a floating interest rate. The CPI
at the beginning of the first year is 100. Lease payments are updated at the end of every second year.
At the end of year one, the CPI is 105. At the end of year two, the CPI is 108. What should be included
in lease payments?
Illustration 24 - Variable lease payments that do not depend on an index or rate

Entity XYZ is a medical equipment manufacturer and a supplier of the related consumable. Customer
ABC operates a medical centre. Under the agreement entered into by both parties, Entity XYZ grants
Customer ABC the right to use a medical laboratory machine at no cost and Customer ABC purchases
consumables for use in the equipment from Entity XYZ at ₹ 100 each.
The consumables can only be used for that equipment and Customer ABC cannot use other
consumables as substitutes. There is no minimum purchase amount required in the contract.
Based on its historical experience, Customer ABC estimates that it is highly likely to purchase at least
8,000 units of consumables annually. Customer ABC has appropriately assessed that the arrangement
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contains a lease of medical equipment. There are no residual value guarantees or other forms of
consideration included in the contract. Whether these payments affect the calculation of lease liability
and ROU Asset?
How does Entity XYZ and Customer ABC would allocate these lease payments?
Illustration 25 - Variable lease payments

Entity A enters into a five-year lease of an office building. The lease payments are ₹ 5,00,000 per year
and the contract includes an additional water charge calculated as ₹ 0.50 per litre consumed. Payments
are due at the end of year. Entity A elects to apply the practical expedient to combine lease and non-
lease components
Illustration 26 - Residual value guarantee included in lease payments

An entity (a lessee) enters into a lease and guarantees that the lessor will realise ₹ 20,000 from selling
the asset to another party at the end of the lease. At lease commencement, based on the lessee’s
estimate of the residual value of the underlying asset, the lessee determines that it expects that it will
owe ₹ 8,000 at the end of the lease. Whether the lessee should include the said payment of ₹ 8,000 as
a lease payment?
Illustration 27: Initial measurement of lease liability

Entity L enters into a lease for 10 years, with a single lease payment payable at the beginning of each
year. The initial lease payment is ₹ 100,000. Lease payments will increase by the rate of LIBOR each
year. At the date of commencement of the lease, LIBOR is 2 per cent.
Assume that the interest rate implicit in the lease is 5 per cent. How lease liability is initially measured?
Illustration 28: Measuring right-of-use asset

Entity Y and Entity Z execute a 12-year lease of a railcar with the following terms on1January, 20X1:
 The lease commencement date is 1 February 20X1.
 Entity Y must pay Entity Z the first monthly rental payment of ₹ 10,000 upon execution of the lease.
 Entity Z will pay Entity Y ₹ 50,000 cash incentive to enter into the lease payable upon lease execution.
Entity Y incurred ₹ 1,000 of initial direct costs, which are payable on 1 February 20X1. Entity Y
calculated the initial lease liability as the present value of the lease payments discounted using its
incremental borrowing rate because the rate implicit in the lease could not be readily determined; the
initial lease liability is
₹ 8,50,000.
How would Lessee Company measure and record this lease?
Illustration 29 - Dismantling costs to be included in initial measurement of ROU Asset

Company H leases an aircraft for a period of 5 years. The aircraft must undergo a planned check after
every 100,000 flight hours. At the end of the lease, company H must have a check performed (or refund
the costs to the lessor), irrespective of the actual number of flight hours. What are the lease payments
for purposes of calculating ROU asset?
Illustration 30 - Lessee Accounting

Entity ABC (lessee) enters into a three-year lease of equipment. Entity ABC agrees to make the
following annual payments at the end of each year:
₹ 20,000 in year one
₹ 30,000 in year two
₹ 50,000 in year three.
For simplicity purposes, there are no other elements to the lease payments (like purchase options, lease
incentives from the lessor or initial direct costs). Assumed a discount rate of 12% (which is Entity ABC’s
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incremental borrowing rate because the interest rate implicit in the lease cannot be readily determined).
Entity ABC depreciates the ROU Asset on a straight-line basis over the lease term.
How would Entity ABC would account for the said lease under Ind AS 116?
Illustration 31 - Subsequent measurement using cost model (MTP MAY 2020)

Company EFG enters into a property lease with Entity H. The initial term of the lease is 10 years with a
5- year renewal option. The economic life of the property is 40 years and the fair value of the leased
property is ₹ 50 Lacs. Company EFG has an option to purchase the property at the end of the lease
term for ₹ 30 lacs. The first annual payment is ₹ 5 lacs with an increase of 3% every year thereafter.
The implicit rate of interest is9.04%. Entity H gives Company EFG an incentive of ₹ 2 lacs (payable at
the beginning of year 2), which is to be used for normal tenant improvement.
Company EFG is reasonably certain to exercise that purchase option. How would EFG measure the right-
of- use asset and lease liability over the lease term?
Illustration 32- Remeasurement of a lease with variable lease payments

Entity W entered into a contract for lease of retail store with Entity J on January 01/01/20X1. The initial
term of the lease is 5 years with a renewal option of further 3 years. The annual payments for initial
term and renewal term is ₹ 100,000 and ₹ 110,000 respectively. The annual lease payment will
increase based on the annual increase in the CPI at the end of the preceding year. For example, the
payment due on 01/01/20X2 will be based on the CPI available at 31/12/20X1.
Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/20X4 is 5% and 6%
respectively and the CPI at lease commencement date and as at 01/01/20X4 is 120 and 125
respectively.
At the lease commencement date, Entity W did not have a significant economic incentive to exercise the
renewal option. In the first quarter of 20X4, Entity W installed unique lease improvements into the retail
store with an estimated five-year economic life. Entity W determined that it would only recover the cost
of the improvements if it exercises the renewal option, creating a significant economic incentive to
extend.
Is Entity W required to remeasure the lease in the first quarter of 20X4?
Illustration 33 - Modification that is a separate lease

Lessee enters into a 10-year lease for 2,000 square metres of office space. At the beginning of Year 6,
Lessee and Lessor agree to amend the original lease for the remaining five years to include an
additional 3,000 square metres of office space in the same building. The additional space is made
available for use by Lessee at the end of the second quarter of Year 6. The increase in total
consideration for the lease is commensurate with the current market rate for the new 3,000 square
metres of office space, adjusted for the discount that Lessee receives reflecting that Lessor does not
incur costs that it would otherwise have incurred if leasing the same space to a new tenant (for
example, marketing costs).
How should the said modification be accounted for?
Illustration 34 - Modification that increases the scope of the lease by extending the contractual
lease term
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments
are ₹ 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a. At the
beginning of Year 7, Lessee and Lessor agree to amend the original lease by extending the contractual
lease term by four years. The annual lease payments are unchanged (i.e., ₹ 1,00,000 payable at the
end of each year from Year 7 to Year 14). Lessee’s incremental borrowing rate at the beginning of Year
7 is 7% p.a.
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Illustration 35 - Modification that decreases the scope of the lease
are
₹ 50,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a. At the
beginning of Year 6, Lessee and Lessor agree to amend the original lease to reduce the space to only
2,500 square metres of the original space starting from the end of the first quarter of Year 6. The
annual fixed lease payments (from Year 6 to Year
10) are ₹ 30,000. Lessee’s incremental borrowing rate at the beginning of Year 6 is 5% p.a. How should
the said modification be accounted for?
Illustration 36 - Modification that is a change in consideration only

Lessee enters into a 10-year lease for 5,000 square metres of office space. At the beginning of Year 6,
Lessee and Lessor agree to amend the original lease for the remaining five years to reduce the lease
payments from ₹ 1,00,000 per year to ₹ 95,000 per year. The interest rate implicit in the lease cannot
be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
Lessee’s incremental borrowing rate at the beginning of Year 6 is 7% p.a. The annual lease payments
are payable at the end of each year.
Illustration 37 - Modification that both increases and decreases the scope of the lease
are ₹ 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined.Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
(a) include an additional 1,500 square metres of space in the same building starting from the
beginning of Year 6 and
(b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500
square metres is ₹ 1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s
incremental borrowing rate at the beginning of Year 6 is 7% p.a.
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with
the stand-alone price for that increase adjusted to reflect the circumstances of the contract.
Consequently, Lessee does not account for the increase in scope that adds the right to use an additional
1,500 square metres of space as a separate lease.
Illustration 38 - Lessor accounting for a finance lease dealer-lessor case

A Lessor enters into a 10-year lease of equipment with Lessee. The equipment is not specialised in
nature and is expected to have alternative use to Lessor at the end of the 10-year lease term. Under
the lease:
 Lessor receives annual lease payments of ₹ 15,000, payable at the end of the year
 Lessor expects the residual value of the equipment to be ₹ 50,000 at the end of the 10-year lease term
 Lessee provides a residual value guarantee that protects Lessor from the first ₹ 30,000 of loss for a sale
at a price below the estimated residual value at the end of the lease term (i.e.,₹ 50,000)
 The equipment has an estimated remaining economic life of 15 years, a carrying amount of ₹ 1,00,000
and a fair value of ₹ 1,11,000
 The lease does not transfer ownership of the underlying asset to Lessee at the end of the lease term or
contain an option to purchase the underlying asset
 The interest rate implicit in the lease is 10.078%.
How should the Lessor account for the same in its books of accounts?
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Illustration 39- Deferral of lease payments not a lease modification
Lessor L leases retail space to Lessee Z and classifies the lease as an operating lease. The lease includes
fixed lease payments of ₹ 10,000 per month.
Due to the COVID-19 pandemic, L and Z agree on a rent concession that allows Z to pay no renting the
period from July, 2020 to September 2020 but to pay rent of 20,000 per month in the period from
January 2021 to March 2021. There are no other changes to the lease.
How this will be accounted for by lessor?
Illustration 40 - Unamortised lease incentive: Lease modification

Lessor M enters into a 10-year lease of office space with Lessee K, which commences on 1 April2015.
The rental payments are 15,000 per month, payable in arrears. M classifies the lease as an operating
lease. M reimburses K’s relocation costs of K of 600,000, which M accounts for as a lease incentive. The
lease incentive is recognised as a reduction in rental income over the lease term using the same basis
as for the lease income – in this case, on a straight- line basis over 10 years.
On 1 April 2020, during the COVID-19 pandemic, M agrees to waive K’s rental payments for May, June
and July 2020.
This decrease in consideration is not included in the original terms and conditions of the lease and is
therefore a lease modification.
Illustration 41 - Modification that is not a separate lease and lease would have been classified
as an operating lease
Lessor L enters into an eight-year lease of 40 lorries with Lessee M that commences on 1 January 2018.
The lease term approximates the lorries’ economic life and no other features indicate that the lease
transfer or does not transfer substantially all of the risks and rewards incidental to ownership of the
lorries. Assuming that substantially all of the risks and rewards incidental to ownership of the lorries are
transferred, L classifies the lease as a finance lease.
During the COVID-19 pandemic, M’s business has contracted. In June 2020, L and M amend the
contract so that it now terminates on 31 December 2020.
Early termination was not part of the original terms and conditions of the lease and this is therefore a
lease modification. The modification does not grant M an additional right to use the underlying assets
and therefore cannot be accounted for as a separate lease.
Illustration 42 - Classification of a sublease in case of an Intermediate Lessor

Entity ABC (original lessee/intermediate lessor) leases a building for five years. The building has an
economic life of 40 years. Entity ABC subleases the building for four years.
How should the said sublease be classified by Entity ABC?
Illustration 43 - Intermediate Lessor – Where the sublease is classified as a ‘Finance Lease’

Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of office space (the head
lease) with Entity XYZ (the head lessor).
Sublease:
At the beginning of Year 3, the intermediate lessor subleases the 10,000 square metres of office space
for the remaining lease term i.e three years of the head lease to a sub-lessee.
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How should the said sublease be classified and accounted for by the Intermediate Lessor?
Illustration 44 - Intermediate Lessor – Where the sublease is classified as a ‘Operating Lease’

Head lease:
An intermediate lessor enters into a five-year lease for 10,000 square metres of office space (the head
lease) with Entity XYZ (the head lessor).
Sublease:
At the commencement of the head lease, the intermediate lessor subleases the 10,000 square metres of
office space for two years to a sub-lessee.
How should the said sublease be classified and accounted for by the Intermediate Lessor?
Illustration 45 - Sale and leaseback transaction

An entity (Seller-lessee) sells a building to another entity (Buyer-lessor) for cash of ₹ 30,00,000.
Immediately before the transaction, the building is carried at a cost of ₹ 15,00,000. At the same time,
Seller-lessee enters into a contract with Buyer-lessor for the right to use the building for 20 years, with
annual payments of ₹ 2,00,000 payable at the end of each year.
The terms and conditions of the transaction are such that the transfer of the building by Seller- lessee
satisfies the requirements for determining when a performance obligation is satisfied in Ind AS 115
Revenue from Contracts with Customers.
The fair value of the building at the date of sale is ₹ 27,00,000. Initial direct costs, if any, are to be
ignored. The interest rate implicit in the lease is 12% p.a., which is readily determinable by Seller-
lessee.
Buyer-lessor classifies the lease of the building as an operating lease.
How should the said transaction be accounted by the Seller-lessee and the Buyer-lessor?
Illustration 46 - Transition Approaches

A retailer (lessee) entered into 3-year lease of retail space beginning at 1 April 2017 with three annual
lease payments of ₹ 2,00,000 due on 31 March 2018, 2019 and 2020, respectively. The lease is
classified as an operating lease under Ind AS 17. The retailer initially applies Ind AS 116 for the first
time in the annual period beginning at 1 April 2019. The incremental borrowing rate at the date of the
initial application (i.e., 1 April 2019) is 10% p.a. and at the commencement of the lease (i.e., 1 April
2017) was 12% p.a. The ROU asset is subject to straight-line depreciation over the lease term. Assume
that no practical expedients are elected, the lessee did not incur initial direct costs, there were no lease
incentives and there were no requirements for th lessee to dismantle and remove the underlying asset,
restore the site on which it is located or restore the underlying asset to the condition under the terms
and conditions of the lease.
What would be the impact for the lessee using all the following transition approaches:
Alternative 1: Full Retrospective Approach
Alternative 2: Modified Retrospective Approach
Illustration 47 Revised consideration is substantially the same as or less than the original
consideration
Retailer Q leases a store in a large retail mall. The rent payable is ₹ 1,00,000 per month. As a result of
the COVID-19 pandemic, Q agrees with the lessor to defer the rent originally due in the months April,
2020 to June, 2020.
As part of this agreement, the rent for the period January, 2021 to March 2021 will be increased by ₹
1,10,000 per month, which compensates the lessor for the deferred rent as adjusted for the time value
of money.
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Whether the rent deferral is eligible for the practical expedient if the other conditions are met?
Illustration 48 - Consider only payments that were originally due on or before 30 June, 2022
Lessee P operates a chain of restaurants and leases several outlets. As a result of COVID-19 pandemic,
P agrees a rent deferral with the lessor.
Under the terms of the rent deferral, rent originally due in the period July 2021 to December 2021 will
be added to the rent due in the period July 2021 to December 2022.
Illustration 49 - Reduction in rent payments that extends beyond 30 June 2021

Lessee T leases office buildings from a lessor. As a result of the COVID-19 pandemic, in September
2021, T agrees a rent concession with the lessor, under which the monthly rent will be reduced by 50%
per month for the 12 months commencing 1 October 2021.
Illustration 50- Deferral of rent payments by extending the lease term

A lessee is granted a rent concession by the lessor whereby the lease payments for the period April
2021 to June 2021 are deferred. Three months are added to the end of the lease term at the same
monthly rent, and the lessee repays the deferred rent during those additional months. The rent
concession is a direct consequence of COVID-19.
Whether the rent deferral is eligible for the practical expedient?
Illustration 51- Forgiveness of lease payments

Lessee Z entered into a lease contract with Lessor L to lease 1,500 sqm of retail space for five years.
The lease commenced on 1 April 2019 and the rental payments are 100,000 payable quarterly in
advance on 1 April, 1 July, 1 October and 1 January. Z’s incremental borrowing rate at commencement
of the lease is 5% (assume that the interest rate implicit in the lease cannot be readily determined).
There are no initial direct costs, lease incentives or dismantling costs.
Z’s business is severely impacted by the COVID-19 pandemic and L and Z negotiate a rent concession.
On 1 June 2011, L agrees to provide Z with an unconditional rent concession that allows Z to forego
payment of its rent due on 1 July – i.e. L forgives Z the rent payment of 100,000 due on 1 July.
What will be the accounting treatment in the books of lessee for rent concessions assuming that it is
eligible for practical expedient?
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TEST YOUR KNOWLEDGE
Question 01:
A lessee enters into a ten-year contract with a lessor (freight carrier) to transport a specified
quantity of goods. Lessor uses rail wagons of a particular specification, and has a large poo lof
similar rail wagons that can be used to fulfil the requirements of the contract. The rail wagons
and engines are stored at lessor’s premises when they are not being used to transport goods.
Costs associated with substituting the rail wagons are minimal for lessor.
Whether the lessor has substantive substitutions rights and whether the arrangement contains a
lease?
Question 02:
Customer M enters into a 20-year contract with Energy Supplier S to install, operate and
maintain a solar plant for M’s energy supply. M designed the solar plant before it was
constructed – M hired experts in solar energy to assist in determining the location of the plant
and the engineering of the equipment to be used. M has the exclusive right to receive and the
obligation to take any energy produced. Whether it can be established that M is having the right
to control the use of identified asset?
Question 03:
A Customer enters into a ten-year contract with a Company (a ship owner) for the use of an
identified ship. Customer decides whether and what cargo will be transported, and when and to
which ports the ship will sail throughout the period of use, subject to restrictions specified in the
contract. These restrictions prevent the company from sailing the ship into waters at a high risk
of piracy or carrying explosive materials. The company operates and maintains the ship, and is
responsible for safe passage.
Does the customer have the right to direct how and for what purpose the ship is to be used
throughout the period of use and whether the arrangement contains a lease?
Question 04:
A Lessee enters into a ten-year lease contract with a Lessor to use an equipment. The contract
includes maintenance services (as provided by lessor). The Lessor obtains its own insurance for
the equipment. Annual payments are ₹ 10,000 (₹ 1,000 relate to maintenance services and ₹
500 to insurance costs).
The Lessee is able to determine that similar maintenance services and insurance costs are
offered by third parties for ₹ 2,000 and ₹ 500 a year, respectively. The Lessee is unable to find
an observable stand-alone rental amount for a similar equipment because none is leased
without related maintenance services provided by the lessor.
How would the Lessee allocate the consideration to the lease component?
Question 05:
A Lessee enters into a non-cancellable lease contract with a Lessor to lease a building. Initially,
the lease is for five years, and the lessee has the option to extend the lease by another five
years at the same rental.
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To determine the lease term, the lessee considers the following factors:
Market rentals for a comparable building in the same area are expected to increase by 10%
over the ten- year period covered by the lease. At inception of the lease, lease rentals are in
accordance with current market rents.
The lessee intends to stay in business in the same area for at least 20 years.
The location of the building is ideal for relationships with suppliers and customers. What should
be the lease term for lease accounting under Ind AS 116?
Question 06:
A Lessee enters into a lease of a five-year-old machine. The non-cancellable lease term is 15
years. The lessee has the option to extend the lease after the initial 15-year period for optional
periods of 12 months each at market rents.
To determine the lease term, the lessee considers the following factors:
 The machine is to be used in manufacturing parts for a type of plane that the lessee
expects will remain popular with customers until development and testing of an improved
model are completed in approximately 15 years.
 The cost to install the machine in lessee’s manufacturing facility is significant.
 The non-cancellable term of lessee’s manufacturing facility lease ends in 19 years, and the
lessee has an option to renew that lease for another twelve years.
 Lessee does not expect to be able to use the machine in its manufacturing process for other
types of planes without significant modifications.
 The total remaining life of the machine is 30 years
What should be the lease term for lease accounting under Ind As 16?
Question 07:
A Company leases a manufacturing facility. The lease payments depend on the number of
operating hours of the manufacturing facility, i.e., the lessee has to pay ` 2,000 per hour of
use. The annual minimum payment is ` 2,00,00,000. The expected usage per year is 20,000
hours.
Whether the said payments be included in the calculation of lease liability under Ind AS 116?
Question 08:
Entity X (lessee) entered into a lease agreement (‘lease agreement’) with Entity Y (lessor) to
lease an entire floor of a shopping mall for a period of 9 years. The annual lease rent of` 70,000
is payable at year end. To carry out its operations smoothly, Entity X simultaneously entered
into another agreement (‘facilities agreement’) with Entity Y for using certain other facilities
owned by Entity Y such as passenger lifts, DG sets, power supply infrastructure, parking space
etc., which are specifically mentioned in the agreement, for annual service charges amounting
to ` 1,00,000. As per the agreement, the ownership of the facilities shall remain with Entity Y.
Lessee's incremental borrowing rate is 10%.
The facilities agreement clearly specifies that it shall be co-existent and coterminous with ‘lease
agreement’. The facility agreement shall stand terminated automatically on termination or
expiry of ‘lease agreement’.
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Entity X has assessed that the stand-alone price of ‘lease agreement’ is ` 1,20,000 per yearand
stand-alone price of the ‘facilities agreement’ is ` 80,000 per year. Entity X has not elected to
apply the practical expedient in paragraph 15 of Ind AS 116 of not to separate non-lease
component(s) from lease component(s) and accordingly it separates non-lease components
from lease components.
How will Entity X account for lease liability as at the commencement date?
Question 09:(RTP MAY’21)
Entity X is an Indian entity whose functional currency is Indian Rupee. It has taken a plant on
lease from Entity Y for 5 years to use in its manufacturing process for which it has to pay annual
rentals in arrears of USD 10,000 every year. On the commencement date, exchange rate was
USD = Rs. 68. The average rate for Year 1 was Rs. 69 and at the end of year 1,the exchange rate
was Rs. 70. The incremental borrowing rate of Entity X on commencement of the lease for a USD
borrowing was 5% p.a.
How will entity X measure the right of use (ROU) asset and lease liability initially and at the end of
Year 1?
RTP, MTP, TEST PAPERS

Buildings Limited entered into a 10-year lease for 6,000 square meter of office space. The annual
lease payments are Rs. 60,000 payable at the end of each year. The interest rate implicit in the
lease cannot be readily determined. Buildings Limited's incremental borrowing rate at the
commencement date is 8% p.a. At the beginning of 6th year, Buildings Limited and lessor agree
to amend the original lease to reduce the space to only 3,000 square meters of the original space
starting from the end of the first quarter of year 6. The annual fixed lease payments (from year 6
to year 10) are Rs. 35,000. Buildings Limited's incremental borrowing rate at the beginning of
year 6 is 6% p.a.
The CFO of the Company has requested your suggestion on how to account for the modification in
the lease of office space? Prepare the detailed working for the modification.
QUESTION 02: (PP NOV’20)
Venus Ltd. (Seller-lessee) sells a building to Mars Ltd. (Buyer-lessor) for cash of ₹ 28,00,000.
Immediately before the transaction, the building is carried at a cost of ₹ 13,00,000. At the same
time, Seller- lessee enters into a contract with Buyer-lessor for the right to use the building for 20
years, with an annual payment of ₹ 2,00,000 payable at the end of each year.
The terms and conditions of the transaction are such that the transfer of the building by Seller-
lessee satisfies the requirements for determining when a performance obligation is satisfied in
accordance with Ind AS 115 "Revenue from Contracts with Customers".
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The fair value of the building at the date of sale is ₹ 25,00,000. Initial direct costs, if any, are to
be ignored. The interest rate implicit in the lease is 12% p.a., which is readily determinable by
Seller-lessee. Present Value (PV) of annual payments (20 payments of ₹ 2,00,000 each
discounted @ 12%) is ₹ 14,94,000.
Buyer-lessor classifies the lease of the building as an operating lease. How should the said
transaction be accounted by Venus Ltd.? (8 Marks)
QUESTION 3 (PP JAN’21)

Coups Limited availed a machine on lease from Ferrari Limited. The terms and conditions of the Lease
are as under:
Lease period is 3 years, machine costing ₹ 8,00,000.
Machine has expected useful life of 5 years.
Machine reverts back to Ferrari Limited on termination of lease.
The unguaranteed residual value is estimated at ₹ 50,000 at the end of 3rd year.
3 equal annual installments are made at the end of each year. - Implicit Interest Rate (IRR) =
10%.
Present value of ₹ 1 due at the end of 3 rd year at 10% rate of interest is 0.7513.
Present value of annuity of ₹ 1 due at the end of 3rd year at 10% IRR is 2.4868.
You are required to ascertain whether it is a Finance Lease or Operating Lease and also calculate
Unearned Finance Income with the relevant context to relevant Ind AS.
Question 4 (PP JULY’21)

Ted entered into a lease contract with lessor to lease 2,000 sqm of retail space for 5 years. The rentals
are payable monthly in advance. The lease commenced on 1st April 2019. In the year 2020, as a direct
consequence of Covid 19 pandemic, Ted has negotiated with the lessor which may results in the
following situations:
 Lessor agrees a rent concession under which the monthly rent will be reduced by 30% per
month for the 12 months commencing 1st October 2020.
 Ted is granted a rent concession by the lessor whereby the lease payments for the period
October 2020 to December 2020 are deferred. Three months are added to the end of the
lease term at same monthly rent.
 Lessor offers to reduce monthly rent by 50% for the months October 2020 to March 2021 on
the condition that its space is reduced from 2,000 sq m to 1,500 sq m.
Analyze the given situations in the light of Ind AS 116 and comment on whether rent
concession/deferral is eligible for practical expedient? (4
Marks)
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BUSINESS COMBINATION AND CORPORATE RESTRUCTURING
Illustration 1: Asset acquisition

An entity acquires an equipment and a patent in exchange for ` 1,000 crore cash and land.
The fair value of the land is ` 400 crore and its carrying value is ` 100 crore. Fair values of
the equipment and patent are estimated to be ` 500 crore and ` 1,000 crore, respectively.
The equipment and patent relate to a product that has just recently been commercialised.
The market for this product is still developing.
Assume the entity incurred no transaction costs. For ease of convenience, the tax
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consequences on the gain have been ignored. How should the transaction be accounted for?
Illustration 2
Company A is a pharmaceutical company. Since inception, the Company had been conducting
in- house research and development activities through its skilled workforce and recently
obtained an intellectual property right (IPR) in the form of patents over certain drugs. The
Company’s has a production plant that has recently obtained regulatory approvals. However,
the Company has not earned any revenue so far and does not have any customer contracts
for sale of goods. Company B acquires Company A.
Does Company A constitute a business in accordance with Ind AS 103?
Illustration 3
Modifying the above illustration, if Company A had revenue contracts and a sales force, such
that Company B acquires all the inputs and processes other than the sales force, then
whether the definition of the business is met in accordance with Ind AS 103?

Company P Ltd., a manufacturer of textile products, acquires 40,000 equity shares of
Company X (a manufacturer of complementary products) out of 1,00,000 shares in issue. As
part of the same agreement, the Company P purchases an option to acquire an additional
25,000 shares. The option is exercisable at any time in the next 12 months. The exercise
price includes a small premium to the market price at the transaction date.
After the above transaction, the shareholdings of Company P’s two other original
shareholders are 35,000 and 25,000. Each of these shareholders also has currently
exercisable options to acquire 2,000 additional shares. Assess whether control is acquired by
Company P.
Illustration 5
Veera Limited and Zeera Limited are both in the business of manufacturing and selling of
Lubricant. Shareholders of Veera Limited and Zeera Limited agreed to join forces to benefit
from lower delivery and distribution costs. The business combination is carried out by setting
up a new entity called Meera Limited that issues 100 shares to Veera Limited shareholders
and 50 shares to Zeera Limited shareholders in exchange for the transfer of the shares in
those entities. The number of shares reflects the relative fair values of the entities before the
combination. Also respective company’s shareholders get the voting rights in Meera Limited
based on their respective shareholdings.
Determine the acquirer by applying the principles of Ind AS 103 ‘Business Combinations’
Illustration 6
ABC Ltd. incorporated a company Super Ltd. to acquire 100% shares of another entity Focus
Ltd. (and therefore to obtain control of the Focus Ltd.). To fund the purchase, Super Ltd.
acquired a loan from XYZ Bank at commercial interest rates. The loan funds are used by
Super Ltd. to acquire entire voting shares of Focus Ltd. at fair value in an orderly transaction.
Post the acquisition, Super Ltd. has the ability to elect or appoint or to remove a majority of
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the members of the governing body of the Focus Ltd. and also Super Ltd.’s management is in
a power where it will be able to dominate the management of the Focus Ltd. Can Super Ltd.
be identified as the acquirer in this business combination?
Illustration 7
Can an acquiring entity account for a business combination based on a signed non-binding
letter of intent where the exchange of consideration and other conditions are expected to be
completed with 2 months?
Illustration 8
On 1st April, X Ltd. agrees to acquire the share of B Ltd. in an all equity deal. As per the
binding agreement X Ltd. will get the effective control on 1st April. However, the
consideration will be paid only when the shareholders’ approval is received. The shareholders
meeting is scheduled to happen on 30th April. If the shareholders’ approval is not received
for issue of new shares, then the consideration will be settled in cash. What is the acquisition
date?
Illustration 9 : Business Combination without a Court approved scheme

ABC Ltd. acquired all the shares of XYZ Ltd. The negotiations had commenced on 1st
January, 20X1 and the agreement was finalised on 1st March, 20X1. While ABC Ltd. obtains
the power to control XYZ Ltd.'s operations on 1st March, 20X1, the agreement states that the
acquisition is effective from 1st January, 20X1 and that ABC Ltd. is entitled to all profits after
that date. In addition, the purchase price is based on XYZ Ltd.'s net asset position as at 1st
January, 20X1.
What is the date of acquisition?
Illustration 10 : Acquisition date- Regulatory approval

ABC Ltd. and XYZ Ltd. are manufacturers of rubber components for a particular type of
equipment. ABC Ltd. makes a bid for XYZ Ltd.'s business and the Competition Commission of
India (CCI) announces that the proposed transaction is to be scrutinised to ensure that
competition laws are not breached. Even though the contracts are made subject to the
approval of the CCI, ABC Ltd. and XYZ Ltd. mutually agree the terms of the acquisition and
the purchase price before competition authority clearance is obtained. Can the acquisition
date in this situation be the date on which ABC Ltd. and XYZ Ltd. agree the terms even
though the approval of CCI is awaited (Assume that the approval of CCI is substantive)?
Illustration 11
On 1st April, 20X1, PQR Ltd. acquired 30% of the voting ordinary shares of XYZ Ltd. for `
8,000 crore. PQR Ltd. accounts its investment in XYZ Ltd. using equity method as prescribed under Ind
AS 28. At 31st March, 20X2, PQR Ltd. recognised its share of the net asset changes of XYZ Ltd. using
equity accounting as follows:
(` in crore)
Share of profit or loss 700
Share of exchange difference in OCI 100
Share of revaluation reserve of PPE in OCI 50
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The carrying amount of the investment in the associate on 31st March, 20X2 was therefore `
8,850 crore (8,000 + 700 + 100 + 50).
On 1st April, 20X2, PQR Ltd. acquired the remaining 70% of XYZ Ltd. for cash ` 25,000 crore. The
following additional information is relevant at that date:
(` in crore)
Fair value of the 30% interest already owned 9,000
Fair value of XYZ's identifiable net assets 30,000
How should such business combination be accounted for?
Illustration 12: Business Combination Achieved by Contract Alone

Sita Ltd and Beta Ltd decides to combine together for forming a Dual Listed Corporation (DLC). As per
their shareholder’s agreement, both the parties will retain original listing and Board of DLC will be
comprised of 10 members out of which 6 members will be of Sita Ltd and remaining 4 board members
will be of Beta Ltd.
The fair value of Sita Ltd is ` 100 crores and fair value of Beta Ltd is ` 80 crores. The fair value of net
identifiable assets of Beta Limited is ` 70 crores. Assume non-controlling Interest (NCI) to be
measured at fair value.
You are required to determine the goodwill to be recognised on acquisition.
Illustration 13
Should stamp duty paid on acquisition of land pursuant to a business combination be capitalised to
the cost of the asset or should it be treated as an acquisition related cost and accordingly be
expensed off?
Illustration 14
ABC Ltd. acquires PQR Ltd. on 30th June, 20X1. The assets acquired from PQR Ltd. include an
intangible asset that comprises wireless spectrum license. For this intangible asset, ABC Ltd. is
required to make an additional one-time payment to the regulator in PQR’s jurisdiction in order for the
rights to be transferred for its use. Whether such additional payment to the regulator is an
acquisition-related cost?
Illustration 15
ABC Ltd. acquired a beverage company PQR Ltd. from XYZ Ltd. At the time of the acquisition, PQR
Ltd. is the defendant in a court case whereby certain customers of PQR Ltd. have alleged that its
products contain pesticides in excess of the permissible levels that have caused them health damage.
PQR Ltd. is being sued for damages of ` 2 crore. XYZ Ltd. has indemnified ABC Ltd. for the losses, if
any, due to the case for amount up to ` 1 crore. The fair value of the contingent liability for the court
case is ` 70 lakh.
How should ABC Ltd. account for the contingent liability and the indemnification asset? What if the fair
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value of the liability is ` 1.2 crore instead of ` 70 lakh.
Illustration 16
ABC Ltd. pays ` 50 crore to acquire PQR Ltd. from XYZ Ltd. PQR Ltd. manufactured products
containing fiber glass and has been named in 10 class actions concerning the effects of these fiber
glass. XYZ Ltd. agrees to indemnify ABC Ltd. for the adverse results of any court cases up to an
amount of ` 10 crore. The class actions have not specified amounts of damages and past experience
suggests that claims may be up to ` 1 crore each, but that they are often settled for small amounts.
ABC Ltd. makes an assessment of the court cases and decides that due to the potential variance in
outcomes, the contingent liability cannot be measured reliably and accordingly no amount is
recognised in respect of the court cases. How should indemnification asset be accounted for?
Illustration 17
Company A, FMCG company acquires an online e-commerce company E, with the intention to start its
retail business. The e-commerce company has over the period have 10 million registered users.
However, the e-commerce company E does not have any intention to sale the customer
list. Should this customer list be recorded as an intangible in a business combination?
Illustration 18
ABC Ltd. a pharmaceutical group acquires XYZ Ltd. another pharmaceutical business. XYZ Ltd. has
incurred significant research costs in connection with two new drugs that have been undergoing
clinical trials. Out of the two drugs, one drug has not been granted necessary regulatory approvals.
However, ABC Ltd. expects that approval will be given within two years. The other drug has recently
received regulatory approval. The drugs’ revenue-earning potential was one of the principal reasons
why entity ABC Ltd. decided to acquire entity XYZ Ltd. Whether the research and development on
either of the drugs be recognised as an intangible asset in the books of ABC Ltd.?
Illustration 19
Vadapav Ltd. is a successful company has number of own stores across India and also offers
franchisee to other companies. Efficient Ltd. is one of the franchisee of Vadapav Ltd. and is and
operates number of store in south India. Vadapav Ltd. decided to acquire Efficient Ltd due to its huge
distribution network and accordingly purchased the outstanding shares on 1st April, 20X2. On the
acquisition date, Vadapav Ltd. determines that the license agreement reflects current market terms.
Illustration 20
ABC Ltd. acquires PQR Ltd. for a consideration of ` 1 crore. Four years ago, ABC Ltd. had granted a
ten-year license allowing PQR Ltd. to operate in Europe. The cost of the license was ` 2,50,000. The
contract allows either party to terminate the franchise at a cost of the unexpired initial fee plus 20%.
At the date of acquisition, the settlement amount is ` 1,80,000 [(` 2,50,000 x 6/10) + 20%].
ABC Ltd. has acquired PQR Ltd., because it sees high potential in the European market and wishes to
exploit it. ABC Ltd. calculates that under current economic conditions and at current prices it could
grant a six-year franchise for a price of ` 4,50,000.
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How is the license accounted for as part of the business combination?
Illustration 21
On 1st January, 20X1, A Ltd. acquires 80 per cent of the equity interests of B Ltd. in exchange for
cash of ` 15 crore. The former owners of B Ltd. were required to dispose off their investments in B
Ltd. by a specified date, and accordingly they did not have sufficient time to find potential buyers. A
qualified valuation professional hired by the management of A Ltd. measures the identifiable net
assets acquired, in accordance with the requirements of Ind AS 103, at ` 20 crore and the fair value
of the 20 per cent non-controlling interest in B Ltd. at ` 4.2 crore. How should A Ltd. recognise the
above bargain purchase?
Illustration 22
Entity X acquired 100% shareholding of Entity Y on 1st April, 20X1 and had complete the preliminary
purchase price allocation and accordingly recorded net assets of ` 100 million against the purchase
consideration of 150 million. Entity Y had significant carry forward losses on which deferred tax asset
was not recorded due to lack of convincing evidence on the acquisition date. However, on 31st March,
20X2, Entity Y won a significant contract which is expected to generate enough taxable income to
recoup the losses. Accordingly, the deferred tax asset was recorded on the carry forward losses on
31st March, 20X2. Whether the aforesaid losses can be adjusted with the Goodwill recorded based on
the preliminary purchase price allocation?
Illustration 23
ABC Ltd. acquires XYZ Ltd. in a business combination on 15th January, 20X1. Few days before the
date of acquisition, one of XYZ Ltd.'s customers had claimed that certain amounts were due by XYZ
Ltd. under penalty clauses for completion delays included in the contract.
ABC Ltd. evaluates the dispute based on the information available at the date of acquisition and
concludes that XYZ Ltd. was responsible for at least some of the delays in completing the contract.
Based on the evaluation, ABC Ltd. recognises ` 1 crore towards this liability which is its best estimate
of the fair value of the liability to the customer based on the information available at the date of
acquisition.
In October, 20X1 (within the measurement period), the customer presents additional information as
per which ABC Ltd. concludes the fair value of liability on the date of acquisition to be ` 2 crore.
ABC Ltd. continues to receive and evaluate information related to the claim after October, 20X1. Its
evaluation doesn’t change till February, 20X2 (i.e. after the measurement period), when it concludes
that the fair value of the liability for the claim at the date of acquisition is ` 1.9 crore. ABC Ltd.
determines that the amount that would be recognised with respect to the claim under Ind AS 37,
Provisions, Contingent Liabilities and Contingent Assets as at February, 20X2 is ` 2.2 crore.
How should the adjustment to the provisional amounts be made in the financial statements during
and after the measurement period?
Illustration 24
Progressive Ltd is being sued by Regressive Ltd for an infringement of its Patent. At 31st March,
20X2, Progressive Ltd recognised a ` 10 million liability related to this litigation.
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On 30th July, 20X2, Progressive Ltd acquired the entire equity of Regressive Ltd for ` 500 million. On
that date, the estimated fair value of the expected settlement of the litigation is ` 20 million
Illustration 25
KKV Ltd acquires a 100% interest in VIVA Ltd, a company owned by a single shareholder who is also
the KMP in the Company, for a cash payment of USD 20 million and a contingent payment of USD 2
million. The terms of the agreement provide for payment 2 years after the acquisition if the following
conditions are met:
 the EBIDTA margins of the Company after 2 years post acquisition is 21%.
 the former shareholder continues to be employed with VIVA Ltd for at least 2 years after the
acquisition. No part of the contingent payment will be paid if the former shareholder does not
complete the 2 year employment period.
Illustration 26 : Contingent consideration- Payments to employees who are former owners of

acquiree
ABC Ltd. acquires all of the outstanding shares of XYZ Ltd. in a business combination. XYZ Ltd. had
three shareholders with equal shareholdings, two of whom were also senior-level employees of XYZ
Ltd. and would continue as employee post acquisition of shares by ABC Ltd.
 The employee shareholders each will receive ` 60,00,000 plus an additional payment of `
1,50,00,000 to 2,00,00,000 based on a multiple of earnings over the next two years.
 The non-employee shareholders each receive ` 1,00,00,000.
The additional payment of each of these employee shareholders will be forfeited if they leave the
employment of XYZ Ltd. at any time during the two years following its acquisition by ABC Ltd. The
salary received by them is considered reasonable remuneration for their services.
How much amount is attributable to post combination services?
Illustration 27
Green Ltd acquired Pollution Ltd. as a part of the arrangement Green Ltd had to replace the Pollution
Ltd.’s existing equity-settled award. The original awards specify a vesting period of five years. At the
acquisition date, Pollution Ltd employees have already rendered two years of service.
As required, Green Ltd replaced the original awards with its own share-based payment awards
(replacement award). Under the replacement awards, the vesting period is reduced to 2 year (from
the acquisition date).
The value (market-based measure) of the awards at the acquisition date are as follows:
original awards:500
replacement awards: ` 600.
As of the acquisition date, all awards are expected to vest.
Illustration 28
P a real estate company acquires Q another construction company which has an existing equity
settled share based payment scheme. The awards vest after 5 years of employee service. At the
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acquisition date, Company Q’s employees have rendered 2 years of service. None of the awards are
vested at the acquisition date. P did not replace the existing share-based payment scheme but
reduced the remaining vesting period from 3 years to 2 year. Company P determines that the market-
based measure of the award at the acquisition date is ` 500 (based on measurement principles and
conditions at the acquisition date as per Ind AS 102).
Illustration 29
Classic Ltd. acquires 60% of the ordinary shares of Natural Ltd. a private entity, for ` 97.5 crore. The
fair value of its identifiable net assets is ` 150 crore. The fair value of the 40% of the ordinary shares
owned by non-controlling shareholders is ` 65 crore. Carrying amount of Natural Ltd.’s net assets is `
120 crore.
How will the non-controlling interest be measured?
Illustration 31
ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom holds 25% of the
shares in each company. Shareholders B, C and D have entered into a shareholders' agreement in
terms of governance of ABC Ltd. and XYZ Ltd. due to which they exercise joint control.
Whether ABC Ltd. and XYZ Ltd. are under common control?
Illustration 32
ABC Ltd. and XYZ Ltd. are owned by four shareholders B, C, D and E, each of whom holds 25% of the
shares in each company. However, there are no agreements between any of the shareholders that
they will exercise their voting power jointly.
Whether ABC Ltd. and XYZ Ltd. are under common control?
Illustration 30
Company X, the ultimate parent of a large number of subsidiaries, reorganises the retail segment of
its business to consolidate all of its retail businesses in a single entity. Under the reorganisation,
Company Z (a subsidiary and the biggest retail company in the group) acquires Company X’s
shareholdings in its one operating subsidiary, Company Y by issuing its own shares to Company
X. After the transaction, Company X will directly control the operating and financial policies of
Companies Y.
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Before-Reorganisation
After- Reorganisation
125
Illustration 33
ABC Ltd. had a subsidiary, namely, X Ltd. which was acquired on 1st April, 2XX0. ABC
Ltd. acquires all of the shares of Y Ltd. on 1st April, 2X17. ABC Ltd. transfers the shares
in Y Ltd. to X Ltd. on 2nd April, 2X17. How should the above transfer of Y Ltd. into X Ltd.
be accounted for in the consolidated financial statements of X Ltd.?
Before:
Intermediate
After:
Illustration 34
How will the financial statement of the prior periods be restated under common control in the
following scenarios:
a) Common Control period extends beyond the start of comparative period

XYZ Ltd acquired PQR Ltd in a common control transaction on 1 October
20X9. The year-end of XYZ Ltd is 31 March. Both XYZ Ltd and PQR Ltd have
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been controlled by shareholders since their incorporation.
b) Common Control period started in the comparative period

ABC Ltd acquired DEF Ltd in a common control transaction on 1 October
20X9. The year end of ABC Ltd is 31 March. Both ABC Ltd and DEF Ltd are
controlled by shareholder A. A made investment in ABC Ltd in 20X0 and
made investment in DEF Ltd on 1 October 20X8.
Illustration 35
Entity A owns 100% equity shares of entity B since 01.04.20X1. Entity A arranges loan funding from a
financial institution in a new wholly-owned subsidiary called “Entity C”. The loan is used by Entity C to
acquire 100% shareholding in entity B, for cash consideration of ` 2,00,000. Entity A applies Ind AS
103 to account for common control transactions and Entity C will adopt the same policy. Fair Value of
Net identifiable Assets is ` 1,50,000 and Carrying Value of Net Identifiable Assets is ` 1,00,000.
How will Entity C apply acquisition accounting in its consolidated financial statements?
Illustration 36
Enterprise Ltd. has 2 divisions Laptops and Mobiles. Division Laptops has been making constant
profits while division Mobiles has been invariably suffering losses.
On 31st March, 20X2, the division-wise draft extract of the Balance Sheet was: (` in crores)
Laptops Mobiles Total

Property, Plant and Equipment cost 250 500 750
Depreciation (225) (400) (625)
Net Property, Plant and Equipment (A) 25 100 125
Current assets: 200 500 700
Less: Current liabilities (25) (400) (425)
(B) 175 100 275
Total (A+B) 200 200 400
Financed by:
Loan funds - 300 300
Capital : Equity ` 10 each 25 - 25
Surplus 175 (100) 75
200 200 400
Division Mobiles along with its assets and liabilities was sold for ` 25 crores to Turnaround Ltd. a new
company, who allotted 1 crore equity shares of ` 10 each at a premium of ` 15 per share to the
members of Enterprise Ltd. in full settlement of the consideration, in proportion to their shareholding
in the company. One of the members of the Enterprise Ltd. was holding 52% shareholding of the
Company.
Assuming that there are no other transactions, you are asked to:
(i) Pass journal entries in the books of Enterprise Ltd.
127
(ii) Prepare the Balance Sheet of Enterprise Ltd. after the entries in (i).
(iii) Prepare the Balance Sheet of Turnaround Ltd.
Illustration 37
Maxi Mini Ltd. has 2 divisions - Maxi and Mini. The draft information of assets and liabilities as at 31st
October 20X2 was as under.
Maxi Mini Total
division division (in crores)
Property, Plant and
Equipment Cost 600 300 900
Depreciation (500) (100) (600)
100 200 300
W.D.V. (A)
Current assets 400 300 700
Less: Current liabilities (100) (100) (200)
(B) 300 200 500
Total (A+B) 40 400 800

0
Financed by :
Loan funds (A) – 100 100
(secured by a charge on property, plant and
equipment)
Own funds:
Equity capital (fully paid up ₹ 10 per share) 50
Other Equity --- --- 650
(B) ? ? 700
Total (A+B) 40 400 800

0
It is decided to form a new company Mini Ltd. to take over the assets and liabilities of Mini division.
Accordingly, Mini Ltd. was incorporated to take over at Balance Sheet figures, the assets and liabilities
of that division. Mini Ltd. is to allot 5 crore equity shares of ₹ 10 each in the company to the members
of Maxi Mini Ltd. in full settlement of the consideration. The members of Maxi Mini Ltd. are therefore
to become members of Mini Ltd. as well without having to make any further investment.
(a) You are asked to pass journal entries in relation to the above in the books of Maxi Mini Ltd
.and Mini Ltd. Also show the Balance Sheets of the 2 companies as on the morning of 1st
November, 20X2, showing corresponding previous year’s figures.
(b) The directors of the 2 companies ask you to find out the net asset value of equity shares pre
and post demerger.
(c) Comment on the impact of demerger on “shareholders wealth”.
128
Illustration 38 (MTP: October, 2019)
AX Ltd. and BX Ltd. amalgamated from 1st January, 20X2. A new Company ABX Ltd. with shares of
₹10 each was formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-20X2

(₹ in '000)
ASSETS Note No. AX BX Ltd

Ltd
Non-current assets
Property, Plant and Equipment 8,500 7,500
Financial assets
Investment 1,050 550
Current assets
Inventory 1,250 2,750
Trade receivables 1,800 4,000
Cash and Cash equivalent 450 400
13,050 15,200
EQUITY AND LIABILITIES
Equity 1
Equity share capital (of face value of ₹ 10 each) 6,000 7,000
Other equity 3,050 2,700
Liabilities
Non-current liabilities
Borrowings (12% Debentures) 3,000 4,000
Current liabilities
Trade payables 1,000 1,500
13,050 15,200
Note:
1. Other equity AX BX Ltd

Ltd
General Reserve 1,500 2,000
Profit & Loss 1,000 500
Investment Allowance Reserve 500 100
Export Profit Reserve 50 100
3,050 2,700
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of
the transferor companies. Also the new debentures were issued in exchange of the old series of
both the companies.
Prepare a note showing purchase consideration and discharge thereof and draft the Balance Sheet
of ABX Ltd:
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a. Assuming that both the entities are under common control
b. Assuming BX Ltd is a larger entity and their management will take the control of the entity
ABX Ltd The fair value of net assets of AX and BX limited are as follows:
Assets AX Ltd. BX Ltd. (‘000)
(‘000)
Property, Plant and Equipment 9,500 1,000
Inventory 1,300 2,900
Fair value of the business 11,000 14,000
Illustration 39:
On 9th April, 20X2, Shyam Ltd. a listed company started to negotiate with Ram Ltd, which is an
unlisted company about the possibility of merger. On 10th May, 20X2, the board of directors of
Shyam Ltd. authorized their management to pursue the merger with Ram Ltd. On 15th May, 20X2,
management of Shyam Ltd. offered management of Ram Ltd. 12,000 shares of Shyam Ltd. against
their total share outstanding. On 31st May, 20X2, the board of directors of Ram Ltd accepted the
offer subject to shareholder’s vote. On 2nd June, 20X2 both the companies jointly made a press
release about the proposed merger.
On 10th June, 20X2, the shareholders of Ram Ltd approved the terms of the merger. On 5th June,
the shares were allotted to the shareholders of Ram Ltd.
The market price of the shares of Shyam Ltd was as follows:
Date Price per share
9th April 70
10th May 75
15th May 60
31st May 70
2nd June 80
10th June 85
15th June 90
What is the acquisition date and what is purchase consideration in the above scenario?
Illustration 40 (MTP MAY 2019 & SIMILAR TO (PP NOV 2019/MTP APR 2021)
The balance sheet of Professional Ltd. and Dynamic Ltd. as of 31st March, 20X2 is given below: (₹
lakhs)
Assets Professional Ltd Dynamic Ltd
Non-Current Assets:
Property, plant and equipment 300 500
Investment 400 100
Current assets:
Inventories 250 150
Financial assets
Trade receivables 450 300
Cash and cash equivalents 200 100
130
Others 400 230
Total 2,000 1,380
Equity
Share capital- Equity shares of ₹100
Each of Dynamic Ltd. and ₹ 10 each of
Professional Ltd. 500 400
Other Equity 810 225
Non-Current liabilities:
Long term borrowings 250 200
Deferred tax 40 35
Current Liabilities:
Short term borrowings 100 150
Total 2,000 1,380
Other information
(a) Professional Ltd. acquired 70% shares of Dynamic Ltd. on 1st April, 20X2 by issuing its own
shares in the ratio of 1 share of Professional Ltd. for every 2 shares of Dynamic Ltd. The fair
value of the shares of Professional Ltd was ₹ 40 per share.
(b) The fair value exercise resulted in the following: (all nos in Lakh)
i. Fair value of PPE on 1st April, 20X2 was ₹ 350 lakhs.
ii. Professional Ltd also agreed to pay an additional payment as consideration that is higher
of 35 lakhs and 25% of any excess profits in the first year, after acquisition, over its
profits in the preceding 12 months made by Dynamic Ltd. This additional amount will be
due after 2 years. Dynamic Ltd has earned ₹ 10 lakh profit in the preceding year and
expects to earn another ₹ 20 Lakh.
iii. In addition to above, Professional Ltd also had agreed to pay one of the founder share
holder a payment of ₹20 lakh provided he stays with the Company for two year after the
acquisition.
iv. Dynamic Ltd had certain equity settled share-based payment award (original award) which
got replaced by the new awards issued by Professional Ltd. As per the original term the
vesting period was 4 years and as of the acquisition date the employees of Dynamic Ltd
have already served 2 years of service. As per the replaced awards the vesting period has
been reduced to one year (one year from the acquisition date). The fair value of the award
on the acquisition date was as follows:
 Original award- ₹ ₹ 5 lakh
 Replacement award-₹ ₹8 lakh.
v. Dynamic Ltd had a lawsuit pending with a customer who had made a claim of ₹ 50 lakh.
131
Management reliably estimated the fair value of the liability to be ₹ 5 lakh.
vi. The applicable tax rate for both entities is 30%.

You are required to prepare opening consolidated balance sheet of Professional Ltd as on 1st April,
20X2. Assume 10% discount rate.
132
TEST YOUR KNOWLEDGE
Question 01: (NOV 2020)
B. On 1st November, Company A obtains control of Company B when it acquires a further 65% of
Company B’s shares, thereby resulting in a total holding of 90%.The acquisition had the following
features:
 Consideration: Company A transfers cash of ₹ 59,00,000 and issues 1,00,000 shares on 1st
November. The market price of Company A’s shares on the date of issue is ₹ 10 per share.
 Contingent consideration: Company A agrees to pay additional consideration of ₹ 7,00,000 if

the cumulative profits of Company B exceed ₹ 70,00,000 over the next two years. At the
acquisition date, it is not considered probable that the extra consideration will be paid. The fair
value of the contingent consideration is determined to be ₹ 3,00,000 at the acquisition date.
 Transaction costs: Company A pays acquisition-related costs of ₹ 1,00,000.
 Non-controlling interests (NCI): The fair value of the NCI is determined to be ₹

7,50,000 at the acquisition date based on market prices. Company A elects to measure non-
controlling interest at fair value for this transaction.
 Previously held non-controlling equity interest: Company A has owned 25% of the shares
in Company B for several years. At 1st November, the investment is included in Company A’s
consolidated balance sheets at ₹ 6,00,000, accounted for using the equity method; the fair
value is ₹ 20,00,000.
The fair value of Company B’s net identifiable assets at 1st November is ` 60,00,000, determined
in accordance with Ind AS 103.
Determine the accounting under acquisition method for the business combination by Company A.
Question 02: (MTP MAR 2018)

On 31st December, 20X1, Entity A issues 2.5 shares in exchange for each ordinary share of Entity
B. All of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150
ordinary shares in exchange for all 60 ordinary shares of Entity B.
The fair value of each ordinary share of Entity B at 31st December, 20X1 is ₹ 40. The quoted
market price of Entity A’s ordinary shares at that date is ₹ 16.
The fair values of Entity A’s identifiable assets and liabilities at 31st December, 20X1 are the same
as their carrying amounts, except that the fair value of Entity A’s non- current assets at 31st
December, 20X1 is ₹ 1,500.
The balance sheets of Entity A and Entity B immediately before the business combination are:
Entity A (legal parent, Entity B (legal subsidiary,

accounting acquiree) accounting acquirer)
Current assets 500 700
Non-current assets 1,300 3,000
133
0
Current liabilities 300 600
Non-current liabilities 400 1,100
Total liabilities 700 1,70
0
Shareholders’ equity
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total shareholders’ equity 1,100 2,000
Total liabilities and shareholders’ equity 1,800 3,700
Assume that Entity B’s earnings for the annual period ended 31st March, 20X1 were ₹ 600 and that
the consolidated earnings for the annual period ended 31st March,20X2 were ₹ 800. Assume also
that there was no change in the number of ordinary shares issued by Entity B during the annual
period ended 31st March, 20X1 and during the period from 1st January, 20X1 to the date of the
reverse acquisition on 31st December, 20X1.
Calculate the fair value of the consideration transferred measure goodwill and prepare consolidated
balance sheet as on 31st December, 20X1.
Question 3
Scenario 1: New information on the fair value of an acquired loan
Bank F acquires Bank E in a business combination in October, 20X1. The loan by Bank E to Borrower
B is recognised at its provisionally determined fair value. In December 20X1, F receives Borrower B’s
financial statements for the year ended 30th September, 20X1, which indicate significant decrease in
Borrower B’s income from operations. Basis this, the fair value of the loan to B at the acquisition date
is determined to be less than the amount recognised earlier on a provisional basis.
Scenario 2: Decrease in fair value of acquired loan resulting from an event occurring
during the measurement period.
Bank F acquires Bank E in a business combination in October, 20X1. The loan by Bank E to Borrower
B is recognised at its provisionally determined fair value. In December 20X1, F receives information
that Borrower B has lost its major customer earlier that month and this is expected to have a
significant negative effect on B’s operations.
Comment on the treatment done by Bank F.
Question 04:
Company A acquired 90% equity interest in Company B on 1st April, 20X1 for a consideration of ₹ 85
crores in a distress sale. Company B did not have any instrument recognised in equity. The Company
appointed a registered valuer with whose assistance, the Company valued the fair value of NCI and
the fair value identifiable net assets at ₹ 15 crores and ₹ 100 crores respectively.
Find the value at which NCI has to be shown in the financial statements.
Question 05:
On 1st April, 20X1, Company A acquired 5% of the equity share capital of Company B for 1,00,000. A
accounts for its investment in B at Fair Value through OCI (FVOCI) under Ind AS 109, Financial
Instruments: Recognition and Measurement. At 31st March, 20X2, A carried its investment in B at
fair value and reported an unrealised gain of ₹ 5,000 in other comprehensive income, which was
presented as a separate component of equity. On 1st April, 20X2, A obtains control of B by acquiring
the remaining 95 percent of B. Comment on the treatment to be done based on the facts given in the
134
question.
Question 06:
Company A acquires 70 percent of Company S on 1st January, 20X1 for consideration transferred
of ₹ 5 million. Company A intends to recognise the NCI at proportionate share of fair value of
identifiable net assets. With the assistance of a suitably qualified valuation professional, A
measures the identifiable net assets of B at ₹ 10 million. A performs a review and determines that
the business combination did not include any transactions that should be accounted for separately
from the business combination.
State whether the procedures followed by A and the resulting measurements are appropriate or
not. Also calculate the bargain purchase gain in the process
Question 07:
Entity A and entity B provide construction services in India. Entity A is owned by a group of
individuals, none of whom has control and does not have a collective control agreement. Entity B is
owned by a single individual, Mr. Ram. The owners of entities A and B have decided to combine
their businesses. The consideration will be settled in shares of entity B. Entity B issues new shares,
amounting to 40% of its issued share capital, to its controlling shareholder, Mr. Ram. Mr. Ram
then transfers the shares to the owners of entity A in exchange for their interest in entity A. At this
point Mr. Ram controls both entities A and B, owning 100% of entity A and 71.42% of entity B. Mr.
Ram had a controlling interest in both entity A and entity B before and after the contribution. Is
the combination of entities A and B a combination of entities under common control?
Question 08:
On 1 April 20X1, Alpha Ltd. acquires 80 percent of the equity interest of Beta Pvt. Ltd. in exchange
for cash of ₹ 300. Due to legal compulsion, Beta Pvt. Ltd. had to dispose of their investments by a
specified date. Therefore, they did not have sufficient time to market Beta Pvt. Ltd. to multiple
potential buyers. The management of Alpha Ltd. initially measures the separately recognizable
identifiable assets acquired and the liabilities assumed as of the acquisition date in accordance with
the requirement of Ind AS 103. The identifiable assets are measured at ₹ 500 and the liabilities
assumed are measured at ₹ 100. Alpha Ltd. engages on independent consultant, who determined
that the fair value of 20 per cent non-controlling interest in Beta Pvt. Ltd. is ₹84.
Alpha Ltd. reviewed the procedures it used to identify and measure the assets acquired and
liabilities assumed and to measure the fair value of both the non-controlling interest in Beta Pvt.
Ltd. and the consideration transferred. After the review, it decided that the procedures and
resulting measures were appropriate.
Calculate the gain or loss on acquisition of Beta Pvt. Ltd. and also show the journal entries for
accounting of its acquisition. Also calculate the value of the non-controlling interest in Beta Pvt.
Ltd. onthe basis of proportionate interest method, if alternatively applied?
135
Question 09: (MTP: May , 2020)
ABC Ltd. prepares consolidated financial statements up to 31st March each year. On 1st
July 20X1, ABC Ltd. acquired 75% of the equity shares of JKL Ltd. and gained control of JKL Ltd.
the issued shares of JKL Ltd. is 1,20,00,000 equity shares. Details of the purchase consideration
are as follows:
- On 1st July, 20X1, ABC Ltd. issued two shares for every three shares acquired in JKL Ltd. On
1st July, 20X1, the market value of an equity share in ABC Ltd. was ₹ 6.50 and the market
value of an equity share in JKL Ltd. was ₹ 6.
- On 30th June, 20X2, ABC Ltd. will make a cash payment of ₹ 71,50,000 to the former
shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st July, 20X1. On 1st July,
20X1, ABC Ltd. would have to pay interest at an annual rate of 10% on borrowings.
- On 30th June, 20X3, ABC Ltd. may make a cash payment of ₹ 3,00,00,000 to the former
shareholders of JKL Ltd. who sold their shares to ABC Ltd. on 1st July, 20X1. This payment is
contingent upon the revenues of ABC Ltd. growing by 15% over the two-year period from 1st
July, 20X1 to 30th June, 20X3. On 1st July, 20X1, the fair value of this contingent
consideration was ₹ 2,50,00,000. On 31st March, 20X2, the fair value of the contingent
consideration was ₹ 2,20,00,000.
On 1st July, 20X1, the carrying values of the identifiable net assets of JKL Ltd. in the books of that
company was ₹ 6,00,00,000. On 1st July, 20X1, the fair values of these net assets was ₹
7,00,00,000. The rate of deferred tax to apply to temporary differences is 20%.
During the nine months ended on 31st March, 20X2, JKL Ltd. had a poorer than expected
operating performance. Therefore, on 31st March, 20X2 it was necessary for ABC Ltd. to recognise
an impairment of the goodwill arising on acquisition of JKL Ltd., amounting to 10% of its total
computed value.
Compute the impairment of goodwill in the consolidated financial statements of ABC Ltd. under
both the methods permitted by Ind AS 103 for the initial computation of the non- controlling
interest in JKL Ltd. at the acquisition date.
Question 10: (MTP:OCT,2019) (RTP MAY,2019) (MTP APR 2018)

How should contingent consideration payable in relation to a business combination be accounted for
on initial recognition and at the subsequent measurement as per Ind AS in the following cases:
On 1 April 20X1, A Ltd. acquires 100% interest in B Ltd. As per the terms of agreement the purchase
consideration is payable in the following 2 tranches:
a. an immediate issuance of 10 lakhs shares of A Ltd. having face value of INR 10 per share;
b. a further issuance of 2 lakhs shares after one year if the profit before interest and tax of B
Ltd.for the first year following acquisition exceeds INR 1 crore.
i. The fair value of the shares of A Ltd. on the date of acquisition is INR 20 per share.
136
Further, the management has estimated that on the date of acquisition, the fair value of
contingent consideration is ₹ 25 lakhs.
ii. During the year ended 31 March 20X2, the profit before interest and tax of B Ltd.
exceeded ₹ 1 crore. As on 31 March 20X2, the fair value of shares of A Ltd. is ₹25 per
share.
iii. Continuing with the fact pattern in (a) above except for:
c. The number of shares to be issued after one year is not

fixed.
d. Rather, A Ltd. agreed to issue variable number of shares having a fair value equal to ₹ 40 lakhs
after one year, if the profit before interest and tax for the first year following acquisition exceeds
₹ 1 crore. A Ltd. issued shares with ₹ 40 lakhs after a year.
Question 11: (RTP MAY 2019) (PP NOV 2019)

As part of its business expansion strategy, KK Ltd. is in process of setting up a pharma
intermediates business which is at very initial stage. For this purpose, KK Ltd. has acquired on 1st
April, 20X1, 100% shares of ABR Ltd. that manufactures pharma intermediates. The purchase
consideration for the same was by way of a share exchange valued at ₹ 35 crores. The fair value of
ABR Ltd. s net assets was ₹ 15 crores, but does not include:
(i) A patent owned by ABR Ltd. for an established successful intermediate drug that has a
remaining life of 8 years. A consultant has estimated the value of this patent to be ₹ 10
crores. However, the outcome of clinical trials for the same are awaited. If the trials are
successful, the value of the drug would fetch the estimated ₹ 15 crores.
(ii) ABR Ltd. has developed and patented a new drug which has been approved for clinical use.
The cost of developing the drug was ₹12 crores. Based on early assessment of its sales
success, the valuer has estimated its market value at ₹ 20 crores.
(iii)
(iv) ABR Ltd.'s manufacturing facilities have received a favourable inspection by a government
department. As a result of this, the Company has been granted an exclusive five-year license
to manufacture and distribute a new vaccine. Although the license has no direct cost to the
Company, its directors believe that obtaining the license is a valuable asset which assures
guaranteed sales and the value for the same is estimated at ₹10 crores.
KK Ltd. has requested you to suggest the accounting treatment of the above transaction under
applicable Ind AS. ·
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Question 12: (MTP: March, 2019)
H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as mentioned in the below
table:
Date Equity stake Remarks

purchased
1st November, 20X6 15% The shares were purchased based on the
quoted price on the stock exchange on
1st January, 20X7 45%
the relevant dates.
Both the above-mentioned companies have Rupees as their functional currency. Consequently, H
Ltd. acquired control over S Ltd. on 1st January, 20X7. Following is the Balance Sheet of S Ltd. as
on that date:
Particulars Carrying Fair value(₹
value in crore)
(₹ in crore)
ASSETS:
Non-current assets
Intangible assets 20 30
Financial assets
Investments 100 350
Current assets
A) Inventories 20 20
B) Financial assets
Cash held in functional currency 4 4.5
C. Other current assets
Non-current asset held for sale 4 4.5
TOTAL ASSETS 208
EQUITY AND LIABILITIES:
Equity
(a) Share capital (face value ₹ 100) 12 50.4
(b) Other equity 141 Not Applicable
(a) Financial liabilities
Borrowings 20 20
Current liabilities
(a) Financial liabilities
Provision for warranties 3 3
Current tax liabilities 4 4
138
TOTAL EQUITY AND LIABILITIES 208
Other information:
Property, plant and equipment in the above Balance Sheet include leasehold motor vehicles having
carrying value of ₹ 1 crore and fair value of ₹ 1.2 crore. The date of inception of the lease was 1st
April, 20X0.On the inception of the lease, S Ltd. had correctly classified the lease as a finance
lease. However, if facts and circumstances as on 1st April, 20X7 are considered, the lease would
be classified as an operating lease.
Following is the statement of contingent liabilities of S Ltd. as on 1st January, 20X7:
Particulars Fair value Remarks

(₹in crore)
Law suit filed by a 0.5 It is not probable that an outflow of resources embodying
customer for a claim economic benefits will be required to settle the claim.
of ₹2 crore Any amount which would be paid in respect of law suit will
be tax deductible.
Income tax demand 2.0 It is not probable that an outflow of resources embodying
of ₹ 7 crore raised economic benefits will be required to settle the claim.
by tax authorities; S
Ltd. has challenged
the demand in the
court.
In relation to the above-mentioned contingent liabilities, S Ltd. has given an indemnification
undertaking to H Ltd. up to a maximum of ₹1 crore.
₹ 1 crore represents the acquisition date fair value of the indemnification undertaking.
Any amount which would be received in respect of the above undertaking shall not be taxable.
The tax bases of the assets and liabilities of S Ltd. is equal to their respective carrying values being
recognised in its Balance Sheet.
Carrying value of non-current asset held for sale of ₹ 4 crore represents its fair value less cost to
sell in accordance with the relevant Ind AS.
In consideration of the additional stake purchased by H Ltd. on 1st January, 20X7, it has issued to
the selling shareholders of S Ltd. 1 equity share of H Ltd. for every 2 shares held in S Ltd. Fair
value of equity shares of H Ltd. as on 1st January, 20X7 is ₹ 10,000 per share.
On 1st January, 20X7, H Ltd. has paid ₹ 50 crore in cash to the selling shareholders of S Ltd.
Additionally, on 31st March, 20X9, H Ltd. will pay ₹ 30 crore to the selling shareholders of S Ltd. if
return on equity of S Ltd. for the year ended 31st March, 20X9 is more than 25% per annum. H
Ltd. has estimated the fair value of this obligation as on 1st January, 20X7 and 31st March, 20X7
as ₹ 22 crore and ₹ 23 crore respectively. The change in fair value of the obligation is attributable
139
to the change in facts and circumstances after the acquisition date. Quoted price of equity shares
of S Ltd. as on various dates is as follows:
As on November, 20X6 ₹ 350 per share

As on 1st January, 20X7 ₹ 395 per share
As on 31st March, 20X7 ₹ 420 per share
On 31st May, 20X7, H Ltd. learned that certain customer relationships existing as on 1st January,
20X7, which met the recognition criteria of an intangible asset as on that date, were not
considered during the accounting of business combination for the year ended 31st March, 20X7.
The fair value of such customer relationships as on 1st January, 20X7 was ₹ 3.5 crore (assume
that there are no temporary differences associated with customer relations; consequently, there is
no impact of income taxes on customer relations).
On 31st May, 20X7 itself, H Ltd. further learned that due to additional customer relationships being
developed during the period 1st January, 20X7 to 31st March, 20X7, the fair value of such
customer relationships has increased to ₹ 4 crore as on 31st March, 20X7.
On 31st December, 20X7, H Ltd. has established that it has obtained all the information necessary
for the accounting of the business combination and that more information is not obtainable.
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting. Income tax rate
applicable is 30%.
You are required to provide your detailed responses to the following, along with reasoning and
computation notes:
A) What should be the goodwill or bargain purchase gain to be recognised by H Ltd. in its
financial statements for the year ended 31st March, 20X7. For this purpose, measure non-
controlling interest using proportionate share of the fair value of the identifiable net assets
of S Ltd.
B) will the amount of non-controlling interest, goodwill, or bargain purchase gain so recognised
in above change subsequent to 31st March, 20X7? If yes, provide relevant journal entries.
C) what should be the accounting treatment of the contingent consideration as on31st March,
20X7?
QUESTION 13 (RTP NOV’21)
Company X is engaged in the business of exploration & development of Oil & Gas Blocks.
Company X currently holds participating interest (PI) in below mentioned producing Block as follows:
Block Name Company X Company Y Company Z Total
AWM/01 30% 60% 10% 100%
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For the above Block, Company X, Y & Z has entered into unincorporated Joint Venture.
Company Y is the Operator of the Block AWM/01. Company X & Company Z are the Joint Operators.
Company Y incurs all the expenditure on behalf of Joint Venture and raise cash call to Company X &
Company Z at each month end in respect of their share of expenditure incurred in Joint Venture. All
the manpower and requisite facilities / machineries owned by the Joint venture and thereby owned
by all the Joint Operators.
For past few months, due to liquidity issues, Company Z defaulted in payment of cash calls to
operators. Therefore, company Y (Operator) has issued notice to company Z for withdrawal of their
participating right from on 01.04.20X1. However, company Z has filed the appeal with arbitrator on
30.04.20X1.
Financial performance of company Z has not been improved in subsequent months and therefore
company Z has decided to withdraw participating interest rights from Block AWM/01 and entered into
sale agreement with Company X & Company Y. As per the terms of the agreement, dated 31.5.20X1,
Company X will receive 33.33% share & Company Y will receive 66.67% share of PI rights owned by
Company Z.
Company X is required to pay ₹ 1 Lacs against 33.33% share of PI rights owned by Company Z. After
signing of sale agreement, Operator (company Y) approach government of India for modification in
PSC (Production Sharing Contract) i.e. removal of Company Z from PSC of AWM/01 and government
has approved this transaction on 30.6.20X1. Government approval for the modification in PSC is
essential given the industry in which the joint operators operate.
Balance sheet of Company X & Company Z are as follows:

Company X Company Z
Particulars 31.5.20X1 30.6.20X1 31.5.20X1 30.6.20X1
₹ ₹ ₹ ₹
Assets
Non-Current Assets
Property, Plant & Equipment 5,00,000 10,00,000 1,50,000 3,00,000
Right of Use Asset 1,00,000 2,00,000 10,000 20,000
Development CWIP 50,000 1,00,000 50,000 1,00,000
Financial Assets
Loan receivable 25,000 50,000 25,000 50,000
Total Non-Current Assets 6,75,000 13,50,000 2,35,000 4,70,000
Current assets
Inventories 1,00,000 2,00,000 15,000 30,000
Financial Assets
Trade receivables 1,50,000 3,00,000 50,000 1,00,000
Cash and cash equivalents 2,00,000 4,00,000 1,00,000 2,00,000
Other Current Assets 2,25,000 50,000 25,000 50,000
Total Current Assets 6,75,000 9,50,000 1,90,000 3,80,000
Total Assets 13,50,000 23,00,000 4,25,000 8,50,000
Equity
141
Equity share capital 3,00,000 3,00,000 1,00,000 1,00,000
Other equity 2,00,000 3,00,000 75,000 2,50,000
Total Equity 5,00,000 6,00,000 1,75,000 3,50,000
Liabilities
Provisions 4,00,000 8,00,000 1,00,000 2,00,000
Other Liabilities 1,50,000 3,00,000 50,000 1,00,000
Total Non-Current Liabilities 5,50,000 11,00,000 1,50,000 3,00,000
Current Liabilities
Trade Payables 3,00,000 6,00,000 1,00,000 2,00,000
Total Current Liabilities 3,00,000 6,00,000 1,00,000 2,00,000
Total Liabilities 13,50,000 23,00,000 4,25,000 8,50,000
Additional Information:
1. Fair Value of PPE & Development CWIP owned by Company Z as per Market participant
approach is ₹ 5,00,000 & ₹ 2,00,000 respectively.
2. Fair Value of all the other assets and liabilities acquired are assumed to be at their carrying
values (except cash & cash equivalent). Cash and cash equivalents of Company Z are not to
be acquired by Company X as per the terms of agreement.
3. Tax rate is assumed to be 30%.
4. As per Ind AS 28, all the joint operators are joint ventures whereby each parties that have joint
control of the arrangement have rights to the net assets of the arrangement and therefore every
operator records their share of assets and liabilities in their books.
You need to determine the following:

1. Whether the above acquisition falls under business or asset acquisition as defined under
business combination standard Ind AS 103?
2. Determine the acquisition date in the above transaction?

3. Prepare Journal entries for the above-mentioned transaction?
4. Draft the Balance Sheet for Company X based on your analysis in Part 1 above as at
acquisition date.
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RTP, MTP, PAST PAPERS
Question 01 (MTP Aug, 2018)

In March 2018, Pharma Ltd. acquires Dorman Ltd. in a business combination for a total cost of Rs.
12,000 lakhs. At that time Dorman Ltd.'s assets and liabilities are as follows:
Item Rs. in
Assets: lakhs
Cash 780
Receivables (net) 5,200
Plant and equipment 7,000
Deferred tax asset 360
Liabilities:
Payables 1,050
Borrowings 4,900
Employee entitlement liabilities 900
Deferred tax liability 300
The plant and equipment has a fair value of Rs. 8,000 lakhs and a tax written down value of Rs.
6,000 lakhs. The receivables are short-term trade receivables net of a doubtful debts allowance of
Rs. 300 lakhs.
Bad debts are deductible for tax purposes when written off against the allowance account by
Dorman Ltd. Employee benefit liabilities are deductible for tax when paid.
Dorman Ltd. owns a popular brand name that meets the recognition criteria for intangible assets
under Ind AS 103 'Business Combinations’. Independent valuers have attributed a fair value of Rs.
4.300 lakhs for the brand. However, the brand does not have any cost for tax purposes and no tax
deductions are available for the same.
The tax rate of 30% can be considered for all items. Assume that unless other-wise stated, all
items have a fair value and tax base equal to their carrying amounts at the acquisition date.
You are required to:

(i) Calculate deferred tax assets and liabilities arising from the business combination (do not
offset deferred tax assets and liabilities)
(ii) Calculate the goodwill that should be accounted on consolidation.
QUESTION 2 (RTP MAY 2021 )

Bima Ltd. acquired 65% of shares on 1 June, 20X1 in Nafa Ltd. which is engaged in production of
components of machinery. Nafa Ltd. has 1,00,000 equity shares of ₹ 10 each. The quoted market
price of shares of Nafa Ltd. was ₹ 12 on the date of acquisition. The fair value of Nafa Ltd.'s
identifiable net assets as on 1 June, 20X1 was ₹ 80,00,000. Bima Ltd. wired ₹ 50,00,000 in cash
and issued 50,000 equity shares as purchase consideration on the date of acquisition. The quoted
market price of shares of Bima Ltd. on the date of issue was ₹ 25 per share. Bima Ltd. also agrees
to pay additional consideration of ₹ 15,00,000, if the cumulative profit earned by Nafa Ltd.
Exceeds ₹ 1 crore over the next three years. On the date of acquisition, Nafa Ltd. assessed and
determined that it is considered probable that the extra consideration will be paid. The fair value of
this consideration on the date of acquisition is ₹ 9,80,000. Nafa Ltd. incurred ₹ 1,50,000 in relation
to the acquisition. It measures Non-controlling interest at fair value.
143
How will the acquisition of Nafa Ltd. be accounted by Bima Ltd., under Ind AS 103? Prepare
detailed workings and pass the necessary journal entry.
QUESTION 3 (RTP MAY 2021 )

Monsoon Limited acquired, on 30 September, 20X2, 70% of the share capital of Mark Limited, an
entity registered as company in Germany. The functional currency of Monsoon Limited is Indian
Rupee and its financial year ends on 31 March, 20X3. The fair value of the net assets of Mark
Limited was 23 million EURO and the purchase consideration paid is 17.5 million EURO on 30
September, 20X2. The exchange rates as on 30 September, 20X2 was ₹ 82 per EURO and at 31
March, 20X3 was ₹ 84 per EURO. On acquisition of Mark limited, what is the value at which the
goodwill / capital reserve has to be recognized in the financial statements of Monsoon Limited as
on 31 March 20X3?
QUESTION 4 (MTP OCT’21)

On 1st April 20X1, A Ltd. acquired 12 Cr shares (representing 80% stake) in B Ltd. by means of a
cash payment of ₹ 25 Cr. It is the group policy to value the non-controlling interest in subsidiaries
at the date of acquisition at fair value. The market value of an equity share in B Ltd. at 1st April
20X1 can be used for this purpose. On 1st April 20X1, the market value of a B Ltd. share was
₹2.00
On 1st April 20X1, the individual financial statements of B Ltd. showed the net assets at ₹ 23 Cr.
The directors of A Ltd. carried out a fair value exercise to measure the identifiable assets and liabilities
of B Ltd. at 1st April 20X1. The following matters emerged:
– Property having a carrying value of ₹ 15 Cr at 1st April 20X1 had an estimated market value of
₹18 Cr at that date.
– Plant and equipment having a carrying value of ₹ 11 Cr at 1st April 20X1 had an estimated
market value of ₹ 13 Cr at that date.
– Inventory in the books of B Ltd. is shown at a cost of ₹ 2.50 Cr. The fair value of the inventory
on the acquisition date is ₹ 3 Cr.
The fair value adjustments have not been reflected in the individual financial statements of B Ltd.
In the consolidated financial statements, the fair value adjustments will be regarded as temporary
differences for the purposes of computing deferred tax. The rate of deferred tax to apply to
temporary differences is 20%.
Calculate the deferred tax impact on above and calculate the goodwill arising on acquisition of B
Ltd.
144
QUESTION 5 (PP MAY 2018)

Moon Ltd. acquires 75% of Star Limited on 1st April, 2017 for consideration transferred ₹ 60 lakh.
Moon Limited intends to recognize the Non-Controlling Interest (NCI) at proportionate share of fair
value of identifiable assets. With the assistance of a suitably qualified valuation professional, Moon
Limited measures the identifiable net assets of Star.Limited at ₹ 90 lakh. Moon Limited performs a
review and determines that the business combination did not include any transactions that should
be accounted for separately from the business combination. State whether the procedures followed
by Moon Limited and the resulting measurements are appropriate or not. Also calculate the bargain
purchase gain in the process. .
QUESTION 6 (PP MAY 2019 ) SIMILAR TO ICAI SM ILL 11)

Deepak Ltd., an automobile group acquires 25% of the voting ordinary shares of Shaun Ltd.,
another automobile business, by paying, ₹ 4,320 crore on 01.04.2017. Deepak Ltd. accounts its
investment in Shaun Ltd. using equity method as prescribed under Ind AS 28. At 31.03.2018,
Deepak Ltd. recognised its share of the net asset changes of Shaun Ltd. using equity accounting as
follows:
(₹ in crore)
Share of Profit or Loss 378
Share of Exchange difference in OCI 54
Share of Revaluation Reserve of PPE in OCI 27
The carrying amount of the investment in the associate on 31.03.2018 was therefore ₹ 4,779 crore
(4,320 + 378 + 54 + 27).
On 01.04.2018, Deepak Ltd. acquired remaining 75% of Shaun Ltd. for cash ₹ 13,500 crore. Fair
value of the 25% interest already owned was ₹ 4,860 crore and fair value of Shaun Ltd.' s
identifiable net assets was ₹ 16,200 crore as on 01.04.2018. How should such business
combination be accounted for in accordance with the applicable Ind AS?
QUESTION 7 (PP NOV 2019 )

Parent A holds 100% in its subsidiary B. Parent A had acquired B, 10 years back and had decided
to account for the acquisition under the purchase method using fair values of the subsidiary B in its
consolidated financial statements. During the current year, A decides to merge B with itself. For
the purpose of this proposed merger, what values of B should be used for accounting under the
Ind AS?
145
QUESTION 8 (PP NOV 2019/MTP APR 2021) -SIMILAR TO ICAI SM ILL 40
The Balance Sheet of David Ltd. and Parker Ltd. as of 31st March, 2019 is given below:
Assets David Ltd. Parker
Ltd.
Non-current assets:
Investment 300 200
Current assets:
Inventories 300 100
Financial assets:
Cash and cash equivalents 150 200
Others 300 300
Total 1,850 1,600
Equity and
Liabilities
Equity
Share capital - Equity shares of Rs. 100 each for Parker Ltd. & Rs. 10
each for David Limited 500 400
Other 700 275
Equity
Non-current liabilities:
Long term borrowings 200 300
Deferred tax 20 55
Current liabilities:
Short term borrowings 130 170
Total 1,850 1,600
Other Information :
(i) David Ltd. acquired 70% shares of Parker Ltd. on 1st April, 2019·by issuing its own shares in
the ratio of 1 share of David Ltd. for every 2 shares of Parker Ltd. The fair value of the
shares of David Ltd. was ₹ 50 per share.
(ii) The fair value exercise resulted in the following :
(1) Fair value of property, plant and equipment (PPE) on 1st April, 2019 was ₹ 450 lakh.
(2) David Ltd. agreed to pay an additional payment as consideration that is higher of ₹ 30
lakh and 25% of any excess profits in the first year after acquisition, over its profits in
the preceding 12 months made by Parker Ltd. This additional amount will be due after 3
years. Parker Ltd. has earned ₹ 20 lakh profit in the preceding year and expects to earn
another ₹ 10 lakh.
(3) In addition to above, David Ltd. also has agreed to pay one of the founder shareholder-
Director a payment of ₹ 25 lakh provided he stays with the Company for two years after
146
the acquisition.
(4) Parker Ltd. had certain equity settled share-based payment award (original award) which
got replaced by the new awards issued by David Ltd. As per the original term, the
vesting period was 4 years and as of the acquisition date the employees of Parker Ltd.
have already served 2 years of service. As per the replaced awards, the vesting period
has been reduced to one year (one year from the acquisition date). The fair value of the
award on the acquisition date was as follows:
Original award - ₹
6 lakh Replacement
award - ₹ 9 lakh
(5) Parker Ltd. had a lawsuit pending with a customer who had made a claim of ₹ 35 lakh.
Management reliably estimated the fair value of the liability to be ₹ 10 lakh.
(6) The applicable tax rate for both entities is 40%. You are required to prepare opening
consolidated balance sheet of David Ltd. as on 1 st April, 2019 along with workings.
Assume discount rate of 8%.
QUESTION 9 (PP)
On 1st April 2019, Big Limited acquired a 35 interest in Dig Limited and achieved a significant
influence. The cost of the investment was ₹ 3,00,000. Dig Limited has net assets of ₹ 5,50,000 as
on 1st April 2019. The fair value of those net assets is ₹ 6,50,000, since the fair value of property,
plant and equipment is ₹ 1,00,000 higher than its book value. This property, plant and equipment
have a remaining useful life of 8 years. For the financial year 2019-2020, Dig Limited earned a
profit (after tax) of ₹ 1,00,000 and paid a dividend of ₹ 11,000 out of these profits. Dig Ltd. has
also recognized the loss of ₹ 15,000, that arose from re-measurement of defined benefit directly in
'Other Comprehensive Income'. Calculate Big Ltd.'s interest in Dig Ltd. as at the year ended 31st
March 2020 under the relevant method.
147
INDAS 102-SHARE BASED PAYMENT
Illustration 1-Equity Settled Shared Based Payment- Service conditions

ABC Limited granted to its employees, share options with a fair value of ₹5,00,000 on 1st April,
20X0, if they remain in the organization up to 31st March, 20X3. On 31st March, 20X1, ABC
Limited expects only 91% of the employees to remain in the employment. On 31st March, 20X2,
company expects only 89% of the employees to remain in the employment. However, only 82%
of the employees remained in the organisation at the end of March, 20X3 and all of them
exercised their options. Pass the Journal entries?
Illustration 2 - Cash Settled Shared Based Payment-Service conditions ( SIMILAR

QUESTION ASKED IN PP MAY’18 & PP NOV’20)
XYZ issued 10,000 Share Appreciation Rights (SARs) that vest immediately to its employees on
1st April, 20X0. The SARs will be settled in cash. Using an option pricing model, at that date it is
estimated that the fair value of a SAR is ₹ 95. SAR can be exercised any time up to 31st March,
20X3. At the end of period on 31st March, 20X1 it is expected that 95% of total employees will
exercise the option, 92% of total employees will exercise the option at the end of next year and
finally 89% were exercised at the end of the 3rd year. Fair Values at the end of each period have
been given below: Pass the Journal entries?
Illustration 3 - Share-based payment with cash alternative (MTP OCT’21)

On 1st January, 20X1, ABC limited gives options to its key management personnel (employees)
to take either cash equivalent to 1,000 shares or 1,500 shares. The minimum service
requirement is 2 years and shares being taken must be kept for 3 years.
Fair values of the shares are as follows: ₹

Share alternative fair value (with restrictions) 102
Grant date fair value on 1st January, 20X1 113
Fair value on 31st December, 20X1 120
Fair Value on 31st December, 20X2 132
The employees exercise their cash option at the end of 20X2. Pass the journal entries.
Illustration 4-Share-based payment - Purchase of goods

Indian Inc. issued 995 shares in exchange for purchase of an office building. The title was
transferred in the name of Indian Inc. on February, 20X1 and shares were issued. Fair value of
the office building was ₹ 2,00,000 and face value of each share of Indian Inc was ₹ 100.
Pass the journal entries?
Illustration 5-Share-based payment – Services

Reliance limited hired a maintenance company for its oil fields. The services will be settled by
issuing 1,000 shares of Reliance. Period for which the service is to be provided is 1st April, 20X1
to 1st July, 20X1 and fair value of the service was estimated using market value of similar
contracts for ₹ 1,00,000. Nominal value per share is ₹ 10.
Record the transactions?
148
Illustration 6 - Share-based payment - Cash & equity alternatives (MTP APR 2018)
Tata Industries issued share-based option to one of its key management personal which can be
exercised either in cash or equity and it has following features:
Option I Period ₹
No of cash settled 74,000
shares Service condition 3 years
Option II
90,000
No of equity settled shares of face value of ₹ 100
each Conditions: 3 years
Service 2 years
Restriction to
sell Fair values 115
Equity price with a restriction of sale for 2 135
years Fair value at grant date 138
Fair value 20X0 140
20X1 147
20X2
Pass the journal entries
Illustration 7 - Equity Settled – Non market conditions (MTP: APRIL / March 2019 /
MARCH 2018) & SIMILAR Q IN NOV’18 / MAY’19
Ankita Holding Inc. grants 100 shares to each of its 500 employees on 1st January, 20X1. The
employees should remain in service during the vesting period. The shares will vest at the end of
the First year if the company’s earnings increase by 12%;
Second year if the company’s earnings increase by more than 20% over the two-year
period; Third year if the entity’s earnings increase by more than 22% over the three-year
period.
The fair value per share at the grant date is ₹ 122. In 20X1, earnings increased by 10%, and 29
employees left the organisation. The company expects that the shares will vest at the end of the
year 20X2. The company also expects that additional 31 employees will leave the organisation in
the year 20X2 and that 440 employees will receive their shares at the end of the year 20X2. At
the end of 20X2, company's earnings increased by 18%. Therefore, the shares did not vest. Only
29 employees left the organization during 20X2. Company believes that additional 23 employees
will leave in 20X3 and earnings will further increase so that the performance target will be
achieved in 20X3. At the end of the year 20X3, only 21 employees have left the organization.
Assume that the company’s earnings increased to desired level and the performance target has
been met.
Determine the expense for each year and pass appropriate journal entries?
149
Illustration 8 - Equity Settled – Non market conditions (Reversals)
ACC limited granted 10,000 share options to one of its managers. In order to get the options,
the manager has to work for next 3 years in the organization and reduce the cost of production
by 10% over the next 3 years.
Fair value of the option at grant date ₹ 95
was
Cost reduction achieved-
Year 1 12% Achieved
Year 2 8% Not expected to vest in future
Year 3 10% Achieved
How the expenses would be recorded?
Illustration 9 - Equity Settled – Market based conditions

Apple Limited has granted 10,000 share options to one of its directors for which he must
work for next 3 years and the price of the share should increase by 20% over next 3 years.
The share price has moved as per below details -
Year 1 22%
Year 2 19%
Year 3 25%
At the grant date, the fair value of the option was ₹ 120.How should we recognize the transaction?
Illustration 10 – Modifications – Equity-settled share based payment

Marathon Inc. issued 150 share options to each of its 1,000 employees subject to the service
condition of 3 years. Fair value of the option given was calculated at ₹ 129. Below are the details
and activities related to the SBP plan-
Year 1: 35 employees left and further 60 employees are expected to leave. Share options re-
priced (as MV of shares has fallen) as the FV fell to ₹ 50. After the re-pricing they are now
worth ₹ 80, hence expense is expected to increase by ₹ 30.
Year 2: 30 employees left and further 36 employees are expected to leave
Year 3: 39 employees left
How the modification/ re-pricing will be accounted?
Illustration 11 - Cancellation- Equity Settled Share based payment

Anara Fertilisers Limited issued 2000 share options to its 10 directors for an exercise price of ₹
100.The directors are required to stay with the company for next 3 years.
Fair value of the option estimated ₹

130 Expected number of directors to vest the option 8
During the year 2, there was a crisis in the company and Management decided to cancel the scheme
immediately. It was estimated further as below-
Fair value of option at the time of cancellation was ₹ 90
Market price of the share at the cancellation date was ₹ 99
There was a compensation which was paid to directors and only 9 directors were currently in
employment. At the time of cancellation of such scheme, it was agreed to pay an amount of ₹ 95
150
per option to each of 9 directors. How the cancellation would be recorded?
Illustration 12 (RTP: May , 2019)

A parent grants 200 share options to each of 100 employees of its subsidiary, conditional
upon the completion of two years‘ service with the subsidiary. The fair value of the share options
on grant date is ₹30 each. At grant date, the subsidiary estimates that 80 percent of the
employees will complete the two-year service period. This estimate does not change during the
vesting period. At the end of the vesting period, 81 employees complete the required two years
of service. The parent does not require the subsidiary to pay for the shares needed to settle the
grant of share options.
Pass the necessary journal entries for giving effect to the above arrangement.
TEST YOUR KNOWLEDGE

Question 01:
An entity issued 100 shares each to its 1,000 employees subject to service condition of next 2
years. Grant date fair value of the share is ₹ 195 each. There is an expectation 97% of the
employees will remain in service at the end of 1st year. However, at the end of 2nd year the
expected employees to remain in service would be 91% of the total employees. Calculate
expense for the year 1 & 2?
Question 02:
An entity issued 50 shares each to its 170 employees subject to service condition of next 2
years. The settlement is to be made in cash. Grant date fair value of the share is ₹ 85 each,
however, the fair value as at end of 1st year, 2nd year were ₹ 80 & ₹ 90 respectively. Calculate
expense for years 1 and 2?
Question 03: (RTP: M a y ,2021)

Company P is a holding company for company B. A group share-based payment is being
organized in which Parent issues its own equity-shares for the employees of company B. The
details are as below –
Number of employees of company B 100

Grant date fair value of share ₹87
Number of shares to each employee 25
granted Vesting conditions Immediately
Pass the journal entry in the books of company P & company B?
Question 04:
Entity X acquired entity Y in a business combination as per Ind AS 103. There is an existing
share- based plan in entity Y with a vesting condition for 3 years in which 2 years have already
lapsed at the date of such business acquisition. Entity X agrees to replace the existing award for
the employees of combined entity. The details are as below –
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Acquisition date fair value of share-based payment plan ₹ 300
Number of years to vest after acquisition 1 year
Fair Value of award which replaces existing plan ₹400
Calculate the share-based payment values as per Ind AS 102?
Question 05:
An entity P issues share-based payment plan to its employees based on the below details:
Number of employees 100
Fair value at grant date ₹25
Market condition Share price to reach at ₹30
Service condition To remain in service until market
condition is fulfilled
Expected completion of market condition 4 years
Define expenses related to such share-based payment plan in each year subject to the
below scenarios-
a) Market condition if fulfilled in year 3, or
b) Market condition is fulfilled in year 5.
Question 06:
Entity X grants 10 shares each to its 1000 employees on the conditions as mentioned below-
 To remain in service & entity‘s profit after tax (PAT) shall reach to ₹100 million.
 It is expected that PAT should reach to ₹100 million by the end of 3 years.
 Fair value at grant date is ₹100.
 Employees expected for vesting right by 1st year 97%, then it revises to 95% by
2nd year and finally to 93% by 3rd year.
Calculate expenses for next 3 years in respect of share-based payment?
Question 07: (MTP AUG 2018)

At 1st January, 20X0, Ambani Limited grants its CEO an option to take either cash amount
equivalent to 800 shares or 990 shares. The minimum service requirement is 2 years. There is a
condition to keep the shares for 3 years if shares are opted.
Fair values of the shares ₹

Share alternative fair value (with restrictions) 212
Grant date fair value on 1st January, 20X0 213
The key management exercises his cash option at the end of 20X2. Pass journal entries
Question 08: (MTP: OCT’18 & SIMILAR Q ASKED IN PP NOV’20)

MINDA issued 11,000 share appreciation rights (SARs) that vest immediately to its employees on
1st April, 20X0. The SARs will be settled in cash. Using an option pricing model, at that date it is
estimated that the fair value of a SAR is ₹ 100. SAR can be exercised any time until 31st March,
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20X3. It is expected that out of the total employees, 94% at the end of period on 31st March,
20X1, 91% at the end of next year will exercise the option. Finally, when these were vested i.e.
at the end of the 3rd year, only 85% of the total employees exercised the option.
Fair value of SAR ₹

31st March, 20X1 132
Pass the Journal entries?
Question 09: (RTP Nov’18 & SIMILAR Q ASKED IN PP NOV’19)

P Ltd. granted 400 stock appreciation rights (SAR) each to75 employees on 1st April 20X1 with a
fair value ₹ 200. The terms of the award require the employee to provide service for four years in
order to earn the award.The fair value of each SAR at each reporting date is as follows:
31st March 20X2

₹210 31st March 20X3
₹218
What would be the difference if at the end of the second year of service (i.e. at 31st March
20X3), P Ltd. modifies the terms of the award to require only three years of service?
Question 10: (MTP:March,2019) (RTP:November,2019)

QA Ltd. had on 1st April, 20X1 granted 1,000 share options each to 2,000 employees. The
options are due to vest on 31st March, 20X4 provided the employee remains in employment till
31st March, 20X4.
On 1st April, 20X1, the Directors of Company estimated that 1,800 employees would qualify for
the option on 31st March, 20X4. This estimate was amended to 1,850 employees on 31st March,
20X2 and further amended to 1,840 employees on 31 st March, 20X3.
On 1st April, 20X1, the fair value of an option was ₹ 1.20. The fair value increased to ₹ 1.30 as
on 31st March, 20X2 but due to challenging business conditions, the fair value declined
thereafter. In September, 20X2, when the fair value of an option was ₹ 0.90, the Directors
repriced the option and this caused the fair value to increase to ₹ 1.05. Trading conditions
improved in the second half of the year and by 31st March, 20X3 the fair value of an option was
₹ 1.25. QA Ltd.decided that additional cost incurred due to repricing of the options on 30th
September, 20X2 should be spread over the remaining vesting period from 30th September,
20X2 to 31st March, 20X4.
The Company has requested you to suggest the suitable accounting treatment for these
transaction as on 31st March, 20X3.
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Question 11:
A parent, Company P, grants 30 shares to 100 employees each of its subsidiary, Company S, on
condition that the employees remain employed by Company S for three years. Assume that at
the outset, and at the end of Years 1 and 2, it is expected that all the will remain employed for
all the three years. At the end of Year 3, none of the employees has left. The fair value of the
shares on grant date is ₹ 5 per share.
Company S agrees to reimburse Company P over the term of the arrangement for 75 percent of
the final expense recognised by Company S. What would be the accounting treatment in the
books of Company P and Company S?
Question 12: (MTP/RTP : M a y , 2020)

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

31 December 20X5 1
2
31 December 20X6 8
31 December 20X7 13
31 December 20X8 12
10% of employees left before the end of 20X6. On 31st December 20X7 (when the intrinsic value
of each SAR was ₹ 10), six employees exercised their options; and the remaining 30 employees
exercised their options at the end of 20X8 (when the intrinsic value of each SAR was equal to the
fair value of ₹12). How much expense and liability is to be recognized at the end of each year?
Pass Journal entries.
RTP / MTP/ PAST PAPERS

New Age Technology Limited has entered into following Share Based payment transactions:
i. On 1st April, 20X1, New Age Technology Limited decided to grant share options to its
employees. The scheme was approved by the employees on 30th June, 20X1. New Age
Technology Limited determined the fair value of the share options to be the value of the
equity shares on 1st April, 20X1.
ii. On 1st April, 20X1, New Age Technology Limited entered into a contract to purchase IT
equipment from Bombay Software Limited and agreed that the contract will be settled by
issuing equity instruments of New Age Technology Limited. New Age Technology Limited
received the IT equipment on 30th July, 20X1. The share-based payment transaction was
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measured based on the fair value of 'the equity instruments as on 1st April, 20X1.
iii. On 1st April, 20X1, New Age Technology Limited decided to grant the share options to its
employees. The scheme was approved by the employees on 30th June, 20X1. The issue of
the share options was however subject to the same being approved by the shareholders in a
general meeting. The scheme was approved in the general meeting held on 30th
September, 20X1. The fair value of the equity instruments for measuring the sharebased
payment transaction was taken on 30th September, 20X1.
Identify the grant date and measurement date in all the 3 cases of Share based payment
transactions entered into by New Age Technology Limited, supported by appropriate rationale
for the determination?
QUESTION 2 (MTP OCT’21)

Ryder, a public limited company is reviewing certain events which have occurred since its year -
end 31st March, 20X4. The financial statements were authorized for issue on 12th May, 20X4.
The following events are relevant to the financial statements for the year ended 31 st March,
20X4.
The company granted share appreciation rights (SARs) to its employees on 1 st April, 20X2
based on 10 million shares. At the date the rights are exercised, the SAR’s provide employees
with the right to receive cash equal to the appreciation in the company’s share price since the
grant date. The rights vested on 31st March, 20X4 and payment was made on schedule on 1st
May, 20X4.
The FV of the SAR’s per share at 31st March, 20X3 was ₹ 6, at 31st March, 20X4 was ₹ 8 and at
1st May, 20X4 was ₹ 9. The company has recognized a liability for the SAR’s as at 31st March,
20X2 based upon Ind AS 102 ‘Share-based Payments’ but the liability was stated at the same
amount at 31st March, 20X4.
Discuss the accounting treatment of the above events in the financial statements of the Ryder
Group for the year ending 31st March, 20X4 taking into account the implications of events
occurring after the reporting period.
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QUESTION 3: (PP NOV 2018) – SIMILAR TO ICAI SM ILLUSTRATION 7
Golden Era Limited grants 200 shares to each of its 400 employees on 1st January, 2016. The
employee should remain in service during the vesting period so as to be eligible. The shares will
vest at the end of the
1st year - If the company's earnings increase by 12%.
2nd year - If the company's earnings increase by more than 20% over the two year
period. 3rd year - If the company's earnings increase by more than 20% over the three
year period.
The fair value per share (non-market related) at the grant date is ₹ 61. In 2016, earnings
increased by 10% and 22 employees left the company. The company expects that earnings will
continue at a similar rate in 2017 and expect that the shares will vest at the end of the year
2017. The company also expects that additional 18 employees will leave the organization in the
year 2017 and that 360 employees will receive their shares at the end of the year 2017. At the
end of 2017 company's earnings increased by 18% (over the 2 years period). Therefore, the
shares did not vest. Only 16 employees left the organization during 2017.
The company believes that additional 14 employees will leave in 2020 and earnings will further
increase so that the performance target will be achieved in 2018. At the end of the year 2018,
only 9 employees have left the organization. Assume that the company's earnings increased to
desired level and the performance target has been met.
You are required to determine the expense as per Ind AS for each year (assumed as financial
year) and pass appropriate journal entries.(8 Marks)
QUESTION 4: (MAY 2019) - SIMILAR TO ICAI SM ILLUSTRATION 7

Beetel Holding Inc. grants 100 shares to each of its 300 employees on 1st January, 2015. The
employees should remain in service during the vesting period. The shares will vest at the end of the
First year if the company's earnings increase by 13%
Second year if the company's earnings increased by more than 21% over the two -year
period Third year if the entity's earning increased by more than 23% over the three-year
period.
The fair value per share at the grant date is ₹ 125.
In 2015, earnings increased by 9% and 20 employees left the organization. The company
expects that earnings will continue at a similar rate in 2016 and expects that the shares will
vest at the end of the year 2016. The company also expects that additional 30 employees will
leave the organization in the year 2016 and that 250 employees will receive their shares at
the end of the year 2016.
At the end of 2016, company's earnings increased by 19%. Therefore, the shares did not vest.
Only 20 employees left the organization during 2016. Company believes that additional 25
employees will leave in 2017 and earnings will further increase so that the performance target
will be achieved in 2017.
At the end of the year 2017, only 22 employees have left the organization. Assume that the
company's earnings increased to desired level and the performance target has been met.
Determine the expense for each year and pass appropriate journal entries. (8 Marks)
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Question 5 (PP JULY 2021)- SIMILAR TO SM ILLUSTRATION 11 CANCELLATION TOPIC
Voya Limited issued 1,000 share options to each of its 200 employees for an exercise price of ₹
10. The employees are required to stay in employment for next 3 years. The fair value of the
option is estimated at
₹ 18.
90% of the employees are expected to vest the option.
The Company faced severe crisis during the 2nd year and it was decided to cancel the scheme
with immediate effect. The market price of the share at the date of cancellation was ₹ 15.
The following information is available:
 Fair value of the option at the date of cancellation is ₹ 12.
 The company paid compensation to the employees at the rate of ₹ 13.50. There were only 190
employees in the employment at that time.
You are required to show how cancellation will be recorded in the books of the Company as per
relevant Ind AS.
(5 Marks)
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ANALYSIS OF FINANCIAL STATEMENTS
Case Study 1(SIMILAR TO PAST PAPER NOV’20-STAR LIMITED)

On 1 April 20X1, Star Limited has advanced a housing loan of ₹ 15 lakhs to one of its
employeesat an interest rate of 6% per annum which is repayable in 5 equal annual
installments along with interest at each year end. Employee is not required to give any
specific performance against this benefit. The market rate of similar loan for housing finance
by banks is 10% per annum.
The accountant of the company has recognized the staff loan in the balance sheet equivalent
tothe amount of housing loan disbursed i.e. ₹ 15 lakhs. The interest income for the year is
recognized at the contracted rate in the Statement of Profit and Loss by the company i.e. ₹
90,000 (6% of ₹ 15 lakhs).
Analyze whether the above accounting treatment made by the accountant is in compliance
with the relevant Ind AS. If not, advise the correct treatment of housing loan, interest and
other expenses in the financial statements of Star Limited for the year 20X1-20X2 along with
workings and applicable Ind AS.
You are required to explain how the housing loan should be reflected in the Ind AS compliant
Balance Sheet of Star Limited on 31 March 20X2.
Case Study 2
Pluto Ltd. has purchased a manufacturing plant for ₹ 6 lakhs on 1st April, 20X1. The useful
life of the plant is 10 years. On 30th September, 20X3, Pluto temporarily stops using the
manufacturing plant because demand has declined. However, the plant is maintained in a
workable condition and it will be used in future when demand picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the demands picks
up and accordingly measures the plant at lower of carrying amount and fair value less cost
tosell.
Also, the accountant has also stopped charging the depreciation for the rest of period
considering the plant as held for sale. The fair value less cost to sell on 30th September, 20X3
and 31st March, 20X4 was ₹ 4 lakhs and ₹ 3.5 lakhs respectively.
The accountant has performed the following working:
Carrying amount on initial classification as held

for sale
Purchase Price of Plant 6,00,000
Less: Accumulated dep(6,00,000/ 10 Years) x 2.5 (1,50,000) 4,50,000
years
Fair Value less cost to sell as on30th September, 20X3
4,00,000
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The value will be lower of the above two 4,00,000
Balance Sheet extracts as on 31st March, 20X4
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000
Analyse whether the above accounting treatment made by the accountant is in compliance
with the Ind AS. If not, advise the correct treatment along with the necessary workings
Case Study 3
On 5th April, 20X2, fire damaged a consignment of inventory at one of the Jupiter’s Ltd.’s
warehouse. This inventory had been manufactured prior to 31st March, 20X2 costing ₹ 8
lakhs. The net realisable value of the inventory prior to the damage was estimated at ₹ 9.60
lakhs. Because of the damage caused to the consignment of inventory, the company was
required to spend an additional amount of ₹ 2 lakhs on repairing and re-packaging of the
inventory. The inventory was sold on 15th May, 20X2 for proceeds of ₹ 9 lakhs.
The accountant of Jupiter Ltd treats this event as an adjusting event and adjusted this event
of causing the damage to the inventory in its financial statement and accordingly re-measures
the inventories as follows:
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Analyse whether the above accounting treatment made by the accountant in regard to
financial year ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise the correct
treatment along with working for the same.
Case Study 4
On 1st April, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ₹ 30 lakhs. Sun Ltd.
has 3 cash- generating units A, B and C with fair value of ₹ 12 lakhs, ₹ 8 lakhs and ₹ 4 lakhs
respectively. The company recognizes goodwill of Rs 6 lakhs that relates to CGU ‘C’ only.
During the financial year 20X2-20X3, the CFO of the company has a view that there is no
requirement of any impairment testing for any CGU since their recoverable amount is
comparatively higher than the carrying amount and believes there is no indicator of
impairment.
Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the Ind AS. If
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not, advise the correct treatment in accordance with relevant Ind AS
Case Study 5
Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of
55% is done by Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary of
Iktara Ltd. with two directors, and Deepak eventually becomes one of the directors of
company. A consultant was hired and he charged ₹ 30,000 for the incorporation of company
and to do other necessarystatuary registrations. ₹ 30,000 is to be charged as an expense in
the books after incorporation of company. The company, Softbharti Pvt. Ltd. was incorporated
on 1st April 20X1.
The financials of Iktara Ltd. are prepared as per Ind AS.
An accountant who was hired at the time of company’s incorporation, has prepared the draft
financials of Softbharti Pvt. Ltd. for the year ending 31st March, 20X2 as follows:
Statement of Profit and Loss
Revenue from operations 10,00,000
Other Income 1,00,000
Total Revenue (a) 11,00,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase)/Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (b) 7,45,000
Profit before tax (c) = (a)-(b) 3,55,000
Current tax 1,06,500
Deferred tax 6,000
Total tax expense (d) 1,12,500
Profit for the year (e) = (c) – (d) 2,42,500
Balance Sheet
(1) Shareholders’ Funds
(a) Share Capital 1,00,000
(b) Reserves & Surplus 2,27,500
(2) Non-Current Liabilities
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(a) Long Term Provisions 25,000
(b) Deferred tax liabilities 6,000
(3) Current Liabilities
(a) Trade Payables 11,000
(b) Other Current Liabilities 45,000

(c) Short Term Provisions 1,06,500
TOTAL 5,21,000
ASSETS
(1) Non Current Assets
(a) Property, plant and equipment (net) 1,00,000
(b) Long-term Loans and Advances 40,000
(c) Other Non Current Assets 50,000
(2) Current Assets
(a) Current Investment 30,000
(b) Inventories 80,000
(c)Trade Receivables 55,000
(d) Cash and Bank Balances 1,15,000
(e) Other Current Assets 51,000
TOTAL 5,21,000
Additional information of Softbharti Pvt Ltd.:
i. Deferred tax liability of ₹ 6,000 is created due to following temporary difference:
Difference in depreciation amount as per Income tax and Accounting profit
ii. There is only one property, plant and equipment in the company, whose closing balance as
at 31st March, 20X2 is as follows:
Asset description As per Books As per Income tax
Property, plant and equipment ₹ 1,00,000 ₹ 80,000
iii. Pre incorporation expenses are deductible on straight line basis over the period of five years
as per Income tax. However, the same are immediately expensed off in the books.
iv. Current tax is calculated at 30% on PBT - ₹ 3,55,000 without doing any adjustments
relatedto Income tax. The correct current tax after doing necessary adjustments of
allowances / disallowances related to Income tax comes to ₹ 1,25,700.
v. After the reporting period, the directors have recommended dividend of ₹ 15,000 for the
year ending 31st March, 20X2 which has been deducted from reserves and surplus. Dividend
payable of ₹ 15,000 has been grouped under ‘other current liabilities’ alongwith other
financial liabilities.
vi. There are ‘Government statuary dues’ amounting to ₹ 15,000 which are grouped under
‘other current liabilities’.
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vii. The capital advances amounting to ₹ 50,000 are grouped under ‘Other non-current assets’.
viii. Other current assets of ₹ 51,000 comprise Interest receivable from trade receivables.
ix. Current investment of ₹ 30,000 is in shares of a company which was done with the purpose
of trading; current investment has been carried at cost in the financial statements. The fair
value of current investment in this case is ₹ 50,000 as at 31st March, 20X2.
x. Actuarial gain on employee benefit measurements of ₹ 1,000 has been omitted in the
financials of Softbharti private limited for the year ending 31st March, 20X2.
The financial statements for financial year 20X1-20X2 have not been yet approved.
You are required to ascertain that whether the financial statements of Softbharti Pvt. Ltd. are
correctly presented as per the applicable financial reporting framework. If not, prepare the
revised financial statements of Softbharti Pvt. Ltd. after the careful analysis of mentioned facts
and information.
Case Study 6
Mumbai Challengers Ltd., a listed entity, is a sports organization owning several cricket
andhockey teams. The issues below pertain to the reporting period ending 31 March 20X2.
(a) Owing to the proposed schedules of Indian Hockey League as well as Cricket Premier
Tournament, Mumbai Challengers Ltd. needs a new stadium to host the sporting events.
This stadium will form a part of the Property, Plant and Equipment of the company.
Mumbai Challengers Ltd. began the construction of the stadium on 1 December, 20X1. The
construction of the stadium was completed in 20X2-20X3. Costs directly related to the
construction amounted to ₹ 140 crores in December 20X1. Thereafter, ₹ 350 crores have
been incurred per month until the end of the financial year. The company has not
takenany specific borrowings to finance the construction of the stadium, although it has
incurred finance costs on its regular overdraft during the period, which were avoidable had
the stadium not been constructed. Mumbai Challengers Ltd. has calculated that the
weighted average cost of the borrowings for the period 1 December 20X1 to 31 March
20X2 amounted to 15% per annum on an annualized basis.
The company seeks advice on the treatment of borrowing costs in its financial statements
for the year ending 31 March 20X2.
(b) Mumbai Challengers Ltd. acquires and sells players’ registrations on a regular basis. For a
player to play for its team, Mumbai Challengers Ltd. must purchase registrations for that
player. These player registrations are contractual obligations between the player and the
company. The costs of acquiring player registrations include transfer fees, league levy
fees, and player agents’ fees incurred by the club.
At the end of each season, which happens to also be the reporting period end for Mumbai
Challengers Ltd., the club reviews its contracts with the players and makes decisions as to
whether they wish to sell/transfer any players’ registrations. The company actively
markets these registrations by circulating with other clubs a list of players’ registrations
and their estimated selling price. Players’ registrations are also sold during the season,
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often with performance conditions attached. In some cases, it becomes clear that a player
will not play for the club again because of, for example, a player sustaining a career
threatening injury or being permanently removed from the playing squad for any other
reason. The playing registrations of certain players were sold after the year end, for total
proceeds, netof associated costs, of ₹ 175 crores. These registrations had a net book value
of₹ 49 crores.
Mumbai Challengers Ltd. seeks your advice on the treatment of the acquisition, extension,
review and sale of players’ registrations in the circumstances outlined above.
(c) Mumbai Challengers Ltd. measures its stadiums in accordance with the revaluation model.
An airline company has approached the directors offering ₹ 700 crores for the property
naming rights of all the stadiums for five years. Three directors are on the management
boards of both Mumbai Challengers Ltd. and the airline. Additionally, statutory legislations
regulate the financing of both the cricket and hockey clubs. These regulations prevent
contributions to the capital from a related party which ‘increases equity without repayment
in return’. Failure to adhere to these legislations could lead to imposition of fines and
withholding of prize money.
Mumbai Challengers Ltd. wants to know how to take account of the naming rights in the
valuations of the stadium and the potential implications of the financial regulations imposed
by the legislations.
Case Study 7
(a) Neelanchal Gas Refinery Ltd. (hereinafter referred to as Neelanchal), a listed company, is
involved in the production and trading of natural gas and oil. Neelanchal jointly owns an
underground storage facility with another entity, Seemanchal Refineries Ltd. (hereinafter
referred to as Seemanchal). Both the companies are engaged in extraction of gas from
offshore gas fields, which they own and operate independently of each other. Neelanchal
owns 60% of the underground facility and Seemanchal owns 40%. Both the companies have
agreed to share services and costs accordingly, with decisions relating to the storage facility
requiring unanimous agreement of the parties. The underground facility is pressurised so that
the gas is pushed out when extracted. When the gas
pressure is reduced to a certain level, the remaining gas is irrecoverable and remains in the
underground storage facility until it is decommissioned. As per the laws in force, the storage
facility should be decommissioned at the end of its useful life.
Neelanchal seeks your advice on the treatment of the agreement with Seemanchal as well as
the accounting for the irrecoverable gas.
(b) Neelanchal has entered into a ten-year contract with Uttaranchal Refineries Pvt. Ltd.
(hereinafter referred to as Uttaranchal) for purchase of natural gas. Neelanchal has paid an
advance to Uttaranchal equivalent to the total quantity of gas contracted for ten years based
on the forecasted price of gas. This advanced amount carries interest at the rate of 12.5%
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per annum, which is settled by Uttaranchal way of supply of extra gas. The contract requires
fixed quantities of gas to be supplied each month. Additionally, there is a price adjustment
mechanism in the contract whereby the difference between the forecasted price of gas and
the prevailing market price is settled in cash on a quarterly
basis. If Uttaranchal does not deliver the gas as agreed, Neelanchal has the right to claim
compensation computed at the current market price of the gas.
Neelanchal wants to account for the contract with Uttaranchal in accordance with Ind AS 109
Financial Instruments and seeks your inputs in this regard.
164
TEST YOUR KNOWLEDGE
QUESTIONS 1:(MTP MAR’18)

Venus Ltd. is a multinational entity that owns three properties. All three properties were
purchased on 1st April, 20X1. The details of purchase price and market values of theproperties
are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase price 15,000 10,000 12,000
Market value 31.03.20X2 16,000 11,000 13,500
Life 10 Years 10 Years 10 Years
Subsequent Measurement Cost Model Revaluation Model Revaluation Model
Property 1 and 2 are used by Venus Ltd. as factory building whilst property 3 is let-out to a non-
related party at a market rent. The management presents all three properties in balance sheet
as ‘property, plant and equipment’.
The Company does not depreciate any of the properties on the basis that the fair values are
exceeding their carrying amount and recognise the difference between purchase price and fair
value in Statement of Profit and Loss.
Required:
Analyse whether the accounting policies adopted by the Venus Ltd. in relation to these
properties is in accordance with Ind AS. If not, advise the correct treatment along with working
for the same.
OUESTION 2:
On 1st January, 20X2, Sun Ltd. was notified that a customer was taking legal action against
the company in respect of a financial losses incurred by the customer. Customer alleged that
the financial losses were caused due to supply of faulty products on 30th September, 20X1
by the Company. Sun Ltd. defended the case but considered, based on the progress of the
case up to 31st March, 20X2, that there was a 75% probability they would have to pay
damages of ₹ 10 lakhs to the customer.
However, the accountant of Sun Ltd. has not recorded this transaction in its financial
statement as the case is not yet finally settled. The case was ultimately settled against the
company resulting in to payment of damages of ₹ 12 lakhs to the customer on 15th May,
20X2. The financials have been authorized by the Board of Directors in its meeting held on
18th May, 20X2.
Analyse whether the above accounting treatment made by the accountant is in complianceof
the Ind AS. If not, advise the correct treatment along with working for the same.
165
OUESTION 3:
Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified across
India. On 1st April, 20X1, the company has received a government grant for₹ 10 lakhs
subject to a condition that it will continue to engage in plantation of eucalyptus tree for a
coming period of five years. Eucalyptus trees are not considered as bearer plantin this case.
The management has a reasonable assurance that the entity will comply with condition of
engaging in the plantation of eucalyptus tree for specified period of five years and accordingly
it recognises proportionate grant for ₹ 2 lakhs in Statement of Profit and Loss as income
following the principles laid down under Ind AS 20 Accounting for Government Grants and
Disclosure of Government Assistance.
Analyse whether the above accounting treatment made by the management is in compliance
of the Ind AS. If not, advise the correct treatment alongwith working for the same.
OUESTION 4:
Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ₹ 10 lakhs, the receipt of which
receivable in three equal installments of ₹ 3,33,333 over a two year period (receipts on 1st
April, 20X1, 31st March, 20X2 and 31st March, 20X3).
The company is offering a discount of 5 % (i.e. ₹ 50,000) if payment is made in full at the
time of sale. The sale agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ₹ 10 Lakhs and hence, the
management has recognised the revenue from sale of goods for ₹ 10 lakhs. Further, the
management is of the view that there is no difference in this aspect between Indian GAAP
and Ind AS.
Analyse whether the above accounting treatment made by the accountant is in compliance of
the Ind AS. If not, advise the correct treatment along with working for the same.
166
QUESTION 5:(MTP APR’21)
Master Creator Private Limited (a subsidiary of listed company) is an Indian company to whom Ind AS
are applicable. Following draft balance sheet is prepared by the accountant for year ending 31st March
20X2.
Balance Sheet of Master Creator Private Limited as at 31st March, 20X2
Particulars ₹
ASSETS
Non-current assets
Property, plant and equipment 85,37,500
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 17,33,480

2,54,150
Deferred tax assets
Current assets
Trade receivables
7,25,000
Inventories 5,98,050
Financial assets
Investments 55,000
Other financial assets 2,17,370

1,16,950
Cash and cash equivalents
1,27,00,000
TOTAL ASSETS

Equity share capital 10,00,000
25,00,150
Other Equity
4,74,850
Deferred tax liability 64,00,000
Borrowings
Long term provisions 5,24,436
Current liabilities
Other financial liabilities Trade payables 2,00,564
6,69,180
Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,27,00,000
Additional Information:
1. On 1st April 20X1, 8% convertible loan with a nominal value of ₹ 64,00,000 was issued by the entity.
It is redeemable on 31st March 20X5 also at par. Alternatively,it may be converted into equity shares
on the basis of 100 new shares for each ₹ 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10%. Interest of ₹
167
5,12,000 has already been paid and included as a finance cost.
Present Value (PV) rates are as follows:
Year End @ 8% @ 10%
1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68
2. After the reporting period, the board of directors have recommended dividend of ₹ 50,000 for the
year ending 31st March, 20X1. However, the same has not been yet accounted by the company in its
financials.
3. ‘Other current financial liabilities’ consists of the following:

Wages payable 21,890
Salary payable 61,845
TDS payable 81,265
Interest accrued on trade payables 35,564
4. Property, Plant and Equipment consists following items:

Particulars Amount (₹) Remarks
Building 37,50,250 It is held for administration purposes
Land 15,48,150 It is held for capital appreciation
Vehicles 12,37,500 These are used as the conveyance foremployees
Factory 20,01,600 The construction was started on 31st March 20X2

premises and consequently no depreciation has been
charged on it. The construction activities will
continue to happen, and it will take
2 years to complete and be availablefor use.
5. The composition of ‘other current financial assets’ is as follows:

Particulars Amount (Rs.)
Interest accrued on bank deposits 57,720
Prepaid expenses 90,000
Royalty receivable from dealers 69,650
6. Current Investments consist of securities held for trading which are carried at fair value through
profit & loss. Investments were purchased on 1st January,20X2 at ₹ 55,000 and accordingly are shown
at cost as at 31st March 20X2. The fair value of said investments as on 31st March 20X2 is ₹ 60,000.
7. Trade payables and Trade receivables are due within 12 months.
8. There has been no changes in equity share capital during the year.
9. Entity has the intention to set off a deferred tax asset against a deferred tax liability as they relate to
income taxes levied by the same taxation authority andthe entity has a legally enforceable right to set
off taxes.
10. Other Equity consists retained earnings only. The opening balance of retained earnings was ₹
21,25,975 as at 1st April 20X1.
11. No dividend has been actually paid by company during the year.
12. Assume that the deferred tax impact, if any on account of above adjustments is correctly calculated
168
in financials.
Being Finance & Accounts manager, you are required to identify the errors and misstatements if any in
the balance sheet of Master Creator Private Limited and prepare corrected balance sheet with details on
the face of the balance sheet i.e. no need to prepare notes to accounts, after considering the additional
information. Provide necessary explanations/workings for the treated items, wherever necessary.
OUESTION 6 ( RTP MAY’21)

HIM Limited having net worth of ₹ 250 crores is required to adopt Ind AS from 1st April, 20X2 in
accordance with the Companies (Indian Accounting Standard) Rules 2015.
Rahul, the senior manager, of HIM Ltd. has identified following issues which need specific attention of
CFO so that opening Ind AS balance sheet as on the date of transition can be prepared:
Issue 1 : As part of Property, Plant and Equipment, Company has elected to measure land at its fair
value and want to use this fair value as deemed cost on the date of transition. The carrying value of
land as on the date of transition was ₹ 5,00,000. The land was acquired for a consideration of ₹
5,00,000. However, the fair value of land as on the date of transition was ₹ 8,00,000.
Issue 2 : Under Ind AS, the Company has designated mutual funds as investments at fair value
through profit or loss. The value of mutual funds as per previous GAAP was
₹ 4,00,000 (at cost). However, the fair value of mutual funds as on the date of
transition was ₹ 5,00,000.
Issue 3 : Company had taken a loan from another entity. The loan carries an interest rate of 7% and it
had incurred certain transaction costs while obtaining the same. It was carried at cost on its initial
recognition. The principal amount is to be repaid in equal instalments over the period of loan. Interest is
also payable at each year end. The fairvalue of loan as on the date of transition is ₹ 1,80,000 as against
the carrying amount of loan which at present equals ₹ 2,00,000.
Issue 4 : The company has declared dividend of ₹ 30,000 for last financial year. On the date of
transition, the declared dividend has already been deducted by the accountant from the company’s
‘Reserves & Surplus’ and the dividend payable has been grouped under ‘Provisions’. The dividend was
only declared by board of directors at that time and it was not approved in the annual general meeting
of shareholders. However, subsequently when the meeting was held it was ratified by the shareholders.
Issue 5 : The company had acquired intangible assets as trademarks amounting to
₹ 2,50,000. The company assumes to have indefinite life of these assets. The fair value of the intangible
assets as on the date of transition was ₹ 3,00,000. However, the company wants to carry the intangible
assets at ₹ 2,50,000 only.
Issue 6 : After consideration of possible effects as per Ind AS, the deferred tax impact is computed as ₹
25,000. This amount will further increase the portion of deferred tax liability. There is no requirement to
carry out the separate calculation of deferred tax on account of Ind AS adjustments.
Management wants to know the impact of Ind AS in the financial statements of company for its general
understanding.
Prepare Ind AS Impact Analysis Report (Extract) for HIM Limited for presentation to the management
wherein you are required to discuss the corresponding differences between Earlier IGAAP (AS) and Ind AS
against each identified issue for preparation of transition date balance sheet. Also pass journal entry for
each issue.
169
RTP / MTP/ PAST PAPERS
Question 01: (MTP: MAY, 2020)
Flying Airways Ltd is a company which manufactures aircraft parts and engines and sells them to large
multinational companies like Boeing and Airbus Industries.
On 1 April 20X1, the company began the construction of a new production line in its aircraft parts
manufacturing shed.
Costs relating to the production line are as follows:
Details Amount
Rs.’000
Costs of the basic materials (list price Rs.12.5 million less a 20% trade 10,000
discount)
Recoverable goods and services taxes incurred not included in the purchase 1,000
cost
Employment costs of the construction staff for the three months to 30 June 1,200
20X1
Other overheads directly related to the construction 900
Payments to external advisors relating to the construction 500
Expected dismantling and restoration costs 2,000
Additional Information
The construction staff was engaged in the production line, which took two months to make ready for use
and was brought into use on 31 May 20X1.
The other overheads were incurred in the two months period ended on 31 May 20X1. They included an
abnormal cost of Rs.3,00,000 caused by a major electrical fault.
The production line is expected to have a useful economic life of eight years. At the end of that time Flying
Airways Ltd is legally required to dismantle the plant in a specified manner and restore its location to an
acceptable standard. The amount of Rs.2 million mentioned above is the amount that is expected to be
incurred at the end of the useful life of the production line. The appropriate rate to use in any discounting
calculations is 5%. The present value of Re.1 payable in eight years at a discount rate of 5% is
approximately Re.0·68.
Four years after being brought into use, the production line will require a major overhaul to ensure that it
generates economic benefits for the second half of its useful life. The estimated cost of the overhaul, at
current prices, is Rs.3 million.
The Company computes its depreciation charge on a monthly basis. No
impairment of the plant had occurred by 31 March 20X2.
Analyze the accounting implications of costs related to production line to be recognized in the balance
sheet and profit and loss for the year ended 31 March, 20X2
Question 2: (RTP: NOVEMBER,2018)

Mr. X, is the financial controller of ABC Ltd., a listed entity which prepares consolidated financial
statements in accordance with Ind AS. Mr. X has recently produced the final draft of the financial
statements of ABC Ltd. for the year ended 31st March, 2018 to the managing director for approval. Mr. Y,
who is not an accountant, had raised following queries from Mr. X after going through the draft financial
statements:
a. One of the notes to the financial statements gives details of purchases made by ABC Ltd. from PQR
Ltd. during the period. Mr. Y own 100% of the shares in PQR Ltd.. However, he feels that there is no
170
requirement for any disclosure to be made in ABC Ltd.’s financial statements since the transaction is
carried out on normal commercial terms and is totally insignificant to ABC Ltd., as it represents less
than 1% of ABC Ltd.’s purchases.
b. The notes to the financial statements say that plant and equipment is held under the ‘cost model’.
However, property which is owner occupied is revalued annually to fair value. Changes in fair value
are sometimes reported in profit or loss but usually in ‘other comprehensive income’. Also, the
amount of depreciation charged on plant and equipment as a percentage of its carrying amount is
much higher than for owner occupied property. Another note states that property owned by ABC Ltd.
but rent out to others is depreciated annually and not fair valued.
Mr. Y is of the opinion that there is no consistent treatment of PPE items in the accounts. Elucidate
how all these treatments comply with the relevant Ind AS.
c. In the year to March, 2018, ABC Ltd. spent considerable amount on designing a new product. ABC
Ltd. spent the six months from April, 2017 to September, 2017 researching into the feasibility of the
product. Mr. X charged these research costs to profit or loss. From October, 2017, A Ltd. was
confident that the product would be commercially successful and A Ltd. is fully committed to finance
its future development. A Ltd. spent remaining part of the year in developing the product, which is
expected to start from selling in the next few months. These development costs have been recognised
as intangible assets in the Balance Sheet. State whether the treatment done by Mr. X is correct when
all these research and development costs are design costs. Justify your answer with reference to
relevant Ind AS.
Provide answers to the queries raised by the managing director Mr. Y as per Ind AS.
a. development phase.

Following are the Financial Statements of Abraham Ltd.:
Balance Sheet
Particulars Note No. As at 31 March,2020 (₹ in

lakh)
EQUITY AND LIABILITIES:
Shareholders’ funds
Share capital (shares of ₹10 each) 1,000
Reserves and surplus 1 2,400
Long term borrowings 2 5,700
Deferred tax liabilities 3 400
Current liabilities
Trade payables 300
Short-term provisions 300
Other current liabilities 4 200
Total 10,300
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 3 700
Current assets
Inventories 1,500
171
Trade receivables 5 1,100
Cash and bank balances 2,000
Total 10,300
Statement of Profit & Loss
Particulars NoteNo. Year ended 31 March

2020 (₹ in lakh)
Revenue from operations 6,000
Expenses:
Employee benefit expense 1,200
Operating costs 3,199
Depreciation 450
Total expenses 4,849
Profit before tax 1,151
Tax expense 201
Profit after tax 950
Notes to Accounts:
Note 1: Reserves and surplus (₹ in lakh)
Capital reserve 500

Surplus from P & L
Opening balance 550
Additions 950 1,500
Reserve for foreseeable loss 400
Total 2,400
Note 2: Long-term borrowings
Term loan from bank 5,700

Total 5,700
Note 3: Deferred tax
Deferred tax asset 700

Deferred tax liability 400
Total 300
Note 4: Other current liabilities
Unclaimed dividends 10
Billing in advance 150
Other current liabilities 40
Total 200
Note 5: Trade Receivables
Considered good (outstanding within 6 months) 1,065

Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)
Total 1,100
Additional information:
172
i. Share capital comprises of 100 lakh shares of ₹10 each.
ii. Term Loan from bank for ₹ 5,700 lakh also includes interest accrued and due of 700 lakhs as on the
reporting date.
iii. Reserve for foreseeable loss is created against a service contract due within 6months.
iv. Inventory should be valued at cost ₹1,500 lakh, NRV as on date is ₹1,200 lakh.
v. A dividend of 10% was declared by the Board of directors of the company.
vi. Accrued Interest income of ₹300 lakh is not booked in the books of the company.
vii. Deferred taxes related to taxes on income are levied by the same governing tax laws. Identify and
report the errors and misstatements in the above extracts and prepare corrected Balance Sheet and
Statement of Profit & Loss and where required the relevant notes to the accounts with explanations
thereof.
Question:4 (MTP: AUGUST, 2018)

UK Ltd. has purchased a new head office property for Rs. 10 crores. The new office building has 10 floors
and the organisation structure of UK Ltd. is as follows:
Floor 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
Use Waiting Admin HR Accounts Inspection MD Canteen Vacant
Area Office
Since UK Ltd. did not need the floors 8, 9 and 10 for its business needs, it has leased out the same to a
restaurant on a long- term lease basis. The terms of the lease agreement are as follows:
-Tenure of Lease Agreement - 5 Years
-Non-Cancellable Period - 3 years
-Lease Rental-annual lease rental receivable from these floors are Rs. 10,00,000 per floor with an
escalation of 5% every year.
Based on the certificate from its architect, UK Ltd. has estimated the cost of the 3 top floors as
approximately Rs. 3 crores. The remaining cost of Rs. 7 crores can be allocated as 25% towards Land and
75% towards Building.
As on 31st March, 2018, UK Ltd. obtained a valuation report from an independent valuer who has
estimated the fair value of the property at Rs. 15 crores. UK Ltd. wishes to use the cost model for
measuring Property, Plant & Equipment and the fair value model for measuring the Investment Property.
UK Ltd. depreciates the building over an estimated useful life of 50 years, with no estimated residual
value.
Advise UK Ltd. on the accounting and disclosures for the above as per the applicable Ind AS.
(10 Marks)
173

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FINANCIAL INSTRUMENTS: SCOPE AND DEFINITIONS

Illustration 1: Trade receivables

Illustration 3: Perpetual debt instruments

Illustration 4: Creditors for sale of goods

Illustration 5: Contract for exchange on unfavorable conditions (MTP APR 2021)

Illustration 6 :Preference shares with non-cumulative dividend

Illustration 8 Settlement in variable number of shares

Illustration12: Hold-to-collect’ business model test

Illustration 13 Hold-to-collect’ business model test

Illustration 16 : SPPI Test for loan with interest rate

Illustration 17: Trade receivables – Amortised cost

Illustration 18: : Security Deposits – Amortized Costs

Illustration 19: Hold-to-collect’ or ‘hold-to-collect & sell’ business model test

Illustration 21: Deposits carrying off-market rate of interest:

Illustration 23: Determining fair value upon initial measurement

Illustration 25 : Accounting for assets at amortised cost (SIMILAR PP NOV’19)

Illustration 26: Accounting for assets at FVTPL

Illustration 27: Accounting for assets at FVOCI

Illustration 29 : Trade creditors at market terms

Illustration 31: Issue of borrowings with fixed rate of interest

Installment amount ₹ 2,500

Illustration 33(Old SM 34) : Accounting treatment of processing fees belonging to undisbursed

Illustration 36(OLD SM 37)

Illustration 37(OLD SM 38)

Illustration 39 (OLD SM 40)

Illustration 40(OLD SM ILL 41)

Illustration 41(OLD SM 42)

Group Historic per annum average Present value of observed loss

Company M uses following default rates for making provisions:

Illustration 2 : Redeemable debentures with discretionary dividend

Illustration 3: Perpetual loan with mandatory interest

Illustration 4: Restriction on the ability of an entity to satisfy a contractual obligation

Illustration 5: Optionally convertible redeemable preference shares (MTP MAY 2020)

Illustration 6: Settlement alternative is non-financial obligation

Illustration 7: Cap on amount payable on liquidation

Illustration 8: Investment manager’s share in a mutual fund

Illustration 10: Conversion into a variable number of equity instruments

Illustration 15(OLD SM 14): Conversion into a number of equity instruments equivalent to a

Examine the nature of the financial

Illustration 18(OLD SM 17): Written option with multiple exercise prices

Illustration 19(OLD SM ILL 18): Share swap arrangements

Illustration 20(OLD SM ILL 19): Conversion ratio changes with time

Illustration 24: Conversion ratio changes under independent scenarios

Illustration 25: Conversion ratio changes under inter-dependent scenarios

Illustration 26: Foreign currency convertible bond

Illustration 27: Redeemable debentures with discretionary dividend (continued from

Illustration 34 (OLD SM 33) Optionally convertible redeemable preference shares (continued

Illustration 2: Prepaid pay-variable, receive-fixed interest rate swap

Illustration 3: Prepaid forward

Illustration 6 (SIMILAR ASKED IN PP JAN’21)

Illustration 7 : Derivative contract:

Illustration 10: Debt instrument with indexed repayments

Illustration 11: Lease contracts dependent on inﬂation index

Illustration 12: Lease contracts dependent on inﬂation index

Illustration 13: Debt instrument with prepayment option

Ilustration 14(OLD SM ILL 15)

Illustration 15(OLD SM ILL 16) Foreign currency embedded derivatives

Key terms of the contract:

Illustration 1: Regular way contracts: forward contracts