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IND AS-2: VALUATION OF INVENTORIES 1
IND AS-2: VALUATION OF INVENTORIES
CONCEPT 1: OBJECTIVE
The objective of this Standard is to prescribe the accounting treatment for inventories.
This Standard provides the guidance for determining the cost of inventories and for
subsequent recognition as an expense, including any write-down to net realizable value.
It provides guidance on the techniques for the measurement of cost, such as the standard
cost method or retail method. It also outlines acceptable methods of determining cost,
including specific identification, first-in-first-out and weighted average cost method.
CONCEPT 2: SCOPE
• This standard is applicable to all inventories except:

(a) Financial instruments (to be accounted under Ind AS 32, Financial Instruments:
Presentation and Ind AS 109, Financial Instruments);
(b) Biological assets (i.e. living animals or plants) related to agricultural activity and
agricultural produce at the point of harvest (to be accounted under Ind AS 41,
Agriculture); and
(c) Work-in-progress arising under construction contracts including directly related
service contracts (accounted under Ind AS 115 Revenue from Contracts)
• This Standard does not apply to the measurement of inventories held by:
(a) Producers of agricultural and forest products, agricultural produce after harvest,
and minerals and mineral products, to the extent that they are measured at net
realizable value in accordance with well-established practices in those industries.
When such inventories are measured at net realizable value, changes in that value
are recognised in profit or loss in the period of the change
(b) Commodity broker-traders who measure their inventories at fair value less costs
to sell.
When such inventories are measured at net realizable value/ fair value less costs
to sell, changes in those values are to be recognised in profit or loss in the period
of the change.
CONCEPT 3: RELEVANT DEFINITIONS

The following are the key terms used in this standard:
1) Inventories are assets:

(a) held for sale in the ordinary course of business; (Finished Goods)
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(b) in the process of production for such sale; or (Work in progress)

(c) in the form of materials or supplies to be consumed in the production process or
in the rendering of services. (Raw material)
In the process of
production for such sale
In the form of
Held for sale in the
materials and supplies
ordinary course of
to be consumed in the
business
production process
or in the rendering of
Inventories services
are assets
2) Inventories encompass of:
a) goods purchased and held for resale (e.g. merchandise purchased by a retailer
and held for resale, or land and other property held for resale);
b) finished goods produced, or work in progress being produced, by the entity; and
includes
c) materials and supplies awaiting use in the production process.
In the case of a service provider, inventories include the costs of the service, for
which the entity has not yet recognised the related revenue (see Ind AS 115 Revenue
from Contracts).
3) Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale.
Net realisable value refers to the net amount that an entity expects to realize from
the sale of inventory in the ordinary course of business. Fair value reflects the price
at which an orderly transaction to sell the same inventory in the principal (or most
advantageous) market for that inventory would take place between market participants
at the measurement date. The former is an entity-specific value; the latter is not. Net
realisable value for inventories may not equal fair value less costs to sell.
4) Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date. (Ind AS 113, Fair Value Measurement.)
CONCEPT 4: MEASUREMENT OF INVENTORIES

Inventories shall be measured at the lower of cost and net realisable value.
At the lower of
Cost Net realisable value
1) Cost of inventories
Cost of Inventories comprises:
a) All costs of purchase;
b) Costs of conversion; and
c) Other costs incurred in bringing the inventories to their present location and
condition.
Cost of Purchase
Cost
Conversion Cost
Other cost to bring inventory to present location and condition
2) Cost of purchase
The costs of purchase of inventories include:
a) The purchase price,
b) Import duties and other taxes (other than those subsequently recoverable by
the entity from the taxing authorities),
c) Transport, handling and
d) Other costs directly attributable to the acquisition of finished goods, materials
and services.
Any trade discounts, rebates and other similar items are deducted in determining the
costs of purchase of inventory.
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Purchase Price
Import duties and other taxes

Cost of purchase
Transport, handing and
Other cost to bring inventory to present location and condition
Less trade discounts, rebates and other similar items
3) Cost of conversion
• The costs of conversion of inventories include costs directly related to the units of
production, such as:
a) direct material, direct labour and other direct costs; and
b) a systematic allocation of fixed and variable production overheads that are
incurred in converting materials into finished goods.
Direct material
Cost of conversion
Direct labour
Other direct costs
Overheads (fixed and variable production overheads)
• Fixed production overheads are those indirect costs of production that remain relatively
constant regardless of the volume of production, such as depreciation and maintenance of
factory buildings and equipment, and the cost of factory management and administration.
• Allocation of fixed production overheads to the costs of conversion is based on the normal
capacity of the production facilities. Normal capacity is the production expected to be
achieved on average over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned maintenance. The actual
level of production may be used if it approximates normal capacity.
• When production levels are abnormally low, unallocated overheads are recognised as an
expense in the period in which they are incurred. In periods of abnormally high production,
the amount of fixed overhead allocated to each unit of production is decreased so that
inventories are not measured above cost.

• Variable production overheads are those indirect costs of production that vary directly,
or nearly directly, with the volume of production, such as indirect materials and indirect
labour. Variable production overheads are allocated to each unit of production on the
basis of the actual use of the production facilities.
EXAMPLE:
Pluto ltd. has a plant with the normal capacity to produce 5,00,000 unit of a product per
annum and the expected fixed overhead is `15,00,000. Fixed overhead on the basis of
normal capacity is `3 per unit (15,00,000|5,00,000).
CASE 1:
Actual production is 5,00,000 units. Fixed overhead on the basis of normal capacity and
actual overhead will lead to same figure of `15,00,000. Therefore, it is advisable to include
this on normal capacity.
CASE 2:
Actual production is 3,75,000 units. Fixed overhead is not going to change with the change
in output and will remain constant at `15,00,000, therefore, overheads on actual basis is `4
p|u (15,00,000|3,75,000).
Hence by valuing inventory at `4 each for fixed overhead purpose, it will be overvalued and
the losses of `3,75,000 will also be included in closing inventory leading to a higher gross
profit then actually earned.
Therefore, it is advisable to include fixed overhead per unit on normal capacity to actual
production (3,75,000 X 3) `11,25,000 and balance `3,75,000 shall be transferred to Profit
& Loss Account.
CASE 3:
Actual production is 7,50,000 units. Fixed overhead is not going to change with the change
is output and will remain constant at `15,00,000, therefore, overheads on actual basis is `2
(15,00,000|7,50,000).
Hence by valuing inventory at `3 each for fixed overhead purpose, we will be adding the
element of cost to inventory which actually has not been incurred. At `3 per unit, total
fixed overhead comes to `22,50,000 whereas, actual fixed overhead expense is only
`15,00,000. Therefore, it is advisable to include fixed overhead on actual basis (7,50,000
X 2) `15,00,000.
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4) Other costs
• Other costs are included in the cost of inventories only to the extent that they are
incurred in bringing the inventories to their present location and condition. Cost to
be excluded from the cost of inventories and recognised as expenses in the period in
which they are incurred are:
a) abnormal amounts of wasted materials, labour or other production costs;
b) storage costs, unless those costs are necessary in the production process before
a further production stage;
c) administrative overheads that do not contribute to bringing inventories to their
present location and condition; and
d) selling costs.
• The extent to which borrowing cost is included in the cost of inventories is determined
on the basis of the requirement of Ind AS 23 Borrowing Costs.
• An entity may acquire inventories on deferred settlement terms. When the
arrangement effectively contains a financing element, that element, for example a
difference between the purchase prices for normal credit terms and the amount paid,
is recognised as interest expense over the period of the financing.
EXAMPLE 1: COST OF INVENTORY

Venus Trading Company purchases cars from several countries and sells them to Asian
countries. During the current year, this company has incurred following expenses:
1. Trade discounts on purchase.
2. Handling costs relating to imports
3. Salaries of accounting department
4. Sales commission paid to sales agents.
5. After sales warranty costs
6. Import duties
7. Costs of purchases (based on supplier’s invoices)
8. Freight expense
9. Insurance of purchases
10. Brokerage commission paid to indenting agents
Evaluate which costs are allowed by Ind AS 2 for inclusion in the cost of inventory in the
books of Venus.
SOLUTION
Items number 1, 2, 6, 7, 8, 9, 10 are allowed by Ind AS 2 for the calculation of cost of
inventories. Salaries of accounts department, sales commission, and after sale warranty
costs are not considered to be the cost of inventory therefore they are not allowed by Ind
AS 2 for inclusion in cost of inventory and are expensed off in the profit and loss account.
CONCEPT 5:
ALLOCATION OF COST TO JOINT PRODUCTS AND BY-PRODUCTS
• A production process may result in more than one product being produced simultaneously.
This is the case, for example, when joint products are produced or when there is a main
product and a by-product.
• When the costs of conversion of each product are not separately identifiable, they are
allocated between the products on a rational and consistent basis. The allocation may
be based, for example, on the relative sales value of each product either at the stage
in the production process when the products become separately identifiable, or at the
completion of production.
• Most by-products, by their nature, are immaterial. When this is the case, they are often
measured at net realisable value and this value is deducted from the cost of the main
product. As a result, the carrying amount of the main product is not materially different
from its cost.
CONCEPT 6: COST OF INVENTORIES OF SERVICE PROVIDER

To the extent that service providers have inventories, they measure them at the costs of
their production. These costs consist primarily of the labour and other costs of personnel
directly engaged in providing the service, including supervisory personnel, and attributable
overheads. Labour and other costs relating to sales and general administrative personnel are
not included but are recognised as expenses in the period in which they are incurred. The
cost of inventories of a service provider does not include profit margins or non-attributable
overheads that are often factored into prices charged by service providers.
CONCEPT 7: COST OF AGRICULTURAL PRODUCE

HARVESTED FROM BIOLOGICAL ASSETS
In accordance with Ind AS 41, Agriculture, inventories comprising agricultural produce that
an entity has harvested from its biological assets are measured on initial recognition at
their fair value less costs to sell at the point of harvest. This is the cost of the inventories
at that date for application of this Standard.
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CONCEPT 8: TECHNIQUES FOR THE MEASUREMENT OF COST
• Techniques for the measurement of the cost of inventories, such as the standard cost
method or the retail method, may be used for convenience if the results approximate to
actual cost.
• Standard Cost Method: Cost is based on normal levels of materials and supplies, labour
efficiency and capacity utilisation. They are regularly reviewed and revised where
necessary
Measurement • Retail method

Techniques • Standard cost
• Retail Method: Cost is determined by reducing the sales value of the inventory by
the appropriate percentage gross margin. The percentage used takes into consideration
inventory that has been marked down to below its original selling price. This method is
often used in the retail industry for measuring inventories of rapidly changing items
that have similar margins.
• The percentage used takes into consideration inventory that has been marked down
to below its original selling price. An average percentage for each retail department is
often used.
EXAMPLE 2: MEASUREMENT TECHNIQUES OF COST

Mars Fashions is a new luxury retail company located in Lajpat Nagar, New Delhi. Kindly
advise the accountant of the company on the necessary accounting treatment for the
following items:
(a) One of Company’s product lines is beauty products, particularly cosmetics such as
lipsticks, moisturizers and compact make-up kits. The company sells hundreds of
different brands of these products. Each product is quite similar, is purchased at
similar prices and has a short lifecycle before a new similar product is introduced.
The point of sale and inventory system is not yet fully functioning in this department.
The sales manager of the cosmetic department is unsure of the cost of each product
but is confident of the selling price and has reliably informed you that the Company,
on average, make a gross margin of 65% on each line.
(b) Mars Fashions also sells handbags. The Company manufactures their own handbags
as they wish to be assured of the quality and craftsmanship which goes into each
handbag. The handbags are manufactured in India in the head office factory which
has made handbags for the last fifty years. Normally, Mars manufactures 100,000
handbags a year in their handbag division which uses 15% of the space and overheads
of the head office factory. The division employs ten people and is seen as being an
efficient division within the overall company.
In accordance with Ind AS 2, explain how the items referred to in a) and b) should be
measured.
SOLUTION
(a) The retail method can be used for measuring inventories of the beauty products. The
cost of the inventory is determined by taking the selling price of the cosmetics and
reducing it by the gross margin of 65% to arrive at the cost.
• The handbags can be measured using standard cost especially if the results approximate
cost. Given that The company has the information reliably on hand in relation to direct
materials, direct labour, direct expenses and overheads, it would be the best method
to use to arrive at the cost of inventories.
CONCEPT 9: INVENTORY ORDINARILY NOT INTERCHANGEABLE

The cost of inventories of items that are not ordinarily interchangeable and goods or
services produced and segregated for specific projects shall be assigned by using specific
identification of their individual costs. Specific identification of cost means that specific
costs are attributed to identified items of inventory.
CONCEPT 10: INVENTORY ORDINARILY INTERCHANGEABLE
• The costs of inventories, other than that are not ordinarily interchangeable and goods
or services produced and segregated for specific projects, shall be assigned by using
the first-in, first-out (FIFO) or weighted average cost formula.
• An entity shall use the same cost formula for all inventories having a similar nature
and use to the entity. For inventories with a different nature or use, different cost
formulas may be justified.
• FIFO formula assumes that the items of inventory that were purchased or produced
first are sold first, and consequently the items remaining in inventory at the end of the
period are those most recently purchased or produced.
• Under the weighted average cost formula, the cost of each item is determined from
the weighted average of the cost of similar items at the beginning of a period and the
cost of similar items purchased or produced during the period. The average may be
calculated on a periodic basis, or as each additional shipment is received, depending upon
the circumstances of the entity.
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Specific identification of Other items

items of inventory of inventory
Apply either:
Identified actual costs First-in-first out
Weighted Average
EXAMPLE 3
Mercury Ltd. uses a periodic inventory system. The following information relates to 20X1-
20X2.
Date Particular Unit Cost p.u. Total Cost

April Inventory 200 10 2,000
May Purchases 50 11 550
September Purchases 400 12 4,800
February Purchases 350 14 4,900
Total 1,000 12,250
Physical inventory at 31.03.20X2 400 units. Calculate ending inventory value and cost of
sales using:
(a) FIFO
(b) Weighted Average
SOLUTION
FIFO inventory 31.03.20X2 350@ 14= 4,900

50 @ 12= 600
5,500
Cost of Sales 12,250-5,500= 6,750
Weighted average cost per item 12.250|1000= 12.25
Weighted average inventory at 31.03.20X2 400*12.25= 4,900
Cost of sales 20X1-20X2 12,250-4,900= 7,350
CONCEPT 11: NET REALISABLE VALUE

Measurement of net realisable value
• Net realisable value is the estimated selling price in the ordinary course of business less
the estimated costs of completion and the estimated costs necessary to make the sale.
The cost of inventories may not be recoverable if those inventories are damaged, if they
have become wholly or partially obsolete, or if their selling prices have declined.
• Estimates of net realisable value are based on the most reliable evidence available at
the time the estimates are made, of the amount the inventories are expected to realise.
These estimates take into consideration fluctuations of price or cost directly relating
to events occurring after the end of the period to the extent that such events confirm
conditions existing at the end of the period.
• Estimates of net realisable value also take into consideration the purpose for which the
inventory is held. For example, the net realisable value of the quantity of inventory held
to satisfy firm sales or service contracts is based on the contract price. If the sales
contracts are for less than the inventory quantities held, the net realisable value of the
excess is based on general selling prices.
• Inventories are usually written down to net realisable value item by item. It is not
appropriate to write inventories down on the basis of a classification of inventory, for
example, finished goods, or all the inventories in a particular operating segment.
Writing inventories down to net realisable value

Materials and other supplies held for use in the production of inventories are not written
down below cost if the finished products in which they will be incorporated are expected to
be sold at or above cost. However, when a decline in the price of materials indicates that
the cost of the finished products exceeds net realisable value, the materials are written
down to net realisable value. In such circumstances, the replacement cost of the materials
may be the best available measure of their net realisable value.
CONCEPT 12: REVERSALS OF WRITE-DOWNS

• A new assessment is made of net realisable value in each subsequent period. When
the circumstances that previously caused inventories to be written down below cost
no longer exist or when there is clear evidence of an increase in net realisable value
because of changed economic circumstances, the amount of the write-down is reversed
(ie the reversal is limited to the amount of the original write-down) so that the new
carrying amount is the lower of the cost and the revised net realisable value.
• This occurs, for example, when an item of inventory that is carried at net realisable
value, because its selling price has declined, is still on hand in a subsequent period and
its selling price has increased.
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EXAMPLE 4
Sun Pharma Limited, a renowned company in the field of pharmaceuticals has the following
four items in inventory: The Cost and Net realizable value is given as follows:
Item Cost Net Realisable Value

A 2,000 1,900
B 5,000 5,100
C 4400 4,550
D 3,200 2990
Total 14,600 14,540
Determine the value of Inventories:

a. On an item by item basis
b. On a group basis
SOLUTION
Inventories shall be measured at the lower of cost and net realisable value.
Item by item basis :

A 1,900
B 5,000
C 4,400
D 2,990
14,290
Group basis 14,540
CONCEPT 13 :DISCLOSURE
The financial statements shall disclose:
1) Accounting policies
the accounting policies adopted in measuring inventories, including the cost formula
used.
2) Analysis of carrying amount
the total carrying amount of inventories and the carrying amount in classifications
appropriate to the entity.
Common classifications of inventories are as follows:

a) Merchandise;
b) Production supplies;
c) Materials;
d) Work in progress; and
e) Finished goods.
The inventories of a service provider may be described as work in progress
3) Inventories carried at fair value less costs to sell
the carrying amount of inventories carried at fair value less costs to sell.
4) Amounts recognised in profit or loss
a) the amount of inventories recognised as an expense during the period;
b) the amount of any write-down of inventories recognised as an expense in the
period; and
c) the amount of any reversal of any write-down that is recognised as a reduction in
the amount of inventories recognised as expense in the period.
In addition, disclosure is required of the circumstances or events that led to the
reversal of a write-down of inventories.
5) Inventories pledged as security
the carrying amount of inventories pledged as security for liabilities.
An entity adopts a format for profit or loss that results in amounts being disclosed
other than the cost of inventories recognised as an expense during the period. Under
this format, the entity presents an analysis of expenses using a classification based
on the nature of expenses. In this case, the entity discloses the costs recognised as
an expense for raw materials and consumables, labour costs and other costs together
with the amount of the net change in inventories for the period.
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SIGNIFICANT DIFFERENCES IN IND AS VIS-À-VIS AS2

S.No. Particular Ind AS 2 AS2
1. Subsequent Ind AS 2 deals with the AS 2 does not provide the
subsequent recognition of same
cost/ carrying amount of
inventories as an expense
2. Inventory In AS 2 provides explanation AS 2 does not contain such an
of Service with regard to inventories of explanation
provider service providers
3. Machinery Ind AS 2 does not contain AS 2 explains that inventories
Spares specific explanation in respect do not include spare parts,
of such spares as this aspect servicing equipment and
is covered under Ind AS 16 standby equipment which meet
the definition of property,
plant and equipment, Plant and
Equipment. Such items are
accounted for in accordance
with Accounting Standard
(AS) 10, Property, Plant and
Equipment.
4. Inventory Ind AS 2 does not apply to This aspect is not there in the
held by measurement of inventories AS 2
Commodity held by commodity broker-
Broker- traders, who measure their
traders inventories at fair value less
costs to sell.
5. Definition Ind AS 2 defines fair value AS 2 does not contain the
of Fair and provides an explanation in definition of fair value and
Value and respect of distinction between such explanation.
Distinction ‘net realisable value’ and ‘fair
Between value’
NRV and Fair
Value
6. Subsequent Ind AS 2 provides detailed
Assessment guidance in case of subsequent
of NRV assessment of net realisable
value.
It also deals with the

reversal of the write-down of
inventories to net realisable
value to the extent of the
amount of original write-
down, and the recognition
and disclosure thereof in the
financial statements.
7. Exclusion Ind AS 2 excludes from its AS 2 excludes from its scope
from its scope only the measurement such types of inventories.
Scope but of inventories held by
Guidance producers of agricultural and
given forest products, agricultural
produce after harvest, and
minerals and mineral products
though it provides guidance
on measurement of such
inventories.
8. Cost Ind AS 2 requires the use of AS 2 specifically provides
Formulae consistent cost formulas for that the formula used in
all inventories having a similar determining the cost of an
nature and use to the entity. item of inventory should
reflect the fairest possible
approximation to the cost
incurred in bringing the items
of inventory to their present
location and condition.
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UNSOLVED QUESTION
QUESTION NO 1
State with reference to AS, how will you value the inventories in the following case. For
kilogram of Finished Goods consisted of Material cost Rs. 100 per kg. Direct Labour Cost Rs.
20 per kg. and Direct Variable Production Overhead Rs.10per kg. Fixed Production charges
for the year on normal capacity of 1,00,000 kg. is Rs.10 Lakhs. 2,000 kg. of Finished Goods
are on stock at the year end.
QUESTION NO 2
Lambodar Ltd’s normal production volume is 50,000 units and the Fixed Overheads are
estimated at Rs. 5,00,000 Give the treatment of Fixed Production. OH under IND- AS-2
if actual production during a period was – (a) 42,000 units (b) 50,000 units and (c) 60,000
units.
QUESTION NO 3
Vaiabh Industries produces four Joint Products L,M, N and P from a joint process, incurring
a cost of Rs. 571,200. Allocate the Joint Costs with the following information.
Particulars L M N P
Quantity Produced (in ‘000s) 10000 Kgs. 12000 Kgs. 14000 Kgs. 16000 Kgs.
Sales Price per Kg. Rs.13 Rs. 17 Rs.19 Rs.22
Stock Qty. at the end of year 1,625 Kgs. 400 Kgs. Nil 1,550 Kgs.
Also determine the value of Closing Stock in respect of the above products.
QUESTION NO 4
In a manufacturing process of Mars ltd, one by-product BP emerges besides two main
products MP1 and MP2 apart from scrap. Details of cost of production process are here
under:
Item Unit Amount Output Closing Stock

31-3-20X1
Raw material 14,500 1,50,000 MP I-5,000 units 250
Wages - 90,000 MP II-4,000 units 100
Fixed overhead - 65,000 BP- 2,000 units
Variable overhead - 50,000
Average market price of MP1 and MP2 is ` 60 per unit and ` 50 per unit respectively, by
- product is sold @ ` 20 per unit. There is separate processing charges of ` 8,000 and
packing charges of ` 2,000, ` 5,000 was realised from sale of scrap.
Required:
Calculate the value of closing stock of MP1 and MP2 as on 31-03-20X1.
QUESTION NO 5
Closing Inventory at Cost of a Company amounted to Rs. 956,700. The following items were
included at cost in the total –
(a) 350 Shirts, which had cost Rs. 380 each and normally sold for Rs. 750 each. Owing to
a defect in manufacture, they were all sold after the Balance Sheet date at50% of
their normal price. Selling expenses amounted to 5% of the proceeds.
(b) 700 Trousers, which had cost Rs. 520 each. These too were found to be defective.
Selling expenses for the batch totaled Rs. 3800. They were sold for Rs. 950 each.
What should the inventory value be according to IND IND AS-2 after considering the
above items?
QUESTION NO 6
A Ltd. produces chemical, X which has following production cost per unit.
Raw Material = Rs. 5
Direct Labor = Rs. 2
Direct Expenses = Rs. 3
Normal capacity = 5,00 units per annum
Actual production = 4,000 units
Fixed Production Overhead =Rs. 20,000 per annum.
The Company hIND AS-2,000 units of unsold stock lying with it at the end of year. You are
required to value the closing Stock.
QUESTION NO 7
The Company incurred Rs. 20,00,000 as fixed production overhead per year. It normally
produces 1,00,000 units in a year. In 2009-10 how ever its production has been only 40,000
units. At the year end 31.3.2010 the closing stock was 10,000 units. The cost of unit is
below:
Material = Rs. 500 per unit
Labour = Rs. 250 per unit
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Fixed Production overhead = Rs. 20,00,000 p.a.

Fixed administration = Rs. 10,00,000 p.a.
Calculate the value of closing stock
QUESTION NO 8
The Company deals in three products X, Y and Z, which are neither similar nor interchangeable.
at the time of closing of its account for the year 2001-2002. The historical cost and net
realizable values of the items of closing stock are determined as below:
Items Historical cost Net realizable value

(Rs. in Lakhs) (Rs.in Lakhs)
X 20 14
Y 16 16
Z 8 12
44 42
What will be the value of closing Stock?
QUESTION NO 9
Y Ltd. purchased 500 units of raw material @ Rs. 150 per unit gross less 10% Trade discount
GST is chargeable @ 5% on the net price. The duty element on product is Rs. 12 per unit
against which CREDIT can be claimed. The company spent Rs. 1,000 on transportation and
Rs. 500 for loading and unloading Calculate the cost of purchase of raw material.
QUESTION NO 10
XYZ Ltd produced 10,00,000 units of product A during 2009-10 per unit cost is as follows:
Raw Material Rs. 100
Direct Wages Rs. 50
Direct Expenses Rs. 2
Rs. 152
Production overhead is Rs. 20,00,000 of which 40% is fixed. The company sold 8,00,000
units and 2,00,000 units were in stock as on 31st March, 2010. Normal capacity is 5,00,000
units.
Calculate the value of closing stock
(Ans: Rs. 3.08 Crores)
QUESTION NO 11
Cost of Production of product X is given below:
Raw Material per unit Rs. 120
Wages per unit Rs. 80
Overhead per unit Rs. 50
Rs. 250
As on the balance sheet date the replacement cost of raw material is Rs. 110 per unit There
were 1000 units of raw material on 31.3.2011.
Calculate the value of closing stock of raw material in following conditions.
(a) If finished product is sold at the rate of Rs.275 per unit, what will be value of closing
stock of raw material.
(b) If finished product is sold at the rate of Rs.230 per unit, what will be value of closing
stock of raw material.
QUESTION NO 12
A company does not value it’s W.I.P. because the quantity of work-in-progress cannot be
determined accurately and in any case, there is not much variation between the opening and
closing W.I.P. quantities. Comment on the above statement of the company.
Ans: Statement of company is not in accordance with IND AS-2.
QUESTION NO 13
JATIN Ltd. purchased raw materials for 1,25,000 less a rebate of 2%. It paid 25,000 as
import duty, including ` 10,000 towards a special duty. According to local tax laws, it will
get a credit of the amount paid towards the special duty, while determining its customs
liability. It spent ` 8,000 on ocean freight, clearing agent’s charges of 2,000, 4,000 on
warehouse rent and 1,500 on the watchman’s salary.
QUESTION NO 14
Per kg. of finished goods consisted of:
Material cost Rs 100 per kg.
Direct labour cost 20 per kg.
Direct variable production overhead 10 per kg.
Fixed production charges for the year on normal capacity of one lakh kg. is 10 lakhs. 2,000
kg. of finished goods are on stock at the year end. Calculate value of inventories.
20 ACCOUNTS
QUESTION NO 15
Total Unit : 10,000 (closing stock)
Contract sales : 6,000 units
Normal units : 4,000 units
Cost per unit : 150
Contract selling price : 200
Market Price : 90
QUESTION NO 16 (VALUATION OF WIP)

On 31St March, 2013 a business firm finds that cost of a partly finished unit on that date is
530. The unit can be finished in 2013-14 by an additional expenditure of 310. The finished
unit can be sold for 750 subject to payment of 4% brokerage on selling price. The firm
seeks your advice regarding:
(i) The amount at which the unfinished unit should be valued as at 31st March, 2013 for
preparation of final accounts and
(ii) The desirability or otherwise of producing -the finished unit.
SOLVED QUESTIONS FOR SELF PRACTICE
QUESTION NO 17
Grow More Private Limited a Wholesaler in Food and Other Agro Products has valued the
year-end Inventory of Net Realizable Value on the ground that IND IND AS-2 does not
apply to inventory of Agriculture Products Comment.
SOLUTION
1. Principle: IND IND AS-2 does not apply to Producers Inventories of Livestock, Forest
Product and Mineral Ores and Gases. These can be valued at Net Realizable value as
per established practices.
2. Analysis and Conclusion:
(a) However, the above principle does not apply in Trader’s Inventory of Food and
Agro Products. In the above case, Grow More Ltd. is only a Trader (Wholesaler)
and not the producer. Hence, they cannot value their inventory at Net Realizable
Value.
(b) As IND IND AS-2, the Company should value the Inventory at lower of cost or
Net Realisable Value. If the Management of M/s. Grow More Ltd. does not agree,
the Auditor should qualify the Report.
QUESTION NO 18
Varada Ltd. purchased goods at the cost of Rs. 40 Lakhs in October. Till the end of the
Financial year, 75% of the Stocks were sold. The Company wants to disclose Closing
Stock at Rs. 10 Lakhs. The expected Sale value is Rs. 11 Lakhs and a commission at 10% on
sale is payable to the Agent. What is the correct value of Closing Stock.
SOLUTION
Principle: Inventories are valued at – (a) Cost or (b) Net Realisable Value, whichever is lower.
Particulars Amount (Rs.)

1. Cost Inventory (Rs. 40 Lakhs x 25% Unsold) 10.00 Lakhs
2. NRV (Expected Sales Value Rs.11 Lakhs Less cost to make the sale 9.90 Lakhs
10% Rs. 1.10 Lakh)
3. Value of Inventory under IND AS-2 = Least of the above 9.90 Lakhs
QUESTION NO 19
Gajanan Ltd. manufacturing garments and fancy terry towels has valued at the year end,
its Closing Stock of Inventories of Finished Goods, (for which firm contracts have been
22 ACCOUNTS
received and goods are packed for export, but the ownership of which has not been
transferred to the foreign buyers) at the Realisable Value inclusive of Profit and the
export cash Incentives. Give your views on the above.
SOLUTION
1. General Principle: IND IND AS-2 requires that inventories should be valued at lower
of cost and NRV. A departure from the general principle can be made if – (a) the
AS is not applicable, or (b) having regard to the nature of industry say, plantations,
inventories may be valued at market prices or price subsequently realized.
2. Special Items (Para 2): IND IND AS-2 also states that Producers’ Inventories of
Livestock, Agriculture Crops, etc. are measured at NRV based on established practices
if – (a) sale is assured under a Forward Contract or a Government Guarantee, or (b)
where market is homogenous, and there is a negligible risk of failure to sell.
3. Analysis: In the given case the sale is assured under a Forward Contract but the goods
are not of a nature covered by exceptions under Para 2. Hence, the Closing Stock
of Finished Goods should have been valued at cost, as it is lower than the realizable
value (as it includes profit). Also, Export Cash Incentives should not be included for
valuation purposes.
4. Conclusion: Hence, the Company’s policy of valuation is not correct.
QUESTION NO 20
Akshay Pharma Ltd. ordered 16,000 kg. of certain material at Rs. 160 per unit. The
Purchase Price includes GST Rs. 10 per kg. in respect of which full GST Credit is admissible.
Freight incurred amounted to Rs. 1,40,160. Normal Transit Loss is 2%. The Company
actually received 15,500 kg. and consumed 13,600 kg. of Material. Compute the Cost of
Inventory under IND IND AS-2 and the amount of Abnormal Loss.
SOLUTION
1. Quantity Reconciliation:
Total Purchase Quantity (given) = 16,000 kg.
Normal Loss 2% on 16,000 = 320 kg.
Balance Effective Quantity = 16,000 (-) 320 = 15,680 kg.
Actually Received (given) = 15,500 kg.
Balance Abnormal Loss 15,680 (-) 15,500 = 180 kg.
Consumption Quantity (given) = 13,600 kg.
Closing Stock (bal.fig) = 15500 (–) 13,600 = 1900 kg.
2. Computation of Effective Cost per kg.
Particulars Rs.
Net Cost Per unit (excluding GSTfor which Credit is available) 150
Total Purchase Cost for 16,000 kg. ordered 24,00,000
Add: Freight Charges 1,40,160
Total Cost of Inventory 25,40,160
Effective Quantity ()i.e. Gross Ordered Quantity Less Normal 15,680 Kg.
Loss) = 16,000 (-) 320 =
Effective Cost Per Kg. Rs. 25,40,160/15,680 Rs. 162.00
3. Valuation of Inventory and Abnormal Loss
Particulars Rs. Treatment

(a) Cost of Material Consumed 22,03,200 Shown in Income Statement
= 13,600 Kg. at Rs.162 as Expense
(b) Cost of Abnormal Loss 29,160 Shown in Income Statement

= 180 Kg. at Rs.162 as Expense/Loss
(c) Cost of Closing Stock 3,07,800 Shown in Balance Sheet

= 1,900 Kg. at Rs.162
Note: Claim, if any, from Insurance Company will be set off against the cost of
Abnormal Loss as shown above.
QUESTION NO 21
In a production process, normal waste is 5% of input, 5,000 MT of input wee put in
process resulting in a wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire
quantity of waste is on stock at the year – end. State with reference to how you will value
the inventories in the above case.
SOLUTION
1. Principle: Abnormal Amounts of Waste Materials, Labour or other Production Costs
are excluded from cost of inventories and such costs are recognized as expenses in
the period in which they are incurred.
2. Analysis and Conclusion: In this case, Normal Waste is 5% of 5000 MT = 250 MT and
Abnormal Waste is 300 MT (-) 25% MT = 50 MT.
(a) Cost of Normal Waste 250 MT will be absorbed and included in determining the
cost of inventories (Finished Goods) at the year end.
24 ACCOUNTS
(b) Cost of Abnormal Waste = Rs. 52631 (50 MT x Rs. 1,052) will be charged in the
P&L Statement.
QUESTION NO 22 (INTEREST ON BANK OVERDRAFT)

Can PT Ltd. a Wire Netting Company, while valuing its Finished Stock at the year end
include interest on Bank Overdraft as an element of cost, for the reason that Overdraft
has been taken specifically for the purpose of financing Current Assets like Inventory and
for meeting day to day working expenses?
SOLUTION
1. Nature of Interest: As per IND IND AS-2, “Interest and other Borrowing Costs are
usually considered as not relating to bringing the inventories to their present location
& condition, and hence usually, excluded in the cost of inventories”.
2. Qualifying Assets: IND IND AS-23 identifies inventories which require a substantial
period of time to bring them to a saleable condition as a Qualifying Assets, and permits
capitalization of borrowing costs directly attributable to the asset as part of the Cost
of the Asset.
3. Conclusion: In the given case, PI Ltd. can capitalize the interest cost on Bank
Overdraft, only if its Inventories are is the nature of a Qualifying Asset as per IND
IND AS-23. Otherwise, the entire amount will be treated as expense.
QUESTION NO 23
From the following data, find out value of Inventory as on 30th April using (a) LIFO Method,
and (b) FIFO Method –
(a) Purchased on 1st April 10 units at Rs. 70 per unit
(b) Sold on 6th April 6 units at Rs. 90 per unit
(c) Purchased on 9th April 20 units at Rs. 75 per unit
(d) Sold on 18th April 14 units at Rs. 100 per unit
SOLUTION
1. Closing Stock (in Units) : 10 (-) 6 + 20 (-)14 = 10 units.

2. Valuation :
Value of Inventory under LIFO Basis Value of Inventory under FIFO Basis
4 units from 1st April – 4 x Rs.70 = Rs.280 10 Units from 9th April – 10 x Rs.75 = Rs.750
6 units from 9th April – 6 x Rs.75 = Rs.450 Total Cost = Rs. 750
Total Cost = Rs. 730
QUESTION NO 24
In order to value the inventory of Finished Goods HR Ltd. has adopted the Standard Cost
of Raw Materials, Labour and Overheads. The Income Tax Officer wants to know the
method, as per IND IND AS-2 for the valuation of Raw Material. Comment.
SOLUTION
1. The use of Standard Cost of Production has been suggested by IND IND AS-2 as a
matter of convenience only. IND IND AS-2 suggests that Standard Cost system may
be used for convenience if the results approximate the actual cost.
2. For Inventory Valuation, IND IND AS-2 recognises the use of absorption costing based
on normal capacity. If the Company can adopt absorption costing for value of inventory,
then the Standard Cost system need not be adopted.
QUESTION NO 25
HP is a leading distributor of Petrol. A detail Inventory of Petrol in hand is taken when
the books are closed at the end of each month. At the end of the month, the following
information is available.
Sales – Rs. 47,25,000, General Overheads Cost – Rs. 1,25,000, Inventory at beginning
– 1,00,000 Litres at Rs. 15 per Litre.
Purchases: (a) June 1 Two Lakh Litres at 14.25 (b) June 30 One Lakh Litres at 15.15 (c)
Closing Inventory 1.30 Lakh Litres Compute the following by the FIFO as per IND IND
AS-2.
(a) Value of Inventory on June 30.
(b) Amount of Cost of goods sold for June.
(c) Profit/Loss for the month of June.
SOLUTION
1. Value of Inventory as on June 30:
Particulars Rs.
0.30 Lakh Litres from June 1 Purchase Lot 4,27,500
(0.30 Lakh Litres x Rs.14.25 Per Litre)
1 Lakh Litres from June 30 Purchase Lot 15,15,000
(1 Lakh Litres x Rs.15.15 Litre)
Value of Inventory s on June 30 19,42,500

26 ACCOUNTS
2. Cost of Goods Sold:
Particulars Rs.
Opening Stock (1 Lakh Litres x Rs.15) 15,00,000
Add: Purchases (2 Lakh Litres x Rs.14.5) + (1 Lakh Litres x Rs.15.15) 43,65,000
Less: Closing Stock 19,42,000
Cost of Goods Sold 39,22,500
3. Profit/Loss for June:

Sales (Rs. 47,25,000) – Cost of Goods Sold (Rs.39,22,500) – General Overheads Cost
(Rs. 1,25,000) = Profit Rs. 6,77,500
QUESTION NO 26 (RETAIL VALUE WITH WEIGHTED AVERAGE)

Shri Ganesh operates a retail business. For a financial year, the following data is given -
Particulars At Retail Price At cost

Value of Opening Inventory Rs. 80,000 Rs. 60,000
Value of Purchases Rs. 1,40,000 Rs. 1,20,000
Calculate the cost of Closing Stocks, if the Sales made during the period is Rs.2,00,000
(APPLY WEIGHTED AVERAGE METHOD)
SOLUTION
Value of Closing Inventory at Retail = Opening Stock + Purchases (-) Sales

Prices = Rs. 80,000 + Rs. 1,40,000 (-) Rs. 2,00,000
= Rs. 20,000
Average Percentage of Cost to Retail Total Average Cost
=
Prices Total Average Retail Value
60,000 + 1,20,000
= = 81.82%
80,000 + 1,40,000
Value of Closing Inventory at Cost = Retail values Less Margin of 18.18%

Prices = Rs.20,000 (-) 18.18% thereon
= Rs.16,364.
QUESTION NO 27 (APPLICATION OF NRV)

Inventories of a Car Manufacturing Company include the value of items, required for the
manufacture of a model, which was removed from the production line five years back, at
Cost Price. As an Auditor, give your comments.
SOLUTION
1. IND IND AS-2 provides that the cost of inventories may not be recoverable if those
inventories which are damaged, have become partially/fully obsolete, or if their selling
prices have declined.
2. The Auditor should examine whether appropriate allowance has been made for the
defective/obsolete/damaged inventories in determining the NRV. Having regard to
this, NRV of inventory items, whichever was removed from the production line 5 years
back, is likely to be much lower than the cost, as shown in the books of account. Thus,
it becomes necessary to write down the inventories to NRV.
3. Since the Company has valued these inventories at cost, it has resulted in over
statement of inventory and profits. Hence, the Auditor should qualify his report.
QUESTION NO 28 (VALUATION OF INVENTORY)

Best Ltd. deals in 5 products – P Q, R, S & T which are neither similar nor interchangeable.
While closing its accounts for the year ending 31st March, the Historical Cost and NRV of
the items of Closing Stock are determined as follows:-
Items P Q R S T
Historical Cost (Rs.) 5,70,000 9,80,000 4,25,000 4,25,000 1,60,000
Net Realizale Value (Rs.) 4,75,000 10,32000 2,89,000 4,25,000 2,15,000
What is the Value of Closing Stock for the year ending 31st March as per IND IND AS-27.
Note: Refer Principle relating to item-by-item write-down given above.
SOLUTION
In the given case, since Inventories are not interchangeable, they are to be valued
independently.
Item Historical Cost (Rs.) NRV (Rs.) Valuation (Rs.) = Least of (2) or (3)
P 5,70,000 4,75,000 4,75,000
Q 9,80,000 10,32,000 9,80,000
R 3,16,000 2,89,000 2,89,000
S 4,25,000 4,25,000 4,25,000
T 1,60,000 2,15,000 1,60,000
Inventory Value = 23,29,000
28 ACCOUNTS
QUESTION NO 29 (VALUATION OF RAW MATERIAL)

A Raw Material costing Rs. 150 has Net Realisable Value (which can be the Replacement
Cost) Rs.130. The Finished Goods for which this Raw Material is used, has other cost to
incur Rs.60. At what Price should the Raw Material be valued, if Finished Goods has a Net
Realizable Value – (1) Rs. 210 or above (2) less than Rs. 190
SOLUTION
Note: In all cases given above Cost of Finished Goods (RM at actuals 150+ Conversion 60)
= Rs. 210.
1. SP Rs. 210 or above: If Sale Price is Rs. 210 or above the cost of FG can be
recovered/realized fully. Hence, there is no need to write down RM Inventory to Rs.
130. So, Raw Material will be valued at Rs. 150.
2. SP less than Rs.190: In this case, since cost of finished goods is not realizable fully,
the Raw Material Inventory should be written down to Replacement Cost, i.e. Rs.130
QUESTION NO 30 (VALUATION OF WIP)

On 31st March, a Business Firm finds that cost of a partly finished unit on that date is
Rs.530. The unit can be finished in its next financial year, by an additional expenditure of
Rs. 310. The Finished Unit can be sold for Rs.750 subject to payment of 4% brokerage on
Selling Price The firm seeks your advice regarding -
(a) The amount at which the unfinished Unit should be valued as at 31st March for
preparation of Final Accounts, and
(b) The desirability or otherwise of producing the Finished unit.
SOLUTION
Particulars Amount
1. Estimated Net Realisable Value of Final Product
= Sale value 750 less 4% Brokerage 30 less Further
Processing Costs 310 = 750 – 30 – 310 410
2. Actual Cost incurred till date on the partly finished unit 530
(including RM cost therein)
3. Since the entire actual cost of Rs.530 is not recovered by use in finished 530 - 410
production, the partly finished unit should be valued at its value in use, = 120
i.e. NRV Rs.410. So Inventory should be written down by
4. Considering actual costs till date Rs.530 + additional expected cost

Rs. 310 it is not worthwhile to process this item further.
QUESTION NO 31 (VALUATION OF RAW MATERIAL)

Hari Ltd. purchased Raw Material at Rs. 400 per kg. The Company does not sell Raw
Material but uses it in the production of Finished Goods. The Finished Gods in which Raw
Material is used are expected to be sold at below cost. At the end of the accounting year,
the Company is having 10,000 kg. of Raw Material in Stock as the Company never sells the
Raw Material, does not know the Selling Price of Raw Material and hence cannot calculate
the Realizable Value of the Raw Material for valuation of Inventories at the end of the
year. However, Replacement cost of Raw Material is Rs.300 per kg. How will you value the
Inventory of Raw Material?
SOLUTION
Hint: Refer principle relating to RM valued at NRV given above.
Inventory should be valued at Replacement Cost of 10,000 Kgs. x Rs.300 per Kg.
= Rs. 30,00,000
QUESTION NO 32
A company is engaged in the manufacturing of organic chemicals Production of one
intermediate product (say X) is in excess of its immediate requirement for captive
consumption. Further factors are:
(i) X is not marketable and therefore, the market price is not known.
(ii) The estimated expenditure the further processing of X is Rs. 6000 per ton.
(iii) The company has been valuing the stock of X by theoretically converting it into
equivalent units of finished products and then valuing the same on the principle of
cost or net realizable value, whichever is lower.
Comments:
(a) Whether the present practice of valuating the X at the lower of cost and net
realizable value of the end-product by theoretically converting it into equivalent
finished product is in order.
(b) Whether the company can value at cost the stock X since X will have to undergo
further processing to become marketable and net realizable value of X in its present
form cannot be ascertained.
(c) If the answer of above (a) & (b) is negative, suggest the correct method for
valuation of X.
ANSWER:
(a) NO
(b) NO – If net realizable after processing of X is ascertainable.
(c) At cost
30 ACCOUNTS
QUESTION NO 33
Capital Cables Ltd. has normal wastage of 4% in the production process. During the year
2013-14 the Company used 12,000 MT of Raw Material costing Rs.150 per MT. At the end
of the year 630 MT of Wastage was in Stock. The Accountant wants to know how this
wastage is to be treated in the books. Explain in the context of IND AS-2 the treatment
of Normal Loss and Abnormal Loss and also find out the amount of Abnormal Loss if any.
SOLUTION
1. Principle: Abnormal Amounts of Waste Material, Labour or other Production costs are
excluded from cost of inventories and such costs are recognized as Expenses in the
period in which they are incurred.
2. Analysis and Conclusion: Normal Waste is 4% of 12,000 MT = 480 MT & Abnormal

Waste is 630 MT (-) 480 MT = 150MT.
(a) Cost of Normal Waste 480 MT wil be absorbed in the cost of Production and
included in determining the Cost of Inventories (Finished Goods) at the year end.
(b) Cost of Abnormal Waste will be charged in the Profit and Loss Statement.
3. Computation
12,000 MT x Rs. 150
(a) Effective Material Cost of Output =
12,000 MT – 4% Normal Waste
18,00,000
=
11,520
= Rs.156.25 Per MT
(b) Cost of Abnormal Waste = 150 MT x Rs.156.25 = Rs.23,437.50
QUESTION NO 34
Calculate the value of Raw Materials and Closing Stock based on the following information:
Particulars Raw Material X Particulars Finished Goods Y

Closing Balance 500 Units Closing Balance 1200 Units
Cost Price including GST Rs.200 per unit Material Consumed Rs.220 per unit
GST (GST Credit is Direct Labour Rs. 60 per unit
receivable on GST paid) Rs.10 per unit Direct Overhead Rs. 40 per unit
Freight Inward Rs.20 per unit
Unloading Charges Rs.10 per unit
Replacement Cost Rs.150 per unit
Total Fixed Overhead for the year was Rs. 2,00,000, on normal capacity of
20,000 units.
Calculate the value of the Closing Stock when –
(i) Net Realizable Value of the Finished Goods Y is Rs.400
(ii) Net Realizable Value of the Finished Goods Y is Rs.300
SOLUTION
1. Principle:
(a) Raw Materials and Supplies held for use in production are valued at cost. However,
they can be valued below cost (i.e. NRV) in the following peculiar situations.
• S
ale below cost : When the Finished Products in which the Raw Material is
incorporated, are expected to be sold below cost.
• P
rice Decline : When there is a decline in the price of materials, and it is
estimated that the cost of Finished Goods will be exceed NRV.
(b) Finished Goods will be valued at Cost (or) Net Realisable Value, whichever
is lower.
2. Valuation of Finished Goods Stock: In the given case the Valuation of FG Stock will
be as under:-
(a)
Cost per unit of Finished Goods:
(Material +Direct Labour + Direct Overhead + Fixed Production OH)
2,00,000
= 220 + 60 + 40 +
20,000
= Rs.330 per unit
(b) Valuation of FG will be –
Particulars If NRV is rs.400 p.u. If NRV is rs.300 p.u.

Value p.u. (Lower of 330 300
cost Rs.330 & NRV)
Total Value of Finished Rs. 330 x 1200 units Rs. 300 x 1200 units
Goods Stock = Rs. 3,96,000 = Rs. 3,60,000
3. Valuation of Raw Material Stock:

In the given case, the Valuation of RM Stock will be as under:-
32 ACCOUNTS
(a) Cost p.u. of Raw Material:
Particulars Cost p.u.

Purchase Price net of Excise Duty 190
(since GST Duty eligible for GST Credit) 200-10
Add: Freight Charges 20
Add: Unloading cost p.u. 10
Total Cost p.u. 220
(b) Total Value of Raw Material Closing Stock:
Particulars Finished Goods of Finished Goods of

valued at Cost valued at NRV
* Raw Material cost p.u. Rs. 220 Rs. 220
* Replacement cost p.u. Rs. 150 Rs. 150
* Relevant Value p.u. Rs. 229 (since FG is Rs. 150 (since FG is
valued at Cost) valued NRV)
* Total value for 500 units 500 x Rs.220 500 x Rs.150
= Rs.1,10,000 = Rs. 75,000
Note: Replacement Cost of the Raw Material is assumed as its Net Realisable
value.
QUESTION NO 35
Mr. Mehul gives the following information relating to items forming part of inventory as
on 31.03.2015. His Factory produces Product X using Raw Material A.
1. 600 units of Raw Material A (Purchased at Rs.120). Replacement Cost of Raw
Material A as on 31.03.2015 is Rs. 90 per unit.
2. 500 units of Partly Finished Goods in the process of producing X and Cost incurred
till date Rs.260 per unit. These units can be finished next year by incurring
Additional Cost of Rs. 60 per unit.
3. 1,500 units of Finished Product X and Total Cost incurred Rs. 320 per unit.
Expected Selling price of Product X is Rs. 300 per unit.
Determine how each item of inventory will be valued on 31.03.2015. Calculate the Value of
Total Inventory as on 31.03.2015.
SOLUTION
Item Valuation Principle Result

Raw Material Since the Finished Product using this Raw Material 600 x Rs. 90
is expectable be sold below cost, Raw Material may = Rs. 54000
be valued of NRV, i.e. Replacement cost of Rs.90.
WIP • Cost Rs. 260 500 x Rs. 240
• Estimated NRV = Rs. 1,20,000
= Sale Price Rs.300 – Cost to Complete Rs. 60
= Rs.240
• Hence, valued at least of the above, i.e. Rs.240
p.u.
Finished Cost Rs.320 or Net Realisable Value Rs.300, 1500 x Rs. 300
Goods whichever is lower. Hence valued at Rs.300 p.u. = Rs. 4,50,000
Total Rs. 6,24,000
QUESTION NO 36
From the following information, value the Inventories as on 31st March, 2015.
Raw Material has been purchased at Rs.125 per Kg. Prices of Raw Material are on the
decline. The Finished Goods being manufactured with the Raw Material is also being sold
at below Cost. The Stock of Raw Material is of 15,000kg. and the Replacement Cost of
Raw Material is Rs.100 Per Kg.
Cost of Finished Goods per Kg. is as under:-
Particulars Rs. per Kg.

Material cost 125
Direct Labour Cost 20
Direct Variable Production Overhead 10
Fixed Production Overhead for the year for a normal capacity of 1,00,000 kgs. of
production is rs.10 Lakhs. At the year end, there were 2,000 Kgs. of Finished Goods in
stock. Net Realisabale value of Finished gods is rs.140 Per Kg.
34 ACCOUNTS
SOLUTION
1. Conversion Cost Per Kg. of Finished Product

= Direct Labour + Direct Variable Production OH + Fixed Production OH
Rs. 10 Lakhs
= Rs. 20 + Rs. 10 + = Rs. 40 Per Kg.
1 Lakh Kgs.
2. Inventory Valuation is as under:-

(A) For Finished Goods
(a) Cost per Kg. for Finished Product 125 + 40 = Rs. 165 Per Kg.
= Material + Conversion
(b) Net Realizable value of Finished Product if Given = Rs. 140 per kg.
sold after Conversion
(c) Hence, Valuation Rate for finished goods Rs. 140 Per kg.
= (a) or (b), whichever is lower.
(d) Value of Inventory 2,000 kg. of Finished 2,000 Kg. x Rs. 140
Product = Rs. 2,80,000
(B) For Raw Materials
(a) Cost of Raw Material Given = Rs. 125 Per kg.

(b) Replacement Cost of Material, i.e. Sale Given = Rs.100 Per Kg.
without Conversion
(c) Valuation Rate for Raw Material (i.e. least o Rs. 100 per Kg.
Cost or NRV, least of (a) and (b)
(d) Value of Inventory 15,000 kg. of Raw Material 15,000 kgs x Rs. 100
= Rs. 15,00,000
Note: When the Finished Products in which the Raw Material is incorporated, are expected
to be sold below Cot (NRV rs.140 Vs. Cost Rs.165), it is preferable to sell the product
without Conversion. In such case, the Raw Materials will be valued below cost, i.e. at NRV,
being the Replacement cost.
QUESTION NO 37
Inventories of a Car manufacturing company include the value of items, required for the
manufacture of model which was removed from the production line five years back, at cost price.
As an Auditor Comment.
ANSWER:
(1) Provision of IND AS-2

The cost of inventories may not be recoverable if those inventories are damaged,
have become wholly or partially obsolete, or if their selling prices have declined.
Accordingly, the auditor should examine whether appropriate allowance has been made
for the defective, damaged, obsolete and slow-moving inventories in determining the
net realizable value.
(2) Analysis and Conclusion

In this case, items required be the manufacture of a model which has been withdrawn
from the production line five veal’s ago are included in the stock at cost price resulting
in overstatement of inventory and profit. As it appears from the facts given that the
net realizable value of these items is likely to much lower than the cost at which these
are being shown in the books of account. Accordingly, it becomes necessary to write
down the inventory to ‘net realizable value’ if the items of inventories become wholly
or partially obsolete. Under the circumstance, the auditor should qualify the report
appropriately.
QUESTION NO 38
The management tells you that the WIP is not valued since it is difficult to ascertain the
same, in view of the multiple processes involved and in any case, the value of opening and
closing WIP would be more or less the same. Advise.
ANSWER:
(i) Provision of IND AS-2

Inventory includes raw material, work-in-progress and finished goods and should
be valued at cost or NRV whichever is lower.
(ii) Analysis and Conclusion

In this case work-in-progress is also a component of inventory and should be valued
at cost or NRV whichever is lower.
QUESTION NO 39
CC Ltd. a Pharmaceutical Company, while valuing its finished stock at the year end wants to
include interest on Bank Overdraft as an element of cost, for the Reason that overdraft
has been taken specifically for the purpose of financing curl-cut assets like inventory and
for meeting day to day working expenses.
36 ACCOUNTS
ANSWER:

Cost of inventories comprises all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition. However,
it makes clear that interest and othet- borrowing costs are usually not included in
the cost of inventories because generally such costs at-c not related in bringing the
inventories to their present location and condition.
(ii) Conclusion
Therefore, the proposal of CC Ltd. to include interest on bank overdraft as an element
of cost is not acceptable because it does not form part of cost of production.
QUESTION NO 40
A company is engaged in the manufacture of electronic products and systems. As per Chief
Accountant a prototype system was installed at one of the customer’s locations in June
2010 for getting acceptance on the performance of the system. The Chief Accountant has
stated that as the ownership of the system installed for field trials was vested with the
company, for accounting & control purposes, the prototype system installed at customer’s
location in 2010 was capitalised in the accounts for the year 20 10-1 1 at its bought-out
cost. State whether the accounting treatment adopted by the company is correct or not?
ANSWER:

Inventories mean assets held for sale in the ordinary course of business, or in the
process of production for such sale, or for consumption in the production of goods or
services for sale, including maintenance supplies and consumable other than machinery
spares.
(ii) Provision of IND AS 16

Fixed asset is an asset held with the intention of being used for the purpose of
producing or providing goods or services and is not held for sale in the normal course
of business.
(iii) Analysis and Conclusion

Accordingly, the system installed by the company at customer’s site for his acceptance,
based on the field trials of the system, is an item of inventory, it is not a fixed assets.
installation of such prototype system at customer’s sites for their acceptance is akin
to sale of goods on approval basis. Therefore, the capitalization of such prototype
system at its bought out cost is not correct.
QUESTION NO 41
(Study Material) Ambica Stores is a departmental store, which sell goods on retail basis.
It makes a gross profit of 20% on net sales. The following figures for the year-end are
available:
Opening Stock Rs. 50,000
Purchases Rs. 3,60,000
Purchases Returns Rs. 10,000
Freight Inwards Rs. 10,000
Gross Sales Rs. 4,50,000
Sales Returns Rs. 11,250
Carriage Outwards Rs. 5,000
Compute the estimated cost of the inventory on the closing date.
ANSWER:
Calculation of Cost for Closing Stock
Particulars Rs
Opening Stock 50,000
Purchase less return ( 3,60,000-10,000) 3,50,000
Freight Inwards 10,000
4,10,000
Less:COGS ( 4,50,000 -11,250) – profit @ 20% 3,51,000
Closing Stock 59,000
QUESTION NO 42 (STUDY MATERIAL)
Particular Kg. Rs
Opening Stock: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchase 10,000 1,00,000
Labour 76,500
Overhead (Fixed ) 75,000
Sales 10,000 2,80,000
Closing Stock: Raw Materials 900
Finished Goods 1,200
38 ACCOUNTS
The expected production for the ‘year was 15,000 kg. of the finished product. Due to fall
in market demand the sales price for the finished goods 20 per kg. and the replacement
cost for the raw metatarsal was 9.50 per kg. n the closing day. You are required to
calculate the closing stock as on that date.
ANSWER:
(i) Calculation of Cost per Unit
Particulars Rs
Raw Material consumed (1100 + 10000 - 900) @10 per unit 1,02,000
Director Labour 76,500
Fixed Overhead 51,000
Cost of production 2,29,500

Cost of closing stock per unit ( 2,29,500 10,200) 22.50
(ii) Conclusion
Since NRV is lower than cost hence Finished goods is valued at 20 i.e. NRV and raw
material is valued at replacement cost i.e. 9.5.
Finished Goods (1,200 × 20) 24,000
Raw Materials (900 × 9.50) 8,550
32,550
QUESTION NO 43
The closing inventory at cost of a company amounted to 2,84,700. The following items
were included at cost in the total:
(a) 400 coats, which had cost 80 each and normally sold for 150 each. Owing to a
defect in manufacture, they were all sold after the balance sheet date at 50%of
their normal price. Selling expenses amounted to 5% of the proceeds.
(b) 800 skirts, which had cost 20 each. These too were found to be defective. Remedial
work in April cost 5 per skirt, and selling expenses for the batch totalled800. They
were sold for 28 each.
What should the inventory value be according to IND AS-2 after considering the above
items?
ANSWER:
Valuation of Closing Stock
Particulars Rs Rs
Closing Stock at Cost 2,84,700
Less: Cost of 400 coats ( 400x 80) 32,000
Less: Net Realisable Value (400 X 75) - 5% (28,500) (3,500)
Value of closing Stock 2,81,200
Note: There is no loss on skirts due to which we have not considered any decline.
QUESTION NO 44
Best Ltd. deals in Five Products - P, Q, R, Sand T which are neither similar nor
interchangeable. At the time of closing of its Accounts for the year ending 31St March
2011, the Historical Cost and Net Realizable Value of the items of the Closing Stock are
determined as follows :-
Items Historical Cost (R) Net Realizable Value (R)

P 5,70,000 4,75,000
Q 9,80,000 10,32,000
R 3,16,000 2,89,000
S 4,25,000 4,25,000
T 1,60,000 2,15,000
What will be the Value of Closing Stock for the year ending 31St March 2011 as per IND
AS-2 “Valuation of Inventories”?
ANSWER:
Statement of Valuation of Inventory
Particulars Rs
Item P 4,75,000
Item Q 9,80,000
Item R 2,89,000
Item S 4,25,000
Item-T 1,60,000
Total 23,29,000
40 ACCOUNTS
QUESTION NO 45
XY Ltd. was making provisions for non-moving stocks based on no issues for the last
L2 months upto 31.3.11. Based on technical evaluation the company wants to make
pmvsionsTuring year 3 1.3.12.
Total value of stock - 100 lakhs.
Provisions required based on 12 months issue 3.5 Iakhs
Provisions required based on technical evaluation ‘ 2.5 lakhs.
Does this amount to change in accounting policy ? Can the company change the method of
provision?
ANSWER:
(i) Provision of AS
The decision of making provisions for non-moving stocks on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a
company may require that provision for non-moving stocks should be made. The method
of estimating the amount of provision may be changed in case a more prudent estimate
can !ie made.
(ii) Analysis and Conclusion
In the given case, considering the total value of stock, the change in the amount of
required provision of non-moving stock from ‘ 3.5 lakhs to 2.5 Iakhs is also not material.
The disclosure can be made for such change in the following lines by way of notes to
the accounts in the annual accounts of ABC Ltd. for the year 2011-12.
“The company has provided for non-moving stocks on the basis of technical evaluation
unlike preceding years. Had the same method been followed as in the previous year,
the profit for the year and the corresponding effect on the year end net assets would
have been higher by Rs 1 Lakh.
QUESTION NO 46
“ In determining the cost of inventories, it is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are incurred. “ Provide example of
such costs as per IND AS-2: Valuation of Inventories.
ANSWER:
As per of IND AS 2, “Valuation of Inventories” in determining the cost of inventories, it
is appropriate to exclude following costs and recognize them as expenses in the period in
which they are incurred:
(a) Abnormal amounts of wasted materials, labour, or other production cost:

(b) Storage cost, unless the production process requires such storage,
(c) Administrative overheads that do not contribute to bringing the inventories to their
present location and condition.
(d) Selling and distribution cost.
STUDY MATERIAL PRACTICAL QUESTIONS
QUESTION NO 1
UA Ltd. purchased raw material @ ` 400 per kg. Company does not sell raw material but
uses in production of finished goods. The finished goods in which raw material is used are
expected to be sold at below cost. At the end of the accounting year, company is having
10,000 kg of raw material in inventory. As the company never sells the raw material, it
does not know the selling price of raw material and hence cannot calculate the realizable
value of the raw material for valuation of inventories at the end of the year. However,
replacement cost of raw material is ` 300 per kg. How will you value the inventory of raw
material?
ANSWER:
As per Ind AS 2 “Inventories”, materials and other supplies held for use in the production
of inventories are not written down below cost if the finished products in which they will
be incorporated are expected to be sold at or above cost. However, when there has been a
decline in the price of materials and it is estimated that the cost of the finished products will
exceed net realizable value, the materials are written down to net realizable value. In such
circumstances, the replacement cost of the materials may be the best available measure of
their net realizable value. Therefore, in this case, UA Ltd. will value the inventory of raw
material at ` 30,00,000 (10,000 kg. @ ` 300 per kg.).
QUESTION NO 2
Sun Ltd. has fabricated special equipment (solar power panel) during 20X1-20X2 as per
drawing and design supplied by the customer. However, due to a liquidity crunch, the
customer has requested the company for postponement in delivery schedule and requested
the company to withhold the delivery of finished goods products and discontinue the
production of balance items.
As a result of the above, the details of customer balance and the goods held by the
company as work-in-progress and finished goods as on 31-03-20X3 are as follows:
Solar power panel (WIP) ` 85 lakhs
Solar power panel (finished products) ` 55 lakhs
42 ACCOUNTS
Sundry Debtor (solar power panel) ` 65 lakhs

The petition for winding up against the customer has been filed during 20X2-20X3 by Sun
Ltd. Comment with explanation on provision to be made of ` 205 lakh included in Sundry
Debtors, Finished goods and work-in-progress in the financial statement of 20X2-20X3.
ANSWER:
From the fact given in the question it is obvious that Sun Ltd. is a manufacturer of solar
power panel. As per Ind AS 2 ‘Inventories’, inventories are assets (a) held for sale in the
ordinary course of business; (b) in the process of production for such sale; or (c) in the form
of materials or supplies to be consumed in the production process or in the rendering of
services. Therefore, solar power panel held in its stock will be considered as its inventory.
Further, as per the standard, inventory at the end of the year are to be valued at lower of
cost or NRV.
As the customer has postponed the delivery schedule due to liquidity crunch the entire cost
incurred for solar power panel which were to be supplied has been shown in Inventory. The
solar power panel are in the possession of the Company which can be sold in the market.
Hence company should value such inventory as per principle laid down in Ind AS 2 i.e. lower of
Cost or NRV. Though, the goods were produced as per specifications of buyer the Company
should determine the NRV of these goods in the market and value the goods accordingly.
Change in value of such solar power panel should be provided for in the books. In the
absence of the NRV of WIP and Finished product given in the question, assuming that cost
is lower, the company shall value its inventory as per Ind AS 2 for ` 140 lakhs [i.e solar
power panel (WIP) ` 85 lakhs + solar power panel (finished products) ` 55 lakhs].
Alternatively, if it is assumed that there is no buyer for such fabricated solar power panel,
then the NRV will be Nil. In such a case, full value of finished goods and WIP will be
provided for in the books.
As regards Sundry Debtors balance, since the Company has filed a petition for winding up
against the customer in 20X2-20X3, it is probable that amount is not recoverable from the
party. Hence, the provision for doubtful debts for ` 65 lakhs shall be made in the books
against the debtor’s amount.
PAST EXAMS QUESTIONS

QUESTION 1 MAY 2018 EXAM
XYZ Limited has a plant with the normal capacity to produce 10,00,000 units of a product
per annum and the expected fixed overhead is ` 30,00,000, Fixed overhead, therefore
based on normal capacity is ` 3 per unit.
Determine Fixed overhead as per Ind AS 2’ Inventories’ if
(i) Actual production is 15,00,000 units.
(ii) Actual production is 7,50,000 units
ANSWER
(i) Actual production is 7,50,000 units: Fixed overhead is not going to change with the
change in output and will remain constant at ` 30,00,000, therefore, overheads on
actual basis is ` 4 per unit (30,00,000/7,50,000).
Hence, by vvaluing inventory ` 4 each for fixed overhead purpose, it will be overvalued
and the losses of ` 7,50,000 will also be included in closing inventory leading to a high-
er gross profit then actually earned.
Therefore, it is advisable to include fixed overhead per unit on normal capacity to

actual production (7,50,000 x 3) ` 22,50,000 and balance ` 7,50,000 shall be trans-
ferred to Profit & Loss Account.
(ii) Actual production is 15,00,000 units : Fixed overhead is not going to change with
the change in output and will remain constant at ` 30,00,000, therefore, overheads on
actual basis is ` 2 (30,00,000/15,00,000).
Hence by valuing inventory at ` 3 each for fixed overhead purpose, we will be adding
the element of cost to inventory which actually has not been incurred. At ` 3 per unit,
total fixed overhead comes to ` 45,00,000 whereas, actual fixed overhead expense is
only ` 30,00,000. Therefore, it is advisable to include fixed overhead on actual basis
(15,00,000 x2) ` 30,00,000.
44 ACCOUNTS
EXTRA QUESTIONS
NEW QUESTIONS ADDED IN STUDY MATERIAL RECENTLY
QUESTION 1
ABC Ltd. buys goods from an overseas supplier. It has recently taken delivery of 1,000
units of component X. The quoted price of component X was Rs. 1,200 per unit but ABC Ltd.
has negotiated a trade discount of 5% due to the size of the order.
The supplier offers and early settlement discount of 2% for payment within 30 days and
ABC Ltd. intends to achieve this.
Import duties (basic custom duties) of Rs. 60 per unit must be paid before the goods are
released through custom. Once the goods are released through customs. ABC Ltd. must pay
a delivery cost of Rs. 5,000 of have the components taken to its warehouse.
Calculate the cost of inventory.
QUESTION 2 (NORMAL PRODUCTION CAPACITY)

A business plans for production overhead of Rs. 10,00,000 per annum.
The normal level of production is 1,00,000 units per annum.
Due to supply difficulties the business was only able to make 75,000 units in the current year.
Other costs per unit were Rs. 126.
Calculate the per unit cost and amount of overhead to be expensed during the year.
QUESTION 3 (CONVERSION COSTS)

ABC Ltd. manufactures control units for air conditioning system.
Each control unit requires the following:
1 component X at a cost of Rs. 1,205 each
1 component Y at a cost of Rs. 800 each
Sundry raw materials at a cost of Rs. 150 each
The company faces the following monthly expenses:
Factory rent Rs. 16,500
Energy cost Rs. 7,500
Selling and administrative costs Rs. 10,000
Each unit takes two hours to assemble. Production workers are paid Rs. 300 per hour.
Production overheads are absorbed into units of production using an hourly rate. The
Determine the cost of inventory.
QUESTION 4 (CONVERSION COSTS)

A dealer has purchased 1,000 cars costing Rs. 2,80,000 each on deferred payment basis as
Rs. 25,000 per month per car to be paid in 12 equal installments.
At year end 31 March 20X1, twenty cars are in stock. What would be the cost of goods sold, finance
cost and inventory carrying amount?
QUESTION 5
ABC Ltd. manufactures and sells paper envelopes. The stock of envelopes was included in
the closing inventory as of 31st March, 20X1, at a cost of Rs. 50 per pack. During the final
audit, the auditors noted that the subsequent sale price for the inventory at 15th April,
20X1, was Rs. 40 per pack. Furthermore, enquiry reveals that during the physical stock
take, a water leakage has created damages to the paper and the glue. Accordingly, in the
following week, ABC Ltd. has spent a total of Rs. 15 per pack for repairing and reapplying
glue to the envelopes.
Calculate the net realizable value and inventory write-down (loss) amount
QUESTION 6
At the end of its financial year, Company P has 100 units of inventory on hand recorded at a
carrying amount of Rs. 10 per unit. The current market price is Rs. 8 per unit at which these
units can be sold. Company P has a firm sales contract with Company Q to sell 60 units at Rs.
11 per unit, which cannot be settled net. Estimated incremental selling cost is Rs. per unit.
Determine Net Realisable Value (NRV) of the inventory of Company P.
QUESTION 7
A business has four items of inventory. A count of the inventory has established that the
amounts of inventory currently held, at cost, are as follows:
46 ACCOUNTS
Cost Estimated Sales price Selling costs
Inventory item A1 8,000 7,800 500

Inventory Item A2 14,000 18,000 200
Inventory Item B1 16,000 17,000 200
Inventory Item C1 6,000 7,5000 150
Determine the value of closing inventory in the financial statements of a business.
QUESTION 8
On 31 March 20X1, the inventory of ABC includes spare parts which it had been supplying
to a number of different customers for s.ome years. The cost of the spare parts was Rs 10
million and based on retail prices at 31 March 20X1, the expected selling price of the spare
parts is Rs 12 million. On 15 April 20X1, due to market fluctuations, expected selling price
of the spare parts in stock reduced to Rs 8 million. The estimated selling expense required
to make the sales would Rs 0.5 million. Financial statements were approved by the Board of
Directors on 20th April 20X1.
As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in
the warehouse of the company. Directors believe that inventory is in a saleable condition
and active marketing would result in an immediate sale. Since the market conditions have
improved, estimated selling price of inventory is Rs 11 million and estimated selling expenses
are same Rs 0.5 million.
What will be the value inventory at the following dates:
(a) 31st March 20X1
(b) 31st March 20X2
QUESTION 9
The following is relevant information for an entity :
• Full capacity is 10,000 labour hours in a year.

• Normal capacity is 7,500 labour hours in a year.
• Actual labour hours for current period are 6, 500 hours.
• Total fixed production overhead is Rs. 1,500.
• Total variable production overhead is Rs. 2, 600.
• Total opening inventory is 2,500 units.
• Total units produced in a year are 6,500 units.

• Total units sold in a year are 6, 700 units.
• The cost of inventories is assigned by using FIFO cost formula.
How overhead costs are to be allocated to cost of goods sold and closing inventory?
QUESTION 10
Sharp Trading Inc. purchases motorcycles from various countries and exports them to
Europe.
Sharp Trading has incurred these expenses during 20X1: .
(a) Cost of purchases (based on vendors invoices) 5,00,000
(b) Trade discounts on purchases 10,000
(c) Import duties 200
(d) Freight and insurance on purchases 250
(e) Other handling costs relating to imports 100
(f) Salaries of accounting department 15,000
(g) Brokerage commission payable to indenting agents for arranging imports 300
(h) Sales commission payable to sales agents 150
(i) After-sales warranty costs 600 ,
Sharp Trading Inc. is seeking your advice as if which of the above item is to be included in
the cost of inventory and wants you to calculate cost of inventory as per lnd AS 2.
48 ACCOUNTS
QUESTION 11 (RTP MAY 2021….ALREADY DISCUSSED IN RTP VIDEO)

On 1 January 20X1 an entity accepted an order for 7,000 custom-made corporate gifts.
On 3 January 20X1 the entity purchased raw materials to be consumed in the production
process for ` 5,50,000, including ` 50,000 refundable purchase taxes. The purchase price
was funded by raising a loan of ` 5,55,000 (including ` 5,000 loan-raising fees). The loan is
secured by the inventories.
During January 20X1 the entity designed the corporate gifts for the customer. Design
costs included:
• cost of external designer = ` 7,000; and

• labour = ` 3,000.
During February 20X1 the entity’s production team developed the manufacturing
technique and made further modifications necessary to bring the inventories to the
conditions specified in the agreement. The following costs were incurred in the testing
phase:
• materials, net of ` 3,000 recovered from the sale of the scrapped output = `21,000;
• labour = ` 11,000; and
• depreciation of plant used to perform the modifications = ` 5,000.
During February 20X1 the entity incurred the following additional costs in manufacturing
the customised corporate gifts:
• consumable stores = ` 55,000;

• labour = ` 65,000; and
• depreciation of plant used to manufacture the customised corporate gifts = ` 15,000.
The customised corporate gifts were ready for sale on 1 March 20X1. No abnormal wastage
occurred in the development and manufacture of the corporate gifts.
Compute the cost of the inventory? Substantiate your answer with appropriate reasons and
calculations, wherever required.
ANSWER
Statement showing computation of inventory cost
Particulars Amount Remarks

(`)
Costs of purchase 5,00,000 Purchase price of raw material [purchase
price (` 5,50,000) less refundable purchase
taxes (` 50,000)]
Loan-raising fee – Included in the measurement of the
liability
Costs of purchase 55,000 Purchase price of consumable stores
Costs of conversion 65,000 Direct costs—labour
Production overheads 15,000 Fixed costs—depreciation
Production overheads 10,000 Product design costs and labour cost for
specific customer
Other costs 37,000 Refer working note
Borrowing costs Recognised as an expense in profit or loss
Total cost of 6,82,000
inventories
Working Note:
Costs of testing product designed for specific customer:
` 21,000 material (ie net of the ` 3,000 recovered from the sale of the scrapped output) +
` 11,000 labour + ` 5,000 depreciation.
50 ACCOUNTS
NOTES
IND AS 16: PROPERTY, PLANT & EQUIPMENT 51
IND AS 16: PROPERTY, PLANT & EQUIPMENT
The objective of this Standard is to prescribe the accounting treatment for property,
plant and equipment. The principal issues in accounting for property, plant and equipment
are the recognition of the assets, the determination of their carrying amounts and the
depreciation charges and impairment losses to be recognised in relation to them.
Under Ind AS 16, property, plant and equipment is initially measured at its cost, subsequently
measured using either a cost or a revaluation model and depreciated so that its depreciable
amount is allocated on a systematic basis over its useful life.
CONCEPT 2: SCOPE
• This Standard shall be applied in accounting for property, plant and equipment except
when another Standard requires or permits a different accounting treatment.
• This Standard does not apply to:
(a) PPE classified as held for (b) Biological assets related to

sale (as per Ind AS 105) agricultural activity other than
bearer plants (Ind AS 41)
(c) Recognition and (d) Mineral rights and mineral

measurement of exploration reserves such as oil, natural gas and
and evaluation assets (Ind similar non -regenerative resources
AS 106)
• However, this Standard applies to property, plant and equipment used to develop or
maintain the assets described in (b)–(d).
• It may be noted that other Indian Accounting Standards may require recognition of an
item of property, plant and equipment based on an approach different from that in this
Standard. For example, Ind AS 17, Leases, requires an entity to evaluate its recognition
of an item of leased property, plant and equipment on the basis of the transfer of risks
and rewards. However, in such cases other aspects of the accounting treatment for
these assets, including depreciation, are prescribed by this Standard.
• An entity accounting for investment property in accordance with Ind AS 40, Investment
Property shall use the cost model in this Standard.
52 ACCOUNTS

• Property, plant and equipment are tangible items that:

a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
b) are expected to be used during more than one period.
Held for use in production or supply /

Rental / Administrative purposes
Expected to used
Tangible items during more than one
period
PPE
• A bearer plant is a living plant that:

(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.
• Carrying amount is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
• Cost is the amount of cash or cash equivalents paid or the fair value of the other
consideration given to acquire an asset at the time of its acquisition or construction
or, where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other Indian Accounting Standards, e.g.
Ind AS 102, Share-based Payment.
• Depreciable amount is the cost of an asset, or other amount substituted for cost, less
its residual value.
• Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life.
• Entity-specific value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its useful life or
expects to incur when settling a liability.
• Fair value is the price that would be received to sell an asset or paid to transfer a
date. (See Ind AS 113, Fair Value Measurement.)
• An impairment loss is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
• Recoverable amount is the higher of an asset’s fair value less costs to sell and its value
in use.
• The residual value of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if
the asset were already of the age and in the condition expected at the end of its useful
life.
• Useful life is:
a) the period over which an asset is expected to be available for use by an entity; or
b) the number of production or similar units expected to be obtained from the asset
by an entity.
CONCEPT 4: RECOGNITION
General recognition criteria
The cost of an item of property, plant and equipment shall be recognised as an asset if, and
only if:
a) it is probable that future economic benefits associated with the item will flow to the
entity; and
b) the cost of the item can be measured reliably.
Probable that
future economic
benefit will
flow to entity
Recognition of
cost as an
asset (PPE)
Cost can be
measured reliably
54 ACCOUNTS
CONCEPT 5: SPARE PARTS, STAND-BY

EQUIPMENT AND SERVICING EQUIPMENT
Items such as spare parts, stand-by equipment and servicing equipment are recognised in
accordance with this Ind AS when they meet the definition of property plant and equipment
otherwise, such items are classified as inventory.
CONCEPT 6: AGGREGATION OF
INDIVIDUALLY INSIGNIFICANT ITEMS
This Standard does not prescribe the unit of measure for recognition, ie what constitutes
an item of property, plant and equipment. Thus, judgement is required in applying the
recognition criteria to an entity’s specific circumstances. It may be appropriate to aggregate
individually insignificant items, such as moulds, tools and dies, and to apply the criteria to
the aggregate value.
CONCEPT 7: INITIAL COST

Items of property, plant and equipment may be acquired for safety or environmental reasons.
The acquisition of such property, plant and equipment, although not directly increasing the
future economic benefits of any particular existing item of property, plant and equipment,
may be necessary for an entity to obtain the future economic benefits from its other
assets.
Such items of property, plant and equipment qualify for recognition as assets because they
enable an entity to derive future economic benefits from related assets in excess of what
could be derived had those items not been acquired.
For example: A chemical manufacturer may install new chemical handling processes to comply
with environmental requirements for the production and storage of dangerous chemicals;
related plant enhancements are recognised as an asset because without them the entity
is unable to manufacture and sell chemicals. However, the resulting carrying amount of
such an asset and related assets is reviewed for impairment in accordance with Ind AS 36
Impairment of Assets.
CONCEPT 8: SUBSEQUENT COSTS
Repair & Maintenance

(Day to Day Servicing)
Replacement at Major Inspection/

Regular Intervals Overhauls
CONCEPT 9: REPAIR AND MAINTENANCE

An entity does not recognise in the carrying amount of an item of property, plant and
equipment the costs of the day-to-day servicing of the item. Rather, these costs are
recognised in profit or loss as incurred. Costs of day-to -day servicing are primarily the
costs of labour and consumables, and may include the cost of small parts.
CONCEPT 10: REPLACEMENT PARTS

Parts of some items of property, plant and equipment may require replacement at regular
intervals. For example, a furnace may require relining after a specified number of hours of
use, or aircraft interiors such as seats and galleys may require replacement several times
during the life of the airframe.
Items of property, plant and equipment may also be acquired to make a less frequently
recurring replacement, such as replacing the interior walls of a building, or to make a non-
recurring replacement.
Under the recognition principle, an entity recognises in the carrying amount of an item of
property, plant and equipment the cost of replacing part of such an item when that cost is
incurred if the recognition criteria are met. The carrying amount of those parts that are
replaced is derecognised in accordance with the derecognition provisions of this Standard.
CONCEPT 10: MAJOR INSPECTIONS OR OVERHAULS

A condition of continuing to operate an item of property, plant and equipment may be
performing regular major inspections for faults regardless of whether parts of the item
are replaced.
When each major inspection is performed, its cost is recognised in the carrying amount of
the item of property, plant and equipment as a replacement if the recognition criteria are
satisfied.
56 ACCOUNTS
Any remaining carrying amount of the cost of the previous inspection is derecognised. This
occurs regardless of whether the cost of the previous inspection was identified in the
transaction in which the item was acquired or constructed. If necessary, the estimated
cost of a future similar inspection may be used as an indication of what the cost of the
existing inspection component was when the item was acquired or constructed.
CONCEPT 11: MEASUREMENT AT RECOGNITION
Measurement at cost
An item of property, plant and equipment that qualifies for recognition as an asset should
be initially measured at its cost.
Element of cost
CASE I: COST OF AN ACQUIRED ASSET
Component of cost
The cost of an item of property, plant and equipment comprises:
a) its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;
b) any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management;
and
c) the initial estimate of the costs of dismantling and removing the item and restoring
the site on which it is located, the obligation for which an entity incurs either when
the item is acquired or as a consequence of having used the item during a particular
period for purposes other than to produce inventories during that period.
Initially measured at cost
Purchase price including Initial estimate of the

import duties and non- Directly attributable costs of dismantling
refundable purchase Cost and removing the item
taxes and restoring
CASE II: COST OF SELF-CONSTRUCTED ASSET

The cost of a self -constructed asset is determined using the same principles as for an
acquired asset. If an entity makes similar assets for sale in the normal course of business,
the cost of the asset is usually the same as the cost of constructing an asset for sale.
Examples of directly attributable costs are:
Employee benefits cost arising directly from construction or acquisition PPE
Cost of Site Preparation
Initial delivery and handling costs
Installation and assembly costs
Professional Fees
Costs of testing- whether the asset is working properly after deducting proceeds from
sale of any product produced during the testing period.
• Example of costs that are not costs of an item of property, plant and equipment
are:
Costs of
conducting
business in a Costs incurred Administrative
new location or in introducing a Cost of opening a and other
with a new class new product or new facility general overhead
of customer service costs
(including costs
of staff
training)
Therefore, any internal profits are eliminated in arriving at such costs. Similarly, the
cost of abnormal amounts of wasted material, labour, or other resources incurred in self-
constructing an asset is not included in the cost of the asset.
Ind AS 23, Borrowing Costs, establishes criteria for the recognition of interest as
a component of the carrying amount of a self-constructed item of property, plant and
equipment.
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Bearer plants are accounted for in the same way as self-constructed items of property,
plant and equipment before they are in the location and condition necessary to be capable of
operating in the manner intended by management. Consequently, references to ‘construction’
in this Standard should be read as covering activities that are necessary to cultivate the
bearer plants before they are in the location and condition necessary to be capable of
operating in the manner intended by management.
Cost of dismantling, removal and site restoration

Cost incurred by an entity in respect of obligation for dismantling, removing and restoring
the site on which an item of property, plant and equipment is located are recognised and
measured in accordance with Ind AS 37, Provisions, Contingent Liabilities and Contingent
Assets.
If the obligations are incurred when the asset is acquired, or during a period when the
item is used other than to produce inventories, they are included in the cost of the item
property, plant and equipment.
An entity applies Ind AS 2, Inventories, to the costs of obligations for dismantling, removing
and restoring the site on which an item is located that are incurred during a particular
period as a consequence of having used the item to produce inventories during that period.
Incidental operations
Some operations occur in connection with the construction or development of an item of
property, plant and equipment, but are not necessary to bring the item to the location and
condition necessary for it to be capable of operating in the manner intended by management.
These incidental operations may occur before or during the construction or development
activities. For example, income may be earned through using a building site as a car park
until construction starts.
Because incidental operations are not necessary to bring an item to the location and condition
necessary for it to be capable of operating in the manner intended by management, the
income and related expenses of incidental operations are recognised in profit or loss and
included in their respective classifications of income and expense.
Cessation of capitalisation
Recognition of costs in the carrying amount of an item of property, plant and equipment
ceases when the item is in the location and condition necessary for it to be capable of
operating in the manner intended by management. Therefore, costs incurred in using or
redeploying an item are not included in the carrying amount of that item.
For example, the following costs are not included in the carrying amount of an item of
property, plant and equipment:
a) costs incurred while an item capable of operating in the manner intended by management
has yet to be brought into use or is operated at less than full capacity;
b) initial operating losses, such as those incurred while demand for the item’s output
builds up; and
c) costs of relocating or reorganising part or all of an entity’s operations.
EXAMPLE
Moon Ltd incurs the following costs in relation to the construction of a new factory and
the introduction of its products to the local market.
Particulars INR,000 INR,000

(cost (As per Ind
incurred) AS16)
Site preparation costs 150 150
Direct Material 2,000 2,000
Direct Labour cost, including `10,000 incurred during an 1,160 1,150
industrial strike
Testing of various processes in factory 200 200
Consultancy fees for installation of equipment 300 300
Relocation of staff to new factory 450 -
General overheads 550 -
Estimated Costs to dismantle (at present value) 200 200
Total Cost to be Capitalised as per Ind AS 16 4,000
CASE III: PAYMENT DEFERRED BEYOND NORMAL CREDIT TERMS

The cost of an item of property, plant and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the difference
between the cash price equivalent and the total payment is recognised as interest over the
period of credit unless such interest is capitalised in accordance with Ind AS 23.
CASE IV: EXCHANGE OF ASSETS
• One or more items of property, plant and equipment may be acquired in exchange for a
non-monetary asset or assets, or a combination of monetary and nonmonetary assets.
The cost of such an item of property, plant and equipment is measured at fair value
(even if an entity cannot immediately derecognise the asset given up) unless:
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a) the exchange transaction lacks commercial substance; or

b) the fair value of neither the asset received nor the asset given up is reliably
measurable.
• If the acquired item is not measured at fair value, its cost is measured at the carrying
amount of the asset given up.
• An entity determines whether an exchange transaction has commercial substance by
considering the extent to which its future cash flows are expected to change as a result
of the transaction. An exchange transaction has commercial substance if:
a) the configuration (risk, timing and amount) of the cash flows of the asset received
differs from the configuration of the cash flows of the asset transferred; or
b) the entity-specific value of the portion of the entity’s operations affected by
the transaction changes as a result of the exchange; and
c) the difference in (a) or (b) is significant relative to the fair value of the assets
exchanged.
• For the purpose of determining whether an exchange transaction has commercial
substance, the entity-specific value of the portion of the entity’s operations affected
by the transaction shall reflect post-tax cash flows.
• he fair value of an asset is reliably measurable if:
a) the variability in the range of reasonable fair value measurements is not significant
for that asset or
b) the probabilities of the various estimates within the range can be reasonably
assessed and used when measuring fair value.
• If an entity is able to measure reliably the fair value of either the asset received or
the asset given up, then the fair value of the asset given up is used to measure the
cost of the asset received unless the fair value of the asset received is more clearly
evident.
If PPE is acquired in exchange for other non-monetary asset or for a

combination of monetary and non-monetary asset
Measure cost at fair value

Unless the exchange transaction Fair value of neither the asset
has no commercial substance or received for given up can be
measured reliably
CASE V: ASSETS HELD UNDER FINANCE LEASE

The cost of an item of property, plant and equipment held by a lessee under a finance lease
is determined in accordance with Ind AS 17, Leases.
CONCEPT 12: MEASUREMENT AFTER RECOGNITION
Alternative bases available for measurement after recognition

A entity may choose either the cost model or the revaluation model as its accounting policy
and should apply that policy to an entire class of property, plant and equipment.
Cost model
After recognition as an asset, an item of property, plant and equipment should be carried
at its cost less any accumulated depreciation and any accumulated impairment losses.
Cost
Accumulated
Carrying Amount
Depreciation
Accumulated
Impairment Loss
Revaluation model
After recognition as an asset, an item of property, plant and equipment whose fair value
can be measured reliably is carried at a revalued amount, being its fair value at the date of
the revaluation less any subsequent accumulated depreciation and subsequent accumulated
impairment losses. Revaluations are required to be carried out with sufficient regularity
to ensure that the carrying amount does not differ materially from that which would be
determined using fair value at the end of the reporting period.
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FV at the date of
revaluation
Subsequent
Accumulated Carrying Amount
Depreciation
Subsequent
Accumulated
Impairment Loss
Frequency of revaluations
• The frequency of revaluations depends upon the changes in fair values of the items of
property, plant and equipment being revalued. When the fair value of a revalued asset
differs materially from its carrying amount, a further revaluation is required. Some
items of property, plant and equipment experience significant and volatile changes in
fair value, thus necessitating annual revaluation.
• Such frequent revaluations are unnecessary for items of property, plant and equipment
with only insignificant changes in fair value. Instead, it may be necessary to revalue the
item only every three or five years.
Accumulated depreciation at the date of revaluation
• When an item of property, plant and equipment is revalued, the carrying amount of
that asset is adjusted to the revalued amount. At the date of revaluation, the asset is
treated in one of the following ways:
a) The gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. For example, the gross carrying
amount may be restated by reference to observable market data or it may be
restated proportionately to the change in the carrying amount. The accumulated
depreciation at the date of the revaluation is adjusted to equal the difference
between the gross carrying amount and the carrying amount of the asset after
taking into account accumulated impairment losses; or
b) The accumulated depreciation is eliminated against the gross carrying amount of
the asset.
Revaluation to be made for entire class of assets

If an item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs shall be revalued.
A class of property, plant and equipment is a grouping of assets of a similar nature and use
in an entity’s operations. The following are examples of separate classes:
Land
Land and Buildings
Machinery
Ships
Aircraft
Motor Vehicles
Furniture and Fixtures
Office Equipment
Bearer Plants
The items within a class of property, plant and equipment are revalued simultaneously to
avoid selective revaluation of assets and the reporting of amounts in the financial statements
that are a mixture costs and values as at different dates.
However, a class of assets may be revalued on a rolling basis provided revaluation of the
class of assets is completed within a short period and provided the revaluations are kept
up to date.
Treatment of Surplus or Deficit arising on Revaluation
• If an asset’s carrying amount is increased as a result of a revaluation, the increase

should be recognised in other comprehensive income and accumulated in equity under the
heading of revaluation surplus. However, the increase should be recognised in profit or
loss to the extent that it reverses a revaluation decrease of the same asset previously
recognised in profit or loss.
• If an asset’s carrying amount is decreased as a result of a revaluation, the decrease should
be recognised in profit or loss. However, the decrease should be recognised in other
comprehensive income to the extent of any credit balance existing in the revaluation
surplus in respect of that asset. The decrease recognised in other comprehensive income
reduces the amount accumulated in equity under the heading of revaluation surplus.
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Treatment of revaluation gain and loss is summarized in the below diagram:
First Time
Increase Decrease
Recognised in OCI as Profit or Loss

Revaluation Surplus
Subsequent
Increase Decrease
Increase Decrease
Debited to Charge to P&L

Recognised in OCI Revaluation Surplus to the extent of
as Revaluation to the extent earlier debit to Charge to P&L
Surplus available and P&L and balance to
balance to P&L revaluation surplus
The revaluation surplus included in equity in respect of an item of property, plant and
equipment may be transferred directly to retained earnings when the asset is derecognised.
This may involve transferring the whole of the surplus when the asset is retired or disposed
of.
However, some of the surplus may be transferred as the asset is used by an entity. In such a
case, the amount of the surplus transferred would be the difference between depreciation
based on the revalued carrying amount of the asset and depreciation based on the asset’s
original cost. Transfers from revaluation surplus to retained earnings are not made through
profit or loss.
The effects of taxes on income, if any, resulting from the revaluation of property, plant
and equipment are recognised and disclosed in accordance with Ind AS 12, Income Taxes.
CONCEPT 13: DEPRECIATION
• The depreciable amount of an asset should be allocated on a systematic basis over its
useful life. The depreciation charge for each period should be recognised in profit or
loss unless it is included in the carrying amount of another asset.
• Each part of an item of property, plant and equipment with a cost that is significant in
relation to the total cost of the item should be depreciated separately.
• An entity allocates the amount initially recognised in respect of an item of property,

plant and equipment to its significant parts and depreciates separately each such part.
• A significant part of an item of property, plant and equipment may have a useful life and
a depreciation method that are the same as the useful life and the depreciation method
of another significant part of that same item. Such parts may be grouped in determining
the depreciation charge.
• To the extent that an entity depreciates separately some parts of an item of property,
plant and equipment, it also depreciates separately the remainder of the item. The
remainder consists of the parts of the item that are individually not significant. If
an entity has varying expectations for these parts, approximation techniques may be
necessary to depreciate the remainder in a manner that faithfully represents the
consumption pattern and/or useful life of its parts.
• Land and buildings are separable assets and are accounted for separately, even when
they are acquired together. With some exceptions, such as quarries and sites used for
landfill, land has an unlimited useful life and therefore is not depreciated. Buildings have
a limited useful life and therefore are depreciable assets. An increase in the value of
the land on which a building stands does not affect the determination of the depreciable
amount of the building.
• If the cost of land includes the costs of site dismantlement, removal and restoration,
that portion of the land asset is depreciated over the period of benefits obtained by
incurring those costs. In some cases, the land itself may have a limited useful life, in
which case it is depreciated in a manner that reflects the benefits to be derived from
it.
Residual Value
The residual value and the useful life of an asset should be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, the change(s)
should be accounted for as a change in an accounting estimate in accordance with Ind AS 8,
Accounting Policies, Changes in Accounting Estimates and Errors.
EXAMPLE : REVISION OF USEFUL LIFE
An asset which cost ` 10,000 was estimated to have a useful life of 10 years and residual
value ` 2000. After two years, useful life was revised to 4 remaining years.
Calculate the depreciation charge.
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SOLUTION:
INR
Year-1 Year-2 Year-3

Cost 10,000 10,000 10,000
Less: Accumulated Depreciation (800) (1,600) (3,200)
Carrying Amount 9,200 8,400 6,800
10,000 - 2,000 10,000 - 2,000 8,400 - 2,000
Charges for year 10 10 10
= 800 = 800 = 1,600
• The residual value of an asset may increase to an amount equal to or greater than the
asset’s carrying amount. If it does, the asset’s depreciation charge is zero unless and
until its residual value subsequently decreases to an amount below the asset’s carrying
amount.
• Depreciation is recognised even if the fair value of the asset exceeds its carrying
amount, as long as the asset’s residual value does not exceed its carrying amount. Repair
and maintenance of an asset do not negate the need to depreciate it.
Commencement of depreciation
Depreciation of an asset begins when it is available for use, i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
Cessation of depreciation
• Depreciation of an asset ceases at the earlier of:

a) the date that the asset is classified as held for sale (or included in a disposal
group that is classified as held for sale) in accordance with Ind AS 105.
b) and the date that the asset is derecognised.
• Therefore, depreciation does not cease when the asset becomes idle or is retired from
active use unless the asset is fully depreciated. However, under usage methods of
depreciation the depreciation charge can be zero while there is no production.
Factors affecting the useful life of an asset

The future economic benefits embodied in an asset are consumed by an entity principally
through its use. However, other factors, such as technical or commercial obsolescence and
wear and tear while an asset remains idle, often result in the diminution of the economic
benefits that might have been obtained from the asset. Consequently, all the following
factors are considered in determining the useful life of an asset:
a) expected usage of the asset. Usage is assessed by reference to the asset’s expected
capacity or physical output;
b) expected physical wear and tear, which depends on operational factors such as the
number of shifts for which the asset is to be used and the repair and maintenance
programme, and the care and maintenance of the asset while idle;
c) technical or commercial obsolescence arising from changes or improvements in
production, or from a change in the market demand for the product or service output
of the asset. Expected future reductions in the selling price of an item that was
produced using an asset could indicate the expectation of technical or commercial
obsolescence of the asset, which, in turn, might reflect a reduction of the future
economic benefits embodied in the asset; and
d) legal or similar limits on the use of the asset, such as the expiry dates of related
leases.
Impact of an entity’s asset management policy

The useful life of an asset is defined in terms of the asset’s expected utility to the
entity. The asset management policy of the entity may involve the disposal of assets after
a specified time or after consumption of a specified proportion of the future economic
benefits embodied in the asset.
Therefore, the useful life of an asset may be shorter than its economic life. The estimation
of the useful life of the asset is a matter of judgement based on the experience of the
entity with similar assets.
Depreciation method
The depreciation method used shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity.
The depreciation method applied to an asset is reviewed at least at each financial year-end
and, if there has been a significant change in the expected pattern of consumption of the
future economic benefits embodied in the asset, the method should be changed to reflect
the changed pattern. Such a change is accounted for as a change in an accounting estimate
in accordance with Ind AS8.
EXAMPLE: CHANGE IN DEPRECIATION METHOD
An entity acquired an asset 3 years ago at a cost of ` 5 million. The depreciation method
adopted for the asset was 10 percent reducing balance method.
At the end of Year 3, the entity estimates that the remaining useful life of the asset is 8
years and determines to adopt straight –line method from that date so as to reflect the
revised estimated pattern of recovery of economic benefits.
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Show the necessary treatment in accordance of Ind AS 16.
SOLUTION:
Change in Depreciation Method shall be accounted for as a change in an accounting estimate
in accordance of Ind AS 8 and hence will have a prospective effect.
Depreciation Charges for year 1 to 11 will be as follows:
Year 1 ` 500,000
Year 2 ` 450,000
Year 3 ` 405,000
Year 4 to year 11 ` 456,000 p.a.
A variety of depreciation methods can be used to allocate the depreciable amount of an

asset on a systematic basis over its useful life. These methods include:
a) Straight-line depreciation method results in a constant charge over the useful life if
the asset’s residual value does not change.
b) Diminishing balance method results in a decreasing charge over the useful life.
c) Units of production method results in a charge based on the expected use or output.
The entity selects the method that most closely reflects the expected pattern of
consumption of the future economic benefits embodied in the asset. That method is applied
consistently from period to period unless there is a change in the expected pattern of
consumption of those future economic benefits.
A depreciation method that is based on revenue that is generated by an activity that includes
the use of an asset is not appropriate. The revenue generated by an activity that includes
the use of an asset generally reflects factors other than the consumption of the economic
benefits of the asset (e.g. other inputs and processes, selling activities and changes in sales
volumes and prices).
Depreciation
Asset unused or held

Fair value >Carrying
for sale or included in
Amount (Residual value Residual Value > =
a disposal group that is
is less than Carrying Carrying Amount
classified as held for
Amount
sale
Depreciation Charged Depreciation Zero Depreciation Ceases

IMPAIRMENT
Identification of an impairment loss

To determine whether an item of property, plant and equipment is impaired, an entity applies
Ind AS 36, Impairment of Assets. Ind AS 36 explains how an entity reviews the carrying
amount of its assets, how it determines the recoverable amount of an asset, and when it
recognises, or reverses the recognition of, an impairment loss.
Compensation for impairment
• Compensation from third parties for items of property, plant and equipment that were
impaired, lost or given up shall be included in profit or loss when the compensation
becomes receivable.
• Impairments or losses of items of property, plant and equipment, related claims for
or payments of compensation from third parties and any subsequent purchase or
construction of replacement assets are separate economic events and are accounted
for separately as follows:
a) impairments of items of property, plant and equipment are recognised in accordance
with Ind AS 36;
b) derecognition of items of property, plant and equipment retired or disposed of is
determined in accordance with this Standard;
c) compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up is included in determining profit or loss when it
becomes receivable; and
d) the cost of items of property, plant and equipment restored, purchased or
constructed as replacements is determined in accordance with this Standard.
CONCEPT 14: DERECOGNITION

Derecognition - general
• The carrying amount of an item of property, plant and equipment should be derecognised:
a) on disposal; or
b) when no future economic benefits are expected from its use or disposal.
• The gain or loss arising from the derecognition of an item of property, plant and
equipment is included in profit or loss when the item is derecognised (unless Ind AS 17
requires otherwise on a sale and leaseback). Gains shall not be classified as revenue.
• The gain or loss arising from the derecognition of an item of property, plant and
equipment shall be determined as the difference between the net disposal proceeds, if
any, and the carrying amount of the item.
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• In determining the date of disposal of an item, an entity applies the criteria in Ind AS
18 for recognising revenue from the sale of goods. Ind AS 17 applies to disposal by a sale
and leaseback.
• The amount of consideration to be included in the gain or loss arising from the
derecognition of an item of property, plant and equipment is determined in accordance
with the requirements for determining the transaction price in Ind AS 18.
• Subsequent changes to the estimated amount of the consideration included in the gain
or loss shall be accounted for in accordance with the requirements for changes in the
transaction price in Ind AS 18.
CONCEPT 15: DISCLOSURE
Disclosure-general
• The financial statements should disclose, for each class of property, plant and
equipment:
a) the measurement bases used for determining the gross carrying amount;
b) the depreciation methods used;
c) the useful lives or the depreciation rates used; and
d) the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period.
• Entity is also required to provide a reconciliation of the carrying amount at the
beginning and end of the period showing:
a) additions;
b) assets classified as held for sale or included in a disposal group classified as held
for sale in accordance with Ind AS 105 and other disposals;
c) acquisitions through business combinations;
d) increases or decreases resulting from revaluations and from impairment losses
recognised or reversed in other comprehensive income;
e) impairment losses recognised in profit or loss in accordance with Ind AS 36;
f) impairment losses reversed in profit or loss in accordance with Ind AS 36;
g) depreciation;
h) the net exchange differences arising on the translation of the financial statements
from the functional currency into a different presentation currency, including the
translation of a foreign operation into the presentation currency of the reporting
entity; and
i) other changes.
• The financial statements are also disclose:

a) the existence and amounts of restrictions on title, and property, plant and
equipment pledged as security for liabilities;
b) the amount of expenditures recognised in the carrying amount of an item of
property, plant and equipment in the course of its construction;
c) the amount of contractual commitments for the acquisition of property, plant and
equipment; and
d) if it is not disclosed separately in the statement of profit and loss, the amount of
compensation from third parties for items of property, plant and equipment that
were impaired, lost or given up that is included in profit or loss.
Items stated at revalued amounts
• If items of property, plant and equipment are stated at revalued amounts, the
following should be disclose:
a) the effective date of the revaluation;
b) whether an independent valuer was involved;
c) for each revalued class of property, plant and equipment, the carrying amount
that would have been recognised had the assets been carried under the cost
model; and
d) the revaluation surplus, indicating the change for the period and any restrictions
on the distribution of the balance to shareholders.
Additional recommended disclosure
• Entities are encourages but does not required, to disclose the following amounts:
a) the carrying amount of temporarily idle property, plant and equipment;
b) the gross carrying amount of any fully depreciated property, plant and equipment
that is still in use;
c) the carrying amount of property, plant and equipment retired from active use and
not classified as held for sale in accordance with Ind AS 105; and
d) when the cost model is used, the fair value of property, plant and equipment when
this is materially different from the carrying amount.
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SIGNIFICANT DIFFERENCES IN IND AS 16 VIS-À-VIS AS 10
S.No. Particular Ind AS 16 AS 10

1. Fixed Assets retired Ind AS 16 does not deal AS 10 deals with
from Active Use and with the assets ‘held for accounting for items
Held for Sale sale’ because the treatment of fixed assets retired
of such assets is covered in from active use and
Ind AS 105, Non- current held for sale.
Assets Held for Sale and
Discontinued Operations.
2. Stripping Costs in the Ind AS 16 provides guidance AS 10 does not contain
Production Phase of a on measuring ‘Stripping Costs this guidance.
Surface Mine in the Production Phase of a
Surface Mine’.
PRACTICAL QUESTIONS FOR PRACTICE

ON VARIOUS CONCEPTS
QUESTION 1 (REPLACEMENT)
MS Ltd. has acquired a heavy machinery at a cost of ` 1,00,00,000 (with no breakdown of
the component parts) . The estimated useful life is 10 years. At the end of the sixth year,
one of the major components, the turbine requires replacement, as further maintenance is
uneconomical. The remainder of the machine is perfect and is expected to last for the next
four years. The cost of a new turbine is ` 45,00,000.
Can the cost of the new turbine be recognised as an asset, and, if so, what treatment should
be used?
QUESTION 2 (ACQUISITION OF ASSETS)
On April 1, 20X1, XYZ Ltd, acquired a machine under the following terms:
`
List price of machine 80,00,000
Import duty 5,00,000
Delivery fees 1,00,000
Electrical installation costs 10,00,000
Pre-production testing 4,00,000

Purchase of a five year maintenance 7,00,000
contract with vendor
In addition to the above information XYZ Ltd. was granted a trade discount of 10% on the
initial list price of the asset and a settlement discount of 5%, if payment for the machine
was received within one month of purchase. XYZ Ltd. paid for the plant on April 20, 20X1.
At what cost the asset will be recognised?
QUESTION 3
The term of an operating lease allows a tenant, XYZ Ltd. to tailor the property to meet
its specific needs by building an additional internal wall, but on condition that the tenant
returns the property at the end of the lease in its original state. This will entail dismantling
the internal wall. XYZ Ltd. incurs a cost of `25,00,000 on building the wall and present
value of estimated cost to dismantle the wall is ` 10,00,000. At what value should the
leasehold improvements be capitalised in the books of XYZ Ltd.
SOLUTION
The leasehold improvement is not only the cost of building the wall, but also the cost of
restoring the property at the end of the lease. As such both costs i.e., `35,00,000 are
capitalised when the internal wall is built and will be recognised in profit and loss over the
useful life of the asset (generally the lease term) as a part of depreciation charge).
X Limited started construction on a building for its own use on April 1, 20X0. The following
costs are incurred:
`
Purchase price of land 30,00,000
Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Materials 10,00,000
Direct labour cost 4,00,000
General overheads 1.00.000
Other relevant information: Material costing ` 1,00,000 had been spoiled and therefore
wasted and a further ` 1,50,000 was spent on account of faulty design work. As a result of
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these problems, work on the building was stopped for two weeks during November 20X0
and it is estimated that ` 22,000 of the labour cost relate to that period. The building
was completed on January 1, 20X1 and brought in use April 1, 20X1. X Limited had taken
a loan of ` 40,00,000 on April 1, 20X0 for construction of the building (which meets the
definition of qualifying asset as per Ind AS 23). The loan carried an interest rate of 8% per
annum and is repayable on April 1, 20X2.
Calculate the cost of the building that will be included in tangible non-current asset as an
addition?
QUESTION 5 (CHANGE IN ESTIMATED LIFE)
XYZ Ltd. purchased an asset on January 1, 20X0, for ` 1,00,000 and the asset had an
estimated useful life of ten years and a residual value of ` nil. The company has charged
depreciation using the straight-line method at ` 10,000 per annum. On January 1, 20X4,
the management of XYZ Ltd. Reviews the estimated life and decides that the asset will
probably be useful for a further four years and, therefore, the total life is revised to eight
years. How should the asset be accounted for remaining years?
On 1 April 20X1, Sun ltd purchased some land for ` 10 million (including legal costs of ` 1
million) in order to construct a new factory. Construction work commenced on 1 May 20X1.
Sun ltd incurred the following costs in relation with its construction:
- Preparation and levelling of the land – ` 3,00,000.

- Purchase of materials for the construction – ` 6·08 million in total.
- Employment costs of the construction workers – ` 2,00,000 per month.
- Overhead costs incurred directly on the construction of the factory – `1,00,000 per
month.
- Ongoing overhead costs allocated to the construction project using the company’s normal
overhead allocation model- ` 50,000 per month.
- Income received during the temporary use of the factory premises as a car park during
the construction period - ` 50,000.
- Costs of relocating employees to work at the new factory- ` 300,000.
- Costs of the opening ceremony on 31 January 20X1- ` 150,000.
The factory was completed on 30 November 20X1 and production began on 1 February
20X2. The overall useful life of the factory building was estimated at 40 years from the
date of completion. However, it is estimated that the roof will need to be replaced 20 years
after the date of completion and that the cost of replacing the roof at current prices would
be 30% of the total cost of the building.
At the end of the 40 -year period, Sun ltd has a legally enforceable obligation to demolish
the factory and restore the site to its original condition. The directors estimate that the
cost of demolition in 40 years’ time (based on prices prevailing at that time) will be ` 20
million. An annual risk adjusted discount rate which is appropriate to this project is 8%. The
present value of `1 payable in 40 years’ time at an annual discount rate of 8% is 4·6 cents.
The construction of the factory was partly financed by a loan of ` 17·5 million taken out
on 1 April 20X1. The loan was at an annual rate of interest of 6%. During the period 1
April 20X1 to 31 August 20X1 (when the loan proceeds had been fully utilised to finance
the construction), Sun Ltd received investment income of ` 100,000 on the temporary
investment of the proceeds.
Required:
Compute the carrying amount of the factory in the Balance Sheet of Sun Ltd at 31 March
20X2. You should explain your treatment of all the amounts referred to in this part in your
answer.
QUESTION NO 7 (REPAIRS & REPLACEMENT)
XYZ Ltd. has acquired a heavy road transporter at a cost of ` 1,00,000 (with no breakdown
of the component parts). The estimated useful life is 10 years. At the end of the sixth year,
the power train (one of its component) requires replacement, as further maintenance is
uneconomical due to the off-road time required. The remainder of the vehicle is perfectly
roadworthy and is expected to last for the next four years. The cost of a new power train
is ` 45,000.
Can the cost of the new power train be recognized as an asset, and, if so, what treatment
should be used?
QUESTION NO 8 (ACQUISITION OF ASSETS)
ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
1 Cost of the plant (cost per supplier’s invoice plus taxes) ` 25,00,000
2 Initial delivery and handling costs ` 2,00,000
3 Cost of site preparation ` 6,00,000
4 Consultants used for advice on the acquisition of the plant ` 7,00,000
5 Interest charges paid to supplier of plant for deferred credit ` 2,00,000
6 Estimated dismantling costs to be incurred after 7 years ` 3,00,000
7 Operating losses before commercial production ` 4,00,000
Please advise ABC Ltd. on the costs that can be capitalized in accordance with Ind AS 16.
76 ACCOUNTS
QUESTION NO 9 (REVALUATION OF ASSETS)
A Ltd. has an item of plant with an initial cost of ` 1,00,000. At the date of revaluation,
accumulated depreciation amounted to ` 55,000. The fair value of the asset, by reference
to transactions in similar assets, is assessed to be ` 65,000.
Pass Journal Entries with regard to Revaluation?
QUESTION NO 10 (CHANGE IN ESTIMATED LIFE)
B Ltd. owns an asset with an original cost of ` 2,00,000. On acquisition, management

determined that the useful life was 10 years and the residual value would be ` 20,000. The
asset is now 8 years old, and during this time there have been no revisions to the assessed
residual value.
At the end of year 8, management has reviewed the useful life and residual value and has
determined that the useful life can be extended to 12 years in view of the maintenance
program adopted by the company. As a result, the residual value will reduce to ` 10,000.
How would the above changes in estimates be made by B Ltd.?
QUESTION NO 11
X Ltd. has a machine which got damaged due to fire as on January 31, 20X1. The carrying
amount of machine was ` 1,00,000 on that date. X Ltd. sold the damaged asset as scrap
for ` 10,000. X Ltd. has insured the same asset against damage. As on March 31, 20X1, the
compensation proceeds was still in process but the insurance company has confirmed the
claim. Compensation of ` 50,000 is receivable from the insurance company. How X Ltd. will
account for the above transaction?
QUESTION NO 12 (CHANGE IN DECOMMISSIONING COST)
An entity has a nuclear power plant and a related decommissioning liability. The nuclear
power plant started operating on April 1, 2017. The plant has a useful life of 40 years. Its
initial cost was ` 1,20,000 which included an amount for decommissioning costs of ` 10,000,
which represented ` 70,400 in estimated cash flows payable in 40 years discounted at a
risk-adjusted rate of 5 per cent. The entity’s financial year ends on March 31. On March,
value of the decommissioning liability has decreased by ` 8,000. The discount rate has not
yet changed.
How the entity will account for the above changes in decommissioning liability if it adopts
cost model?
QUESTION NO 13 (CHANGE IN DECOMMISSIONING COST)
An entity has a nuclear power plant and a related decommissioning liability. The nuclear
power plant started operating on April 1, 20X1. The plant has a useful life of 40 years. Its
initial cost was ` 1,20,000.; This included an amount for decommissioning costs of ` 10,000,
which represented ` 70,400 in estimated cash flows payable in 40 years discounted at a
risk-adjusted rate of 5 per cent. The entity’s financial year ends on March 31. Assume that
a market-based discounted cash flow valuation of ` 1,15,000 is obtained at March 31, 20X4.
It includes an allowance of ` 11,600 for decommissioning costs, which represents no change
to the original estimate, after the unwinding of three years’ discount. On March 31, 20X5,
the entity estimates that, as a result of technological advances, the present value of the
decommissioning liability has decreased by ` 5,000. The entity decides that a full valuation
of the asset is needed at March 31, 20X5, in order to ensure that the carrying amount does
not differ materially from fair value. The asset is now valued at ` 1,07,000, which is net of
an allowance for the reduced decommissioning obligation.
How the entity will account for the above changes in decommissioning liability if it adopts
revaluation model ?
QUESTION 14- REPLACEMENT COST
Sun Ltd has acquired a heavy road trailer at a cost of ` 100,000 (with no breakdown of
component parts). The estimated useful life is 10 years. At the end of the sixth year, the
engine requires replacement, as further maintenance is uneconomical due to the off-road
time required. The remainder of the vehicle is perfectly road worthy and is expected to
last for the next four years. The cost of the new engine is ` 45,000. The discount rate
assumed is 5%.
Whether the cost of new engine can be recognised as the asset, and if so, what treatment
should be followed?
SOLUTION
For recognition of an item as property, plant and equipment, the recognition condition needs
to be satisfied:
(a) future economic benefits associated with the asset should flow to the entity and
(b) cost can be measured reliably.
The new engine will produce economic benefits to the Company and cost of the engine can
be measured reliably. Hence, the item should be recognised as the asset.
The cost of ` 45,000 of new engine will be added to the carrying amount.
The original invoice of the trailer did not specify the cost of the engine. Therefore, the
cost of replacement ` 45,000 will used as indicative price and discount to year 1,
78 ACCOUNTS
6
1
i.e., (45,000 x = = 33,580
1.05
Revised Cost = (100,000 - 33,580 + 45,000) = 111,420
QUESTION NO 15 (INSPECTION COST)
A shipping company is required by law to bring all ships into dry dock every five years for
a major inspection overhaul. Overhaul expenditure might at first sight seem to be a repair
to the ships but it is actually a cost incurred in getting the ship back into a seaworthy
condition. As such the costs must be capitalized.
A ship which cost ` 20 million with a 20 year life must have major overhaul every five years.
The estimated cost of the overhaul at the five-year point is ` 5 million.
QUESTION 16 - DEFERRED PAYMENT CREDIT
On 1st April 20X1, an item of property is offered for sale at ` 10 million, with payment terms
being three equal installments of ` 33,33,333 over a two years period (payments are made
on 1st April 20X1, 31st March 20X2 and 31st March 20X3).
The property developer is offering a discount of 5 percent (i.e. ` 0.5 million) if payment is
made in full at the time of completion of sale. Implicit interest rate of 5.36 percent p.a.
Show how the property will be recorded in accordance of Ind AS 16.
QUESTION 17 – EXCHANGE OF ASSETS
Pluto Ltd owns land and building which are carried in its balance sheet at an aggregate
carrying amount of ` 10 million. The fair value of such asset is ` 15 million. It exchanges the
land and building for a private jet, which has a fair value of ` 18 million, and pays additional
` 3 million in cash.
Show the necessary treatment as per Ind AS 16.
QUESTION 18 ACCUMULATED DEPRECIATION AT THE DATE OF

REVALUATION
Jupiter Ltd. has an item of plant with an initial cost of ` 100,000. At the date of revaluation
accumulated depreciation amounted to ` 55,000. The fair value of asset, by reference to
transactions in similar assets, is assessed to be ` 65,000.
Find out the entries to be passed?
QUESTION 19: REVALUATION MODEL FOR ENTIRE CLASS
Venus Ltd. is a large manufacturing group. It owns a considerable number of industrial

buildings, such as factories and warehouses, and office buildings in several capital cities.
The industrial buildings are located in industrial zones whereas the office buildings are in
central business districts of the cities. Venus’s Ltd. management want to apply the Ind AS
16 revaluation model to the subsequent measurement of the office buildings but continue
to apply the historical cost model to the industrial buildings. Is this acceptable under Ind
AS 16, Property, Plant and Equipment?
QUESTION 20 UTILISATION OF REVALUATION SURPLUS
An item of PPE was purchased for ` 9,00,000 on 1 April 20X1. It is estimated to have a
useful life of 10 years and is depreciated on a straight line basis. On 1 April 20X3, the asset
is revalued to ` 9,60,000. The useful life remains unchanged at ten years.
Show the necessary treatment as per Ind AS 16.
80 ACCOUNTS
PAST EXAMINATION QUESTIONS

QUESTION 1 NOVEMBER 2018 EXAM
On 1st April, 2017 Good Time Limited purchase some land for ` 1.5 crore (including legal
cost of ` 10 lakhs) for the purpose of constructing a new factory. Construction work
commenced on 1st May, 2017 Good Time Limited incurred the following costs in relation to
its construction.
`
Preparation and levelling of the land 4,40,000
Purchase of materials of the construction 92,00,000
Employment costs of the construction workers (per month) 1,45,000
Overhead costs incurred directly on the construction of the factory
1,25,000
(per month)
Ongoing overhead costs allocated to the construction project (using he
75,000
company’s normal overhead allocation model) per month
Costs of relocating employees to work at new factory 3,25,000
Costs of the opening ceremony on 1st January, 2018 2.50,000
Income received during the temporary use of the factory premises as a
60,000
store during the construction period.
The construction of the factory was completed on 31st December, 2017 and production
began on 1st February, 2018. The overall useful life of the factory building was estimated
at 40 years from the date of completion. However, it is estimated that the roof will need
to be replaced 20 years after the date of completion and that the cost of replacing the
roof at current prices would be 25% of the total cost of the building.
At the end of the 40 years period, Good Time Limited has a legally enforceable obligation
to demolish the factory and restore the site to its original condition, The company
estimates that the cost of demolition in 40 years time (based on price prevailing at that
time) will be ` 3 crore. The annual risk adjusted discount rate which is appropriate to this
project is 8% The present value of ` 1 payable in 40 years time at an annual discount rate
of 8% is 0.046.
The construction of the factory was partly financed. by a loan of ` 1.4 crore taken out on
1st April, 2017. The loan was at an annual rate of interest of 9% During the period 1st April,
2017 to 30th September, 2017 (when the loan proceeds had been fully utilized to finance
the construction), Good Time Limited received investment income of ` 1,25,000 on the
temporary investment of the proceeds.
You are required to compute the cost of the factory and the carrying amount of the
factory in the Balance Sheet of Good Time Limited as at 31st March, 2018.
ANSWER
Computation of the cost of the factory
`
Purchase of land 1,50,00,000
Preparation and levelling 4,40,000
Materials 92,00,000
Employment costs of construction workers (1,45,000 x 8 months) 11,60,000
Direct overhead costs (1,25,000 x 8 months) 10,00,000
Allocated overhead costs Nil
Income from use of a factory as a store Nil
Relocation costs Nil
Costs of the opening ceremony Nil
Finance costs 9,45,000
Investment income on temporary investment of the loan proceeds -1,25,000
Demolition cost recognised as provision (3,00,00,000 x 0.046) 13,80,000
Total 2,90,00,000
Computation of carrying amount of the factory as at 31st March,2018
Land (Non- Factory

depreciable (Depreciable
asset) asset)
Cost of the asset (Total cost 2,90,00,000) 1,50,00,000 1,40,00,000
Less: Depreciation
On Land Nil
On Factory
Depreciation on roof component

43,750
(1,40,00,000 x 25% x 1/20 x 3/12)
Depreciation on remaining factory

(1,40,00,000 x 75% x 1/40 x 3/12)
65,625 -1,09,375
Carrying amount of depreciable asset ie factory
Total cost 1,50,00,000 1,38,90,625
2,88,90,625
82 ACCOUNTS
Note
1. Interest cost has been capitalised based on nine month period. This is because, pur-
chase of land would trigger off capitalisation.
2. All of the net finance cost ` 8,20,000 (` 9,45,000 – ` 1,25,000) has been allocated to
the depreciable asset i.e Factory. Alternatively, it can be allocated proportionately
between land and factory.
M Ltd. is setting up a new factory outside the Delhi city limits. In order to facilitate the
construction of the factory and its operations, M Ltd. is required to incur expenditure on
the construction/ development of electric-substation. Though M Ltd. incurs (or contributes
to) the expenditure on the construction/development, it will not have ownership rights
on these items and they are also available for use to other entities and public at large.
Whether M Ltd. can capitalise expenditure incurred on these items as property, plant
and equipment (PPE)? If yes, then how should these items be depreciated and presented
in the financial statements of M Ltd. as per Ind AS?
ANSWER
As per Ind AS 16, the cost of an item of property, plant and equipment shall be recognised
as an asset if, and only if:
1. it is probable that future economic benefits associated with the item will flow to the
entity; and
2. the cost of the item can be measured reliably.
Ind AS 16, further, states that the cost of an item of property, plant and equipment
comprise any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management.
In the given case, electric-substation is required to facilitate the construction of the
refinery and for its operations. Expenditure on these items is required to be incurred in
order to get future economic benefits from the project as a whole which can be considered
as the unit of measure for the purpose of capitalisation of the said expenditure even
though the company cannot restrict the access of others for using the assets individually.
It is apparent that the aforesaid expenditure is directly attributable to bringing the asset
to the location and condition necessary for it to be capable of operating in the manner
intended by management.
In view of this, even though M Ltd. may not be able to recognise expenditure incurred on
electric-substation as an individual item of property, plant and equipment in many cases
(where it cannot restrict others from using the asset), expenditure incurred may be
capitalised as a part of overall cost of the project.
From this, it can be concluded that, in the extant case the expenditure incurred on electric-
substation should be considered as the cost of constructing the factory and accordingly,
expenditure incurred on electric-substation should be allocated and capitalised as part of
the items of property, plant and equipment of the factory.
Depreciation
As per Ind AS 16, each part of an item of property, plant and equipment with a cost that
is significant in relation to the total cost of the item shall be depreciated separately.
Further, Ind AS 16 provides that, if these assets have a useful life which is different
from the useful life of the item of property, plant and equipment to which they relate, it
should be depreciated separately. However, if these assets have a useful life and the
depreciation method that are the same as the useful life and the depreciation method
of the item of property, plant and equipment to which they relate, these assets may be
grouped in determining the depreciation charge. Nevertheless, if it has been included
in the cost of property, plant and equipment as a directly attributable cost, it will be
depreciated over the useful lives of the said property, plant and equipment.
The useful lives of electric-substation should not exceed that of the asset to which it
relates.
84 ACCOUNTS
EXTRA QUESTIONS
QUESTION 1
H Limited purchased an item of PPE costing Rs 100 million which has useful life of 10 years.
The entity has a contractual decommissioning and site restoration obligation, estimated at
Rs 5 million to be incurred at the end of 10 year. The current market based discount rate
is 8% .The Company follows SLM method of depreciation. H Limited follows the Cost Model
for accounting of PPE.
Determine the carrying value of an item of PPE and decommissioning liability at each year
end when
(a)
There is no change in the expected decommissioning expenses, expected timing of
incurring the decommissioning expense and / or the discount rate.
(b)
At the end of Year 4, the entity expects that the estimated cash outflow on account
of decommissioning and site restoration to be incurred at the end of the useful life
of the asset will be Rs 8 million (in place of Rs 5 million, estimated in the past).
Determine in case (b), how H Limited need to account for the changes in the decommissioning
liability?
QUESTION 2
A Ltd. purchased some Property, Plant and Equipment on 1st April, 20X1, and estimated
their useful lives for the purpose of financial statements prepared on the basis of lnd AS:
Following were the original cost, and useful life of the various components of property,
plant, and equipment assessed on 1st April, 20X1:
Property, Plant and Equipment Original Cost Estimated useful life

Buildings Rs 15,000,000 15 years
Plant and machinery Rs 10,000,000 10 years
Furniture and fixtures Rs 3,500,000 7 years
A Ltd. uses the straight-line method of depreciation. On 1st April, 20X4, the entity reviewed
the following useful lives of the property, plant, and equipment through an external valuation
expert:
Buildings 10 years
Plant and machinery 7 years
Furniture and fixtures 5 years
There were no salvage values for the three components of the property, plant, and
equipment either initially or at the time the useful lives were revised.
Compute the impact of revaluation of useful life on the Statement of Profit and Loss for
the year ending 31st March, 20X4.
QUESTION 3
Mr. X, is the financial controller of ABC Ltd., a listed entity which prepares consolidated
financial statements in accordance with lnd 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 Mr. Y for approval. Mr. Y, who is not an accountant, had raised following
query from Mr. X after going through the draft financial statements:-
The notes to the financial statements state 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. How should the finance controller respond to the query from the managing
director?
86 ACCOUNTS
QUESTION 4
Company X performed a revaluation of all of its plant and machinery at the beginning
of 20X1. The following information relates to one of the machinery:
Amount (‘000)
Gross carrying amount ` 200
Accumulated depreciation (straight-line method) (` 80)
Net carrying amount ` 120
Fair value ` 150
The useful life of the machinery is 10 years and the company uses Straight line method
of depreciation. The revaluation was performed at the end of 4 years.
How should the Company account for revaluation of plant and machinery and depreciation
subsequent to revaluation? Support your answer with journal entries.
ANSWER
According to paragraph 35 of Ind AS 16, when an item of property, plant and equipment
is revalued, the carrying amount of that asset is adjusted to the revalued amount. At the
date of the revaluation, the asset is treated in one of the following ways:
(a) The gross carrying amount is adjusted in a manner that is consistent with the
revaluation of the carrying amount of the asset. For example, the gross carrying
amount may be restated by reference to observable market data or it may be restated
proportionately to the change in the carrying amount. The accumulated depreciation
at the date of the revaluation is adjusted to equal the difference between the gross
carrying amount and the carrying amount of the asset after taking into account
accumulated impairment losses.
In such a situation, the revised carrying amount of the machinery will be as follows:
Gross carrying amount ` 250 [(200/120) x 150]

Net carrying amount ` 150
Accumulated depreciation ` 100 (` 250 – ` 150)
Journal entry
Plant and Machinery (Gross Block Dr. ` 50

To Accumulated Depreciation ` 20
To Revaluation Reserve ` 30
Depreciation subsequent to revaluation

Since the Gross Block has been restated, the depreciation charge will be ` 25 per annum
(` 250/10 years).
Journal entry
Accumulated Depreciation Dr. ` 25 p.a.

To Plant and Machinery (Gross Block) ` 25 p.a.
(b) The accumulated depreciation is eliminated against the gross carrying amount of the
asset.
The amount of the adjustment of accumulated depreciation forms part of the increase
or decrease in carrying amount that is accounted for in accordance with the paragraphs
39 and 40 of Ind AS 16.
In this case, the gross carrying amount is restated to ` 150 to reflect the fair value
and accumulated depreciation is set at zero.
Journal entry
Accumulated Depreciation Dr. ` 80

To Plant and Machinery (Gross Block) ` 80
Plant and Machinery (Gross Block) Dr. ` 30
To Revaluation Reserve ` 30
Depreciation subsequent to revaluation

Since the revalued amount is the revised gross block, the useful life to be considered
is the remaining useful life of the asset which results in the same depreciation charge
of ` 25 per annum as per Option A (` 150 / 6 years).
Journal entry
Accumulated Depreciation Dr. ` 25 p.a.

To Plant and Machinery (Gross Block) ` 25 p.a.
88 ACCOUNTS
An entity has the following items of property, plant and equipment:
• Property A — a vacant plot of land on which it intends to construct its new administration
headquarters;
• Property B — a plot of land that it operates as a landfill site;
• Property C — a plot of land on which its existing administration headquarters are
built;
• Property D — a plot of land on which its direct sales office is built;
• Properties E1–E10 — ten separate retail outlets and the land on which they are built;
• Equipment A — computer systems at its headquarters and direct sales office that are
integrated with the point of sale computer systems in the retail outlets;
• Equipment B — point of sale computer systems in each of its retail outlets;
• Furniture and fittings in its administrative headquarters and its sales office;
• Shop fixtures and fittings in its retail outlets.
How many classes of property, plant and equipment must the entity disclose?
ANSWER
To answer this question one must make a materiality judgement.
A class of assets is defined as a grouping of assets of a similar nature and use in an entity’s
operations.
The nature of land without a building is different to the nature of land with a building.
Consequently, land without a building is a separate class of asset from land and buildings.
Furthermore, the nature and use of land operated as a landfill site is different from
vacant land. Hence, the entity should disclose Property A separately. The entity must
apply judgement to determine whether the entity’s retail outlets are sufficiently
different in nature and use from its office buildings, and thus constitute a separate
class of land and buildings.
The computer equipment is integrated across the organisation and would probably be
classified as a single separate class of asset.
Furniture and fittings used for administrative purposes could be sufficiently different to
shop fixtures and fittings in retail outlets to be classified in two separate classes of assets.
QUESTION 6 (RTP NOV 2021….ALREADY DISCUSSED IN RTP VIDEO)
Heaven Ltd. had purchased a machinery on 1.4.2X01 for ` 30,00,000, which is reflected in
its books at written down value of ` 17,50,000 on 1.4.2X06. The company has estimated
an upward revaluation of 10% on 1.4.2X06 to arrive at the fair value of the asset. Heaven
Ltd. availed the option given by Ind AS of transferring some of the surplus as the asset
is used by an enterprise.
On 1.4.2X08, the machinery was revalued downward by 15% and the company also re-
estimated the machinery’s remaining life to be 8 years. On 31.3.2X10 the machinery was
sold for ` 9,35,000. The company charges depreciation on straight line method.
Prepare machinery account in the books of Heaven Ltd. over its useful life to record the
above transactions.
ANSWER
In the books of Heaven Ltd. Machinery A/c
Date Particulars Amount Date Particulars Amount

1.4.2X01 To Bank/ Vendor 30,00,000 31.3.2X02 By Depreciation 2,50,000
(W.N.1)
31.3.2X02 By Balance c/d 27,50,000
30,00,000 30,00,000
1.4.2X02 To Balance b/d 27,50,000 31.3.2X03 By Depreciation 2,50,000
31.3.2X03 By Balance c/d 25,00,000
27,50,000 27,50,000
1.4.2X03 To Balance b/d 25,00,000 31.3. 2X04 By Depreciation 2,50,000
31.3.2X04 By Balance c/d 22,50,000
25,00,000 25,00,000
31.3.2X05 By Balance c/d 20,00,000
22,50,000 22,50,000
31.3.2X06 By Balance c/d 17,50,000

20,00,000 20,00,000
(W.N.2)
90 ACCOUNTS
1.4.2X06 To Revaluation 1,75,000 31.3.2X07 By Balance c/d 16,50,000

Reserve @ 10%
19,25,000 19,25,000
31.3.2X08 By Balance c/d 13,75,000
16,50,000 16,50,000
1.4.2X08 To Balance b/d 13,75,000 1.4.2X08 By Revaluation 1,25,000
Reserve (W.N.4)
31.3.2X09 By Profit and 81,250
Loss
A/c (W.N.5)
31.3.2X09 By Depreciation 1,46,094
(W.N.3)
31.3.2X09 By Balance c/d 10,22,656
13,75,000 13,75,000
31.3.2X10 To Profit and Loss 58,438* 31.3.2X10 By Bank A/c 9,35,000
A/c (balancing
figure)
10,81,094 10,81,094
Working Notes:
1. Calculation of useful life of machinery on 1.4.2X01

Depreciation charge in 5 years = (30,00,000 – 17,50,000) = ` 12,50,000 Depreciation
per year as per Straight Line method = 12,50,000 / 5 years
= ` 2,50,000
Remaining useful life = ` 17,50,000 / ` 2,50,000 7 years
Total useful life = 5 years + 7 years = 12 years
2. Depreciation after upward revaluation as on 31.3.2X06 `
Book value as on 1.4.2X06 17,50,000
Add: 10% upward revaluation 1,75,000
Revalued amount 19,25,000
Remaining useful life 7 years (Refer W.N.1)
Depreciation on revalued amount = 19,25,000 / 7 years = ` 2,75,000 lakh
3. Depreciation after downward revaluation as on 31.3.2X08 `
Book value as on 1.4.2X08 13,75,000

Less: 15% Downward revaluation (2,06,25)
Revalued amount 11,68,750
Revised useful life 8 years
Depreciation on revalued amount = 11,68,750 / 8 years = ` 1,46,094
Amount transferred from revaluation reserve

Revaluation reserve on 1.4.2X06 (A) ` 1,75,000
Remaining useful life 7 years
Amount transferred every year (1,75,000 / 7) ` 25,000
Amount transferred in 2 years (25,000 x 2) (B) ` 50,000
Balance of revaluation reserve on 1.4.2X08 (A-B) ` 1,25,000
5. Amount of downward revaluation to be charged to Profit and Loss Account
Downward revaluation as on 1.4.2X08 (W.N.3) ` 2,06,250
Less: Adjusted from Revaluation reserve (W.N.4) (` 1,25,000)
Amount transferred to Profit and Loss Account ` 81,250
92 ACCOUNTS
NOTES
IND AS 23: BORROWING COST 93
IND AS 23: BORROWING COST
CONCEPT 1: APPLICATION OF IND AS 23

Entities are borrowing the funds to acquire, build and install the fixed assets and other
assets, these assets take time to make them useable or saleable, therefore the entity
incur the interest (cost on borrowings) to acquire and build these assets. The objective
of this Ind AS is to prescribe the treatment of borrowing cost (interest+ other cost) in
accounting, whether the cost of borrowing should be included in the cost of assets or not.
CONCEPT 2: NON-APPLICABILITY
This Standard does not apply:
• Cost of owner’s equity, including preference share capital not classified as a liability:
• A qualifying asset measured at fair value, for example, biological asset: or
• Inventories that are manufactured or other otherwise produced in large quantities on a
repetitive basis.
CONCEPT 3: MEANING OF BORROWING COST

Borrowing costs are defined as interest and other costs incurred relating to borrowing of
funds. It includes the following costs or charges:
• Interest expenses calculated using the effective interest rate method.

• Finance charges when the asset acquired under finance leases.
• Exchange difference arising from foreign currency borrowings to the extent that they
are regarded as an adjustment to interest costs.
CONCEPT 4: EFFECTIVE INTEREST RATE METHOD

The effective interest rate is the rate that exactly discounts estimated future cash
payments or receipts through the expected life of the financial instrument to make it equal
to the net carrying amount of the financial liability. This is somewhat akin to internal rate
of return.
When applying the effective interest method, an generally amortize any fees, points paid
or receive transaction costs and other premium or discounts included in the calculation of
the effective interest rate over the expected life of the instrument. However, shorter
period is used if this is the period which the fees, points paid or received, transaction costs
premiums or discounts relate.
94 ACCOUNTS
Example 1:
X Ltd borrowed for 5 years by issuing 10% debentures of ` 100 each having total face value
of ` 1,000 crore issued at discount and collected ` 990.58 crores. The issued expenses
were ` 10 lakhs, which were paid at the time of issue. What will be effective interest rate
on these borrowing?
The debentures are issued at a discount further issue expenses of ` 10 lakhs has also been
incur the effective interest rate will be higher than the coupon rate of 10% by applying the
formula- PV = FV/(i+r)n, The effective rate comes 10.25%
The correctness of this effective interest rate is tested below as the future cash outflow
discounted @10.25% is equal to cash inflow by issuing the debentures.
Year Cash inflow Future Cash Discount rate Discounted cash

(Net carrying outflow interest + @10.25% outflow (Amount in
amount) Principal crores)
0 (990.58-0.10)
=990.48
1 100 0.9070 90.70
2 100 0.8230 82.30
3 100 0.7462 74.62
4 100 0.6768 67.68
5 1100 0.6138 675.18
990.48 990.48
Net Cash inflow received on account of borrowings from debenture is equal to present value
of cash outflow on account of interest ` 100 crores every year and in 5th year ` 1100 crores
including principal repayment.
CONCEPT 5: DIRECT BORROWING COST

As per this Ind AS, borrowing cost, which is directly attributable to the acquisition,
construction or production of qualifying asset should be capitalized as part of cost of the
asset. Other borrowing costs are recognized as expenses.
CONCEPT 6: QUALIFYING ASSET

An asset which takes substantial period of time to get ready for its intended use or sale,
is called qualifying asset.
Examples of qualifying assets:
- Any tangible fixed assets, which are in construction process or acquired tangible fixed
assets, which are not ready for use or resale such as plants and machinery.
- Any intangible assets, which are in development phase or acquired but not ready for use
or resale, such as patent.
- Investment property.
- Inventories that require a substantial period (i.e. generally more than one accounting
period) to bring them to a saleable condition.
Following are the examples which are not qualifying assets:
- Financial asset;
- Inventories that are manufactured, or otherwise produced, over a short period of time;
- Assets which are ready for their intended use or sale when acquired.
CONCEPT 7: CONDITIONS FOR CAPITALIZATION

OF BORROWING COST
Following conditions should be satisfied for capitalization of borrowing costs:
 Those borrowing costs, which are directly attributable to the acquisition, construction
or production of qualifying asset, are eligible for capitalization. Directly attributable
costs are those costs that would have been avoided if the expenditure on the qualifying
asset had not been made.
 Qualifying assets will give future economic benefit to the enterprise and the cost can
be measured reliably.
CONCEPT 8: AMOUNT OF BORROWING COSTS ELIGIBLE

FOR CAPITALIZATION
• Specific borrowing-
Amount of borrowing cost to the = Actual borrowing cost incurred

capitalized (Amount borrowed is during the period less any income
specifically for the purchase of on the temporary investment of
qualifying assets) borrowed amount.
Example 2:
X Ltd borrowed for 5 years by issuing 10% debentures of ` 100 each having total face of `
1,000 crores, issued at discount and collected ` 990.58 crores. The issued expenses were
96 ACCOUNTS
` 10 lakhs, which were paid at the time of issue. Effective rate of interest is 10.25%. It
is specific borrowing for investment in a power plant. Since presently there is requirement
for only 50% of the moray raised and the balance will be required after 6 months of Year
1, the Company invested such fund temporarily for 6 months @ 4% p.a. The plant is under
construction during the Year.
How much of the borrowing cost to be capitalized in year 1
Borrowing cost to be capitalized in Year 1
Interest expense as per effective interest rate method
(` 990.48 crores @ 10.25%) ` 101.52 crores
Less : Investment income 4% of (9904.48 x 50% x 1/2) 9.90 crores
Borrowing cost to be capitalized 91.62 crores
CONCEPT 9: GENERAL BORROWINGS

When the amount borrowed is generally used for the purpose of obtaining qualifying asset:
- Amount of borrowing cost to be capitalized should be determined by applying a
capitalization rate to the expenditure on that asset. The capitalization rate should be
weighted average of borrowing cost.
- Amount of borrowing cost capitalized during a period should not exceed the amount of
borrowing cost incurred during that period.
- The average carrying amount of the asset during a period including borrowing cost
previously capitalized, is normally a reasonable approximation of the expenditure to
which capitalization rate is applied in that period.
Linking borrowing costs relating to general borrowings to qualifying assets:
• Find out qualifying asset in which general borrowings are applied and total investment
therein
• Deduct specific borrowings used to finance such investments. Balance is the utilization
of general borrowings
• Find out general borrowings
• Find out capitalization = Total borrowing costs to general borrowings
• Apportion borrowing costs relating to general borrowings = Total Investment
Requirements Capitalization Rate
• Charges the apportioned borrowings cost in the ratio of investment requirements in
various qualifying assets
• Charges specific borrowing cost net of investment income
• Apportioned general borrowings cost + specific borrowing costs net of investment income
CONCEPT 10: COMMENCEMENT OF CAPITALIZATION

OF BORROWING COST
Following three conditions must be fulfilled before the commencement of capitalization of
borrowing cost:
• Activities, which are essential to prepare the asset for its intended use, should be in
progress.
• Borrowing cost is incurred.
• Expenditure for acquisition, construction or production of a qualifying asset is being
incurred.
CONCEPT 11: EXPENDITURE ON QUALIFYING ASSET
• Expenditure includes payment of cash, transfer of other asset or assumption of interest

bearing liabilities.
• Progress payment received and grant received towards the cost incurred should be
deducted from the expenditure.
CONCEPT 12: SUSPENSION OF CAPITALIZATION

OF BORROWING COST
Capitalization of borrowing costs should be suspended during extended periods in which
active development is interrupted.
Capitalization of borrowing costs is not suspended when a temporary delay is a necessary
part of the process of getting an asset ready for its intended use or sale.
CONCEPT 13: CESSATION OF CAPITALIZATION
 Capitalization of borrowing cost should cease when substantially all the

activities necessary to prepare the qualifying assets for its intended use or sale are
completed.
It means all relevant activities, which are essential for intended use or sale of qualifying
assets, should be completed.
 Construction of the qualifying asset is carried in parts/phase and each part/phase
can be used independently, required activities are completed for such phase and it is
ready for intended use or sale, capitalization of borrowing cost for such phase/part will
cease.
98 ACCOUNTS

An entity shall disclose:
 The amount of borrowing cost capitalized during the period.

 The capitalization rate used to determine the amount of borrowing costs eligible for
capitalization.
CONCEPT 15: EXCHANGE DIFFERENCES PARA 6E

Ind AS-23, “Borrowing Costs”, provides that borrowing costs may include “exchange
differences arising from foreign currency borrowings to the extent that they are regarded
as an adjustment to interest costs.” The manner of arriving at the adjustments stated
therein shall be as follows:
• The adjustment should be of an amount which is equivalent to the extent to which

the exchange loss does not exceed the difference between the cost of borrowing in
functional currency when compared to the cost of borrowing in a foreign currency.
• Where there is an unrealized exchange loss which is treated as an adjustment to interest
and subsequently there is a realized or unrealized gain in respect of the settlement
or translation of the same borrowing, the gain to the extent of the loss previously
recognized as an adjustment should also be recognized as an adjustment to interest.
PRACTICAL PROBLEMS
QUESTION NO 1 (PROGRESS PAYMENT)
Given below are some relevant data as regards a construction contract.
Rs. In lacs
Expenditure incurred till 31.3.2000 450
Interest cost capitalized for the year 1999-2000 @ 12% p.a. 24
Amount specifically borrowed till 31.3.2000 200
Assets transferred to construction during 2000-01 100
Cash payments during 2000-01 78
Progress payment received 300
New borrowings during 2000-01 @ 12% 200
The company intends to capitalize total borrowing cost of Rs.48 lacs. Is it possible to do
that as per IND AS 23?
QUESTION NO 2 (CESSATION IN PARTS)
Given below are expenses incurred in three phases of a project relating to construction of
a captive power plant:
(Rs.)
Phase 1 Phase 2 Phase 3 Total

Cash payments 500000 700000 500000
Transfer of assets 500000 200000 300000
Total 1000000 900000 800000 2700000
Money borrowed at the rate of 12% per annum is Rs.2200000.

The phase 1 is complete. How should the company capitalize borrowing costs?
QUESTION NO 3
Borrowing cost on the loans taken specifically to construct captive power plant is being
capitalized even after the commencement of commercial production. The management
argues that the borrowing cost is attributable solely and exclusively captive power plant
and therefore should be capitalized. Give comment
100 ACCOUNTS
QUESTION NO 4 (DEFINITION OF Q.ASSETS)
Parveen Jindal Limited obtained term loan during the year ended 31st March, 2002 Ltd.
uses extent of Rs.650lacs for modernization and development of its factory. Building worth
Rs.120lacs were completed and plant and machinery worth Rs.350 lacs were installed by
31st March, 2002. A sum of Rs.70 lacs has been advanced for Assets the installation of
which is expected in the following year. Rs.110 lacs have been utilized for working capital
requirements. Interest paid on the loan of Rs.650 lacs during the year 2001-2002 amounted
to Rs.58.50 lacs. How should the interest amount be treated in the Accounts of the company?
QUESTION NO 5 (CAPITALISATION RATE)
C Limited has made the following capital expenditure in an expansion programme commencing
from 1.6.2001:-
Project Remarks Amount Status

A Specific borrowings used 34,00,00,000 Completed on 31.12.01
Rs.24,00,00,000
B Specific borrowing used 20,00,00,000 Completed on 30.11.01
Rs.6,00,00,000
C 4,00,00,000 Under construction
D. 4,00,00,000 Completed on 28.2.02
E 8,00,00,000 Under construction
Details of borrowings:
Rs.20,00,00,000 11% Debentures issued on 1.7.99 redeemable in four equal installments
commencing from 1.7.2001.
Rs.15,00,00,000 14% secured working capital loan taken on 1.4.01 and Rs.5,00,00,000 was
paid on 31.12.2001
Rs.30,00,00,000 14% specific borrowings for projects A and B taken on 1.5.2001
$6,000,000 8% foreign currency loan taken on 1.6.2001 Exchange rate as of that date
was US$1= Rs.43.00. The exchange rate as of March 31, 2001 was US$1= Rs.46.5. Average
exchange rate= Rs.45/-
Calculate the amount of borrowing costs to the capitalized during the year 2001-2002
QUESTION NO 6 (DEFINITION OF Q.ASSETS)
R Ltd. has borrowed Rs.25 crores from financial institution during the financial year 2001-
02. These borrowings are used to invest in shares of A Ltd , a subsidiary company, which
is implementing a new project estimated to cost 50 crores. As on 31st march,2002 since

the said project was not yet complete, the directors of R ltd, resolved to capitalize the
interest on the borrowings amounting to Rs.3 crores and add it to the cost of investments.
As a statutory auditor, please comment.
QUESTION NO 7 (DATE WISE CAPITALISATION)
XYZ Ltd. Has undertaken a profit for expansion of company of capacity as per the following
details;
Plan (RS.) Actual (RS.)

April 2002 2,00,000 2,00,000
May 2002 2,00,000 3,00,000
June 2002 10,00,000 ---
July 2002 1,00,000 ---
August 2002 2,00,000 1,00,000
September 2002 5,00,000 7,00,000
The company pays to its bankers at the rate of 12% p.a., interest being debited on a monthly
basis. During the half year company had Rs.10 lakhs overdraft upto 31st July, surplus cash in
August and again overdraft of over Rs.10 lakhs from 01-09-2002. The company had a strike
during June and hence could not continue the work during June. Work was again commenced
on 1st July and all the works were completed on 30th September. Assume that expenditure
were incurred on 1st Day of each month. Calculate:
1. Interest to be capitalized
2. Give reasons wherever necessary.
QUESTION NO 8
G company has incurred an amount of Rs.80 lakhs as borrowing cost during the year ended
31.12.2002 calculated as under:
Amount borrowed Date on which Amount Interest

borrowing is made (Rs. in lacs)
14%Debentures 1.12.2001 200 28
12%Term loan 1.12.2001 300 36
16% Secured loan 1.10.2002 400 16
102 ACCOUNTS
The 16% secured loan has been specifically raised for construction of factory building. The
plant is likely to be completed in two years. The other qualifying assets & expected time to
complete the assets in which these funds have been utilized are:
Plant 1 200Lacs 18 months
Internal roads 100Lacs 14 months
Plant 11 100Lacs 20 months
Compute the amount of borrowing costs to be capitalized for the year ended 31.3.2002.
QUESTION NO 9
ICS & company is a sugar company. Due to the regulations by Central Government, the
company cannot decide the quantity to be sold in the market. It is regulated on the basis
of release orders issued by the Central government on a monthly basis. Because of the
seasonal nature of production, the company has to carry large inventories throughout the
year. The average holding period of the sugar stock is generally 12-15 months. In the years
when there is surplus stock of sugar, the government creates a buffer stock and reimburses
the carrying charges to the sugar factories, for the inventory to be carried by the sugar
mill, which includes interest. Sweet & company incurs high interest costs since borrowings
are required to meet the large demand for the working capital and payment to sugarcane
producers. Interest costs are the second largest item in the Profit and Loss account of the
company next to raw material consumed. Can interest be capitalized under IND AS-23 as
a part of inventory.
QUESTION NO 10
The main object of a company is to undertake plantation activities, raising of teak and other
forestry operations. It takes about 10 to 15 years for the teak trees to grow. The company
has issued Debentures for the fund to meet all the expenses. The company included all cost
of planetary and interest paid in the valuation of stock of teak. Give comment.
QUESTION NO 11
In may, 2004 speed Ltd. took a bank loan to be used specifically for the construction of a
new factory building. The construction was completed in January 2005 and the building was
put to its use immediately thereafter. Interest on the actual amount used for construction
of the building till its completion was Rs.18 lakhs, whereas the total interest payable to the
bank on the loan for the period till 31st March,2005 amounted to Rs.25 lakhs. Can Rs.25
lakhs be treated as a part of the cost of factory building and thus be capitalized on the plea
that the loan was specifically taken for the construction of factory building.
QUESTION NO 12 (EXPECTED COST OF COMPLETION)
A fixed asset is in the construction period. Actual costs incurred till date and expected
costs to complete along with borrowings and planned borrowings are given below:
(Rs. in lacs)
Year Actual Estimated Money specifically Planned

borrowed borrowings
1 100 60
2 100 60
3 80 40
4 60 40
5 50 30
Borrowed funds costs @ of 12% per annum. Determine the estimated cost of the asset at
the end of 5th year.
QUESTION NO 13
Advise X Ltd. on the weighted average cost of borrowing and the interest cost to be
capitalized based on the following:
Total borrowings and interest of X Ltd. for year ending 31.3.2003 are as follows:
Borrowings Date of borrowing Amount (‘000) Interest (‘000)

18% Bank loan 1.5.2001 1,000 180
14% debentures 1.10.2002 2,000 140
16% term loan 1.7.2002 3,000 360
Total 6,000 680
Qualifying assets & Actual time of work during the year in which these borrowed funds are
utilized are:
Assets Rs.(‘000) Period

Factory shed 2,500 12 months
Plant 1 1,500 9 months
Plant 2 1,000 7 months
104 ACCOUNTS
QUESTION NO 14
Determine the dates from which capitalization should cease

Building A Stage of completion
Completed in full in march
Building B Completed in full in April but not accessible until Building C is completed.
Building C Completed in December
Building D Completed in June but got electricity connection and was ready for
intended use in July.
QUESTIONS FOR SELF PRACTICE
QUESTION NO 15
What do you understand by the term Borrowing costs? Briefly indicate the items
Which are included in the expression “Borrowing cost” as explained in Ind AS 23
ANSWER:
Borrowing costs are interest and other costs incurred by an enterprise In connection with
the borrowing of funds. Borrowing costs may include:
(a) Interest and commitment charges on bank borrowing and short term and long term
borrowings as per effective rate of interest method
(b) Finance charges in respective of assets acquired under finance leases or under other
similar arrangements
(c) Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.
QUESTION NO 16
The notes to accounts of Sharma Ltd. for the year ended 31st March includes the following
“interest on bridge loan from bank and financial institutions and on debentures specifically
obtained for the company’s fertilizer project amounting to Rs.1,80,80,000 has been
capitalized during the year, which includes approximately Rs.1,70,33,465 capitalized in
respect of the utilization of loan and debentures money for the said purpose”. Is the
treatment correct? Briefly comment
ANSWER:
For specific borrowing, amount to be capitalized = actual borrowing cost on that borrowing
during the period less income on the temporary investment of those borrowings, if any.
Hence the amount of capitalized borrowing cost can not exceed actual interest cost.
For general borrowing and use of Capitalization rate, IND AS-23 provides the amount of
borrowing costs Capitalized during a period should not exceed the amount of Borrowing
cost incurred during that period.
The given case is one of specific Borrowings for fertilizer project and hence the Capitalized
Borrowing cost is restricted to the actual amount of interest expenditure that is
Rs.1,70,33,465. Capitalization of Rs.1,80,80,000 has resulted in over statement of profit
and assets by Rs.10,46,535.
Hence the company’s policy is not in accordance with IND AS-23.
106 ACCOUNTS
QUESTION NO 17
(INCOME ON INVESTMENT MADE OUT OF BORROWED FUNDS)

Jindal Ltd. borrowed Rs.12Crores for its capital expansion which lasted for 18 months. The
relevant borrowing rate was 12.5%. During this period the company invested the temporary
surplus funds at 4.5% on short term basis and earned an interest of 25lakhs Which was
offered as miscellaneous income in the profit and loss account. The company has Capitalized
the entire interest cost and added to its plant and machinery. Is this correct?
ANSWER:
For specific borrowing, amount to be capitalized = actual borrowing cost on that borrowing
during the period less income on the temporary investment of those borrowings, if any.
In the above case, the correct accounting treatment will be:
Actual borrowing cost (12crores*12.5%*18months) = 2.25Crores
Less: interest on temporary investment = 0.25Crores
Borrowing cost to be Capitalized under IND AS-23 = 2.00Crores
The company’s treatment in crediting the amount of 0.25crores as miscellaneous income is
not proper. This amount should be used to reduce the amount of Borrowing cost eligible for
Capitalization.
QUESTION NO 18
(CALCULATION OF COST PPE INCLUDING INTEREST)

Kapil Ltd. purchased machinery from Parveen Ltd. on 30.09.2001. The price was Rs.370.44
lakhs after charging 8% sales tax and giving a trade discount of 2% on the quoted price.
Transport charges were 0.25% on the quoted price and installation charges 1% on the
quoted price.
A loan of Rs.300 lakhs was taken on the trial from the bank on which interest at 15% per
annum was to be paid. Expenditure incurred on the trial run was materials Rs.35,000, wages
Rs.25,000 and overheads Rs.15,000.
The machinery was ready for use on 1.12.2001, but it was actually put to use only on 1.5.2002.
Find out the cost of the machine and suggest the accounting treatment for the expenses
incurred in the interval between the dates 1.12.2001 to 1.05.2002. the entire loan amount
remained unpaid on 1.5.2002.
ANSWER:
Particulars Computations Rs. in lakhs

Quoted price (370.44/108*100)*100/98 3,50.000
Less: discount 2% 2% of 3,50.000 7.000
Net price 3,43.000
Add: sales tax 8% 8% of 3,43.000 27.440
Add: Transportation 0.25% on quoted price of 3,50.000 0.875
Add: installation 1.00% of quoted price of 3,50.000 3.500
Add: trial run expense Material+ wages+ OH=0.35+0.25+0.15 0.750
Add: Borrowing cost 300*15%*2/12(30.9.2001 to 7.500

1.12.2001)
Total cost of asset 383.065
• Capitalization of Borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use are complete. In the
above case, this period ends on 1-12-2001 when the asset was ready for use.
• Other Borrowing costs (i.e, not capitalized under IND AS 23) should be written off as
an expense in the profit and loss account. Hence the interest for the period 1.12.2001
and 1.5.2002 on Rs.300 lakhs, amounting to Rs.18.75 lakhs should be expensed off.
QUESTION NO 19 (SIMILAR AS QUESTION 4)
Sadaanand Ltd. has obtained Institutional Term Loan of Rs. 580 Lakhs for modernization
and renovation of its Plant & Machinery. Plant & Machinery acquired under the modernization
scheme and installation completed on 31st March amounted to Rs. 406 Lakhs. Rs. 58 Lakhs
has been advanced to Suppliers for additional assets and the balance loan of Rs. 116 Lakhs
has been utilized for Working Capital purpose. The accountant is in a dilemma as to how to
account for the total interest of Rs. 52.20 Lakhs incurred during the year, on the entire
Institutional Term Loan of Rs. 580 Lakhs. Give your view.
SOLUTION
52.20 Lakhs
Effective Interest Rate - = 9%.
580.00 Lakhs
The treatment for the Total Interest of Rs.52.20 Lakhs is as under:-
108 ACCOUNTS
Purpose/Utilisation Loan Amt. Interest Amount Accounting Treatment

Plant & Machinery Rs. 406 Lakhs Rs. 406 x 9% Added to Cost of Plant
purchased under = Rs. 36.54 Lakhs and Machinery as per
modernization scheme IND AS 23.
Advance to Suppliers Rs. 58 Lakhs Rs. 58 x 9% Kept in Interest
for additional assets = Rs. 5.22 Lakhs Suspense A/c.
(Capital WIP A/c.) till
the date of acquisition/
installation of additional
assets & capitalized
later on asset creation.
Working Capital Rs. 116 Lakhs Rs. 116 x 9% Written off to P&L A/c.
= Rs. 10.44 Lakhs as Expense, as per IND
AS 23
Total Rs. 580 Lakhs Rs. 52.20 Lakhs
QUESTION NO 20 (SIMILAR AS QUESTION NO 4)
Harihara Limited obtained a Loan for Rs. 70Lakhs on 15th April 20X1 from a Nationalised
Bank to be utilized as under:
Particulars Rs.
Construction of Factory Shed 25,00,000
Purchase of Machinery 20,00,000
Working Capital 15,00,000
Advance for Purchase of Truck 10,00,000
In March 20X2, Construction of the Factory Shed was completed and Machinery which was
ready for its intended use installed. Delivery of Truck was received in the next Financial
year. Total Interest RS. 9,10,000 charged by the Bank for the Financial year ending
31.03.20X1. Show the treatment of Interest under IND AS 23
SOLUTION
9.10 Lakhs
Effective Interest Rate = = 13%.
70.00 Lakhs
The treatment for the Total Interest of Rs. 9.10 Lakhs is as under:-
Purpose/Utilisation Loan Amt. Interest Amount Accounting Treatment

Construction of Rs. 25 Lakhs Rs. 25 x 13% Added to Cost of Factory
Factory Shed = Rs. 3.25 Lakhs Shed as per IND AS 23
Purchase of Rs. 20 Lakhs Rs. 20 x 13% Added to Cost of Machinery

Machinery = Rs. 2.60 Lakhs as per IND AS 23
Working Capital Rs. 15 Lakhs Rs. 15 x 13% Written off to P&L A/c. as
= Rs. 1.95 Lakhs Expense, as per IND AS 23
Advance to Rs. 10 Lakhs Rs. 10 x 13% Kept in Interest Suspense

Supplier for = Rs. 1.30 Lakhs A/c. (Capital WIP A/c) till
Purchase of Truck the date of acquisition/
installation of Truck &
capitalized later on asset
creation. (Assumed as
Qualifying Asset)
QUESTION NO 21
On 1st April, Aruna Construction Ltd. obtained a loan of Rs. 32 Crores to be utilized as
under:-
Particulars Rs. in Particulars Rs. in

Crores Crores
Construction of Sea link across 2 25.00 Working Capital 2.00

cities (work was held up totally Purchase of Vehicles 0.50
for a month during the year due Advance for Tools/Cranes,etc. 0.50
to high water levels) Purchase of Technical know- 1.00
How
Purchase of Equipment’s and 3.00
Machineries
Total Interest charged by the Bank for the relevant financial year in Rs. 80 Lakhs. Show
the treatment of Interest by Aruna Construction Ltd. under IND AS 23
110 ACCOUNTS
SOLUTION
80.00 Lakhs
Effective Interest Rate = = 2.5%.
3,200.00 Lakhs
The treatment for the Total Interest of Rs. 80 Lakhs is as under:-
Note: Interest Amount = Loan Amount = 2.5% Both Amounts in Rs. Lakhs
Purpose/Utilisation Loan Amt. Interest Accounting Treatment

Amount
1.
Construction of Sea- 2,500 62.50 Added to Cost of Asset (It is
Link across two cities assumed that during temporary
suspension, some Administrative
Activities were carried on)
2. Purchase of 300 7.50 Added to Cost of Equipments and
Equipments & M/c. Machineries
3. Working Capital 200 5.00 Written off to P&L A/c. as
Expense. IND AS 23
4. Purchase of Vehicles 50 1.25 Debited to P&L A/c. (Assumed
immediate delivery taken and it
is ready for use and hence not a
Qualifying Asset)
5. Advance for Tools/ 50 1.25 Kept in Interest Suspense A/c.
Cranesetc. (Capital WIP A/c) till the date
of acquisition/installation of
the Assets & capitalized later.
(Assumed as Qualifying Asset)
6. Purchase of 100 2.50 Added to the cost of Intangibles.
Technical Know-how
Total Borrowing Cost 3,200.00 80.00
QUESTION NO 22 (SIMILAR AS Q.2)
Hariram Iron and Steel Ltd. is establishing an Integrated Steel Plant consisting of four
phases. It is expected that the full Plant will be established over several years but Phase
I and Phase II will be started as soon as they are completed.
Following are the details of work done on different phases of the Plant during the current
year (in Rs.)
Particulars Phase I Phase II Phase III Phase IV

Cash expenditure 20,00,000 35,00,000 25,00,000 40,00,000
Plant purchased 28,00,000 40,00,000 30,00,000 48,00,000
Total Expenditure 48,00,000 75,00,000 55,00,000 88,00,000
Total Exp. of all Phases 2,66,00,000
Loan Taken at 16% 2,40,00,000
During the current year, Phases I and II have become operational. Find out the total
amount to be capitalized and to be expensed during the year.
SOLUTION
S.No. Particulars Amount Rs.

1. Interest Expense on Loan (Assuming that Loan is taken on 38,40,000
the first day of the financial period concerned, and the work
of asset creation had started on that date) = Rs. 2,40,00,000
at 16%
2. Total Cost of Phases I and II (Rs. 48,00,000 + Rs. 75,00,000) 1,23,00,000
3. Total Cost of Phases III and IV (Rs. 55,00,000 + Rs.88,00,000) 1,43,00,000
4. Total Cost of all 4 Phases 2,66,00,000
5. Total Loan 2,40,00,000
6. Proportionate Loan used for Phases I and II
2,40,00,000 1,10,97,744
x 1,23,00,000
2.66.00,000
7. Proportionate Loan used for Phases IIII and IV

2,40,00,000 1,29,02,256
x 1,43,00,000
2.66.00,000
8. Interest on Loan used for Phases I & II, based on 17,75,639

Proportionate Loan Amount = 1,10,97,744 at 16%
9. Interest on Loan used for Phases III & IV based on 20,64,361
Proportionate Loan Amount = 1,29,02,256 x 16%
Accounting Treatment: Interest of Rs. 17,75,639 relating to Phases I and II should be

expensed (in the ratio of Asset Costs 48:75), and not to be added to respective Assets
in Phases I and II. Interest of Rs. 20,64,361 relating to Phases III and IV should be
112 ACCOUNTS
held in Capital work in Progress till asset construction work is completed, and thereafter
capitalized in the ratio of cost of assets.
QUESTION NO 23
The Notes to Accounts of Gopal Ltd. for the year ended 31st March includes the following –
“Interest on Bridge Loan from Banks and Financial Institutions and on Debentures
specifically obtained for the Company’s Fertilizer Project amounting to Rs. 1,80,80,000 has
been capitalized during the year, which includes approximately Rs. 1,70,33,465 capitalised
in respect of the utilization of Loan and Debenture Money for the said purpose” is the
treatment correct? Briefly comment.
SOLUTION
The given case is one of Specific Borrowings for Fertilizer Project and hence the capitalized
Borrowing Cost should be restricted to the actual amount of interest expenditure i.e. Rs.
1,70,33,465. Capitalisation of Rs. 180,80,000 has been resulted in over-statement of profits
and assets by Rs. 10,46,535.
QUESTION NO 24 (SIMILAR AS QUESTION 17)
Guha Limited borrowed an amount of Rs. 150 Crores on 1st April, for construction of Boiler
Plant at 11% p.a. The Plant is expected to be completed in 4 years. The Weighted Average
Cost of Capital is 13% p.a. The Accountant of Guha Ltd. capitalized interest of Rs. 19.50
Crores for the accounting period ending on 31st March. Due to Surplus Funds out of Rs. 150
Crores, an income Rs. 3.50Crores was earned and credited to P&L A/c. comment.
SOLUTION
1. Capitalization based on the Weighted Average Cost of Capital 13% is not proper in the
above case, since the above is a case of Specific Borrowings.
2. Income received on Temporary Investments should be reduced from the Borrowing
Cost and should not be credited to Profit & Loss A/c. The correct treatment is as
under:-
Actual Interest Cost = Rs. 150 Crores x 11% Rs. 16.50 Crores
Less: Income from Temporary Investments Rs. 3.50 Crores
Borrowing Costs to be Capitalised under IND AS-23 Rs. 13.00 Crores
QUESTION NO 25
Parasuram Ltd. had the following borrowings during a year in respect of capital expansion.
Plant Cost of Asset Remarks

Plant P Rs. 100 Lakhs No Specific Borrowings.
Plant Q Rs. 125 Lakhs Bank Loan of Rs. 65 Lakhs at 10%.
Plant R Rs. 175 Lakhs 9% Debentures of Rs. 125 Lakhs were issued
In addition to the above specific borrowings, the Company had obtained Term Loans from
two Banks – (1) Rs. 100 Lakhs at 10% from Corporation Bank and (2) Rs. 110 Lakhs at 11.50%
from Canara Bank, to meet its capital expansion requirements. What is the amount of
Borrowing Costs to be capitalized in each of the above Plants ?
SOLUTION
1. Computation of Actual Borrowing Costs incurred during the year:
Source Loan Amount Interest Rate Interest Amount

Bank Loan Rs. 65.00 Lakhs 10.00% Rs. 6.50 Lakhs
9% Debentures Rs.125.00 Lakhs 9.00% Rs. 11.25 Lakhs
Term Loan from Rs. 100.00 Lakhs 10.00% Rs. 10.00 Lakhs
Corporation Bank
Term Loan from Canara Rs. 110.00 Lakhs 11.50% Rs. 12.65 Lakhs
Bank
Total Rs. 400.00 Lakhs Rs. 40.40 Lakhs
Specific Borrowings Rs. 190.00 Lakhs Rs. 17.75 Lakhs
included in above
2. Weighted Average Capitalisation Rate for General Borrowings =

Total Interest Less Interest on Specific Borrowings

Total Borrowings Less Specific Borrowings
40.40 - 17.75
=
400 - 190
22.65
= = 10.79%
210
114 ACCOUNTS
3. Capitalisation of Borrowing Costs under IND AS-23 will be as under:-
Plant Borrowing Loan Amount Interest Interest Cost of Asset

Rate Amount
P General Rs. 100 Lakhs 10.79% Rs. 10.79 Lakhs Rs. 110.79 Lakhs
Q Specific Rs. 65 Lakhs 10.00% Rs. 6.50 Rs.137.97 Lakhs
General Rs. 60 Lakhs 10.79% Rs. 6.47 Lakhs
R Specific Rs. 125 Lakhs 9.00% Rs.11.25 Rs. 191.64 Lakhs
General Rs. 50 Lakhs 10.79% Rs. 5.39
Note: The amount of Borrowing Costs capitalized should not exceed the actual interest
cost.
QUESTION NO 26 (SAME AS QUESTION 7)
Madhav Limited began construction of a New Plant on 1st April 2013 and obtained a special
Loan of Rs. 8 Lakhs at 10% p.a. to finance the construction of the Plant. The expenditure
that was made on the project of Plant construction was as -
On 01.04.2014 Rs. 10,00,000
On 01.08.2014 Rs. 24,00,000
On 01.01.2014 Rs.4,00,000
The Company’s other outstanding Non-Specific Loan was Rs. 46,00,000 at an interest of
12% p.a. The construction of Plant was completed on 31.03.2014. Compute the amount of
interest to be capitalized.
SOLUTION
Computation of Interest Amount to be capitalized
Date Amount Spent (Rs.) Computation Interest

Amount (Rs)
01.04.2013 10,00,000 Rs. 8,00,000 from Specific 80,000
Loan = Rs. 8,00,000 x 10%
Rs. 2,00,000 from Non Specific 24,000

Loan = Rs.2,00,000 x 12%
01.08.2013 24,00,000 From Non Specific Loan 1,92,000

Rs. 2400,000 x 12% x 8/12
01.01.2014 4,00,000 From Non Specific Loan 12,000
Rs. 4,00,000 x 12% x 3/12
Total 38,00,000 3,08,000
Total Amount Capitalized = Cost Incurred Rs. 38,00,000 + Interest capitalized under
IND AS-23 Rs. 308,000 = Rs. 41,08,000.
QUESTION NO 27 (PARA 6 E ON EXCHANGE DIFFERENCE)
Harkishan Ltd. took a loan of USD 20,000 at6% p.a. on 1st April for a specific capital
expansion project. The interest was payable annually. The Exchange Rate at the date of
the loan was 1 USD = Rs. 52.00. However, the Company could have taken a corresponding
Rupee Loan from Banks at 12% p.a. on that date. At the end of the year, the Exchange Rate
was 1 USD = Rs. 55.00 How will you treat the Borrowing Costs and Exchange Differences in
the above case?
Analyse the impact of the following changes independently. What would be the accounting
treatment if the Rupees Loan were to carry interest at 14% p.a.? What will be the treatment
if the Exchange Rate at the year end was 1 USD = Rs.53.00?
SOLUTION
S.No. Particulars Situation 1 Situation 2 Situation 3

Interest at12% Interest at 1 USD =
14% Rs.53.00
1. Interest on Local $ 20,000 x $ 20,000 x $ 20,000 x
Currency Borrowings Rs.52 x 12% = Rs.52 x 14% = Rs.52 x 12% =
Rs.1,24,800 Rs.1,45,600 Rs.1,24,800
2. Interest on Foreign $ 20,000x6% $ 20,000 x $ 20,000 x 6%

Currency Borrowings x Rs.55 = 6% x Rs.55 = x Rs.53 = Rs.
Rs.66,000 Rs.66,000 63,600
3. Interest Difference Rs. 58,800 Rs. 79,600 Rs. 61,200

between Foreign
& Local Currency
Borrowings = (1) – (2)
116 ACCOUNTS
4. Exchange Difference $ 20,000 x (55- $ 20,000 x (55- $ 20,000 x (53-

in Principal repayable 52) = Rs.60,000 52) = Rs.60,000 52) = Rs. 20,000
at the end of the
year
5. Further Amt. to be Rs. 58,800 Rs. 60,000 Rs. 20,000

treated as Borrowing
Costs = (3) or (4),
whichever is less.
6. Exchange Difference Rs. 1,200 Nil Nil

to be taken to P&L
/c. as per AS-11 = (4)
– (5)
7. Borrowing Costs Rs. 1,24,800 Rs. 1,26,000 Rs. 83,600
under
IND AS-23 = (2)+(5)
QUESTION NO 28
Srivats Co-operative Society Ltd. has borrowed a sum of US $ 12.50 Million at the
commencement of the Financial year 2012-13 for its Solar Energy Project at LIBOR (London
Interbank Offered Rate of 1%) + 4% Interest is payable at the end of the respective
financial year. The Loan was availed at the then rate of RS. 52 to the Dollar while the
rate as on 31st March 2013, is Rs. 55 to the US Dollar. Had the Company borrowed the
Rupee equivalent in India, the interest would have been 11%. Compute. Borrowing Cost, also
showing the amount of Exchange Difference as per AS.
SOLUTION
S.No Particulars Result

1. Interest Payable if Borrowed in INR = Rs. 71.50 Million
(USD 12.50 Million x Opening Exchange Rate Rs. 52 x
INR Loan Interest Rate 11%)
2. Interest Actually Paid in Foreign Currency = Rs. 34.38 Millions

Foreign Currency Loan USD 12.50 Million x
Closing Exchange Rate Rs. 55 x USD Interest Rate 5%
3. Notional Savings in Interest due to Foreign Currency Rs. 37.12 Millions

Borrowings = (1-2)
4. Change in Carrying Amount of Principal due to Exchange

Rate Difference = Rs. 37.50 Millions
(Closing Exchange Rate Rs. 55 Less Opening Exchange
Rate Rs.52) x USD 12.5 Millions
Note: Since Closing Rate > Opening Rate, there is an
Increase in Carrying Amount in this case.
5. Further Amount to be treated as Borrowing Cost = Rs. 37.12 Millions

Least of (3) and (4)
6. Aggregate Borrowing Cost as per IND AS-23 = Actual Rs. 71.50 Millions
Interest as per (2) + Additional in (5)
7. Exchange Rate Less to be Recognized in Statement of Rs .38 Millions

P&L = (4-5)
QUESTION NO 29
Kaladhar Ltd. dealing in timber finds it advantageous to store selected grades of timber for
a prolonged period in order to improve their quality. It desires to include an actual interest
cost of holding the timber as part of the value of unsold timber in inventory, and consult
you in order to determine whether in your opinion, such a method of valuation would be fair
and reasonable and in accordance with generally accepted accounting principles. Give your
opinion with reasons.
Would your answer be different if the Company did not actually incur any interest charges
for holding the timber but desired to include notional interest charges which could be
imputed to the Company’s own Paid-up Capital and Reserves which are invested in holding
the timber for maturity?
(HINT: IND AS 23 IS NOT APPLICABLE FOR BIOLOGICAL ASSETS)
QUESTION NO 30 (DATE WISE CAPITALISATION) (CLASS EXAMPLE)
Assume NDA Limited begins construction on a new building on 1st January, 2004. In addition,
NDA Limited obtained a Rs. 1 Lakh loan to finance the construction of the building on 1st
January, 2004 at an annual interest rate of 10%. The company’s other outstanding debt
during 2004 consists of two loans of Rs. 6 Lakhs and Rs. 8 Lakhs with interest rates of
11% and 13% respectively. Expenditures that were made on the building project were as
follows:
118 ACCOUNTS
January 2004 200000

April 2004 300000
July 2004 400000
December 2004 120000
Compute the cost to be capitalized including borrowing cost
SOLUTION
STEP 1:
Computation of average accumulated expenses
Rs. 200,000 x 12/12 (January – December) = Rs. 200,000
Rs. 300,000 x 9/12 (April – December) = Rs. 225,000
Rs. 400,000 x 6/12 (July-December) = Rs. 200,000
Rs. 120,000 x 1/12 (December) = Rs. 10,000
Rs. 1020,000 Average Accumulated Expenses = Rs. 635,000
STEP 2
Compute the average interest rate based on the other outstanding debt of the entity
other than specific borrowings:
600,000 x 11% = Rs. 66,000

800,000 x 13% = Rs. 104,000
1,400,000 Rs. 170,000
Average interest rate : Rs. 170,000/1,400,000 = 12.14%
STEP 3
Compute the interest on average accumulated expenses
Average Accumulated Expenses (AAE) Interest to be capitalized

(based on AAE)
100,000 (Specific borrowings) x 10% = 10,000
535,000 (635,000 – 100,000) x 12.14% 64,950
635,000 74,950
STEP 4
Compute actual interest costs incurred during the year.
100,000 x 10% = Rs. 10,000
600,000 x 11% = Rs. 66,000
800,000 x 13% = Rs. 104,000
Total Rs. 180,000
Amount to be capitalized is Rs. 74,950 which is not more than actual interest of Rs. 180,000
(Amt. in Rs.)
Building Account Dr. 1094950
To Cash 1094950
QUESTION NO 31 (BIOLOGICAL ASSETS)
Dhangar Ltd. has a cattle field which serves the company milk, wool etc. The livestock is
carried at Fair value. The Opening fair value of livestock is Rs. 54,40,000. The closing fair
value Rs.67,33,000. Out of which Rs. 2,00,000 worth was purchased during the year. Fresh
borrowings were taken at the beginning of the year to buy livestock. The total borrowings
by the year end was Rs. 22,00,000 @ 12%. Calculate the borrowing cost as per Ind AS-23
and comment.
SOLUTION
Ind AS-23 is not applicable on Biological Assets. It is applicable on those assets which are
carried at cost less depreciation. Also further the assets should be qualifying assets. In
the present case the entire BC of Rs. 2,64,000 is charged to profit/loss account. BC should
not be capitalized on biological assets.
QUESTION NO 32 (HYPER INFLATIONARY SITUATION) ( IND AS 29)
Hyper Ltd is engaged in development of properties and further sell it in the open market.
The development process takes substantial period of time. It has financed its inventories
by taking loan from Yekoshore Development Bank £ 75 million. The economy is under hyper
inflationary situation. The interest rate is 32%. The inflation is 200%. You are required
to calculate the borrowing cost attributable towards the capitalization of asset as per Ind
As 23
SOLUTION
Ind AS-23 : In case of Hyperinflationary situation the borrowing costs relate to the
inflationary element is charged to income statement and not to be capitalized.
120 ACCOUNTS
Accordingly the effective (real element of) interest = 32% / 200% - 16%.
BC requires capitalization = 75 x 16% = £ 12 million.
BC charged to P/L = 75 x 32% - 12 = £ 12 million.
QUESTION NO 33: DATE OF COMMENCEMENT
X Ltd is commencing a new construction project, which is to be financed by borrowing. The

key dates are as follows:
(i) 15 May 20X1: Loan interest relating to the project starts to be incurred
(ii) 2 June 20X1 : Technical site planning commences
(iii) 19 June 20X1 : Expenditure on the project started to be incurred
(iv) 18 July 20X1 : Construction work commences
Identify commencement date.
SOLUTION
In the above case, the three conditions to be tested for commencement date would be:
Borrowing cost has been incurred on: 15 May 20X1
Expenditure has been incurred for the asset on: 19 June 20X1
Activities necessary to prepare asset for its intended use or sale: 2 June 20X1
Commencement date would be the date when the above three conditions would be satisfied
in all i.e 19 June 20X1.
QUESTION NO 34 (PARA 6 E EXCHAGE DIFFERENCES)
ABC Ltd. has taken a loan of USD 20,000 on April 1, 20X1 for constructing a plant at an
interest rate of 5% per annum payable on annual basis.
On April 1, 20X1, the exchange rate between the currencies i.e USD Vs INR was ` 45 per
USD. The exchange rate on the reporting date i.e March 31, 20X2 is ` 48 per USD.
The corresponding amount could have been borrowed by ABC Ltd from State bank of India
in local currency at an interest rate of 11% per annum as on April 1, 20X1.
Compute the borrowing cost to be capitalized for the construction of plant by ABC Ltd.
SOLUTION
In the above situation, the Borrowing cost needs to determine for interest cost on such
foreign currency loan and eligible exchange loss difference if any.
(a) Interest on Foreign currency loan for the period : USD 20,000 x 5% = USD 1,000
Converted in ` : USD 1,000 x ` 48/USD = ` 48,000
Increase in liability due to change in exchange difference :
USD 20,000 x (48 - 45) = ` 60,000
(b) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x ` 45/USD x 11% = ` 99,000
(c) Difference between Interest on Foreign Currency borrowing and local Currency
borrowing : ` 99,000 - 48,000 = ` 51,000
Hence, out of Exchange loss of ` 60,000 on principal amount of foreign currency loan, only
exchange loss to the extent of ` 51,000 is considered as borrowing costs.
Total borrowing cost to be capitalized is as under :
(a) Interest cost on borrowing ` 48,000

(b) Exchange difference to the extent considered to be an adjustment to ` 51,000
Interest cost
` 99,000
The exchange difference of ` 51,000 has been capitalized as borrowing cost and the
remaining ` 9,000 will be expensed off in the Statement of Profit and loss.
QUESTION NO 35 CAPITALISATION RATE
Beta Ltd had the following loans in place at the end of 31st March 20X2
(Amounts in ` 000s)
Loan 1st April 20X1 31st March 20X2

18% Bank Loan 1,000 1,000
16% Term Loan 3,000 3,000
14% Debentures 2,000
14% debenture was issued to fund the construction of Office building on 1st July 20X1 but
the development activities has yet to be started.
On 1st April 20X1, Beta ltd began the construction of a Plant being qualifying asset using
the existing borrowings. Expenditure drawn down for the construction was: ` 500,000 on
1st April 20X1 and ` 2,500,000 on 1st January 20X2.
122 ACCOUNTS
Required
Calculate the borrowing cost that can be capitalised for the plant.
SOLUTION
(18% x 1,000) (16% x 3,000)

Capitalisation rate + 16.5%
1,000 + 3,000 1,000 +3,000
Borrowing Costs (500,000 x 16.5%) + (2,500,000 x 16.5% x 3/12) ` 1,85,625


An entity constructs a new office building commencing on 1st September, 2018, which
continues till 31st December, 2018 (and is expected to go beyond a year).Directly
attributable expenditure at the beginning of the month on this asset are ` 2 lakh in
September 2018 and ` 4 lakh in each of the months of October to December 2018.
The entity has not taken any specific borrowings to finance the construction of the building but
has incurred finance costs on its general borrowings during the construction period. During the
year, the entity had issued 9% debentures with a face value of ` 30 lakh and had an overdraft
of ` 4 lakh, which increased to ` 8 lakh in December 2018. Interest was paid on the overdraft
at 12% until 1st October, 2018 and then the rate was increased to 15%.
Calculate the capitalization rate for computation of borrowing cost in accordance with
Ind AS ‘Borrowing Cost’.
ANSWER
Calculation of capitalization rate on borrowings other than specific borrowings
Nature of Period of Amount of loan Rate of Weighted average amount

general borrow- outstanding i n t e r e s t of interest
ings (`) p.a.
balance (`)
a b c d = [(b x c) x (a/12)]
9% Debentures 12 months 30,00,000 9% 2,70,000
Bank overdraft 9 months 4,00,000 12% 36,000
2 months 4,00,000 15% 10,000
1 month 8,00,000 15% 10,000
46,00,000 3,26,000
Weighted average cost of borrowings
= {30,00,000 x(12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12) = 34,33,334
Capitalisation rate = (Weighted average amount of interest / Weighted average of gen-

eral borrowings) x 100
= (3,26,000 / 34,33,334) x 100 = 9.50% p.a.

124 ACCOUNTS
EXTRA QUESTIONS
QUESTION 1
A company deals in production of dairy products, It prepares and sells various milk products
like ghee, butter and cheese, The company borrowed funds from bank for manufacturing
operation. The cheese takes substantial longer period to get ready for sale.
State whether borrowing costs incurred to finance the production of inventories (cheese)
that have a long production period, be capitalised?
QUESTION 2
A company is in the process of developing computer software. The asset has been qualified
for recognition purposes. However, the development of computer software will take
substantial period of time to complete.
(i) Can computer software be termed as a ‘qualifying asset’ under Ind As 23?
(ii) Is management intention considered when assessing whether an asset is a qualifying
asset?
QUESTION 3
A telecom company has acquired a 3G license. The license could be sold or licensed to a third
party. However, management intends to use it to operate a wireless network. Development
of the network starts when the license is acquired.
Should borrowing costs on the acquisition of the 3G license be capitalised until the network
is ready for its intended use?
QUESTION 4
A real estate company has incurred expenses for the acquisition of a permit allowing
the construction of a building. It has also acquired equipment that will be used for the
construction of various buildings.
Can borrowing costs on the acquisition of the permit and the equipment be capitalised until
the construction of the building is complete?
QUESTION 5
On 1st April, 20X1, A Ltd. Took a 8% loan of Rs. 50,00,000 for construction of building A
which is repayable after 6 years ie on 31st March 20X7. The construction of building was
completed on 31st March 20X3. A Ltd. Started constructing a new building B in the year
20X3-20X4, for which he used his existing borrowings, He has outstanding general purpose
loan of Rs. 25,00,000, interest on which is payable @9% and Rs. 15,00,000 interest on
which is payable @ 7%.
Is the specific borrowing transferred to the general borrowings pool once the respective
qualifying asset is completed? Why?
QUESTION 6
An entity constructs a new head office building commencing on 1st September 20X1, which
continues till 31st December 20X1. Directly attributable expenditure at the beginning of
the month on this asset are Rs. 100,000 in September 20X1 and Rs. 250,000 in each of the
months of October to December 20X1.
The entity has not taken any specific borrowings to finance the construction of the asset
but has incurred finance costs on its general borrowings during the construction period.
During the year, the entity had issued 10% debentures with a face value of Rs. 20 lacs
and had an overdraft of Rs. 500,000 which increased to Rs. 750,000 in December 20X1,
interest was paid on the overdraft at 15% until 1 October 20X1 then the rate was increased
to 16%.
Calculate the capitalization rate for computation of borrowing costs in accordance with Ind
AS 23 ‘Borrowing Costs’.
QUESTION 7
K. Ltd. Began construction of a new building at an estimated cost of Rs. 7 lakh on 1st April,
20X1. To finance construction of the building it obtained a specific loan of Rs. 2 lakh from
a financial institution at an interest rate of 9% per annum.
The company’s other outstanding loans were :
Amount Rate of Interest per annum
Rs. 7,00,000 12%

Rs. 9,00,000 11%
126 ACCOUNTS
The expenditure incurred on the construction was:
April, 20X1 Rs. 1,50,000

August, 20X1 Rs. 2,00,000
October, 20X1 Rs. 3,50,000
January, 20X2 Rs. 1,00,000
The construction of building was completed by 31st January, 20X2. Following the provisions
of Ind As 23 ‘Borrowing Costs’, calculate the amount of interest ot be capitalized and pass
necessary journal entry for capitalizing the cost and borrowing cost in respect of the
building as on 31st January, 20X2.
QUESTION 8
On 1st April, 20X1, entity A contracted for the construction of a building for Rs. 22,00,000.
The land under the building is regarded as a separate asset and is not part of the qualifying
assets. The building was completed at the end of March, 20X2, and during the period the
following payments were made to the contractor :
Payment date Amount (Rs.’000)
1st April, 20X1 200

30th June, 20X1 600
31st December 20X1 1,200
31st March, 20X2 200
Total 2,200
Entity A’s borrowings at its year end of 31st March, 20X2 were as follows :
a. 10% 4-year note with simple interest payable annually, which relates specifically to the
project; debt outstanding on 31st march, 20X2 amounted to Rs. 7,00,000. Interest of
Rs. 65,000 was incurred on these borrowings during the year, and interest income of
Rs. 20,000 was earned on these funds while they were held in anticipation of payments.
b. 12.5% 10-year note with simple interest payable annually, debt outstanding at 1st April
20X1 amounted to Rs. 1,000,000 and remained unchanged during the year; and
c. 10% 10-year note with simple interest payable annually; debt outstanding at 1st April,
20X1 amounted to Rs. 1,500,000 and remained unchanged during the year.
What amount of the borrowing costs can be capitalized at year end as per relevant Ind AS?
QUESTION 9
In A group with Parent Company “P” there are 3 subsidiaries with following business :
“A” – Real Estate Company
“B” – Construction Company
“C” – Finance Company
 arent Company has no operating activities of its own but performs management
P
functions for its subsidiaries.
 Financing activities and cash management in the group are coordinated centrally.
 Finance Company is a vehicle used by the group solely for raising finance.
 All entities in the group prepare Ind AS financial statements.
The following information is relevant for the current reporting period 20X1-20X2:
Real Estate Company

 Borrowings of Rs. 10,00,000 with an interest rate 7% p.a.
 Expenditures on qualifying assets during the period amounted to Rs. 15,40,000.
 ll construction works were performed by Construction Company. Amounts invoiced
A
to Real Estate Company included 10% profit margin.
Construction Company
 No borrowings during the period.
 inanced Rs. 10,00,000 of expenditures on qualifying assets using its own cash
F
resources.
Finance Company
 aised Rs. 20,00,000 at 7% p.a. externally and issued a loan to Parent Company for
R
general corporate purposes at the rate of 8%.
Parent Company
 Used loan from Finance Company to acquire a new subsidiary.
 o Qualifying assets apart from those in Real Estate Company and Construction
N
Company.
 Parent Company did not issue any loans to other entities during the period.
What is the amount of borrowing costs eligible for capitalisation in the financial statements
of each of the four entities for the current reporting period 20X1-20X2?
128 ACCOUNTS
How will you capitalise the interest when qualifying assets are funded by borrowings in
the nature of bonds that are issued at discount?
Y Ltd. issued at the start of year 1, 10% (interest paid annually and having maturity
period of 4 years) bonds with a face value of ` 2,00,000 at a discount of 10% to finance
a qualifying asset which is ready for intended use at the end of year 2.
Compute the amount of borrowing costs to be capitalized if the company amortizes discount
using Effective Interest Rate method by applying 13.39% p.a. of EIR.
ANSWER
1. Capitalisation Method
As per the Standard, borrowing costs may include interest expense calculated using
the effective interest method. Further, capitalisation of borrowing cost should
cease where substantially all the activities necessary to prepare the qualifying
asset for its intended use or sale are complete.
Thus, only that portion of the amortized discount should be capitalised as part of
the cost of a qualifying asset which relates to the period during which acquisition,
construction or production of the asset takes place.
Capitalisation of Interest
Hence based on the above explanation the amount of borrowing cost of year 1 & 2 are
to be capitalised and the borrowing cost relating to year 3 & 4 should be expensed.
Quantum of Borrowing
The value of the bond to Y Ltd. is the transaction price ie ` 1,80,000 (2,00,000 – 20,000)
Therefore, Y Ltd will recognize the borrowing at `1,80,000.
Computation of the amount of Borrowing Cost to be Capitalised Y Ltd will capitalise the
interest (borrowing cost) using the effective interest rate of 13.39% for two years as
the qualifying asset is ready for intended use at the end of the year 2, the details of
which are as follows:
Year Opening Interest expense Total Interest Closing

Borrowing @ 13.39% to be paid Borrowing
capitalised
(1) (2) (3) (4) (5) = (3) – (4)
1 1,80,000 24,102 2,04,102 20,000 1,84,102
2 1,84,102 24,651 2,08,753 20,000 1,88,753
48,753
Accordingly, borrowing cost of ` 48,753 will be capitalized to the cost of qualifying asset.
QUESTION 11 (RTP NOV 21…ALREADY DISCUSSED IN RTP VIDEO)
Nikka Limited has obtained a term loan of ` 620 lacs for a complete renovation and
modernisation of its Factory on 1st April, 20X1. Plant and Machinery was acquired
under the modernisation scheme and installation was completed on 30th April, 20X2. An
expenditure of ` 510 lacs was incurred on installation of Plant and Machinery, ` 54 lacs
has been advanced to suppliers for additional assets (acquired on 25th April, 20X1) which
were also installed on 30th April, 20X2 and the balance loan of ` 56 lacs has been used for
working capital purposes. Management of Nikka Limited considers the 12 months period
as substantial period of time to get the asset ready for its intended use.
The company has paid total interest of ` 68.20 lacs during financial year 20X1-20X2 on the
above loan. The accountant seeks your advice how to account for the interest paid in the
books of accounts. Will your answer be different, if the whole process of renovation and
modernization gets completed by 28th February, 20X2?
ANSWER
As per Ind AS 23, Borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset form part of the cost of that asset.
Other borrowing costs are recognised as an expense.
Where, a qualifying asset is an asset that necessarily takes a substantial period of time
to get ready for its intended use or sale.
Accordingly, the treatment of Interest of ` 68.20 lacs occurred during the year 20X1-
20X2 would be as follows:
(i) When construction of asset completed on 30th April, 20X2

The treatment for total borrowing cost of ` 68.20 lakh will be as follows:
Purpose Nature Interest to be Interest to be

capitalised charged to profit
and loss account
` in lakh ` in lakh
Modernisation and Qualifying [68.20 x (510/620)] =

renovation of plant and asset 56.10
machinery
Advance to suppliers for Qualifying [68.20 x (54/620)] =

additional assets asset 5.94
130 ACCOUNTS
Working Capital Not a [68.20 x (56/620)]

qualifying = 6.16
asset
62.04 6.16
(ii) construction of assets is completed by 28th February, 20X2

When the process of renovation gets completed in less than 12 months, the plant and
machinery and the additional assets will not be considered as qualifying assets (until
and unless the entity specifically considers that the assets took substantial period
of time for completing their construction). Accordingly, the whole of interest will
be required to be charged off / expensed off to Profit and loss account.
IND AS-36: IMPAIRMENT OF ASSETS 131
IND AS-36: IMPAIRMENT OF ASSETS

QUESTION 1
The carrying value of a building in the books of Sun Ltd. as at Mar 31, 20X1 is ` 300 lakhs.
As on that date the value in use is ` 250 lakhs and fair value less cost of disposal is ` 238
lakhs. Calculate the Recoverable Amount.
SOLUTION
Recoverable Amount: Higher of Fair Value less Costs of disposal and Value in Use Fair Value
less costs of disposal: ` 250 Lakhs
Value in Use: ` 238 Lakhs
Therefore, Recoverable value will be ` 250 lakhs
QUESTION 2
Saturn India Ltd is reviewing one of its business segments for impairment. The carrying
value of its net assets is 40 million. Management has produced two computations for the
value -in-use of the business segment. The first value of ` 36 million excludes the benefit
to be derived from a future reorganization, but the second value of ` 44 million includes
the benefits to be derived from the future reorganization. There is not an active market
for the sale of the business segments.
Whether the business segment needs to be Impaired?
SOLUTION
The benefit of the future reorganization should not be taken into account in calculating
value-in-use. Therefore, the net assets of the business segment will be impaired by ` 4
million because the value-in- use of ` 36 million is lower than the carrying value of ` 40
million. The value-in-use can be used as the recoverable amount as there is no active market
for the sale of the business segment.
QUESTION 3
Mars Ltd. gives the following estimates of cash flows relating to property, plant and
equipment on 31-03-20X4. The discount rate is 15%
Year Cash flow (INR Lakhs)

20X4-20X5 2,000
20X5-20X6 3,000
20X6-20X7 3,000
132 ACCOUNTS
20X7-20X8 4,000
20X8-20X9 2,000
Residual Value at 31.03.20X9 500
Property, Plant & equipment was purchased on 1.04.20X1 for ` 20,000 lakhs
Useful life was 8 years
Residual value estimated at the end of 8 years ` 500 lakhs
Fair value less cost to disposal ` 10,000 lakhs
QUESTION 4: IMPAIRMENT LOSS
Jupiter Ltd, a leading manufacturer of steel is having a furnace, which is carried in the
balance sheet on 31.03.20X1 at ` 250 lakhs. As at that date the value in use and Fair value
is ` 200 lakhs. The cost of disposal is ` 13 lakhs.
Calculate the Impairment Loss to be recognised in the books of the Company?
SOLUTION
Calculation of Impairment Loss:
Calculation of Impairment Loss INR in Lakhs

Recoverable Amount = 200
Higher of, Fair Value less Cost of Disposal ( 200-13) 187
Or
Value in Use 200
Impairment Loss = Carrying Amount – Recoverable Amount = 250-200 50
QUESTION 5 (WE WILL COVER IT IN IND AS 12)
Mercury ltd has an identifiable asset with a carrying amount of ` 1,000. Its recoverable
amount is ` 650. The tax rate is 30% and the tax base of the asset is ` 800. Impairment
losses are not deductible for tax purposes. The effect of the impairment loss is as follows:
SOLUTION:
Identifiable Impairment Identifiable

assets before loss assets after
impairment loss impairment loss
` ` `
Carrying amount 1,000 (350) 650
Tax base 800 - 800
Taxable (deductible 200 (350) (150)
temporary
Deferred tax liability 60 (105) (45)
(asset) at 30%
In accordance with Ind AS 12, the entity recognises the deferred tax asset to the extent
that it is probable that taxable profit will be available against which the deductible
temporary difference can be utilised.
QUESTION 6
A mining entity owns a private railway to support its mining activities. The private railway
could be sold only for scrap value and it does not generate cash inflows that are largely
independent of the cash inflows from the other assets of the mine.
SOLUTION:
It is not possible to estimate the recoverable amount of the private railway because its
value in use cannot be determined and is probably different from scrap value. Therefore,
the entity estimates the recoverable amount of the cash-generating unit to which the
private railway belongs, ie the mine as a whole
QUESTION 7
A bus company provides services under contract with a municipality that requires minimum
service on each of five separate routes. Assets devoted to each route and the cash flows
from each route can be identified separately. One of the routes operates at a significant
loss.
SOLUTION:
Since the entity does not have the option to curtail any one bus route, the lowest level of
identifiable cash inflows that are largely independent of the cash inflows from other assets
or groups of assets is the cash inflows generated by the five routes together. The cash-
generating unit for each route is the bus company as a whole.
134 ACCOUNTS
QUESTION 8
A company operates a mine in a country where legislation requires that the owner must
restore the site on completion of its mining operations. The cost of restoration includes
the replacement of the overburden, which must be removed before mining operations
commence. A provision for the costs to replace the overburden was recognised as soon
as the overburden was removed. The amount provided was recognised as part of the cost
of the mine and is being depreciated over the mine’s useful life. The carrying amount of
the provision for restoration costs is ` 500, which is equal to the present value of the
restoration costs.
The entity is testing the mine for impairment. The cash-generating unit for the mine is the
mine as a whole. The entity has received various offers to buy the mine at a price of around
` 800. This price reflects the fact that the buyer will assume the obligation to restore
the overburden. Disposal costs for the mine are negligible. The value in use of the mine is
approximately ` 1,200, excluding restoration costs. The carrying amount of the mine is `
1,000.
SOLUTION:
The cash-generating unit’s fair value less costs of disposal is ` 800. This amount considers
restoration costs that have already been provided for. As a consequence, the value in use
for the cash-generating unit is determined after consideration of the restoration costs and
is estimated to be ` 700 (` 1,200 less ` 500). The carrying amount of the cash-generating
unit is ` 500, which is the carrying amount of the mine (` 1,000) less the carrying amount
of the provision for restoration costs (` 500). Therefore, the recoverable amount of the
cash-generating unit exceeds its carrying amount.
For practical reasons, the recoverable amount of a cash-generating unit is sometimes
determined after consideration of assets that are not part of the cash-generating unit (for
example, receivables or other financial assets) or liabilities that have been recognised (for
example, payables, pensions and other provisions). In such cases, the carrying amount of
the cash-generating unit is increased by the carrying amount of those assets and decreased
by the carrying amount of those liabilities.
QUESTION 9
An entity sells for ` 100 an operation that was part of a cash-generating unit to which
goodwill has been allocated. The goodwill allocated to the unit cannot be identified or
associated with an asset group at a level lower than that unit, except arbitrarily. The
recoverable amount of the portion of the cash-generating unit retained is ` 300.
SOLUTION
Since the goodwill allocated to the cash- generating unit cannot be non-arbitrarily identified
or associated with an asset group at a level lower than that unit, the goodwill associated
with the operation disposed of is measured on the basis of the relative values of the
operation disposed of and the portion of the unit retained. Therefore, 25 per cent of the
goodwill allocated to the cash-generating unit is included in the carrying amount of the
operation that is sold.
If an entity reorganises its reporting structure in a way that changes the composition of
one or more cash -generating units to which goodwill has been allocated, the goodwill shall
be reallocated to the units affected. This reallocation is performed by using a relative
value approach similar to that used when an entity disposes of an operation within a cash-
generating unit, unless the entity can demonstrate that some other method better reflects
the goodwill associated with the reorganised units.
QUESTION 10
Goodwill had previously been allocated to cash -generating unit A. The goodwill allocated
to A cannot be identified or associated with an asset group at a level lower than A, except
arbitrarily. A is to be divided and integrated into three other cash-generating units, B, C
and D.
SOLUTION
Since the goodwill allocated to A cannot be non -arbitrarily identified or associated with an
asset group at a level lower than A, it is reallocated to units B, C and D on the basis of the
relative values of the three portions of A before those portions are integrated with B, C
and D.
QUESTION 11 (CORPORATE ASSETS)
Earth Infra Ltd has two cash- generating units, X and Y. There is no goodwill within the
units’ carrying values. The carrying values of the CGUs are CGU A for ` 20 million and CGU B
for ` 30 million. The company has an office building which it is using as a office headquarter
has not been included in the above values and can be allocated to the units on the basis of
their carrying values. The office building has a carrying value of ` 10 million. The recoverable
amounts are based on value-in-use of ` 18 million for CGU A and ` 38 million for CGU B.
Required: Determine whether the carrying values of CGU A and B are impaired.
QUESTION 12
A machine has suffered physical damage but is still working, although not as well as before
it was damaged. The machine’s fair value less costs of disposal is less than its carrying
amount. The machine does not generate independent cash inflows. The smallest identifiable
group of assets that includes the machine and generates cash inflows that are largely
independent of the cash inflows from other assets is the production line to which the
136 ACCOUNTS
machine belongs. The recoverable amount of the production line shows that the production
line taken as a whole is not impaired.
Assumption 1: budgets/ forecasts approved by management reflect no commitment
management to replace the machine.
Assumption 2: budgets/ forecasts approved by management reflect a commitment
management to replace the machine and sell it in the near future. Cash flows from continuing
use of the machine until its disposal are estimated to be negligible.
SOLUTION:
1. The recoverable amount of the machine alone cannot be estimated because the
machine’s value in use:
a) may differ from its fair value less costs of disposal; and
b) can be determined only for the cash-generating unit to which the machine belongs
(the production line).
The production line is not impaired. Therefore, no impairment loss is recognised for
the machine. Nevertheless, the entity may need to reassess the depreciation period
or the depreciation method for the machine. Perhaps a shorter depreciation period
or a faster depreciation method is required to reflect the expected remaining useful
life of the machine or the pattern in which economic benefits are expected to be
consumed by the entity.
2. The machine’s value in use can be estimated to be close to its fair value less costs of
disposal. Therefore, the recoverable amount of the machine can be determined and no
consideration is given to the cash-generating unit to which the machine belongs (i.e.
the production line). Because the machine’s fair value less costs of disposal is less than
its carrying amount, an impairment loss is recognised for the machine.
After the allocation procedures have been applied, a liability is recognised for any remaining
amount of an impairment loss for a cash-generating unit if, and only if, that is required by
another Indian Accounting Standard.
QUESTION 13: REVERSAL OF IMPAIRMENT LOSS
On 1st April 20X1, Venus ltd acquired 100% of Saturn ltd for ` 4,00,000. The fair value of
the net identifiable assets of Saturn ltd was ` 3,20,000 and goodwill was ` 80,000. Saturn
ltd is in coal mining business. On 31st March 20X3 the government has cancelled licenses
given to it in few states.
As a result Saturn’s ltd revenue is estimated to get reduce by 30%. The adverse change
in market place and regulatory conditions is an indicator of impairment. As a result, Venus
ltd has to estimate the recoverable amount of goodwill and net assets of Saturn ltd on
31st March 20X3. Venus ltd uses straight line depreciation. The useful life of Saturn’s ltd
assets is estimated to be 20 years with no residual value. No independent cash inflows can
be identified to any individual assets. So the entire operation of Saturn ltd is to be treated
as a CGU. Due to the regulatory entangle it is not possible to determine the selling price of
Saturn ltd as a CGU. Its value in use is estimated by the management at ` 2,12,000.
Suppose by 31st March 20X5 the government reinstates the licenses of Saturn ltd. The
management expects a favourable change in net cash flows. This is an indicator that an
impairment loss may have reversed. The recoverable amount of Saturn’s ltd net asset is re-
estimated. The value in use is expected to be ` 3,04,000 and net selling price is expected
to be ` 2,90,000.
QUESTION 14:
From the following details of an asset, find out:
(a) Impairment loss and its treatment.

(b) Current year depreciation at the year end.
Particulars of assets:
Cost of asset ` 56 lakhs

Useful life 10 years
Salvage value Nil
Carrying value at the beginning of the year ` 27.30 lakhs
Remaining useful life 3 years
Recoverable amount at the beginning of the year ` 12 lakhs
Upward revaluation done in last year ` 14 lakhs
QUESTION 15
Venus Ltd. has an asset, which is carried in the Balance Sheet on March 31, 20X1 at ` 500
lakhs. As at that date the value in use is ` 400 lakhs and the fair value less costs to sells
is ` 375 lakhs.
From the above data:
(a) Calculate impairment loss.

(b) Prepare journal entries for adjustment of impairment loss.
(c) Show, how impairment loss will be shown in the Balance Sheet.
138 ACCOUNTS
SOLUTION
According to Ind AS 36, Impairment of Assets, impairment loss is the excess of ‘Carrying
amount of the asset’ over ‘Recoverable Amount’.
In the present case, the impairment loss can be computed in the following manner:
Step 1: Fair value less costs to sell: ` 375 lakhs
Step 2: Value in use: ` 400 lakhs
Step 3: Recoverable amount, i.e., higher of ‘fair value less costs to sell’ & ‘value in use’.
Thus, recoverable amount is ` 400 lakhs
Step 4: Carrying amount of the asset ` 500 lakhs
Step 5: Impairment loss, i.e., excess of amount computed in step 4 over amount
computed in Step 3. ` 100 lakhs (being the difference between ` 500 lakhs
and ` 400 lakhs).
According to Ind AS 36, an impairment loss should be recognised as an expense in the
statement of profit and loss immediately, unless the asset is carried at revalued amount in
accordance with another Accounting Standard. Assuming, that the asset is not carried at
revalued amount, the impairment loss of ` 100 lakhs will be charged to Profit & Loss Account.
Journal Entries
Date Particulars Dr. Cr.

Amt. Amt.
` in Lakhs
31.3.20X1 Impairment Loss A/c Dr. 100
To Assets A/c 100
Being impairment loss on an asset
recognised)
31.3.20X1 Statement of Profit & Loss Dr. 100
To Impairment Loss A/c 100
(Being impairment loss transferred to
statement of profit and loss)
QUESTION 16
A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created.
The price paid for a purchased magazine title is recognised as an intangible asset. The costs
of creating magazine titles and maintaining the existing titles are recognised as an expense
when incurred. Cash inflows from direct sales and advertising are identifiable for each
magazine title. Titles are managed by customer segments. The level of advertising income
for a magazine title depends on the range of titles in the customer segment to which the
magazine title relates. Management has a policy to abandon old titles before the end of
their economic lives and replace them immediately with new titles for the same customer
segment. What is the cash-generating unit for an individual magazine title?
SOLUTION
It is likely that the recoverable amount of an individual magazine title can be assessed.
Even though the level of advertising income for a title is influenced, to a certain extent, by
the other titles in the customer segment, cash inflows from direct sales and advertising are
identifiable for each title. In addition, although titles are managed by customer segments,
decisions to abandon titles are made on an individual title basis. Therefore, it is likely that
individual magazine titles generate cash inflows that are largely independent of each other
and that each magazine title is a separate cash-generating unit.
QUESTION 17
A mining entity owns a private railway to support its mining activities. The private railway
could be sold only for scrap value and it does not generate cash inflows that are largely
independent of the cash inflows from the other assets of the mine. Should the entity
determine the recoverable amount for the private railway or for the mining business as a
whole?
SOLUTION
It is not possible to estimate the recoverable amount of the private railway because its
value in use cannot be determined and is probably different from scrap value. Therefore,
the entity estimates the recoverable amount of the cash-generating unit to which the
private railway belongs, i.e., the mine as a whole.
QUESTION 18
A bus company provides services under contract with a municipality that requires minimum
service on each of seven separate routes. Assets devoted to each route and the cash flows
from each route can be identified separately. One of the routes operates at a significant
loss. Should the company determine the recoverable amount for an individual asset or for
a cash generating unit?
SOLUTION
Because the entity does not have the option to curtail any one bus route, the lowest level of
identifiable cash inflows that are largely independent of the cash inflows from other assets
or groups of assets is the cash inflows generated by the seven routes together. The cash-
generating unit for each route is the bus company as a whole.
140 ACCOUNTS
QUESTION 19 (INTER DEPTT. SALE: UNIT 3 IN CLASS NOTES)
A significant raw material used for plant Y’s final production is an intermediate product
bought from plant X of the same entity. X’s products are sold to Y at a transfer price that
passes all margins to X. 80% of Y’s final production is sold to customers outside of the
entity.
60% of X’s final production is sold to Y and the remaining 40% is sold to customers outside
of the entity. For each of the following cases, what are the cash-generating units for X and
Y?
(a) If X could sell the products it sells to Y in an active market and internal transfer
prices are higher than market prices, what are the cash-generating units for X and Y?
(b) If there is no active market for the products X sells to Y, what are the cash-generating
units for X and Y?
SOLUTION:
(a) Cash-generating unit for X: X could sell its products in an active market and, so,
generate cash inflows that would be largely independent of the cash inflows from Y.
Therefore, it is likely that X is a separate cash-generating unit, although part of its
production is used by Y.
Cash-generating unit for Y: It is likely that Y is also a separate cash-generating unit.
Y sells 80% of its products to customers outside of the entity. Therefore, its cash
inflows can be regarded as largely independent.
Effect of internal transfer pricing: Internal transfer prices do not reflect market
prices for X’s output. Therefore, in determining value in use of both X and Y, the
entity adjusts financial budgets/forecasts to reflect management’s best estimate of
future prices that could be achieved in arm’s length transactions for those of X’s
products that are used internally.
(b) Cash-generating units for X and Y: It is likely that the recoverable amount of each
plant cannot be assessed independently of the recoverable amount of the other plant
because:
(i) the majority of X’s production is used internally and could not be sold in an active
market. So, cash inflows of X depend on demand for Y’s products. Therefore, X
cannot be considered to generate cash inflows that are largely independent of
those of Y.
(ii) the two plants are managed together.
As a consequence, it is likely that X and Y together are the smallest group of assets
that generates cash inflows that are largely independent.
QUESTION 20
XYZ Limited produces a single product and owns plants 1, 2 and 3. Each plant is located in a
different country. Plant 1 produces a component that is assembled in either Plant 2 or Plant
3. The combined capacity of Plant 2 and Plant 3 is not fully utilised. XYZ Limited’s products
are sold worldwide from either Plant 2 or Plant 3, e.g., Plant 2’s production can be sold in
Plant 3’s country if the products can be delivered faster from Plant 2 than from Plant 3.
Utilisation levels of Plant 2 and Plant 3 depend on the allocation of sales between the two
sites. If there is no active market for Plant 1’s products, what are the cash-generating
units for Plant 1, Plant 2 and Plant 3?
SOLUTION:
It is likely that the recoverable amount of each plant cannot be assessed independently
because:
(a) There is no active market for Plant 1’s products. Therefore, Plant 1’s cash inflows
depend on sales of the final product by Plant 2 and Plant 3.
(b) Although there is an active market for the products assembled by Plant 2 and Plant
3, cash inflows for Plant 2 and Plant 3 depend on the allocation of production across
the two sites. It is unlikely that the future cash inflows for Plant 2 and Plant 3 can be
determined individually.
As a consequence, it is likely that Plant 1, Plant 2 and Plant 3 together (i.e., XYZ Limited as
a whole) are the smallest identifiable group of assets that generates cash inflows that are
largely independent.
QUESTION 21
An entity sells for ` 100 crores an operation that was part of a cash- generating unit to
which goodwill has been allocated. The goodwill allocated to the unit cannot be identified
or associated with an asset group at a level lower than that unit, except arbitrarily. The
recoverable amount of the portion of the cash-generating unit retained is ` 300 crores.
How the goodwill should be allocated to the operation sold?
SOLUTION:
Since goodwill allocated to the cash-generating unit cannot be non-arbitrarily identified or
associated with an asset group at a level lower than that unit, the goodwill associated with
the operation disposed of is measured on the basis of the relative values of the operation
disposed of and the portion of the unit retained. Therefore, 25% of the goodwill allocated
to the cash-generating unit is included in the carrying amount of the operation that is sold.
142 ACCOUNTS
QUESTION 22
Goodwill had previously been allocated to cash- generating unit A. The goodwill allocated
to A cannot be identified or associated with an asset group at a level lower than A, except
arbitrarily. A is to be divided and integrated into three other cash-generating units, B, C
and D. How the goodwill should be reallocated to B, C and D?
SOLUTION:
Since goodwill allocated to A cannot be non-arbitrarily identified or associated with an
asset group at a level lower than A, it is reallocated to units B, C and D on the basis of the
relative values of the three portions of A before those portions are integrated with B, C
and D.
QUESTION 23
XYZ Limited has a cash-generating unit ‘Plant A’ as on April 1, 20X1 having a carrying amount
of ` 1,000 crores. Plant A was acquired under a business combination and goodwill of ` 200
crores was allocated to it. It is depreciated on straight line basis. Plant A has a useful life
of 10 years with no residual value. On March 31, 20X2, Plant A has a recoverable amount of
` 600 crores. Calculate the impairment loss on Plant A. Also, prescribe its allocation as per
Ind AS 36.
QUESTION 24
Sun ltd is an entity with various subsidiaries. The entity closes its books of account at
every year ended on 31st March. On 1st July 20X1 Sun ltd acquired an 80% interest in Pluto
ltd. Details of the acquisition were as follows:
- Sun ltd acquired 800,000 shares in Pluto ltd by issuing two equity shares for every five
acquired The fair value of Sun Ltd’s share on 1st July 20X1 was ` 4 per share and the fair
value of a Pluto’s share was ` 1·40 per share. The costs of issue were 5% per share.
- Sun ltd incurred further legal and professional costs of ` 100,000 that directly related
to the acquisition.
- The fair values of the identifiable net assets of Pluto Ltd at 1st July 20X1 were measured
at ` 1·3 million. Sun ltd initially measured the non-controlling interest in Pluto ltd at fair value.
They used the market value of a Pluto ltd share for this purpose. No impairment of goodwill
arising on the acquisition of Pluto ltd was required at 31st March 20X2 or 20X3.
- Pluto ltd comprises three cash generating units A, B and C. When Pluto ltd was acquired the
directors of Sun ltd estimated that the goodwill arising on acquisition could reasonably
be allocated to units A: B: C on a 2:2:1 basis. The carrying values of the assets in these
cash generating units and their recoverable amounts are as follows:
Unit Carrying value Recoverable amount

(before goodwill allocation)
` ’000 ` ’000
A 600 740
B 550 650
C 450 400
Required:
(i) Compute the carrying value of the goodwill arising on acquisition of Pluto Ltd in the
consolidated Balance Sheet of Sun ltd at 31st March 20X4 following the impairment
review.
(ii) Compute the total impairment loss arising as a result of the impairment review,
identifying how much of this loss would be allocated to the non-controlling interests in
Pluto ltd.
144 ACCOUNTS
Extra Practical Questions

Q.1: Apex Ltd. is engaged in manufacturing of steel utensils. It owns a building for its
headquarters. The building used to be fully occupied for internal use. However, recently
the company has undertaken a massive downsizing exercise as a result of which 1/3rd
of the building became vacant. This vacant portion has now been given of on lease for 6
years. Determine the CGU of the building.
Q.2: ABC Ltd. has three cash-generating units: A, B and C, the carrying amounts of which
as on March 31, 20X1 are as follows:
(` in crores)
Cash-generating units Carrying amount Remaining useful life
A 500 10
B 750 20
C 1,100 20
ABC Ltd. also has two corporate assets having a remaining useful life of 20 years.
(` in crores)
Corporate asset Carrying amount Remarks
X 600 The carrying amount of X can be allocated on
a reasonable basis (i.e., pro rata basis) to the
individual cash-generating units.
Y 200 The carrying amount of Y cannot be allocated on a
reasonable basis to the individual cash-generating
units.
Recoverable amount as on March 31, 20X1 is as follows:
Cash-generating units Recoverable amount (` in crores)

A 600
B 900
C 1,400
ABC Ltd. 3,200
Calculate the impairment loss, if any. Ignore decimals.

Q.3: A machine has suffered physical damage but is still working, although not as well
as before it was damaged. The machine’s fair value less costs to sell is less than its
carrying amount. The machine does not generate independent cash inflows. The smallest
identifiable group of assets that includes the machine and generates cash inflows that
are largely independent of the cash inflows from other assets is the production line to
which the machine belongs. The recoverable amount of the production line shows that the
production line taken as a whole is not impaired. Whether any impairment loss should be
recognised for the machine in the following cases?
(a) Budgets/forecasts approved by management reflect no commitment of management

to replace the machine.
The recoverable amount of the machine alone cannot be estimated because the
machine’s value in use:
(i) may differ from its fair value less costs to sell; and
(ii) can be determined only for the cash-generating unit to which the machine belongs
(the production line).
The production line is not impaired. Therefore, no impairment loss is recognised for
the machine. Nevertheless, the entity may need to reassess the depreciation period
or the depreciation method for the machine.
(b) Budgets/forecasts approved by management reflect a commitment of management to
replace the machine and sell it in the near future. Cash flows from continuing use of
the machine until its disposal are estimated to be negligible.
Q.4: Parent acquires an 80% ownership interest in Subsidiary for ` 2,100 on April 1,
20X1. At that date, Subsidiary’s net identifiable assets have a fair value of ` 1,500.
Parent chooses to measure the non-controlling interests as the proportionate interest of
Subsidiary’s net identifiable assets. The assets of Subsidiary together are the smallest
group of assets that generate cash inflows that are largely independent of the cash inflows
from other assets or groups of assets. Because other cash-generating units of Parent are
expected to benefit from the synergies of the combination, the goodwill of ` 500 related
to those synergies has been allocated to other cash-generating units within Parent. On
March 31, 20X2, Parent determines that the recoverable amount of cash-generating unit
Subsidiary is ` 1,000. The carrying amount of the net assets of Subsidiary, excluding
goodwill, is ` 1,350. Allocate the impairment loss on March 31, 20X2.
Q.5: A Ltd. purchased a machinery of ` 100 crores on April 1, 20X1. The machinery has
a useful life of 5 years. It has nil residual value. A Ltd. adopts straight line method of
depreciation for depreciating the machinery. Following information has been provided as
on March 31, 20X2:
146 ACCOUNTS
Financial year Estimated future cash flows

(` in crores)
20X2-20X3 15
20X3-20X4 30
20X4-20X5 40
20X5-20X6 10
Discount rate applicable : 10%

Fair value less costs to sell as on March 31, 20X2 : ` 70 crores
Calculate the impairment loss, if any.
Q.6: Assuming in the above question, as on March 31, 20X3, there is no change in the
estimated future cash flows and discount rate. Fair value less costs to sell as on March
31, 20X3 is ` 40 crores. How should it be dealt with under Ind AS 36?
Financial year Estimated Cash flows Present value Present value

(` in crores) factor @ 10%
20X3-20X4 30 0.9091 27.27
20X4-20X5 40 0.8264 33.06
20X5-20X6 10 0.7513 7.51
67.84
Q.7: A Ltd. purchased an asset of ` 100 lakhs on April 1, 20X0. It has useful life of 4
years with no residual value. Recoverable amount of the asset is as follows:
As on Recoverable amount
March 31, 20X1 ` 60 lakhs
Calculate the amount of impairment loss or its reversal, if any, on March 31, 20X1, March
31, 20X2 and March 31, 20X3.
Q.8: On March 31, 20X1, XYZ Ltd. makes following estimate of cash flows for one of its
asset located in USA:
Year Cash flows

20X1-20X2 US $ 80
20X2-20X3 US $ 100
20X3-20X4 US $ 20
Following information has been provided:
Particulars India USA

Applicable discount rate 15% 10%
Exchange rates are as follows:
As on Exchange rate
March 31, 20X1 ` 45/ US $
As on Expected Exchange rate

March 31, 20X2 ` 48/ US $
March 31, 20X3 ` 51/ US $
March 31, 20X4 ` 55/ US $
Calculate value in use as on March 31, 20X1.
Q.9: Cash flow is ` 100, ` 200 or ` 300 with probabilities of 10%, 60% and 30%, respectively.
Calculate expected cash flows.
Q.10: Cash flow of ` 1,000 may be received in one year, two years or three years with
probabilities of 10%, 60% and 30%, respectively. Calculate expected cash flows assuming
applicable discount rate of 5%, 5.25% and 5.5% in year 1, 2 and 3, respectively.
Q.11: Calculate expected cash flows in each of the following cases:

(a) the estimated amount falls somewhere between ` 50 and ` 250, but no amount in the
range is more likely than any other amount.
(b) the estimated amount falls somewhere between ` 50 and ` 250, and the most likely
amount is ` 100. However, the probabilities attached to each amount are unknown.
(c) the estimated amount will be ` 50 (10 per cent probability), ` 250 (30 per cent
probability), or ` 100 (60 per cent probability).
148 ACCOUNTS
Q.12: X Ltd., is having a plant (asset) carrying amount of which is Rs. 100 lakhs on
31.3.2004. Its balance useful life is 5 years and residual value at the end of 5 years is
Its. 5 lakhs. Estimated future cash flow using the plant in next 5 years are:- For the year
ended on Estimated cash flow (Rs. in lakhs)
For the year ended on Estimated cash flow (Rs. in lakhs)

31.3.2005 50
31.32006 30
31.3.2007 30
31.3.2008 20
31.3.2009 20
Calculate “value in USE” for plant if the discount rate is IO% and also calculate 5 the
recoverable amount if net selling price of plant on 31.3.2004 is Rs. 60 lakhs.
ANSWER:
Present value of future cash flow
Year ended Future Cash Flow Discount @ 10% Rate Discounted cash flow
31.3.2005 50 0.909 45.45
31.3.2006 30 0.826 24.78
31.3.2007 30 0.751 22.53
31.3.2008 20 0.683 13.66
31.3.2009 20 0.620 12.40
118.82
Present value of residual price on 31.3.2009 = 5x 0.620 3.10
Present value of estimated cash flow by use of an asset and 121.92
Residual value, which is called “ value in use”.
If net selling price of plant on 31.3.2004 is Rs. 60 lakhs , the recoverable amount will
be higher of Rs. 121.92 lakhs (value in use) and Rs. 6.60 lakhs (net selling price), hence
recoverable amount is Rs. 121.92 lakhs
Q.13: Hari Ltd. gives following estimates to Cash Flows relating to a Fixed Asset on 31st
December 2013. The Discount Rate is 15%.
Year 2014 2015 2016 2017 2018

Cash Flow (Rs. in Lakhs) 4000 6000 6000 8000 4000
Residual Value at the end of 2018 Rs. 1,000 Lakhs

Fixed Asset purchased on 01.01.2011 Rs. 40,000 Lakhs
Useful Life 8 Years
Net Selling Price on 31.12.2018 Rs. 20,000 Lakhs
Calculate –
(a) Value in Use on 31.12.2013

(b) Carrying Amount at the end of 2013
(c) Recoverable Amount on 31.12.2013
(d) Impairment Loss for the year ended 31.12.2013
(e) Revised Carrying Amount on 31.12.2013
(f) Depreciation charge for the year 2014.
SOLUTION:
1. Computation of Value in Use
Year Cash Flow Discount Rate at 15% Discounted Cash Flow

2014 Rs. 4,000 Lakhs 0.870 Rs. 3480 Lakhs
2015 Rs. 6,000 Lakhs 0.756 Rs. 4,536 Lakhs
2016 Rs. 6,000 Lakhs 0.658 Rs. 3,948 Lakhs
2017 Rs. 8,000 Lakhs 0.572 Rs. 4,576 Lakhs
2018 Rs.4,000 + Rs. 1,000 0.497 Rs. 2485 Lakhs
= Rs. 5000 Lakhs
Value in use Rs. 19,025 Lakhs
2. Computation of Other Particulars
Particulars Rs. Lakhs

1. Original Cost 40,000
2. Depreciation for years 2011, 2012 & 2013 (40000-1,000) x 3/8 (14,625)
3. Carrying Amount on 31.12.2013 (1-2) 25,375
4. Recoverable Amount (Net Selling Price 20,000 (or) Value in Use 19,025 20,000
whichever is higher)
150 ACCOUNTS
5. Impairment Loss – Carrying Amount Less Recoverable Amount (3-4) 5,375

6. Revised Carrying Amount = Old Carrying Amount Less Impairment Loss 20,000
(3-5)
7. Depreciation Charge for 2014 (20,000 – 1,000) ÷ 5 years
Q.14: Upendra Ltd. is the sole manufacturer of Product X. A Particular machine is

exclusively used for production of Product X. The Company had near monopoly of the
Product. A competitor has recently come out with a cheaper substitute of Product X.
The Company is anticipating significant fall in demand for its product and cash flow from
the machine used in production of X is also expected to fall. As per the latest budget
estimates taking the entry of the competitor in consideration, the Operating Pre-Tax
Cash Flows from the Machine expected over next 5 years are Rs. 9 Lakhs Rs. 8 Lakhs Rs. 6
Lakhs, Rs. 5.5 Lakhs and Rs. 5 Lakhs respectively. The expected life of the machine is 10
years. Declining growth rates for future cash flows are estimated from year 6 onwards
at 10%, 20%, 30%, 40%, 60% respectively. The Disposal value (net of expected cost of
disposal) realizable at the end of year 10 is Rs. 1 Lakh. The Machine can be disposed off
immediately for Rs. 25 Lakhs subject to payment of brokerage 2% on disposal value. The
Carrying Amount of the machine on the current date is Rs. 35 Lakhs. Taking the risk
involved in the use of the machine for production of X is consideration, a pre-tax rate of
return of 10% seems to be appropriate. Determine the impairment Loss if any, and give
the Journal Entries in the books of the Company.
SOLUTION:
1. Computation of Value in Use (in Rs.1000s)
Year Operating Cash Flow Disc Factor at 10% Present Value

1. 900 0.909 818.10
2. 800 0.826 660.00
3. 600 0.751 450.0
4. 550 0.683 375.60
5. 500 0.621 310.50
6. 500 – 10% = 450 0.564 253.00
7. 450 – 20% = 360 0.513 184.60
8. 360 – 30% = 252 0.467 117.60
9. 252 – 40% = 151.20 0424 64.11
10. 151.20 – 60% = 60.48 0.386 23.35
10 Disposal Value 100 0.386 38.60
Total 3,297.87
2. Computation of Other Particulars

1. Carrying Amount given 35.00
2. Net Selling Price = Sale Price 25,00 less Brokerage at 2% thereon 24.50
3. Recoverable Amount (Net Selling Price 24,50 less (or) Value in Use 32.90
32,97,87 whichever is higher)
4. Impairment Loss = Carrying Amount Less Recoverable Amount (1-3) 2.00
Journal Entries (Rs. 000s)
Particulars Dr. Cr.

Impairment Loss A/c. Dr. 2,02
To Machine A/c. 2.02
(Being Impairment Loss recognized)
Profit & Loss A/c. Dr. 2,02
To Impairment Loss A/c. 2.02
(Being Impairment Loss transferred to Profit & Loss Account)
Q.15: From the following details provided for an asset, find out – (a) the Impairment
Loss (b) Treatment of Impairment Loss, and (c) Current Year Depreciation.
Cost of the Asset Rs. 56 Lakhs Current Carrying Value Rs. 27.30 Lakhs
Life Period useful 10 Years Life remaining useful 3 Years
Salvage Value NIL Recoverable Amount Rs. 12 Lakhs
Upward Revaluation Rs. 14 Lakhs in
done last year
SOLUTION
1. Impairment Loss = Carrying Amount – Recoverable Amount = Rs. 27.30 Lakhs – Rs.
12.00 Lakhs = Rs. 15.30 Lakhs.
2. Treatment of Impairment Loss:
(a) Adjusted against Revaluation Reserve to the extent amount available in the
account.
(b) Balance of Impairment loss, if any debited to Profit & Loss Account.
152 ACCOUNTS

Amount credited to Revaluation Reserve A/c. at the end of 6th year 14.00
Remaining Useful Life of the Asset as at that date (10-6)= 4 years
Amt. transferred to Retained Earnings from Revaluation Reserve every 3.50
year (Rs. 14.00 Lakhs ÷ 4 Years)
(Note: Rs. 3.5 Lakhs is transferred to Retained Earnings, every year till the
useful lie of the Asset)
Balance available in Revaluation Reserve after transferring to R.E. (Rs. 10.50
14.00 – Rs 3.50)
Impairment Loss:
- First Adjusted against balance in Revaluation Reserve. 10.50
- Balance Adjusted to Profit & Loss Account 4.80
(Rs. 15.30 Lakhs – Rs.10.50 Lakhs)
3. Current Year Depreciation:

(Current Carrying Value – Impairment Loss) ÷ Remaining Useful Life of the Asset
= (27.30 – 15.30) ÷ 3 = Rs. 4 Lakhs
Q.16: A Plant was acquired 15 years ago at a cost of Rs. 5 crores. Its Accumulated
Depreciation as at 31.03.20X0 was rs. 4.15 Crores. Depreciation estimated for the
Financial year 20X0-20X1 is Rs. 25 Lakhs. Estimated Net Selling Price as 31.03.20X0 was
Rs. 30 Lakhs, which is expected to decline by 20% by the end of the next Financial year.
Its Value in Use has been computed at Rs. 35 Lakhs as on 01.04.20X0 which is expected to
decrease By 30% by the end of the Financial year.
1. Assuming that other conditions for applicability of the impairment Accounting Standard
are satisfied, what should be the Carrying Amount of this Plant as at 31.03.20X1?
2. How much will be amount of write off for the Financial year to end on 31.03.20X1?
3. If the Plant had been revalued ten years ago and the Current Reserves against this
Plant were to be Rs. 12 Lakhs, how would you answer to questions (1) and (2) above
change?
4. If the Value in Use was zero and the Enterprise were required to incur a cost of Rs.
2 Lakhs to dispose of the Plant, what would be your response to questions (1) and (2)
above?
SOLUTION
1. Balances as on 31.03.20X1 )Rs. Lakhs)
Particulars Net Book Value Net Selling Price Value in Use

As at 31.03.2000 500-415 = 30.00 35.00
Less: Depreciation for 85.00 20% of 30.00 = 30% of 35.00
20X0-20X1 / Reduction 25.00 6.00 = 10.50
Balance on 31.03.20X1 60.00 24.00 24.50
Recoverable Amount = Higher of NSP Vs. VIU = Rs. 24.00 Vs Rs. 24.50 = Rs. 24.50 Lakhs
(a) Recoverable Amount of Rs. 24.50 Lakhs is lower than the Net Book Value of Rs. 60
Lakhs, and hence the Impairment Loss of Rs. 35.50 Lakhs should be recognized in FY
20X0-20X1.
(b) Carrying Amount of the Plant = Book Value Rs. 60 Lakhs Less Impairment Loss Rs.
3550 Lakhs = Rs. 24.50 Lakhs
(c) Amount written off in FY 20X0-20X1 = Depreciation Rs. 25.00 Lakhs + Impairment
Loss Rs. 35.50 Lakhs = Rs. 60.50 Lakhs
2. Treatment if Assets were revalued earlier:

Total Impairment Loss = Rs. 35.50 Lakhs
Adjusted Against Revaluation Reserve = Rs. 12.00 Lakhs
Balance Transferred to P&L A/c. = Rs. 23.50 Lakhs
3. If VIU is Zero (Rs. Lakhs)
Particulars Without Revaluation With Revaluation

Reserve Reserve
Carrying Amount 60.00 60.00
Less: Recoverable Amount = VIU Nil Nil
Impairment Loss 60.00 60.00
Less: Adjusted Against Revaluation Reserve Nil 12.00
Charged to P&L A/c. 60.00 48.00
Add: Additional Provision to be created for 2.00 2.00
Disposal Expenses
Total Debit to P&L A/c. 62.00 50.00
154 ACCOUNTS

QUESTION 1 NOVEMBER 2018
XYZ Limited has three cash- generating units – X, Y and Z, the carrying amounts of which
as on 31st March, 2018 are as follows:
Cash Generating Units Carrying Amount (` in lakh) Remaining useful life in years
X 800 20
Y 1000 10
Z 1200 20
XYZ Limited also has corporate assets having a remaining useful life of 20 years as given
below:
Corporate Carrying amount (` Remarks
Assets in lakh)
AU 800 The carrying amount of AU can be allocated on a rea-

sonable basis to the individual cash generating units.
BU 400 The carrying amount of BU cannot be allocated on

a reasonable basis to the individual cash-generating
units.
Recoverable amounts as on 31st March, 2018 are as follows:
Cash – generating units Recoverable amount (` in lakh)
X 1000
Y 1200
Z 1400
XYZ Limited 3900
Calculate the impairment loss if any of XYZ Ltd. Ignore decimals.
ANSWER (A)
(i) Allocation of corporate assets to CGU
The carrying amount of AU is allocated to the carrying amount of each individual

cash- generating unit, A weighted allocation basis is used because the estimated re-
maining useful life of Y’s cash - generating unit is 10 years, whereas the estimated
remaining useful lives of X and Z’ s cash- generating units are 20 years.
(` in lakh)
Particulars X Y Z Total
(a) Carrying amount 800 1000 1,200 3,000
(b) Useful life 20 years 10 years 20 years
(c) Weight based on 2 1 2

useful life
(d) Carrying amount 1,600 1,000 2,400 5,000
(after assigning
weight) (a x c)
(e) Pro-rata allocation 32% 20% 48% 100%
of AU
(1,600/500) (1,000/5,000) (2,400/5,000)
(f) Allocation of car- 256 160 384 800
rying amount of AU
(32: 20: 48)
(g) Carrying amount 1,056 1,160 1,584 3,800
(after allocation of
AU) (a +f)
(ii) Calculation of impairment loss
Step 1: Impairment losses for individual cash- generating units and its allocation
a) Impairment loss of each cash – generating units
(` in lakh)
Particulars X Y Z
Carrying amount (after allocation of AU) 1,056 1,160 1,584
Recoverable amount 1,000 1,200 1,400

Impairment loss 56 Nil 184
b) Allocation of the impairment loss (after rounding off)
(` in lakh)
Allocation to X Z
AU 14 (56 x 256/1,056) 45 (184 x 384/1,584)
Other assets in Cash-
42 (56 x 800/1056) 139
generating units
Impairment loss (184 x 1,200/ 1,584)
56 184
156 ACCOUNTS
Step 2: Impairment loss for the larger cash- generating unit, i.e., XYZ Ltd. as a
whole
Particulars X Y Z AU BU XYZ Ltd.
Carrying amount 800 1,000 1,200 800 400 4,200
Impairment loss
(Step 1) -42 ____ -139 (59)* __ -240
400
Carrying amount
758 1,000 1,061 741 3,960
(after Step 1)
Recoverable
3,960
amount
Impairment loss 60
for the ‘larger’
cash- generating
unit
` 14 lakh + ` 45 lakh = ` 59 lakh.
QUESTION 2 NOVEMBER, 2018 EXAM
A Machine was acquired by ABC Ltd. 15 years ago at a cost of ` 20 crore. Its accumulated
depreciation as at 31st March, 2018 was ` 16.60 crore. Depreciation estimated for the
financial year 2018-19 is ` 1 crore. Estimated Net Selling Price of the machine as on 31st
March, 2018 was ` 1.20 corer, which is expected to decline by 20 per cent by the end of
the next financial year.
Its value in use has been computed at ` 1.40 crore as on 1stApril, 2018, which is expected to
decrease by 30 per cent by the end of the financial year. Assuming that other conditions
of relevant Accounting Standard for applicability of the impairment are satisfied:
(i) What should be the carrying amount of this machine as at 31st March, 2019?
(ii) How much will be the amount of write of (impairment loss) for the financial year ended
31st March, 2019?
(iii) If the machine had been revaluation ten years ago and the current revaluation re-
serves against this plant were to be ` 48 lakh, how would you answer to questions (i)
and (ii) above?
(iv) If the value in use was zero and the company was required to incur a cost of ` 8 lakh
to dispose of the plant, what would be your response to questions (i) and (ii) above?
Answer (A) As per the requirement of the question, the following solution has been drawn
on the basis of AS 28
(` in crore)
(i) Carrying amount of plant (before impairment) as on 31st March, 2019 2.4
Carrying amount of plant (after impairment) as on 31st March, 2019 0.98
(ii) Amount of impairment loss for the financial year ended 31st March
1.42
2019 (2.4 Cr.- 0.98 Cr)

(iii) If the plant had been revalued ten years ago
Debit to revaluation reserve 0.48

Amount charged to profit and loss (1.42 – 0.48) 0.94
(iv) If Value in use was zero

Value in use (a) Nil
Net selling price (b) -0.08
Recoverable amount [higher of (a) and (b)] Nil
Carrying amount (closing book value) Nil

Amount of write off (impairment loss) (` 2.4 Cr – Nill) 2.4
Entire book value of plant will be written off and charged to profit

and loss account.
Working Notes:
(1) Calculation of Closing Book Value, as at 31st March, 2019
` in crore
Opening book value das on 1.4.2018 (` 20 crore - 16.60 crore) 3.40
Less: Depreciation for financial year 2018-2019 -1
Closing book value as on 31.3.2019 (before Impairment) 2.40
(2) Calculation of Estimated Net Selling Price on 31st March, 2019
` in crore
Estimated net selling price as on 1.4.2018 1.20
Less: Estimated decrease during the year (20% of ` 1.20 Cr.) (0.24)
Estimated net selling Price as on 31.3.2019 0.96
(3) Calculation of Estimated Value in Use of Plant on 31st March, 2019
` in crore
Estimated value on use as on 1.4. 2018 1.40
Less: Estimated decrease during the year (30% of ` 1.40 Cr.) (0.42)
Estimated value in use as on 31.3.2019 0.98
158 ACCOUNTS
(4) Recoverable amount as on 31.3.2019 is equal to higher of Net selling price and
value in use
` in core
Net selling price 0.96
Value in use 0.98
Recoverable amount 0.98
Impairment Loss [Carrying amount- Recoverable amount ie. 1.42
(2.40 Cr. – 0.98 Cr)]
Revised carrying amount on 31.3.2019 is equal to Recoverable 0.98 Cr.
amount (after impairment)
EXTRA QUESTIONS
QUESTION 1
NCI measurement and Goodwill impairment

A Ltd acquires 80% shares of a subsidiary B Ltd. for Rs 3,200 thousand. At the date of acquisition,
B Ltd. ‘s identifiable net assets is Rs 3,000 thousand. A elects to measure NCI at proportionate share
of net identifiable assets.. It recognizes
Rs. in thousand
Purchase Consideration 3,200
NCI (3,000 x 20%) 600
3,800
Less: Net Assets 3,000
Goodwill 800
At the end of next financial year, B Ltd. ‘s carrying amount is reduced to Rs 2,700 thousand
(excluding goodwill).
Recoverable amount of B Ltd.‘s assets.:
Case (i) Rs. 2,000 thousand Case (ii) Rs. 2,800 thousand
Calculate impairment loss allocable to Parent and NCI in both the cases.
QUESTION 2 (ALREADY DISCUSSED IN RTP MAY 2019….Q1)
Elia limited is a manufacturing company which deals in to manufacturing of cold drinks and beverages.
It is having various plants across India. There is a Machinery A in the Baroda plant which is
used for the purpose of bottling. There is one more machinery which is
Machinery B clubbed with Machinery A. Machinery A can individually have an output and also sold
independently in the open market. Machinery B cannot be sold in isolation and without clubbing
with Machine A it cannot produce output as well. The Company considers this group of assets as
a Cash Generating Unit and an Inventory amounting to Rs 2 Lakh and Goodwill amounting to Rs 1.50
Lakhs is included in such CGU.
Machinery A was purchased on 1st April 2013 for R s 10 Lakhs and residual value is Rs 50
Thousands. Machinery B was purchased on 1st April, 2015 for Rs 5 Lakhs with no residual value. The
160 ACCOUNTS
useful life of both Machine A and B is 10 years. The Company expects following cash flows in the
next 5 years pertaining to Machinery A. The incremental borrowing rate of the company is 10%.
Year Cash Flows from Machinery A

1 1,50,000
2 1,00,000 --
3 1,00,000
4 1,50,000
5 1,00,000 (excluding Residual Value)
Total 6,00,000
On 31st March, 2018, the professional valuers have estimated that the current market value
of Machinery A is Rs 7 lakhs. The valuation fee was Rs 1 lakh. There is a need to dismantle
the machinery before delivering it to the buyer. Dismantling cost is Rs 1.50 lakhs. Specialised
packaging cost would Rs 25 thousand and legal fees would be Rs 75 thousand.
The Inventory has been valued in accordance with lnd AS 2. The recoverable value of CGU is
Rs 10 Lakh as on 31 st March, 2018. In the next year, the company has done the assessment of
recoverability of the CGU and found that the value of such CGU is Rs 11Lakhs ie on 31st March,
2019. The Recoverable value of Machine A is Rs 4,50, 000 and combined Machine A and B is Rs
7,60,000 as on 31st March, 2019.
Required:
a) Compute the impairment loss on CGU and carrying value of each asset after charging
impairment loss for the year ending 31st March, 2018 by providing all the relevant
working notes to arrive at such calculation.
b) Compute the prospective depreciation for the year 2018-2019 on the above assets.
c) Compute the carrying value of CGU as at 31st March, 2019.
QUESTION 3 (ALREADY DISCUSSED IN RTP NOV 2019…..Q17)
E Ltd. owns a machine used in the manufacture of steering wheels, which are sold directly to
major car manufacturers.
• The machine was purchased on 1st April, 20X1 at a cost o f R s 5, 00, 000 through a vendor
financing arrangement on which interest is being charged at the rate of 10% per 1 annum. During
the year ended 31st March, 20X3, E Ltd. sold 10,000 steering wheels at a selling price of Rs 190 per
wheel.
• The most recent financial budget approved by E Ltd.’s management, covering the period 1 st
April, 20X3- 31 s t March, 20X8, including that the company expects to sell each steering
wheel for Rs 200 during 20X3-20X4, the price rising in later years in line with a forecast
inflation of 3% per annum.
• During the year ended 31st March, 20X4, E Ltd. expects to sell 10, 000 steering wheels.
The number is forecast to increase by 5% each year until 3151 March, 20X8.
• E Ltd. estimates that each steering wheel costs Rs 160 to manufacture, which includes Rs 110
variable costs, R s 30 share of fixed overheads and Rs 20 transport costs.
• Costs are expected to rise by 1% during 20X4-20X5, and then by 2% per annum until 31
March, 20X8.
• During 20X5-20X6, the machine will be subject to regular maintenance costing Rs 50,000.
• In 20X3-20X4, E Ltd. expects to invest in new technology costing R s 1,00,000. This
technology will reduce the variable costs of manufacturing each steering wheel from Rs 110 to
Rs 100 and the share of fixed overheads from Rs 30 to Rs 15 (subject to the availability
of technology, which is still under development).
• E Ltd. is depreciating the machine using the straight line method over the machine’s 10 year
estimated useful life. The current estimate (based on similar assets that have reached the
end of their useful lives) of the disposal proceeds from selling the machine is Rs 80 000 net
of disposal costs. E Ltd. expects to dispose of the machine at the end of March, 20X8.
• E Ltd. has determined a pre-tax discount rate of 8%, which reflects the market’s
assessment of the time value of money and the risks associated with this asset.
Assume a tax rate of 30%. What is the value in use of the machine in accordance with lnd
AS 36?
QUESTION 4 (ALREADY DISCUSSED IN RTP MAY 2020….Q9)
PQR Ltd. is the company which has performed well in the past but one of its major assets, an item
of equipment, suffered a significant and unexpected deterioration in performance. Management
expects to use the machine for a further four years after 31st March 20X6, but at a reduced level.
The equipment will be scrapped after four years. The financial accountant for PQR Ltd. has produced
a set of cash-flow projections for the equipment for the next four years, ranging from optimistic
to pessimistic. CFO thought that the projections were too conservative, and he intended to use
the highest figures each year. These were as follows:
162 ACCOUNTS
000
Year ended 31st March 20X7 276
Year ended 31st March 20X8 192
Year ended 31 st March 20X9 120
Year ended 31s t March 20YO 114
The above cash inflows should be assumed to occur on the last day of each financial year.
The pre-tax discount rate is 9%. The machine could have been sold at 31st March 20X6 for
Rs 6,00,000 and related selling expenses in this regard could have been Rs 96,000. The
machine had been revalued previously, and at 31 st March 20X6 an amount of Rs 36,000 was
held in revaluation surplus in respect of the asset. The carrying value of the asset at
31st March 20X6 was R s 6,60,000. The Indian government has indicated that it may
compensate the company for any loss in value of the assets up to its recoverable amount.
Calculate impairment loss, if any and revised depreciation of asset. Also suggest how Impairment
loss, if any would be set off and how compensation from government be accounted for?
QUESTION 5
On 1 January Year 1, Entity Q purchased a machine costing R s 2,40,000 with an estimated useful
life of 20 years and an estimated zero residual value. Depreciation is computed on straight-line
basis. The asset had been re-valued on 1 January Year 3 to Rs 2, 50,000, but with no change in
useful life at that date. On 1 January Year 4 an impairment review showed the machine’s recoverable
amount to be Rs 1,00,000 and its estimated remaining useful life to be 10 years.
Calculate:
a) The carrying amount of the machine on 31 December Year 2 and the revaluation surplus arising
on 1 January Year 3.
b) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment).
c) The impairment loss recognised in the year to 31 December Year 4 and its treatment thereon
d) The depreciation charge in the year to 31 December Year 4.
Note: During the course of utilization of machine, the company did not opt to transfer part of
the revaluation surplus to retained earning.
IND AS-38: INTANGIBLE ASSETS 163
IND AS-38: INTANGIBLE ASSETS
Non-monetary asset
Without physical
Identifiable substance
Intangible
Asset
Entities frequently expend resources, or incur liabilities, on the acquisition, development,

maintenance or enhancement of intangible resources such as:
• Scientific or technical knowledge
• Design and implementation of new processes or systems
• Licences
• Intellectual property
• Market knowledge and trademarks (including brand names and publishing titles).
Common examples of items encompassed by these broad headings are:
• Computer software
• Patents
• Copyrights
• Motion picture films
• Customer lists
• Mortgage servicing rights
• Fishing licences
• Import quotas
• Franchises
• Customer or supplier relationships
• Customer loyalty
• Market share and marketing rights.
164 ACCOUNTS
QUESTION 1: IDENTIFIABILITY
Sun Ltd has an expertise in consulting business. In past years, company has gained a market
share for its services of 30 percent and considers recognising it as an intangible asset. Is
the action by company is justified?
SOLUTION:
Market share does not meet the definition of intangible assets as is not identifiable i.e. It
is neither separable and nor arised from contractual or legal rights.
QUESTION 2: CONTROL
Company XYZ ltd has provided training to its staff on various new topics like GST, Ind AS
etc to ensure the compliance as per the required law. Can the company recognise such cost
of staff training as intangible asset?
SOLUTION:
It is clear that the company will obtain the economic benefits from the work performed by
the staff as it increases their efficiency. But it does not have control over them because
staff could choose to resign the company at any time.
Hence the company lacks the ability to restrict the access of others to those benefits.
Therefore, the staff training cost does not meet the definition of an intangible asset.
QUESTION 3: IDENTIFIABILITY OF INTANGIBLE ASSETS
Pluto Ltd. intends to open a new retail store in a new location in the next few weeks. Pluto
Ltd has spent a substantial sum on a series of television advertisements to promote this
new store. The Company has paid an amount of ` 800,000 for advertisements before 31
March 20X1. ` 700,000 of this sum relates to advertisements shown before 31 March 20X1
and ` 100,000 to advertisements shown in April 20X1. Since 31 March 20X1, The Company
has paid for further advertisements costing ` 400,000.
Pluto Ltd is of view that such costs can be carried forward as intangible assets. Since market
research indicates that this new store is likely to be highly successful. Please explain and
justify the treatment of the above costs in the financial statements for the year ended 31
March 20X1.
SOLUTION:
Under Ind AS 38 – Intangible Assets – intangible assets can only be recognised if they are
identifiable and have a cost which can be reliably measured.
These criteria are very difficult to satisfy for internally developed intangibles.
For these reasons, Ind AS 38 specifically prohibits recognising advertising expenditure as
an intangible asset. The issue of how successful the store is likely to be does not affect
this prohibition. Therefore such costs should be recognised as expenses.
However, the costs would be recognised on an accruals basis. Therefore, of the
advertisements paid for before 31 March 20X1, ` 700,000 would be recognised as an
expense and ` 100,000 as a pre-payment in the year ended 31 March 20X1. The ` 400,000
cost of advertisements paid for since 31 March 20X1 would be charged as expenses in the
year ended 31 March 20X2.
QUESTION 4
Mercury Ltd is preparing its accounts for the year ended 31 March 20X2 and is unsure
about how to treat the following items.
1. The company completed a grand marketing and advertising campaign costing ` 4.8
Lakh. The finance director had authorised this campaign on the basis that it would
create ` 8 lakh of additional profits over the next three years.
2. A new product was developed during the year. The expenditure totalled ` 3 lakh of
which ` 1.5 lakh was incurred prior to 30 September 20X1, the date on which it became
clear that the product was technically viable. The new product will be launched in the
next four months and its recoverable amount is estimated at ` 1.4 lakh.
3. Staff participated in a training programme which cost the company ` 5 lakh. The
training organisation had made a presentation to the directors of the company outlining
that incremental profits to the business over the next twelve months would be ` 7
lakh.
What amounts should appear as intangible assets in accordance with Ind AS 38 in Mercury’s
balance sheet as on 31 March 20X2?
SOLUTION:
The treatment in Mercury’s financials as at 31 March 20X2 will be as follows:
1. Marketing and advertising campaign: no intangible asset will be recognised, because it

is not possible to identify future economic benefits that are attributable only due to
this campaign. All of the expenditure should be expensed in the statement of profit
and loss.
2. New product: development expenditure appearing in the balance sheet will be valued at
` 1.5 lakh. The expenditure prior to the date on which the product becomes technically
feasible is recognised in the statement of profit and loss.
3. Training programme: no asset will be recognised, because there is no control of the
company over the staff and when staff leaves the benefits of the training, whatever
they may be, also departs.
166 ACCOUNTS
QUESTION 4: SEPARATE ACQUISITION
Venus India Private Ltd acquired a software for its internal use costing `10,00,000. The
amount payable for the software was ` 600,000 immediately and ` 400,000 in one year
time. The other expenditure incurred were:-
Purchase tax : ` 1,00,000
Entry Tax : 10% ( recoverable later from tax department) Legal fees: ` 87,000
Consultancy fees for implementation : ` 1,20,000 cost of capital of the company is 10%.
Calculate the cost of the software on initial recognition using the principles of Ind AS 38
Intangible Assets.
QUESTION 5: BUSINESS COMBINATION
On 31st March 20X1, Earth India Ltd paid ` 50,00,000 for a 100% interest in Sun India Ltd.
At that date Sun Ltd’s net assets had a fair value of `30,00,000. In addition, Sun Ltd also
held the following rights:
Trade Mark named “GRAND” – valued at ` 180,000 using a discounted cash flow technique.
Sole distribution rights to an electronic product. Future cash flows from which are estimated
to be ` 150,000 per annum for the next 6 years.
10% is considered an appropriate discount rate. The 6 year, 10% annuity factor is 4.36.
Calculate goodwill and other Intangible assets arising on acquisition.
QUESTION 6: EXCHANGE OF ASSET
Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license.
The telecommunication license is carried at `5,00,000 in the books of Sun Ltd. The Software
is carried at ` 10,000 in the books of the Earth Ltd which is not the fair value.
Advise journal entries in the following situations in the books of Sun Ltd and Earth Ltd:-
1) Fair value of software is ` 5,20,000 and fair value of telecommunication license is `
5,00,000.
2) Fair Value of Software is not measureable. However similar Telecommunication license
is transacted by another company at ` 4,90,000.
3) Neither Fair Value of Software nor Telecommunication license could be reliably measured.
QUESTION 7: DEVELOPMENT PHASE
Expenditure on a new production process in 20X1-20X2:
INR
1st April to 31st December 2,700
1st January to 31st March 900
3,600
The production process met the intangible asset recognition criteria for development on 1st
January 20X2. The amount estimated to be recoverable from the process is ` 1,000.
What is the carrying amount of the intangible asset at 31st March 20X2 and the charge to
profit or loss for 20X1-20X2?
Expenditure incurred in FY 20X2-20X3 is ` 6,000.
At 31st March 20X3, the amount estimated to be recoverable from the process (including
future cash outflows to complete the process before it is available for use) is ` 5,000.
What is the carrying amount of the intangible asset at 31st March 20X3 and the charge to
profit or loss for 20X2-X3?
QUESTION 8 : REVALUATION MODE L
1. Saturn Ltd. acquired an intangible asset on 31st March 20X1 for ` 1,00,000. The asset
was revalued at ` 1,20,000 on 31st March 20X2and ` 85,000 on 31st March 20X3.
2. Jupiter Ltd. acquired an intangible asset on 31st March 20X1 for ` 1,00,000. The asset
was revalued at ` 85,000 on 31st March 20X2 and at ` 1,05,000 on 31st March 20X3.
Assuming that the year -end for both companies is 31 st March, and that they both use the
revaluation model, show how each of these transactions should be dealt with in the financial
statements.
QUESTION 9
X Limited engaged in the business of manufacturing fertilisers entered into a technical

collaboration agreement with a foreign company Y Limited. As a result, Y Limited would
provide the technical know-how enabling X Limited to manufacture fertiliser in a more
efficient way. X Limited paid ` 10,00,00,000 for the use of know-how for a period of 5
years. X Limited estimates the production of fertiliser as follows:
168 ACCOUNTS
Year (in metric tons)

1 50,000
2 70,000
3 1,00,000
4 1,20,000
5 1,10,000
At the end of the 1st year, it achieved its targeted production. At the end of 2nd year,
65,000 metric tons of fertiliser was being manufactured, and X Limited considered to
revise the estimates for the next 3 years. The revised figures are 85,000, 1,05,000 and
1,15,000 metric tons for year 3, 4 & respectively.
How will X Limited amorise the technical know-how fees as per Ind AS 38?
QUESTION 10
X Ltd. purchased a patent right on April 1, 20X1, for ` 3,00,000; which has a legal life of 15
years. However, due to the competitive nature of the product, the management estimates
a useful life of only 5 years. Straight-line amortisation is determined by the management
to be the best method. As at April 1, 20X2, management is uncertain that the process
can actually be made economically feasible, and decides to write down the patent to an
estimated market value of ` 1,50,000 and decides to amortise over 2 years. As at April 1,
20X3, having perfected the related production process, the asset is now appraised at a
value of ` 3,00,000. Furthermore, the estimated useful life is now believed to be 4 more
years. Determine the value of intangible asset at the end of each financial year?
QUESTION 11
X Pharmaceutical Ltd. seeks your opinion in respect of following accounting transactions:
1. Acquired a 4 year license to manufacture a specialised drug at a cost of ` 1,00,00,000

at the start of the year. Production commenced immediately.
2. Also purchased another company at the start of year. As part of that acquisition the
company acquired a brand with a FV of ` 3,00,00,000 based on sales revenue. The life
of the brand is estimated at 15 years.
3. Spent ` 1,00,00,000 on an advertising campaign during the first six months. Subsequent
sales have shown a significant improvement and it is expected this will continue for
3 years.
4. It has commenced developing a new drug ‘Drug-A’. The project cost would be
` 10,00,00,000. Clinical trial proved successful and such drug is expected to generate
revenue over the next 5 years.
Cost incurred (accumulated) till March 31, 20X1 is ` 5,00,00,000.

Balance cost incurred during the financial year 20X1-20X2 is ` 5,00,00,000.
5. It has also commenced developing another drug ‘Drug B’. It has incurred `50,00,000
towards research expenses till March 31, 20X2. The technological feasibility has not
yet been established.
How the above transactions will be accounted for in the books of account of X Pharmaceutical
Ltd?
SOLUTION:
1. It should recognize the drug license as an intangible asset, because it is a separate

external purchase, separately identifiable asset and considered successful in respect
of feasibility and probable future cash inflows.
The drug license should be recorded at 1,00,00,000.
2. It should recognize the brand as an intangible asset because it is purchased as a part
of acquisition and it is separately identifiable. The brand should be amortized over a
period of 15 years. The brand will be recorded at 3,00,00,000.
3. The advertisement expenses of 1,00,00,000 should be expensed off.
4. The development cost incurred during the financial year 20X1-X2 should be capitalized.
Cost of intangible asset (Drug A) (5crore+5crore=10Crores)
5. Research Expenses of 50,00,000 incurred for developing Drug B should be expenses
off since technological feasibility has not yet established.
QUESTION NO 12
A Ltd. is developing a new production process. It has incurred the following expenditure.
Find out value of Intangible Assets.
Date Particulars Amount (Rs. in lacs)

Upto 31 March Research expenditure when intention to 20
2001 commercialise was not establish
2001-02 Development expenses
Salaries and wages 30
Overheads 12
Staff Training 10
Apportioned Administrative Expenses 10
2002-03 Salary and wages 40
Recoverable Amount (AS-28) 70
170 ACCOUNTS
QUESTION NO 13
An enterprise is developing a new production process. During the year 2001, expenditure
incurred was Rs. 10 lakhs, of which Rs. 9 lakhs was incurred before 1 December 2001 and
1 lakh was incurred between 1 December 2001 and 31 December 2001. The enterprise is
able to demonstrate that, at 1 December 2001, the production process met the criteria for
recognition as an intangible asset. The recoverable amount of the know-how embodied in
the process (including future cash outflows to complete the process before it is available
for use) is estimated to be Rs. 5 lakhs.
ANSWER:
At the end of 2001, the production process is recognized as an intangible asset at a cost
of Rs. 1 lakh (expenditure incurred since the date when the recognition criteria were met,
that is, 1 December 2001). The Rs. 9 lakhs expenditure incurred before 1 December 2001
is recognized as an expense because the recognition criteria were not met until 1 December
2001. This expenditure will never form part of the cost of the production process recognized
in the balance sheet.
QUESTION NO 14
A pharma company spent Rs. 33 lakhs during the year to develop a drug on AIDS. It will
take four years to establish whether the drug will be successful. The company wants to
treat the expenditure as deferred revenue expenditure.
ANSWER
With the introduction of IND AS 38, the concept of deferred revenue expenditure does
not any more exist barring few exceptions. In the given case, the pharma company should
not capitalise Rs. 33 lakhs since capitalization conditions as per IND AS 38 are not fulfilled.
The same should charged to the P&L account.
QUESTION NO 15
A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crore
had taken up the marketing of a new product. It was estimated that the company would
have a turnover of Rs. 25 crores from the new product. The company had debited to its
Profit and Loss Account the total expenditure of Rs. 2 crore incurred on extensive special
initial advertisement campaign for the new product.
Is the procedure adopted by the company correct ?
ANSWER:
With the introduction of IND AS 38 - “Intangible Assets’, the concept of deferred revenue
expenditure no longer prevails except in respect of a very few items, such as ancillary costs
on borrowings, share issue expenses, etc. IND AS 38 does not permit the capitalization of
expenses incurred on advertising or brand promotion, etc. Thus the accounting treatment
by the company of debiting the entire advertising expenditure of Rs. 50 lakhs to the profit
and loss account of the year is correct.
QUESTION NO 16 (R&D WITH IMPAIRMENT LOSS)
Ganguly International Ltd. is developing a new production process. During the financial
year ended 31st March 2004, the total expenditure incurred on this process was Rs. 50
lakhs. The production process met the criteria for recognition as an intangible asset on 1st
December 2003. Expenditure incurred till this date was Rs. 22 lakhs.
Further expenditure incurred on the process for the financial year ending 31st March
2005 was Rs. 80 lakhs. As at 31st March 2005, the recoverable amount of the know-how
embodied in the process is estimated to be Rs. 72 lakhs. This includes estimates of future
cash outflow as well as inflows :
You are required to work out :

What is the expenditure to be charged to the P &L Account for the financial year ended
31st March 2004 ? (Ignore depreciation for this purpose)
(i) What is the carrying amount of the intangible asset as at 31st March 2004 ?
(ii) What is the expenditure to be charged to the P &L Account for the financial year
2005 (Ignore depreciation for this purpose)
(iii) What is the carrying amount of the intangible asset as at 31st March 2005 ?
SOLUTION:
(a) Expenditure incurred up to 1.12.2009 will be taken up to profit and loss account for
the financial year ended 31.3.2010 = Rs. 22 Lakhs.
(b) Carrying amount as on 31.3.2010 will be the expenditure incurred after 1.12.2009 = Rs.
28 Lakhs.
(c) Book cost of intangible asst as on 31.3.2011 is worked out as:
Carrying amount as on 31.3.2010 - Rs. 28 Lakhs
Expenditure during 2010-11 - Rs. 80 Lakhs
Total Book Cost - Rs. 108 Lakhs
Recoverable amount, as estimated - Rs. 72 Lakhs
Difference to be charged to Profit and loss account as impairment.
(d) Carrying amount as on 31.3.2011 will be (cost less Impairment loss) Rs. 72 Lakhs
172 ACCOUNTS
QUESTIO NO 17
Sunny Limited is developing a now production process. During the financial year ended 31st
March 2013, the Company has incurred total expenditure of Rs. 40 Lakhs on the process.
On 1st December 2012, the process has met the norms to be recognized as “Intangible
Assets” and the expenditure incurred till that date is Rs. 16 Lakhs. During the financial year
ending on 31st March 2014, the Company has further incurred Rs. 70 Lakhs.T he Recoverable
Amount as on 31st March 2014 of the process is estimated to be Rs. 62 Lakhs. You are
required to work out:
(i) Expenditure to be charged to Profit and Loss Account for the financial year ending on
31st March 2013and31st March 2014 (ignore Depreciation).
(ii) Carrying Amount of the Intangible Assets as at 31st March 2013 and 31st March 2014.
SOLUTION:
1. Expenditure charged to P&L for 2012-2013: Rs. 16 Lakhs will be recognized as an

Expense because the recognition criteria were not met until1st December 2012. The
expenditure will not form part of the cost of the Production Process recognized in the
Balance Sheet.
2. Carrying Amount of Intangible Asset as on 31.03.2013: The Production Process will be
recognized (i.e. Carrying Amount), as an Intangible Asset at a cost of Rs. 24 Lakhs (i.e.
expenditure incurred till the date in which recognition criteria were met, i.e. Total
during FY 2012-2013 Rs. 40 Lakhs less Expenses upto 1st Dec. 2012 Rs. 16 Lakhs).
3. Expenditure charged to P&L A/c. for 2013-2014:

Book Value on 31.3.2014 = Carrying Amt. on 31.3.2013 + Expenditure 94
in 2013-2014 = 24 ÷ 70
Less: Recoverable Amount 62
Impairment Loss to be charged to P&L A/c. 32
4. Carrying Amount of Intangible Asset as on 31.03.2014: The Production Process will be

shown at Book value Rs. 94 Lakhs, or Recoverable Amount Rs. 62 Lakhs, whichever is
less, hence at Rs. 62 Lakhs as above.
QUESTION NO 18
An Enterprise has incurred expense for purchase of Technical Know-how for manufacturing
a Moped. The Enterprise has paid Rs. 5 crores for the use of Know-how for a period of 4
years. The Enterprise estimates the production of mopeds as follows :
Year No. of Mopeds

1 25,000
2 50,000
3 75,000
4 1,00,000
On going into production, at the end of the 1st year it achieved its targeted production, but
considered to revise the estimates for the next 3 years as follows :
Year No. of Mopeds

1 35,000
2 65,000
3 80,000
(a) How will the Enterprise amortise the Technical Know-how Fees as per A IND AS 38
(b) Whether this amortisation should be directly charged as an expense or should form
part of Production Cost of the Mopdes.
ANSWER:
Based on the revised estimate, total sales is 2,05,000 the first year charge should be a
proportion of 25,000 / 2,05,000 on Rs. 5 crores, second year will be 35,000 / 2,05,000,
and so on unless the estimates are again revised. If these estimates cannot be determined
reliably it would be preferable to charge them off on a straight line basis, otherwise, as
can be seen from the above example, significant amortisation amount is inappropriately
postponed to later years. As already mentioned above, there will rarely, if ever, be persuasive
evidence to support an amortisation method for intangible assets that results in a lower
amount of accumulated amortisation than under the straight-line method. In the given case,
amortisation expense will be included as cost of inventory.
QUESTION NO 19
Swift Ltd. acquired a Patent at a cost of Rs. 80,00,000 for a period of 8 years and the
product life-cycle is also 8 years. The company capitalized the cost and started amortizing
the asset at Rs. 10,00,000 per annum. After two years it was found that the product life-
cycle may continue for another 5 years from then. The net cash flows from the product
during these 5 years were expected to be Rs. 36,00,000; Rs. 46,00,000; Rs. 44,00,000;
Rs. 40,00,000 and Rs. 34,00,000. Find out the amortization cost of the patent for each of
the years.
174 ACCOUNTS
Hint: Ratio of cash inflow should be used to write off the intangible asset of 60,00,000
(36:46:44:40:34).
SOLUTION:
As per IND AS 38 “Intangible Assets”, the amortization method used should reflect the
pattern in which the asset’s economic benefits are consumed by the enterprise, if that
pattern cannot be determined reliably, the straight-line method should be used.
In the instant case, pattern of economic benefit in the form of net cash flows is determined
reliably after two years. In the initial two years the pattern of economic benefits could
not have been reliably estimated therefore amaoritzation was done at straight-line method
i.e. Rs. 10 Lakhs per annum. However, after two years pattern of economic benefits for
next five years in the form net cash flows is reliably estimated as under and therefore
amortization will also be done as per the pattern of cash in flows:-
Cash in flows (Rs.) Amt. of amortization in next 5 years (Rs.) Balance WDV
36,00,000 10,80,000 (60,00,000 x 36,00,000/200,00,000)
46,00,000 13,80,000 (60,00,000 x 46,00,000/200,00,000)
44,00,000 13,20,000 (60,00,000 x 44,00,000/200,00,000)
40,00,000 12,00,000 (60,00,000 x 40,00,000/200,00,000)
34,00,000 10,20,000 (60,00,000 x 34,00,000/200,00,000)
200,00,000 60,00,000
QUESTION NO 20
While executing a new project, the company had to pay Rs. 50 lakhs to the State Government
as part of the cost of roads built by the State Government in the vicinity of the project
for the purpose of carrying machinery and materials to the project site. The road so built
is the property of the State Government.
Advice the company about the accounting treatment.
Hint: Refer class notes on toll road licence accounting as per schedule ii given in ppe ind
as 16
QUESTION NO 21
During the Financial year 2014-2015, Power Ltd. had the following transactions.
(i) ON 01.04.2014 Power Ltd. purchased a new Asset of Dark Ltd. for Rs. 11,40,000. The
fair Value of Dark Ltd.’s identifiable Net Assets was Rs. 8,50,000. Power Ltd. is of the
view that due to popularity of Dark Ltd.’s product the life of Goodwill is 10 years.
(ii) On 01.05.2014 Power Ltd. purchased a franchise to operate Transport Service from
the Government for Rs. 12,00,000 and at a Annual Fee of 4% of Transport Revenues.
The Franchise expires after 5 years. Transport Revenue were Rs.1,20,000 for Financial
year 2014-2015. Power Ltd. projects future Revenue of Rs. 2,40,000 in 2015-2016
and Rs. 3,50,000 p.a. for 3 years thereafter.
(iii) On 5.07.2014, Power Ltd. was granted a Patent that had been applied for by Dark
Ltd. During 2014-2015, Power Ltd. incurred Legal Cost of Rs. 1,10,000 to register the
Patent and an additional Rs.3,00,000 to successfully prosecute a Patent infringement
suit against a Computer. Power Ltd. expects the Patent’s economic lie to be 10 years.
Power Ltd. follows an Accounting Policy to amortize all Intangibles on SLM basis over
a maximum period permitted by Accounting Standard, taking a full year amortization
in the year of acquisition.
Prepare:
(a) A Schedule showing the intangible section in Power Ltd. Balance Sheet at 31st March
2015.
(b) A Schedule showing the related expense that would appear in the Statement of Profit
and Loss of Power Ltd. for 2014-2015.
SOLUTION:
1. Treatment under IND AS 38
Point Principle and Treatment (amounts in Rs.000s)

(i) * The excess of consideration paid over the Fair value of identifiable Net
Asset is recognized as Goodwill, Hence, Goodwill= 1140-850=290.
* IND AS 38 assumes that the useful life does not exceed 10 years. So, the
amortization over 10 years is proper.
290
Amortisation p.a. = = 29
10
(ii) • Lumpsum franchise fee 1200 would be recognized as Intangibel Asset.

• The Depreciation Amount should be allocated over the assets useful i.e, on a
systematic basis, (e.g. SLM, or Radio of Revenues to be earned, etc.)
• In this case Total Revenues to be earned in 5 years are –
Year 1 2 3 4 5 Total
Revenue Amortisation 120 240 350 350 350 1410
Apportioned 102 204 298 298 298 1200
• Alternatively, Amortisation p.a. under SLM = 1200 / 5 = 240

176 ACCOUNTS
• Revenue in each year and 4% Annual Fee should be recognized as Income/

Expenses in P&L of each year.
Note: Impairment Testing nor considered in this cases.
(iii) • Cost of Patent = Registration + Directly attributable Cost = 110+300=410
• Amortisation p.a. = 410 /10 years = 41
• Note: Assumed that 410 represents cost relating to right to use, and
hence capitalized under IND AS 38.
2. Balance Sheet of Power Ltd. (extract) (Rs.000)
Particulars as at 31st March 2015 Note This Year Prev. Yr.

II ASSETS 1,728
(1) Non-Current Assets: Intangible Assets 1
Total XXXX
Note for WN 2: Intangible Assets : (Rs 000s)
Particulars Gross Block (Cost) Accumulated Amortisation Net Block

Opg Addns Closing Opg. Addns Closing Opg. Closing
Bal. Bal. Bal Bal. Bal. Bal.
(a) Goodwill - 290 290 - 29 29 - 261
(b) Transport - 1200 1200 - 102 102 - 1098
Franchise
(c) Patent - 410 410 - 41 41 - 369
Total - 1900 1900 - 172 172 - 1728
3. Profit and Loss Statement (extract) (Rs 000)
Particulars as at 31st March 2015 Note This Year Prev. Yr.

Depreciation and Amortisation Expense 1 172
Total XXXX
Note:
1. Depreciation and Amortisation Expenses

(a) Goodwill 20
(b) Transport Service Franchise 102
(c) Patent 41 172
QUESTION NO 22
Srimathi Ltd. acquired patent right for Rs. 400 Lakhs. The product life cycle has been
estimated to be 5 yeas and the amortization was decided in the ratio of estimated future
cash flows which are as under:-
Year 1 2 3 4 5
Estimated Future Cash Flows 200 200 200 100 100
(Rs. in Lakhs)
After the 3rd year, it was ascertained that the Patent would have an estimated balance
future life of 3 years and the Estimated Cash Flow after 5thyear is expected to be Rs. 50
Lakhs each year. Determine the amortization under IND AS 38.
SOLUTION:
1. Initial Estimate of Total Cash Inflow = 200+200+200+100+100= Rs. 800 Lakhs.

2. So, as per initial estimate, the cost of Patent should be written off in the ratio 2:2:2:1:1
i.e. (Rs. Lakhs) 100, 100, 100, 50 and 50 respectively, for the five years.
3. Unamortised Amount (WDV) of Patent at the end of 3rd year = 400 – (100+100+100) =
Rs. 100 Lakhs.
4. Revised Estimate of Useful Life at the end of 3rd year = 3 future years, with estimated
Cash Inflows being as under – Year 4 Rs. 100 Lakhs Year 5 Rs. 100 Lakhs, year 6: Rs.
50 Lakhs.
5. Hence, the unamortized Carrying Amount should be written off over the next 3 years,
in the ratio of 100:100:50, i.e. Rs. 40 Lakhs, Rs. 40 Lakhs and Rs. 20 Lakhs respectively
for years 4,5 and 6.
Hence, If it is assumed that the Patent Right is not renewable, the present unamortized
amount of Rs. 100 Lakhs may be written off in years 4 and 5, as per initial estimate, at Rs.
50 Lakhs p.a.
178 ACCOUNTS
QUESTION NO 23
Preetha Ltd. got a license to manufacture certain medicines for 10 years at a License Fee of
Rs. 200 Lakhs. Given below is the pattern of expected production and expected Operating
Cash Inflow:
Year Production in Bottles Net Operating Cash Flow

(in Lakhs) (Rs. in Lakhs)
1 300 900
2 600 1800
3 650 2300
4 to 10 800 p.a. 3200 p.a.
Net Operating Cash Flow has increased for third year because of better Inventory
management and handling method. Suggest the amortization method.
SOLUTION:
As per IND AS 38, Amortisation Method should be based on the expected pattern of
consumption of economic benefits. Hence, the ratio of Net Operating Cash Flow can be used
for amortization purposes.
Year Net Operating Cash Amortisation Amt.

Flow (Rs. in Lakhs)
(in above ratio)
1 900 6
2 1,800 12
3 2,300 16
4 3,200 24
5 3,200 24
6 3,200 24
7 3,200 24
8 3,200 24
9 3,200 24
10 3,200 22 (bal. fig)
Total 27,400 200
QUESTION NO 24
A Company has deferred R&D Cost of Rs. 150 Lakhs. Sales expected in the subsequent
years are as under:-
Year I II III IV
Sales (Rs. in Lakhs) 400 300 200 100
Suggest how R&D Cost should be charged to Profit & Loss Account. Also, if at the end of the
III year, it is felt that no further benefit will accrue in the IV year, how the unamortized
expenditure would be dealt with in the accounts of the Company?
SOLUTION:
1. The Deferred Research and Development costs is to be charged to P&L A/c. on the
basis of Expected Sales as follows:-
Year Sales Percentage of R&D Costs to be Amount charged to P&L

(Rs. Lakhs) amortized in each year Account (Rs. Lakhs)
(on the basis of Sales)
I 400 40% 150x40% = 60
II 300 30% 150x30% = 45
III 200 20% 150x20% = 30
IV 100 10% 150x10% = 15
2. Requirements under IND AS 38:

(a) The period of Amortization should be reviewed periodically to determine proper
method of amortization.
(b) Change of Amortization period: If the expected benefit from the asset is
significantly different from the previous estimates, the amortization period
should be changed accordingly.
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EXTRA QUESTIONS TO BE COVERED
Q.1: X Ltd. is engaged in the business of publishing Journals. They acquired 50%
stake in Y Ltd., a company in the same industry. X Ltd. paid purchase consideration of `
10,00,00,000 and fair value of net asset acquired is ` 8,50,00,000. The above purchase
consideration includes:
(a) ` 30,00,000 for obtaining the skilled staff of Y Ltd.

(b) ` 50,00,000 by way of payment towards ‘Non-compete Fee’ so as to restrict Y Ltd. to
compete in the same line of business for next 5 years.
How should the above transactions be accounted for by X Ltd?
Q.2: X Ltd. purchased a franchise from a restaurant chain at a cost of `1,00,00,000 and
the franchise has 10 years life. In addition, the franchise agreement mentions that the
franchisee would also pay the franchisor royalty as a percentage of sales made. Can the
franchise rights be treated as an intangible asset under Ind AS 38?
Q.3: An entity regularly places advertisements in newspapers advertising its products

and includes a reply slip that informs individuals replying to the advertisement that the
entity may pass on the individual’s details to other sellers of similar products, unless the
individual ticks a box in the advertisement.
Over a period of time the entity has assembled a list of customers’ names and addresses.
The list is provided to other entities for a fee. The entity would like to recognise an asset
in respect of the expected future economic benefits to be derived from the list. Can the
customer list be treated as an intangible asset under Ind AS 38?
Q.4: A software company X Ltd. is developing new software for the telecom industry. It
employs 100 employs engineers trained in that particular discipline who are engaged in the
development of the software. X Ltd. feels that it has an excellent HR policy and does not
expect any of its employees to leave in the near future. It wants to recognise these set
of engineers as a human resources asset in the form of an intangible asset. What would
be your advice to X Ltd?
Q.5: X Ltd. has acquired a telecom license from Government to operate mobile telephony
in two states of India. Can the cost of acquisition be capitalised as an intangible asset
under Ind AS 38?
Q.6: X Ltd. purchased a standardised finance software at a list price of `30,00,000

and paid `50,000 towards purchase tax which is non refundable. In addition to this, the
entity was granted a trade discount of 5% on the initial list price. X Ltd. incurred cost of
` 7,00,000 towards customisation of the software for its intended use. X Ltd. purchased
a 5 year maintenance contract with the vendor company of ` 2,00,000. At what cost the
intangible asset will be recognised?
Q.7: X Limited in a business combination, purchased the net assets of Y Limited for `
4,00,000 on March 31, 20X1. The assets and liabilities position of Y Limited just before
the acquisition is as follows:
Assets Cost (in `)

Property, Plant & Equipment 1,00,000
Intangible asset 1 20,000
Intangible asset 2 50,000
Cash & Bank 1,30,000
Liabilities
Trade payable 50,000
The fair market value of the PPE, intangible asset 1 and intangible asset 2 is available and
they are ` 1,50,000, ` 30,000 and ` 70,000 respectively.
How would X Limited account for the net assets acquired from Y Limited?
Q.9: X Ltd. acquired Y Ltd. on April 30, 20X1. The purchase consideration is `50,00,000.
The fair value of the tangible assets is ` 45,00,000. The company estimates the fair value
of “in-process research projects” at `10,00,000. No other Intangible asset is acquired
by X Ltd. in the transaction. Further, cost incurred by X Ltd. in relation to that research
project is as follows:
(a) ` 5,00,000 – as research expenses

(b) ` 2,00,000 – to establish technological feasibility
(c) `7,00,000 – for further development cost after technological feasibility is
established.
At what amount the intangible asset should be measured under Ind AS 38?
Q.10: X Ltd. acquired a patent right of manufacturing drug from Y Ltd. In exchange X
Ltd. gives its intellectual property right to Y Ltd. Current market value of the patent
and intellectual property rights are ` 20,00,000 and ` 18,00,000 respectively. At what
value patent right should be initially recognised in the books of X Ltd. in following two
situations?
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(a) X Ltd. did not pay any cash to Y Ltd.

(b) X Ltd. pays ` 2,00,000 to Y Ltd.
Q.11: X Garments Ltd. spent ` 1,00,00,000 towards promotions for a fashion show by
way of various on-road shows, contests etc.
After that event, it realised that the brand name of the entity got popular and resultantly,
subsequent sales have shown a significant improvement. It is further expected that this
hike will have an effect over the next 2-3 years.
How the entity should account for the above cost incurred on promoting such show?
Q.12: An entity is developing a new production process. During 20X1-20X2, expenditure

incurred was ` 1,000, of which ` 900 was incurred before March 1, 20X2 and ` 100 was
incurred between March 1, 20X2 and March 31, 20X2. The entity is able to demonstrate
that at March 1, 20X2, the production process met the criteria for recognition as an
intangible asset. The recoverable amount of the know-how embodied in the process
(including future cash outflows to complete the process before it is available for use) is
estimated to be ` 500.
During 20X2-20X3, expenditure incurred is ` 2,000. At the end of 20X3, the recoverable
amount of the know-how embodied in the process (including future cash outflows to complete
the process before it is available for use) is estimated to be ` 1,900.
Q.13: X Ltd. is engaged is developing computer software. The expenditures incurred by

X Ltd. in pursuance of its development of software is given below:
(a) Paid ` 2,00,000 towards salaries of the program designers.

(b) Incurred ` 5,00,000 towards other cost of completion of program design.
(c) Incurred ` 2,00,000 towards cost of coding and establishing technical feasibility.
(d) Paid ` 7,00,000 for other direct cost after establishment of technical feasibility.
(e) Incurred ` 2,00,000 towards other testing costs.
(f) Cost of producing product masters for training material is ` 3,00,000.
(g) A focus group of other software developers was invited to a conference for the
introduction of this new software. Cost of the conference aggregated to ` 70,000.
(h) On March 15, 20X0, the development phase was completed and a cash flow budget was
prepared.
Net profit for the year was estimated to be equal ` 40,00,000. How X Ltd. should account
for the above mentioned cost?
Q.14: X Ltd. has started developing a new production process in financial year 20X1-20X2.
Total expenditure incurred till September 30, 20X3, was `1,00,00,000 . The expenditure
on the development of the production process meets the recognition criteria on July 1,
20X1. The records of X Ltd. show that, out of total ` 1,00,00,000, ` 70,00,000 were
incurred during July to September 20X1. X Ltd. publishes its financial results quarterly.
How X Ltd. should account for the development expenditure?
Q.15: X Ltd. decides to revalue its intangible assets on April 1, 20X1. On the date
of revaluation, the intangible assets stand at a cost of ` 1,00,00,000 and accumulated
amortisation is ` 40,00,000. The intangible assets are revalued at ` 1,50,00,000. How
should X Ltd. account for the revalued intangible assets in its books of account?
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QUESTION 1 MAY 2019 EXAM
CARP Ltd. is engaged in developing computer software. The expenditures incurred by

CARP Ltd. in pursuance of its development of software is given below:
(i) Paid ` 1,50,000 towards salaries of the program designers.

(ii) Incurred ` 3,00,00 0 towards other cost of completion of program design.
(iii) Incurred ` 80,000 towards cost of coding and establishing technical feasibility.
(iv) Paid ` 3,00,000 for other direct cost after establishment of technical feasibility.
(v) Incurred ` 90,000 towards other testing costs.

(vi) A focus group of other software develop was was invited to a conference for the
introduction of this new software. Cost of the conference aggregated to ` 60,000.
(vii) On March 15, 2018, the development phase was completed and a cash flow budget
was prepared.
Net profit for the year 2017-18 was estimated to be equal ` 30,00,000.
How CARP Ltd. should account for the above mentioned cost as per relevant Ind AS?
ANSWER
Costs incurred in creating computer software, should be charged to research & development
expenses when incurred until technical feasibility/asset recognition criteria have been
established for the product. Here, technical feasibility is established after completion of
detailed program design.
In this case, ` 5,30,000 (salary cost of ` 1,50,000, program design cost of ` 3,00,000 and
coding and technical feasibility cost of ` 80,000) would be recorded as expense in Profit
and Loss since it belongs to research phase.
Cost incurred from the point of technical feasibility are capitalised as software costs.
But the conference cost of ` 60,000 would be expensed off.
In this situation, direct cost after establishment of technical feasibility of ` 3,00,000

and testing cost of ` 90,000 will be capitalised.
The cost of software capitalised is = ` (3,00,000 + 90,000) = ` 3,90,000.

One of the senior engineers at XYZ has been working on a process to improve manufacturing
efficiency and, consequently, reduce manufacturing costs. This is a major project and
has the full support of XYZʼs board of directors. The senior engineer believes that
the cost reductions will exceed the project costs within twenty four months of their
implementation. Regulatory testing and health and safety approval was obtained on 1 June
20X5. This removed uncertainties concerning the project, which was finally completed on
20 April 20X6. Costs of ` 18,00,000, incurred during the year till 31st March 20X6, have
been recognized as an intangible asset. An offer of ` 7,80,000 for the new developed
technology has been received by potential buyer but it has been rejected by XYZ. Utkarsh
believes that the project will be a major success and has the potential to save the company
` 12,00,000 in perpetuity. Director of research at XYZ, Neha, who is a qualified electronic
engineer, is seriously concerned about the long term prospects of the new process and
she is of the opinion that competitors would have developed new technology at some time
which would require to replace the new process within four years. She estimates that
the present value of future cost savings will be ` 9,60,000 over this period. After that,
she thinks that there is no certainty about its future. What would be the appropriate
accounting treatment of aforesaid issue?’
ANSWER
Ind AS 38 ‘Intangible Assets’ requires an intangible asset to be recognised if, and only if,
certain criteria are met. Regulatory approval on 1 June 20X5 was the last criterion to be
met, the other criteria have been met as follows:
• Intention to complete the asset is apparent as it is a major project with full support
from board
• Finance is available as resources are focused on project
• Costs can be reliably measured
• Benefits are expected to exceed costs – (in 2 years)
Amount of ` 15,00,000 (` 18,00,000 x 10/12) should be capitalised in the Balance sheet of
year ending 20X5-20X6 representing expenditure since 1 June 20X5.
The expenditure incurred prior to 1 June 20X5 which is ` 3,00,000 (2/12 x `18,00,000)
should be recognised as an expense, retrospective recognition of expense as an asset is not
allowed.
Ind AS 36 ‘Impairment of assets’ requires an intangible asset not yet available for use to
be tested for impairment annually.
Cash flow of ` 12,00,000 in perpetuity would clearly have a present value in excess of
` 12,00,000 and hence there would be no impairment. However, the research director is
technically qualified, so impairment tests should be based on her estimate of a four-year
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remaining life and so present value of the future cost savings of ` 9,60,000 should be
considered in that case.
` 9,60,000 is greater than the offer received (fair value less costs to sell) of ` 7,80,000
and so ` 9,60,000 should be used as the recoverable amount.
So, the carrying amount should be consequently reduced to ` 9,60,000.
Calculation of Impairment loss:
Particulars Amount `
Carrying amount (Restated) 15,00,000
Less: Recoverable amount 9,60,000
Impairment loss 5,40,000
Impairment loss of ` 5,40,000 is to be recognised in the profit and loss for the year
20X5-20X6.
Necessary adjusting entry to correct books of account will be:
` `
Operating expenses- Development expenditure Dr. 3,00,000
Operating expenses–Impairment loss of intangible assets Dr. 5,40,000
To Intangible assets – Development expenditure 8,40,000

IND AS 40: INVESTMENT PROPERTY 187
IND AS 40: INVESTMENT PROPERTY

CONCEPT 1:BASIC KNOWLEDGE
A real estate property that has been purchased with the intention of earning return on the
investment (purchase) either through rent (income), the future resale of the property or
both. An investment property is like any other investment, the goal is to generate a profit.
In real estate, this is achieved through income (rent, for example) or through a profitable
resale. The way in which a property is used has a significant impact on its value. Investors
sometimes conduct studies to determine the best and most profitable use of a property.
This is often referred to as its highest to as its highest and best use.
CONCEPT 2: COVERAGE
This standard prescribes criteria for the accounting treatment for, and disclosures relating
to, investment property. The Standard shall be applied in the recognition, measurement,
and disclosure of investment property.
▪ The standard applies to the measurement in a lessee’s financial statements of investment

property held under a finance lease and to the measurement in the lessor’s financial
statements of investment property leased out under an operating lease.
▪ However this Standard does not apply
▪ To the matter covered in Ind AS-17, Leases.
▪ To biological assets related to agricultural activity (IndAS-41) or,
▪ To mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative
resources.
CONCEPT 3: CLASSIFICATION OF PROPERTY
1. Investment property – Land or building, or part of a building, or both, held by the owner
or the lessee under a finance lease to earn rentals and/or for capital appreciation,
rather than for:
▪ Use in production or supply of goods and services or
▪ Use in administrative purposes or
▪ Sale in the ordinary course of business.
2. Owner-occupied property – Property held by the owner or the lessee under a finance
lease for use in production or supply of goods and services or for administrative
purposes.
One of the distinguishing characteristics of investment property (compared to owner-
occupied property) is that it generates cash flows that are largely independent from
188 ACCOUNTS
other assets held by an entity. Owner-occupied property is accounted for under Ind
AS-16, Property, plant, and Equipment.
In some instances, an entity occupies part of a property and leases out the balance. If
the two portions can be sold separately, each is accounted for appropriately. If the
portions cannot be sold separately, then the entire property is treated as investment
property only if an insignificant proportion is owner-occupied.
An issue arises with groups of companies wherein one group company leases a property
to another. At group, or consolidation level, the property is owner-occupied. However, at
individual company level, the owning entity treats the building as investment property.
Appropriate consolidation adjustments would need to be made in the group accounts.
EXAMPLES OF INVESTMENT PROPERTIES

The following are examples of investment property:
▪ Land held for long-term capital appreciation rather than for short-term sale in the
ordinary course of business
▪ Land held for a currently undetermined future use. (If an entity has not determined that
it will use the land as owner-occupied property or for short-term sale in the ordinary
course of business, the land is regarded as held for capital appreciation.)
▪ A building owned by the entity (or held by the entity under a finance lease) and leased
out under one or more operating leases.
▪ A building that is vacant but is held to be leased out under one or more operating leases.
▪ Property that is being constructed or developed for future use as investment property.
The following are examples of items that are not investment property and are therefore
outside the scope of this Standard
▪ Property intended for sale in the ordinary course of business or in the process of
construction or development for such sale (Ind AS-2, Inventories), for example,
property acquired exclusively with a view to subsequent disposal in the near future or
for development and resale.
▪ Owner-occupied property (IndAS-16), including (among other things) property held
for future use as owner-occupied property, property held for future development and
subsequent use as owner-occupied property, property occupied by employees (whether
or not the employees pay rent at market rates) and owner-occupied property awaiting
disposal.
▪ Property that is leased to another entity under a finance lease.
CONCEPT 4: MIXED CASES OF PROPERTIES
CASE 1: PROPERTY USED IN BUSINESS AS WELL AS FOR RENTAL

Some properties comprise a portion that is held to earn rentals or for capital appreciation
and another portion that is held for use in the production or supply of goods or services
or for administrative purposes. If these portions could be sold separately (or leased
out separately under a finance lease), an entity accounts for the portions separately. If
the portions could not be sold separately, the property is investment property only if an
insignificant portion is held for use in the production or supply of goods or services or for
administrative purposes.
CASE 2: PROPERTY ON THE BASIS OF ANCILLARY SERVICES

In some cases, an entity provides ancillary services to the occupants of a property it holds.
An entity treats such a property as investment property if the services are significant to
the arrangement as a whole. An example is when the owner of an office building provides
security and maintenance services to the lessees who occupy the building.
▪ In other cases, the services provided are significant. For example, if an entity owns
and manages a hotel, services provided to guests are significant to the arrangement as
a whole. Therefore, an owner-managed hotel is owner-occupied property, rather than
investment property.
▪ It may be difficult to determine whether ancillary services are so significant that a
property does not qualify as investment property. For example, the owner of a hotel
sometimes transfers some responsibilities to third parties under a management contract.
▪ The terms of such contracts vary widely. At one end of the spectrum, the owner’s
position may, in substance, be that of a passive investor. At the other end of the
spectrum, the owner’s may simply have outsourced day-to-day functions while retaining
significant exposure to variation in the cash flows generated by the operations of the
hotel.
▪ Judgment is needed to determine whether a property qualifies as investment property. An
entity develops criteria so that it can exercise that judgment consistently in accordance
with the definition of investment property requires an entity to disclose these criteria
when classification is difficult.
CASE 3: TREATMENT OF PROPERTY IN CONSOLIDATED STATEMENTS

In some cases, an entity owns property that is leased to, and occupied by, its parent or
another subsidiary. The property does not qualify as investment property in the consolidated
financial statements, because the property is owner-occupied from the perspective of the
group.
190 ACCOUNTS
However, from the perspective of the entity that owns it, the property is investment
property if it meets the definition of investment property. Therefore, the lessor treats
the property as investment property in its individual financial statements.
CONCEPT 5: RECOGNITION
Investment property shall be recognized as an asset when and only when:
▪ It is probable that future economic benefits will flow to the entity; and
▪ The cost of the investment property can be measured reliably.
CONCEPT 6: INITIAL MEASUREMENT

An investment property shall be measured initially at its cost, including transaction
charges.
CASE 1: PURCHASE BY CASH

The cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure. Directly attributable expenditure includes for example,
professional fees for legal services, property transfer taxes and other transaction costs.
However cost of an investment property does not include:
▪ Start-up costs (unless they are necessary to bring the property to the condition
necessary for it to be capable of operating in the manner intended by management),
▪ Operating losses incurred before the investment property achieves the planned level of
occupancy, or
▪ Abnormal amounts of wasted material, labour or other resources in constructing or
developing the property
▪ Interest cost in case of deferred payment – If payment for an investment property is
deferred, its cost is the cash price equivalent. The difference between this amount and
the total payments is recognized as interest expense over the period of credit
CASE 2: INVESTMENT PROPERTY ACQUIRED IN EXCHANGE

One or more investment properties may be acquired in exchange for a non-monetary asset
or assets, or a combination of monetary and non-monetary assets. The cost of such an
investment property is measured at fair value unless:
▪ The exchange transaction lacks commercial substance; or

▪ The fair value of neither the asset received nor the asset given up is reliably measurable.
If the acquired asset is not measured at fair value, its cost is measured at the carrying
amount of the asset given up.
CASE 3: PURCHASE ON LEASE

However, property held under a finance lease shall be measured initially using the principles
contained in Ind AS-17, Leases – at the lower of the fair value and the present value of the
minimum lease payments. A key matter here is that the item accounted for at fair value is
not the property itself but the lease interest.
CONCEPT 7: MEASUREMENT AFTER RECOGNITION

An entity shall also measure subsequently after initial recognition all its investment property
at cost. In other words, the investment properties shall be carried in the balance sheet at
its cost less any accumulated depreciation and any accumulated impairment losses.
This Standard requires all entities to measure the fair value of investment property, for
the purpose of disclosure even though they are required to follow the cost model. An
entity is encouraged, but not required, to measure the fair value of investment property
on the basis of a valuation by an independent valuer who holds a recognised and relevant
professional qualification and has recent experience in the location and category of the
investment property being valued.
The investment property which meets the criteria to be classified as held for sale (or
are included in a disposal group that is classified as held for sale) in accordance with Ind
AS-105, Non-current Assets Held for Sale and Discontinued Operations such Investment
properties shall be measured in accordance with Ind AS-105.
CONCEPT 8: TRANSFERS
Transfers to, or from, investment property shall be made when, and only when, there is a
change in use, evidenced by;
▪ Commencement of owner-occupation, for a transfer from investment property to owner-

occupied property;
▪ Commencement of development with a view to sale, for a transfer from investment
property to inventories;
▪ End of owner-occupation, for a transfer from owner-occupied property to investment
property;
▪ Commencement of an operating lease to another party, for a transfer from inventories
to investment property.
Transfers between investment property, owner-occupied property and inventories do not

change the carrying amount of the property transferred and they do not change the cost
of that property for measurement or disclosure purposes.
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CONCEPT 9: DISPOSAL
An investment property shall be derecognized on disposal or at the time that no benefit
is expected from future use or disposal. Any gain or loss is determined as the difference
between the net disposal proceeds and the carrying amount and is recognized in the income
statement.
▪ Classification criteria (to distinguish owner-occupied investment property, property

held for sale in situations where classification is difficult).
▪ Methods and assumptions used to determine fair value.
▪ Extent of involvement of independent used to determine fair value.
▪ Extent of involvement of independent, professional and recently experienced valuers in
the determination of fair value (whether used as measurement basis or disclosed)
Amounts included in profit or losses for:
• Rental income
• Direct operating expenses from rented property
• Direct operating expenses from non-rented property
▪ Restrictions on realisability or property or remittance of income/disposal proceeds
▪ Material contractual obligation:
• To purchase, construct or develop investment property; or
• For repair, maintenance or enhancements
▪ Depreciation method used
▪ Useful lives or depression rates used
▪ Gross carrying amount, accumulated depreciation and impairment losses at beginning and
end of period
▪ Reconciliation of brought forward and carried forward amounts.
▪ The fair value of investment property (or an explanation why it cannot be determined).
QUESTION 1
Sun Ltd owns a building having 15 floors of which it uses 5 floors for its office; the
remaining 10 floors are leased out to tenants under operating leases. According to law
company could sell legal title to the 10 floors while retaining legal title to the other 5
floors.
SOLUTION
In the given scenario, the remaining 10 floors should be classified as investment property,
since they are able to split the title between the floors.
QUESTION 2
Moon ltd uses 35% of the office floor space of the building as its head office. It leases
the remaining 65% to tenants, but it is unable to sell the tenant’s space or to enter into
finance leases related solely to it.
SOLUTION
Therefore, the company should not classify the property as an investment property as the
35% of the floor space used by the company is significant.
QUESTION 3
An entity owns a hotel, which includes a health and fitness centre, housed in a separate
building that is part of the premises of the entire hotel. The owner operates the hotel
and other facilities on the hotel with the exception of the health and fitness centre,
which can be sold or leased out under a finance lease. The health and fitness centre will
be leased to an independent operator. The entity has no further involvement in the health
and fitness centre.
SOLUTION
In this scenario, management should classify the hotel and other facilities as property
plant and equipment and the health and fitness centre as investment property.
If the health and fitness centre could not be sold or leased out separately on a finance
lease, then because the owner-occupied portion is not insignificant, the whole property
would be treated as an owner-occupied property.
QUESTION 4
The owner of an office building provides security and maintenance services to the lessees
who occupy the building.
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SOLUTION
In such a case, since the services provided are insignificant, the property would be treated
as an investment property.
QUESTION 5
If an entity owns and manages a hotel, services provided to guests are significant to the
arrangement as a whole.
SOLUTION
In such case, an owner-managed hotel is owner-occupied property, rather than investment
property.
QUESTION 6
Classify the following cases of given properties & tell which ind as should be applied on
these properties:
Summarisation
S.No. Property Does it meet Which Ind AS

definition of is Applicable
Investment
Property
1. Owned by a Co and leased out under an
Operating Lease
2. Held Under Finance Lease and Leased out under
an Operating Lease
3. Held under Finance Lease and Leased out
under Finance Lease
4. Property acquired with a view for development
and resale
5. Property developed on behalf of 3rd party
6. Property partly owner occupied and partly
leased out under Operating Lease
7. Land held for currently undetermined
use
8. Property occupied by Employees paying rent at
less than market rate
9. Investment Property held for sale

10. Existing Investment Property that is being
redeveloped for continued use as Investment
Property.
QUESTION 7
X Limited owns a building which is used to earn rentals. The building has a carrying amount
of ` 50,00,000. X Limited recently replaced interior walls of the building and the cost of
new interior walls is ` 5,00,000. The original walls have a carrying amount of ` 1,00,000.
How X Limited should account for the above costs?
SOLUTION
Under the recognition principle, an entity recognises in the carrying amount of an investment
property the cost of replacing part of an existing investment property at the time that
cost is incurred if the recognition criteria are met and the carrying amount of those parts
that are replaced is derecognised.
So, X Limited should add the cost of new walls and remove the carrying amount of old
walls. The new carrying amount of the building = ` 50,00,000 + ` 5,00,000 – ` 1,00,000 =
` 54,00,000.
QUESTION 8
Sun Ltd acquired a building in exchange of a warehouse whose fair value is `

5,00,000 and payment of cash is ` 2,00,000. The fair value of the building received by
the Company is ` 8,00,000.
SOLUTION
The company decided to keep that building for rental purposes. The Building is acquired
with the purpose to earn rentals. Hence, it is a case of Investment.
Property acquired in exchange for a combination of monetary and non-monetary asset.
Therefore
Journal entry at the time of acquisition is:
Investment Property (Building) .Dr 8,00,000

To Cash 2,00,000
To PPE (Property Plant and Equipment) i.e. Warehouse 5,00,000
To Gain on exchange (Profit or Loss) 1,00,000
196 ACCOUNTS
QUESTION 9
X Limited purchased a building for ` 30,00,000 in May 1, 20X1.The purchase price was
funded by a loan. Property transfer taxes and direct legal costs of ` 1,00,000 and `
20,000 respectively were incurred in acquiring the building. In 20X1-20X2, X Limited
redeveloped the building into retail shops for rent under operating leases to independent
third parties. Expenditures on redevelopment were:
` 2,00,000 planning permission.
` 7,00,000 construction costs (including ` 40,000 refundable purchases taxes).
The redevelopment was completed and the retail shops were ready for rental on
September 2, 20X1. What is the cost of building at initial recognition?
SOLUTION
The cost of a purchased investment property comprises its purchase price and any direct
attributable expenditure.
So, the cost of the building = ` (30,00,000 +1,00,000 + 20,000 + 2,00,000 + 7,00,000 -
40,000) = ` 39,80,000.
QUESTION 10
X Limited purchased a land worth of ` 1,00,00,000. It has option either to pay full amount
at the time of purchases or pay for it over two years for a total cost of ` 1,20,00,000.
What should be the cost of the building under both the payments method?
SOLUTION
Using either payment method, the cost will be ` 1,00,00,00. If the second payment option
is used, ` 20,00,000 will be treated as interest expenses over the period of credit i.e.,
2 years.
QUESTION 11
X Limited (as the lessee) has taken a building under finance lease from the owner. It
classifies its interest in the leasehold building as investment property and after initial
recognition measures the property interest at fair value. The present value of the
minimum lease payment is ` 40,000. At what value, X Limited will recognise its investment
property?
SOLUTION
X Limited shall initially recognise the property interest at ` 40,000. A corresponding lease
liability of ` 40,000 will be recognised as follows:
Investment Property A/c Dr. ` 40,000

To Finance lease obligation ` 40,000.
QUESTION 12
Moon Ltd has purchased a building on 1st April 20X1 at a cost of ` 10 million. The building
was used as a factory by the Moon Ltd and was measured under cost model. The expected
useful life of the building is estimated to be 10 years. Due to decline in demand of the
product, the Company does not need the factory anymore and has rented out the building
to a third party from 1st April 20X5. On this date the fair value of the building is ` 8 million.
Moon ltd uses cost model for accounting of its investment property.
QUESTION 13
On April 1, 20X1 an entity acquired an investment property (building) for ` 40,00,000.

Management estimates the useful life of the building as 20 years measured from the date
of acquisition. The residual value of the building is ` 2,00,000. Management believes that
the straight-line depreciation method reflects the pattern in which it expects to consume
the building’s future economic benefits. What is the carrying amount of the building on
March 31, 20X2?
QUESTION 14
X Limited has an investment property (building) which is carried in Balance Sheet on March
31, 20X1 at ` 15,00,000. During the year X Limited has stopped letting out the building and
used it as its office premise. On March 31, 20X1, management estimates the recoverable
amount of the building as ` 10,00,000 and its remaining useful life as 20 years and residual
value is nil. How should X Limited account for the above investment property as on March
31, 20X1?
QUESTION 15
In financial year 20X1-20X2, X Limited incurred the following expenditure in acquiring

property consisting of 6 identical houses each with separate legal title including the land
on which it is built.
The expenditure incurred on various dates is given below:
On April 1, 20X1 - Purchase cost of the property ` 1,80,00,000.
On April 1, 20X1 – Non-refundable transfer taxes ` 20,00,000 (not included in the purchase
cost).
On April 2, 20X1- Legal cost related to property acquisition ` 5,00,000. On April 6, 20X1-
Advertisement campaign to attract tenants ` 3,00,000.
198 ACCOUNTS
On April 8, 20X1 - Opening ceremony function for starting business ` 1,50,000.

Throughout 20X1-20X2, incurred ` 1,00,000 towards day-to-day repair maintenance and
other administrative expenses.
X Limited uses one of the six houses for office and accommodation of its few staffs. The
other five houses are rented to various independent third parties.
How X Limited will account for all the above mentioned expenses in the books of account?
QUESTION 16
S1 Ltd. lets out a property to S2 Ltd. under operating lease both the companies are
subsidiary of P Ltd.
Analyse how would different companies treat the property in their respective separate
financial statements and consolidated financial statements.
QUESTION 17
S1 Ltd lets out a property to S2 Ltd. under finance lease.

Both the companies are subsidiary of P Ltd.
S2 Ltd. sub-let out a portion of the property to K Ltd. under operating lease.
Analyse how different companies would treat the property in their respective separate
financial statements and consolidated financial statements.
QUESTION 18
[Acquisition of investment property on deferred payments basis]

X Ltd. acquired an investment property under defer payment plan Down payment on date
of acquisition ` 50,00,000
After 6 months ` 120,00,000
After 1 year ` 5, 00,00,000
The incremental borrowing rate of the company is 11%. Find out cost of investment property
at initial recognition? How should X Ltd. account for the difference?
QUESTION 19
[Component-wise depreciation of investment property]

X Ltd. acquired and land for ` 15 cr. And constructed buildings at a cost of ` 40 cr. To
be used for letting out for commercial and residential purposes under varied lease terms.
Interior walls in the common spaces were decorated at a cost of ` 120 lakhs. The useful
life of the building is estimated at 50 years and that of interior decoration 15 years. After
10 years, the entity changed the interior decoration at a cost of ` 1.50 cr. And estimated
new useful life of 15 years.
Find out depreciation charge during 1-11 years and show accounting entry for the replacement
of interior walls.
QUESTION 20
The fair value of an investment property at the beginning of the year 2015-16 is € 25
million and at end of 2015-16 is € 25 million.
There is an air-conditioning plant which was purchased at the beginning of 2013-14 for € 1
million. It is depreciated @ 10% p.a. and lift installed at the beginning of 2011-12 costing
€ 1.2 million which is also depreciated @ 10% p.a. As per Paragraph 50 of Ind AS 40, the
company wishes to present an all-inclusive fair value of investment property. Assume that
depreciated book value of equipment represents the fair value at the end of the year.
The company is in a dilemma about the procedure to be followed for fair value measurement.
QUESTION 21
X Ltd. has the following four properties:
(i) Property A used as office building of the company – Cost ` 30 cr. Accumulated
depreciation ` 20 cr., Net ` 10 cr.
The company puts the property into renovation and intended to lease out under one or
more operating leases.
(ii) Property B used under operating leases –Cost ` 50 cr. Accumulated depreciation ` 20
cr. Net ` 30 cr.dd
The property is put into renovation for sale.
(iii) Property C used under operating leases – Cost ` 40 cr. accumulated depreciation ` 20
cr., Net ` 20 cr.
The property is put into sale.
(iv) Property D used under operating lease – Cost ` 40 cr. accumulated depreciation ` 20
cr., Net ` 20 cr.
The property is put into renovation and intended to be used as office building after
the renovation.
How should the transfer be evidenced? How would these transfers change the classification
of the respective property?
200 ACCOUNTS
SELF PRACTICE QUESTIONS

Q1: K Ltd is a supplier of industrial products. In 2013, the company purchased a plot of
lands on the outskirts of a major city. The area has mainly low-cost public housing and
very limited public transport facilities. The government has plans to develop the area as
an industrial park in 5 years times and the land is expected to greatly appreciate in value
if the government process with the plan. K Ltd’s management classifies such a property
that is held for undermined future use?
Solution: Management should classify the property as an investment property. Although
management has not determined a use for the property after the parks’ development takes
place, in the medium-term the land is held for capital appreciation. Standard considers land
as held for capital appreciation, if K Ltd has not determined that it will use the land either
as owner-occupied property or for short-term sale in the ordinary course of business.
Q2: M. Ltd owns a hotel resort, which includes a casino, housed in a separate building that
is part of the premises of the entire hotel resort. Its patrons would be largely limited to
tourists and non-resident visitors only.
Solution: The owner operates the hotel and other facilities on the hotel resort, with the
exception of the casino, which can be sold or leased out under a finance lease. The casino
will be leased to an independent operator. M Ltd has no further involvement in the casino.
The casino operator will not be prepared to operate it without the existence of the hotel
and other facilities.
In this scenario, management should classify the hotel and other facilities as property,
plant and equipment and the casino as investment property. As explained in Ind AS-40, the
casino can be sold separately or leased out under finance lease.
Q3: K Ltd owns a hotel, B Ltd, a fellow subsidiary of K Ltd manages a chain of hotels, and
receives management fees for operating its chains, except for the hotel owned by K Ltd.
K Ltd’s owned hotel is leased to B Ltd for ` 20,00,000 a month for a period of 5 years.
Any profit or losses from operating K Ltd’s hotel rests with B Ltd the hotel that K Ltd
owns has an estimated remaining useful life of 4 years.
Solution: In the consolidated financial statement, the hotel should be classified as property,
plant and equipment. This is because it is both owned and managed by the group from the
perspective for the group and therefore, it should be recognized as owner-occupied for the
use in the supply of goods or services.
Q4: An investment property company has been constructing a new cinema as 31st December
2016, the cinema was nearing completion and the costs incurred to date were:
Material, labour and sub-contractors 148 lakhs

Other directly attributable overheads 25 lakhs
Interest on borrowings 13 lakhs
In is company’s policy to capitalize interest on specific borrowing raised for the purpose
of financing a construction. The amount of borrowings outstanding at 31st December 2016
in respect of this project is ` 180 lakhs and annual interest rate is 9.5%.
During the 3 months to 31st March 2017 the cinema was completed, with the following
additional costs incurred.
Material, labour and sub-contractors 17 lakhs
Other overheads 3 lakhs
The company was not able to determine the fair value of the property reliably the
construction period and so valued it at cost pending completion (as allowed Ind AS-40).
On 31st March 2010, the company obtained a professional appraisal of the cinema’s fair
value and the valuer concluded that it was worth ` 240 lakhs. The fee for this appraisal
was ` 1 lakh and has not been included in the above figures for costs incurred during the
3 months.
The cinema was taken by a notional multiplex chain on an operating lease as at 1st April
2017 and was immediately welcoming capacity crowds. Following a complete valuation of
the company’s investment properties at 31st December 2017, the fair value of the cinema
was established at ` 280 lakhs.
Required: Set out the accounting entries in respect of the cinema complex for the year
ended 31st December 2017
Solution: On 1st January 2010 the property would have been valued at its cost of
` 186 lakhs as the fair value was not determinable during the period for construction.
Costs incurred in the 3 months to 31st March 2010
Asset under construction Dr. 17 lakhs

To Cash/ Payable 17 lakhs
Asset under construction Dr. 3 lakhs
To Cash/ Payable 3 lakhs
Asset under construction Dr. 4.30 lakhs
To Interest Expense 4.30 lakhs
202 ACCOUNTS
Working
Outstanding borrowing: ` 180 lakhs
Interest for 3 months: ` 180 lakhs x 3/12 x 9.5% = ` 430,000
Accumulated costs at the date of transfer into investment properties
Cost to 31st December 2009 (148+25+13+) 186.00
Cost to 31st March 2010 (17+3+4.3) 24.30
210.30
Fair value of the investment property as on 31st March 2017 and 31st Dec 2017 would be
disclosed in the financial statement for these period as per Ind AS-40. Fees paid to the
valuer of ` 1 lakhs will be expensed in Profit or loss.
Q5: Phoenix Mills Ltd, a listed company in India ventured into construction of a mega
shopping mall in India, which is rated as the largest shopping mall of India. The company’s
board of directors after market research decided that instead of selling the shopping mall
to a local investor, who had approached them several times during the construction period
with excellent affairs which he progressively increased ruing the year of construction,
the company would hold this property for the purposes of earning rentals by letting out
space in the shopping mall to tenants. For this purpose it used the service of a real estate
company to find an anchor tenant (a major international retail chain) that then attracted
other important retailers locally to rent space in the mega shopping mall, and within
months of the completion of the construction the shopping mall was fully let out.
The construction of the shopping mall was completed and the property was placed in
service at the end of 2016. According to the company’s engineering department the
computed total cost of the construction of the shopping mall was ` 100 core.
The independent valuation expert was of the opinion that the useful life of the shopping
mall was 10 years and its residual value was ` 10 core.
What would be the impact on the profit and loss account of the company under the Cost
Model?
Solution: Under the cost model Company would have to provide depreciation over 10 years
and also to provide impairment losses if any. The asset should be carried at its cost less
accumulated depreciation and any accumulated impairment losses. The annual depreciation
which is computed based on the acquisition cost of the investment property will be the only
charge to the net profit or loss for each period (unless there is impairment which will also
be a charge to the net profit or loss for the year).
Based on the acquisition cost of ` 100 Crores (assuming there is no subsequent expenditure
that would be capitalized), a residual value of ` 10 crores, a useful life of 10 years, and using
the straight-line method of depreciation, the annual impact of depreciation on the Net
profit or loss for each year would be ` (100-10)/10 Crore = 9 Crore besides this the annual
rent will be shown as an income in the Statement of Profit and loss.
SHORT QUESTIONS FOR CROSS CHECKING OF GRIP ON TOPIC

Q1: An investment property should be measured initially at
(a) Cost
(b) Cost less accumulated impairment losses
(c) Depreciable cost less accumulated impairment losses
(d) Fair value less accumulated impairment losses
Answer: (a)
Q2: The applicable IFRS/IAS for PPE being constructed or developed for future use as
investment property is
(a) IAS 2, Inventories, until construction is complete and then it is accounted for
under IAS 40, Investment Property.
(b) IAS 40, Investment Property.
(c) IAS 11, Construction Contracts, until construction is complete and then it is
accounted for under IAS 40, Investment Property.
(d) IAS 16, Property, Plant, and Equipment, until construction is complete and then it
is accounted for under IAS 40, Investment Property.
Answer: (d)
Q3: In case of property held under an operating lease and classified as investment
property
(a) The entity has to account for the investment property under the cost model only.
(b) The entity has to use the fair value model only.
(c) The entity has the choice between the cost model and the fair value model.
(d) The entity needs only to disclose the fair value and can use the cot model under Ind
AS-40.
Answer: (d)
Q4: Transfer from investment property to property plant, and equipment are appropriate
(a) When there is change of use.
(b) Based on the entity’s discretion
204 ACCOUNTS
(c) Only when the entity adopts the fair value model under Ind AS-40.
(d) The entity can never transfer property into another classification on the balance
sheet once it is classified as investment property.
Answer: (a)
Q.5: An investment property is derecognized (eliminated from the balance sheet) when
(a) It is disposed to a third party.
(b) It is permanently withdrawn from use.
(c) No future economic benefits are expected from its disposal.
(d) In all of the above cases.
Answer: (d)
IND AS 40: INVESTMENT PROPERTY
QUESTION 1
Netravati Ltd. purchased a commercial office space as an Investment Property, in the Global
Trade Centre Commercial Complex, for Rs.5 crores. However, for purchasing the same,
the Company had to obtain membership of the Global Trade Centre Commercial Complex
Association by paying Rs.6, 25, 000 as a one-time joining fee. Netravati Ltd. wants to
write off the one-time joining fees paid as an expense under Membership and Subscription
Charges and value the investment property at Rs.5 crores. Advise.
Would you answer change if the office space was purchased with the intention of using it as
an administrative centre of the company?
QUESTION 2
X Ltd. is engaged in the construction industry and prepares its financial statements up
to 31st March each year, On 1st April. 20X1, X Ltd. purchased a large property (consisting
of land) for Rs.2,00,00,000 and immediately began to lease the property to Y Ltd. on an
operating lease. Annual rentals were Rs.20,00,000. On 31st March, 20X5, the fair value of
the property was Rs.2,60,00,000. Under the terms of the lease, Y Ltd. was able to cancel
the lease by giving six months’ notice in writing to X Ltd. Y Ltd. gave this notice on 31st
March, 20X5 and vacated the property on 30th September, 20X5. On 30th September,
20X5, the fair value of the property was Rs.2,90,00,000. On 1st October, 20X5, X Ltd.
immediately began to convert the property into ten separate flats of equal size which X Ltd.
intended to sell in the ordinary course of its business. X Ltd. spent a total of Rs.60,00,000
on this conversion project between 30th September, 20X5 to 31st March, 20X6. The project
was incomplete at 31st March, 20X6 and the directors of X Ltd. estimate that they need to
spend a further Rs.40,00,000 to complete the project, after which each flat could be sold
for Rs.50,00,000.
Examine and show how the three events would be reported in the financial statements of X
Ltd. for the year ended 31st March. 20X6 as per lnd AS.
206 ACCOUNTS
QUESTION 3 (RTP NOV 2020: Q 20)
Shaurya Limited owns a Building A which is specifically used for the purpose of earning
rentals. The Company has not been using the building A or any of its facilities for its own
use for a long time. The company is also exploring the opportunities to sell the building if it
gets the reasonable amount in consideration.
Following information is relevant for Building A for the year ending 31st March, 20X2:
Building A was purchased 5 years ago at the cost of Rs.10 crores and building life is estimated
to be 20 years. The company follows straight line method for depreciation.
During the year, the company has invested in another Building B with the purpose to hold it
for capital appreciation. The property was purchased on 1st April. 20X1 at the cost of Rs.2
crores. Expected life of the building is 40 years. As usual, the company follows straight
line method of depreciation.
Further, during the year 20X1-20X2 the company earned/incurred following direct operating
expenditure relating to Building A and Building B:
Rental income from Building A = Rs.75 lakhs
Rental income from Building B = Rs.25 lakhs
Sales promotion expenses = Rs.5 lakhs
Fees & Taxes = Rs.1 lakhs
Ground rent = Rs.2. 5 lakhs
Repairs & Maintenance = Rs.1. 5 lakhs
Legal & Professional = Rs.2 lakhs
Commission and brokerage = Rs.1 lakhs
The company does not have any restrictions and contractual obligations against Property
- A and B. For complying with the requirements of Ind AS, the management sought an
independent report from the specialists so as to ascertain the fair value of buildings A and
B. The independent valuer has valued the fair value of property as per the valuation model
recommended by International valuation standards committee. Fair value has been computed
by the method by streamlining present value of future cash flows namely, discounted cash
flow method.
The other key inputs for valuation are as follows
The estimated rent per month per square feet for the period is expected to be in the range
of Rs.50 – Rs.60. And it is further expected to grow at the rate of 10 percent per annum
for each of 3 years. The weighted discount rate used is 12% to 13%.
Assume that the fair value of properties based on discounted cash flow method is measured
at Rs.10.50 crores. The treatment of fair value of properties is to be given in the financials
as per the requirements of Indian accounting standards
What would be the treatment of Building A and Building B in the balance sheet of Shaurya
Limited? Provide detailed disclosures and computations in line with relevant Indian accounting
standards. Treat it as if you are preparing a separate note or schedule, of the given assets
in the balance sheet.
X Ltd owned a land property whose future use was not determined as at 31 March 20X1.
How should the property be classified in the books of X Ltd as at 31 March 20X1?
During June 20X1, X Ltd commenced construction of office building on it for own use.
Presuming that the construction of the office building will still be in progress as at 31
March 20X2
(a) How should the land property be classified by X Ltd in its financial statements as at
31 March 20X2?
(b) Will there be a change in the carrying amount of the property resulting from any
change in use of the investment property?
(c) Whether the change in classification to, or from, investment properties is a change
in accounting policy to be accounted for in accordance with Ind AS 8, Accounting
Policies, Changes in Accounting Estimates and Errors?
(d) Would your answer to (a) above be different if there were to be a management
intention to commence construction of an office building for own use; however, no
construction activity was planned by 31 March 20X2?
ANSWER
As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future
use, should be classified as an investment property. Hence, in this case, the land would be
regarded as held for capital appreciation. Hence the land property should be classified by
X Ltd as investment property in the financial statements as at 31 March 20X1.
As per Para 57 of the Standard, an entity can change the classification of any property
to, and from, an investment property when and only when evidenced by a change in use. A
change occurs when the property meets or ceases to meet the definition of investment
property and there is evidence of the change in use. Mere management’s intention for use
of the property does not provide evidence of a change in use.
208 ACCOUNTS
(a) Since X Ltd has commenced construction of office building on it for own use, the
property should be reclassified from investment property to owner occupied as at
31 March 20X2.
(b) As per Para 59, transfers between investment property, owner occupied and
inventories do not change the carrying amount of the property transferred and they
do not change the cost of the property for measurement or disclosure purposes.
(c) No. The change in classification to, or from, investment properties is due to change
in use of the property. No retrospective application is required and prior period’s
financial statements need not be re-stated.
(d) Mere management intentions for use of the property do not evidence change in use.
Since X Ltd has no plans to commence construction of the office building during
20X1-20X2, the property should continue to be classified as an investment property
by X Ltd. in its financial statements as at 31 March 20X2.
IND AS 105: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 209
IND AS 105: NON-CURRENT ASSETS HELD

FOR SALE AND DISCONTINUED OPERATIONS
UNIT 1: ASSETS HELD FOR SALE
• Non-Current assets held for sale are presented separately from other assets in the
Balance Sheet as their classification will change and the value will be principally recovered
through sale transaction rather than through continuous use in operations of the entity.
This standard specifies the accounting for assets held for sale.
• Results of Discontinuing Operations should be separately presented in the Statement
of Profit and loss as it affects the ability of the entity to generate future cash flows.
This standard specifies the presentation and disclosure of discontinued operations.
Hence, two core objectives of the standard is as follows:
Presentation and
Accounting for Assets
Disclosure of
held for sale
Discontinued Operations
Measured at Fair Results to be presented

Value less Cost to sell; separately in the
Depreciation on such Statement of Profit &
assets to cease Loss
Presented separately in
the Balance Sheet
CONCEPT 2: SCOPE
• The classification and presentation requirements of this Ind AS apply to all recognised
non-current assets and to all disposal groups of an entity.
• The measurement requirements of this Ind AS also apply to all recognised non-current
assets and to all disposal groups of an entity except few exceptions mentioned below.
210 ACCOUNTS
• Assets classified as non-current in accordance with Ind AS 1, Presentation of Financial

Statements, shall not be reclassified as current assets until they meet the criteria to
be classified as held for sale in accordance with this Ind AS.
• The classification, presentation and measurement requirements in this Ind AS applicable
to a non-current asset (or disposal group) that is classified as held for sale apply also
to a non-current asset (or disposal group) that is classified as held for distribution to
owners acting in their capacity as owners.
• The measurement provisions of this Ind AS do not apply to the following assets (which
are covered by the Ind ASs listed either as individual assets or as part of a disposal
group):
Measurement Provisions of Ind AS 105 do not apply
Assets Financial Contractual

Deferred arising from Assets Non-current Non-current rights under
tax Assets Employee Assets Assets Insurance
benefits Within the contracts
scope of Ind
AS 109
Which are Which are

measured at measured at Fair
As defined in
Ind AS 12 Ind AS 19 Fair value less value less costs to
Ind AS 104
cost to sell in sell in accordance
Ind AS 41 with Ind AS 41

• Non-current assets are assets that do not meet the definition of current assets.
• Current asset An entity classifies an asset as current when:
(a)
it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle;
(b)
it holds the asset primarily for the purpose of trading;
(c)
it expects to realise the asset within twelve months after the reporting period;
or
(d)
the asset is cash or a cash equivalent (as defined in Ind AS 7) unless the asset is
restricted from being exchanged or used to settle a liability for at least twelve
months after the reporting period.
• Disposal group is a group of assets to be disposed of, by sale or otherwise, together
as a group in a single transaction, and liabilities directly associated with those assets
that will be transferred in the transaction. A disposal group may be a group of cash-
generating units, a single cash-generating unit, or part of a cash-generating unit.
• Cash-generating unit is a smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups
of assets.
• Fair value is the price that would be received to sell an asset or paid to transfer a
date. (Ind AS 113)
• Costs to sell are the incremental costs directly attributable to the disposal of an
asset (or disposal group), excluding finance costs and income tax expense.
• A discontinued operation is a component of an entity that either has been disposed of
or is classified as held for sale and:
represents a separate major line of business or geographical area of operations;
(a)
or
is part of a single co-ordinated plan to dispose of a separate major line of business
(b)
or geographical area of operations; or
(c) is a subsidiary acquired exclusively with a view to resale.
• A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity.
• Highly Probable Significantly more likely than probable. (Probable means more likely
than not)
CONCEPT 4: CLASSIFICATION OF NON-CURRENT ASSETS

(OR DISPOSAL GROUPS) AS HELD FOR SALE OR
AS HELD FOR DISTRIBUTION TO OWNERS
An entity is required to classify a non-current asset (or disposal group) as held for sale
if its carrying amount will be recovered principally through a sale transaction rather than
through continuing use.
212 ACCOUNTS
Available for Immediate

Sale in present condition
Key requirements for Non-current

Assets asset held for sale
Available for Immediate
Sale in present condition
Asset must be available for immediate sale in its present condition and Sale must be highly
probable are the two key requirements to classify a non-current asset as held for sale.
Available for Immediate Sale
The asset (or disposal group) must be available for immediate sale in its present condition.
The terms that are usual and customary for sale of similar assets (or disposal group) doesn’t
disqualify to being classified as held for sale.
However they will not be considered as available for immediate sale if they continue to be
vital for the entity’s ongoing operations or being refurbished to enhance their value. Thus,
an asset (or disposal group) cannot be classified as a non-current asset (or disposal group)
held for sale, if the entity intends to sell it in a distant future.
Examples – Available for Immediate Sale
1. A property being held by the entity needs to be vacated before it can be sold. The
time required to vacate the building is usual and customary for sale of such assets.
Hence the criteria for classification as held for sale would be met.
2. In above example, if property can be vacated only after a replacement is available
then this may indicate that the property is not available for immediate sale, but only
after the replacement becomes available.
3. An entity can’t classify a manufacturing facility as held for sale if prior to selling the
facility it needs to clear a backlog of uncompleted order.
4. In above example, if entity intends to sell the manufacturing facility along with the
uncompleted orders it can be classified as held for sale.
5. An entity plans to renovate some of its property to increase its value prior to selling it
to a third party. The entity is already searching for a buyer at current market values.
But due to the plans to renovate the property prior to sale. The property may not be
meeting condition of available for immediate sale.
6. A company has put a property on the market and expects that all the conditions
of classification as held for sale is meeting. Any buyer will undertake searches and
valuations before making an offer and exchanging contracts : Such conditions are
normal for properties and any delays that might arise from such legal processes do not
preclude the property from being classified as held for sale.
Sale must be highly probable

This Standard defines ‘highly probable’ as ‘significantly more likely than probable’ where
probable means more likely than not.
Ind AS 105 prescribes following five conditions to be satisfied for the sale to qualify as
highly probable :
1. The appropriate level of management must be committed to a plan to sell the asset
(or disposal group).
2. An active programme to trace a buyer and complete the selling plan must have been
initiated.
3. The asset (or disposal group) must be marketed for sale at a price that is reasonable
in relation to its current fair value.
4. The sale transaction is expected to be completed within one year from the date of
classification.
5. Significant changes to or withdrawal from the plan to sell the asset are unlikely.
EXAMPLE
An entity is committed to its selling plan of a manufacturing facility in its present condition
and so classifies it as held for sale. After a firm purchase commitment, the buyer’s inspection
identifies environmental damages not previously known to exist. The entity is required
by the buyer to make good the damage, which will extend the timeframe of one year to
complete the sale within one year. However the entity has initiated actions to make good
the damage and satisfactory rectification is highly probable. In this situation exception to
one year requirement will met.
Sale includes exchange

Sale transaction includes exchange of non-current assets for other non-current assets
when the exchange has commercial substance in accordance of Ind AS 16 Property, Plant
and Equipment.
Asset acquired exclusively with a view to subsequent disposal

When an entity acquires a non-current asset (or disposal group) exclusively with a view to
its subsequent disposal, the non-current asset (or disposal group) is classified as held for
sale at the acquisition date. This standard provides a short period (usually three months)
214 ACCOUNTS
to meet the classification criteria that don’t met at the acquisition except requirement of
one year.
Example:
An entity has acquired a building exclusively with a view of its subsequent disposal. The
management is highly confident that the property can be sold in one year. The property
requires refurbishing it to enhance its value which is highly probable to be completed in less
than a period of three months. The building will be classified as held for sale on the date of
acquisition itself even though it is not immediately available for sale.
CONCEPT 5: MEASUREMENT OF NON-CURRENT ASSETS

(OR DISPOSAL GROUPS) CLASSIFIED AS HELD FOR SALE
Measurement at the lower of carrying amount and fair value less cost to sell
• An entity should measure a non-current asset (or disposal group) classified as held for
sale at the lower of its carrying amount and fair value less costs to sell.
• If a newly acquired asset (or disposal group) meets the criteria to be classified as held
for sale, it will be measured on initial recognition at the lower of its carrying amount
had it not been so classified (for example, cost) and fair value less costs to sell. Hence,
if the asset (or disposal group) is acquired as part of a business combination, it will be
measured at fair value less costs to sell.
• Immediately before the initial classification of the asset (or disposal group) as held
for sale, the carrying amounts of the asset (or all the assets and liabilities in the group)
is measured in accordance with applicable Ind AS.
• On subsequent remeasurement of a disposal group, the carrying amounts of any assets
and liabilities that are not within the scope of the measurement requirements of this Ind
AS, but are included in a disposal group classified as held for sale, should be remeasured
in accordance with applicable Ind Ass before the fair value less costs to sell of the
disposal group is remeasured.
• Depreciation and amortization shall be immediately stopped from the moment the asset
has been classified as held for sale.
• Interest and other expenses attributable to the liabilities of a disposal group classified
as held for sale shall continue to be recognised.
• When the sale is expected to occur beyond one year, the entity should measure the
costs to sell at their present value. Any increase in the present value of the costs to sell
that arises from the passage of time shall be presented in profit or loss as a financing
cost.
• Non-current asset (or disposal group) classified as held for distribution are also measured
on same line as non-current asset (or disposal group) classified as held for sale.
QUESTION 1
Measurement prior to classification as held for sale
An item of property, plant and equipment that is measured on the cost basis should be
measured in accordance with Ind AS 16.
Entity ABC owns an item of property and it was stated at the following amounts in its last
financial statements:
31st December 20X1
Cost 12,00,000
Depreciation (6,00,000)
Net book value 6,00,000
The asset is depreciated at an annual rate of 10% (1,20,000)

During July 20X2 entity ABC decides to sell the asset and on 1st August it meets the
conditions to be classified as held for sale. Analyse.
SOLUTION
At 31st July entity ABC should ensure that the asset is measured in accordance with Ind AS
16. It should be depreciated by a further 70,000 (7 months × 10,000) and should be carried
at 5,30,000 before it is measured in accordance with Ind AS 105.
Note: From the date the asset is classified as held for sale no further depreciation will be
charged.
Example - Classification as held for sale

A ltd acquired a property for ` 2,00,000. After few years the cumulative depreciation on
the property is of ` 80,000 has been recognised and subsequently the property is classified
as held for sale under Ind AS 105.
At the time of classification as held for sale it will be measured at lower of its carrying
amount which is ` 1,20,000 (2,00,000 – 80,000) and fair value less costs to sell as estimated
at ` 1,00,000.
Accordingly, there is a write-down on initial classification of property as held for sale and
accordingly the property is carried at ` 1,00,000. A loss of `20,000 is recognised in profit
or loss.
216 ACCOUNTS
On next reporting date, the property’s fair value less costs to sell is estimated at ` 85,000.
Accordingly, a loss of ` 15,000 is recognised in profit or loss and the property is carried at
` 85,000.
Subsequently, the property is sold for ` 90,000. A gain of ` 5,000 is recognised.
Recognition of impairment losses and reversals
• An entity should recognise an impairment loss for any initial or subsequent write-down
of the asset (or disposal group) to fair value less costs to sell, to the extent that it has
not been recognised in accordance with above.
• An entity should recognise a gain for any subsequent increase in fair value less costs
to sell of an asset, but not in excess of the cumulative impairment loss that has been
recognised either in accordance with this Ind AS or previously in accordance with Ind
AS 36, Impairment of Assets.
• An entity should recognise a gain for any subsequent increase in fair value less costs to
sell of a disposal group:
to the extent that it has not been recognised in the remeasurement of scoped
(a)
out non-current assets, current assets and liablities; but
not in excess of the cumulative impairment loss that has been recognised, either
(b)
in accordance with this Ind AS or previously in accordance with Ind AS 36, on the
non-current assets that are within the scope of the measurement requirements
of this Ind AS.
• The impairment loss (or any subsequent gain) recognised for a disposal group should
reduce (or increase) the carrying amount of the non-current assets in the group that
are within the scope of the measurement requirements of this Ind AS, in the order of
allocation set out in paragraphs 104(a) and (b) and 122 of Ind AS 36 .
As per Para 104 (a) and (b) of Ind AS 36, Impairment of Assets, The impairment loss
shall be allocated to disposal groups in the following order:
(i) first, to reduce the carrying amount of any goodwill allocated to the disposal
group; and
(ii) then to the other assets of the disposal group pro rata on the basis of the carrying
amount of each asset in the group.
• A gain or loss not previously recognised through remeasurement by the date of the
sale of a noncurrent asset (or disposal group) should be recognised at the date of
derecognition.
Requirements relating to derecognition are set out in:
(a) paragraphs 67–72 of Ind AS 16 for property, plant and equipment; and
(b) paragraphs 112–117 of Ind AS 38, Intangible Assets, for intangible assets.
QUESTION 2
Disposal Group Carrying amount at the Carrying amount as

reporting date before remeasured immediately
classification as held for before classification as held
sale for sale
Goodwill 1,500 1,500
Property, Plant and Equipment 4600 4000
(carried at revalued amounts)
Building (carried at cost) 5,700 5,700
Inventory 2,400 2,200
Investment in Equity Instruments 1,800 1,500
Total 16,000 14,900
The entity estimated that fair value less costs to sell of the disposal group amounts to `
13,000.
Suppose, at the end of reporting period the fair value less cost to sell is increased and
estimated at ` 15,500.
CONCEPT 6: PRESENTATION AND DISCLOSURES OF

A NON-CURRENT ASSET (OR DISPOSAL GROUP)
CLASSIFIED AS HELD FOR SALE
Non – current assets and disposal groups classified as held for sale
Entity shall present and disclose information about non - current asset (or disposal group)
classified as held for sale in such a manner that enable the user of financial statements
to evaluate financial effects of non-current asset (or disposal group) classified as held for
sale.
Presentation
• An entity is required to present a non-current asset classified as held for sale and the
assets of a disposal group classified as held for sale separately from other assets in the
balance sheet.
• The liabilities of a disposal group classified as held for sale should be presented
separately from other liabilities in the balance sheet. Those assets and liabilities should
not be offset and presented as a single amount.
218 ACCOUNTS
• The major classes of assets and liabilities classified as held for sale should be separately
disclosed either in the balance sheet or in the notes, except when the disposal group is
a newly acquired subsidiary that meets the criteria to be classified as held for sale on
acquisition.
• An entity should present separately any cumulative income or expense recognised in
other comprehensive income relating to a non-current asset (or disposal group) classified
as held for sale.
• If the disposal group is a newly acquired subsidiary that meets the criteria to be
classified as held for sale on acquisition, disclosure of the major classes of assets and
liabilities is not required.
• Comparative amounts for non-current assets or for the assets and liabilities of disposal
groups classified as held for sale in the balance sheets for prior periods are not
reclassified or re-presented to reflect the classification in the balance sheet for the
latest period presented.
• Any gain or loss on the remeasurement of a non-current asset (or disposal group)
classified as held for sale that does not meet the definition of a discontinued operation
shall be included in profit or loss from continuing operations.
Example: Presentation of Disposal group
Property, Plant and Equipment 4,900

Inventory 1,700
Investment in equity instruments 1,400
Liabilities (3,300)
Net Carrying Amount 4,700
An amount of ` 400 relating to these assets has been recognised in other comprehensive
income and accumulated in equity.
The presentation of disposal group in entity’s Balance Sheet is as follows:
Assets 20X1-20X2 20X2-20X3

Non –Current Assets X X
AAA X X
BBB X X
CCC X X
X X
Current Assets
DDD X X
EEE X X
X X
Non-Current Assets Classified as Held for Sale 8,000 -
X X
Total Assets X X
Equity and Liabilities
Equity attributable to equity holders of the parent
FFF X X
GGG X X
Amounts recognised in other comprehensive income and 400 -
accumulated in equity relating to non-current assets held
for sale
X X
Non-Controlling Interests X X
Total Equity X X
Non-Current Liabilities
HHH X X
III X X
X X
Current Liabilities
KKK X X
LLL X X
MMM X X
Liabilities directly associated with non-current 3,300 -
assets classified as held for sale
X X
Total liabilities X X
Total Equity and liabilities X X
220 ACCOUNTS
CONCEPT 7: DISCLOSURES
• An entity should disclose the following information in the notes to the financial statements
in the period in which a non-current asset (or disposal group) has been either classified
as held for sale or sold:
(a) Description of the non-current asset (or disposal group);
(b) Description of facts and circumstances of the sale, or leading to the expected
disposal and the expected manner and timing of that disposal;
(c) Gain or loss recognised and if not presented separately on the face of the income
statement, the caption in the income statement that includes that gain or loss.
(d) If applicable, the reportable segment in which the non-current asset (or disposal
group) is presented in accordance of Ind AS 108 Operating Segments.
(e) If there is a change of plan to sell, a description of facts and circumstances
leading to the decision and its effect on results.
QUESTION 3
S Ltd purchased a property for ` 6,00,000 on 1 April 20X1. The useful life of the property
is 15 years. On 31 March 20X3 S ltd classify the property as held for sale. The impairment
testing provides the estimated recoverable amount of ` 4,70,000.
The fair value less cost to sell on 31 March 20X3 was ` 4,60,000. On 31 March 20X4
management change the plan as property no longer met the criteria of held for sale. The
recoverable amount as at 31 March 20X4 is ` 5,00,000.
Value the property at the end of 20X3 and 20X4.
UNIT 2: DISCONTINUED OPERATIONS

Discontinued operation – definition
• Ind AS 105 defines Discontinued Operation as: A component of an entity that either has
been disposed of or is classified as held for sale and:
(a) represents a separate major line of business or geographical area of operations;
or
(b) is part of a single co-ordinated plan to dispose of a separate major line of business
or geographical area of operations; or
(c) is a subsidiary acquired exclusively with a view to resale.
• A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the
entity. In other words, a component of an entity will have been a cash-generating unit or
a group of cash-generating units while being held for use.
QUESTION 4
Sun Ltd is a retailer of takeaway food like burger and pizzas. It decides to sell one of its
outlets located in chandni chowk in New Delhi. The company will continue to run 200 other
outlets in New Delhi.
All Ind AS 105 criteria for held for sale classification were first met at 1st October 20X1.
The outlet will be sold in June 20X2.
Management believes that outlet is a discontinued operation and wants to present the
results of outlet as ‘discontinued operations’. Analysis
SOLUTION
The chandani chowk outlet is a disposal group; it is not a discontinued operation as it is only
one outlet. It is not a major line of business or geographical area, nor a subsidiary acquired
with a view to resale.
Separate presentation of discontinued operations

An entity should present and disclose information that enables users of the financial
statements to evaluate the financial effects of discontinued operations and disposals of
non-current assets (or disposal groups).
This allows the user to distinguish between the operations which will continue in the future
and those which will not and make it more predictable the ability of entity to generate
future cash flows.
222 ACCOUNTS
Presentation in the statement of profit and loss

An entity shall disclose a single amount in the statement of profit and loss comprising the
total of:
(a) the post-tax profit or loss of discontinued operations; and

(b) the post-tax gain or loss recognised on the measurement to fair value less costs to
sell or on the disposal of the assets or disposal group(s) constituting the discontinued
operation.
In addition, this single amount must be analysed into:

(a) the revenue, expenses and pre-tax profit or loss of discontinued operations;
(b) the related income tax expense as required by paragraph 81(h) of Ind AS12;
(c) the gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operation; and
(d) the related income tax expense as required by paragraph 81(h) of Ind AS12.
• The analysis may be presented in the notes or in the statement of profit and loss. If it is
presented in the statement of profit and loss it should be presented in a section identified
as relating to discontinued operations, i.e. separately from continuing operations. The
analysis is not required for disposal groups that are newly acquired subsidiaries that
meet the criteria to be classified as held for sale on acquisition.
• Entities are required to disclose the amount of income from continuing operations and
from discontinued operations attributable to owners of the parent. These disclosures
may be presented either in the notes or in the statement of profit and loss.
Disclosures in the statement of cash flows

The net cash flows attributable to the operating, investing and financing activities of
discontinued operations. These disclosures may be presented either in the notes or in the
financial statements. These disclosures are not required for disposal groups that are newly
acquired subsidiaries that meet the criteria to be classified as held for sale on acquisition.
When the amounts relating to discontinued operations are presented separately, the
comparative figures for prior periods are also re -presented, so that the disclosures relate
to all operations that have been discontinued by the end of the reporting period for the
latest period presented.
Adjustment to prior period disposals

Adjustments in the current period to amounts previously presented in discontinued
operations that are directly related to the disposal of a discontinued operation in a prior
period should be classified separately in discontinued operations. The nature and amount
of such adjustments are disclosed. Examples of circumstances in which these adjustments

may arise include the following:
(a) the resolution of uncertainties that arise from the terms of the disposal transaction,
such as the resolution of purchase price adjustments and indemnification issues with
the purchaser;
(b) the resolution of uncertainties that arise from and are directly related to the
operations of the component before its disposal, such as environmental and product
warranty obligations retained by the seller; and
(c) the settlement of employee benefit plan obligations, provided that the settlement is
directly related to the disposal transaction.
Change to a plan of sale

If an entity ceases to classify a component of an entity as held for sale, the results of
operations of the component previously presented in discontinued operations should be
reclassified and included in income from continuing operations for all periods presented.
The amounts for prior periods should be described as having been re-presented.
Loss of Control in Subsidiary

An entity that is committed to a sale plan involving loss of control of a subsidiary should
disclose the information as above when the subsidiary is a disposal group that meets the
definition of a discontinued operation.
Example:
Presentation of Discontinued Operations in the Statement of profit and loss.
Statement of profit and loss for the year ended 31st March 20X3
20X1-20X2 20X2-20X3
Continuing Operations
Revenue XX XX
Cost of Sales (XX) (XX)
Gross Profit XX XX
Other Income XX XX
Distribution Costs (XX) (XX)
Administrative Expenses (XX) (XX)
Other Expenses (XX) (XX)
Finance Costs (XX) (XX)
224 ACCOUNTS
Share of Profit of Associates XX XX

Profit before Tax XX XX
Income Tax Expense (XX) (XX)
Profit for the period from Continuing Operation XX XX
Discontinued Operations
Profit for the period from discontinued Operations* XX XX
Profit for the period XX XX
Attributable to:
Owner of the parent
Profit for the period from continuing operations XX XX
Profit for the period from discontinued operations XX XX
Profit for the period attributable to owners of the parent XX XX
Non-Controlling Interests
Profit for the period from continuing operations XX XX
Profit for the period from discontinued operations XX XX
Profit for the period attributable to non-controlling interests XX XX
XX XX
Note (a) the required analysis would be given in the notes
QUESTION 5
On November 30, 20X1, Entity X becomes committed to a plan to sell a property. However,
it plans certain renovations to increase its value prior to selling it. The renovations are
expected to be completed within a short span of time i.e., 2 months.
Can the property be classified as held for sale at the reporting date i.e. December 31,
20X1?
QUESTION 6
On March 1, 20X1, entity R decides to sell one of its factories. An agent is appointed and
the factory is actively marketed. As on March 31, 20X1, it is expected that the factory
will be sold by February 28, 20X2. However, in May 20X1, the market price of the factory
deteriorated. Entity R believed that the market will recover and thus did not reduce the
price of the factory. The company’s accounts are authorised for issue on June 26, 20X1.
Should the factory be shown as held for sale as on March 31, 20X1?
QUESTION 7
On June 1, 20X1, entity X plans to sell a group of assets and liabilities, which is classified as
a disposal group. On July 31, 20X1, the Board of Directors approves and becomes committed
to the plan to sell the manufacturing unit by entering into a firm purchase commitment with
entity Y. However, since the manufacturing unit is regulated, the approval from the regulator
is needed for sale. The approval from the regulator is customary and highly probable to
be received by November 30, 20X1 and the sale is expected to be completed by March 31,
20X2. Entity X follows December year end. The assets and liabilities attributable to this
manufacturing unit are as under:
Amount (in `)
Particular Carrying value as on Carrying value as on

December 31, 20X0 July 31, 20X1
Goodwill 500 500
Plant and Machinery 1,000 900
Building 2,000 1,850
Debtors 850 1,050
Inventory 700 400
Creditors (300) (250)
Loans (2,000) (1,850)
2,750 2,600
The fair value of the manufacturing unit as on December 31, 20X0 is `2,000 and as on July
31, 20X1 is ` 1,850. The cost to sell is 100 on both these dates. The disposal group is not
sold at the period end i.e., December 31, 20X1. The fair value as on December 31, 20X1 is
lower than the carrying value of the disposal group as on that date.
Required:
1. Assess whether the manufacturing unit can be classified as held for sale and reasons
there for. If yes, then at which date?
2. The measurement of the manufacturing unit as on the date of classification as held
for sale.
3. The measurement of the manufacturing unit as at the end of the year.
226 ACCOUNTS

PB Limited purchased a plastic bottle manufacturing plant for ` 24 lakh on 1st April, 2015.
The useful life of the plant is 8 years. On 30th September. 2017, PB Limited temporarily
stops using the manufacturing plant because demand has declined. However, the plant is
maintained in a workable condition and it will be used in future when demand picks up.
The accountant of PB Limited decide to treat the plant as held for sale until the demand
picks up and accordingly measures the plant at lower of carrying amount and fair value less
cost to sell. The accountant has also stopped charging depreciation for rest of the period
considering the plant as held for sale. The fair value less cost to sell on 30Th September,
2017 and 31St March, 2018 was ` 13.5 lakh and ` 12 lakh respectively.
The accountant has made the following working:
Carrying amount on initial classification as held for sale ` `
Purchase price of Plant 24,00,000
Less: Accumulated Depreciation [(` 24,00,000/8)]x2.5 years] 7,50,000 16,50,000
Fair value less cost to sell as on 31st March, 2017 12,00,000
The value lower of the above two 12,00,000
Balance Sheet extracts as on 31st March, 2018

Particulars `
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 12,00,000
Required:
Analyze whether the above accounting treatment is in compliance with the Ind AS. If not,
advise the current treatment showing necessary workings.
ANSWER
As per Ind AS 105’ Non-current Assets Held for Sale and Discontinued Operations’, an
entity shall classify a non-current asset as held for sale if its carrying amount will be
recovered principally through a sale transaction rather than through continuing use.
For asset to be classified as held for sale, it must be available for immediate sale in its
present condition subject only to terms that are usual are customary for sales of such
assets and its sale must be highly probable. In such a situation, an asset cannot be classified
as a non-current asset held for sale, if the etity intends to sell it in a distant future.
For the sale to be highly probable, the appropriate level of management must be committed
to a plan to sell the asset, and an active programme to locate a buyer and complete the
plan must have been initiated. Further, the asset must be actively marketed for sale at
price that is reasonable in relation to its current fair value. In addition, the sale should be
expected to qualify for recognition as a completed sale within one year from the date of
classification and actions required to complete the plant should indicate that it is unlikely
that significant changes to the plan will be made or that the plan will be withdrawn.
Further Ind AS 105 also states that an entity shall not classify as held for sale a non –
current asset that is to be abandoned. This is because its carrying amount will be recovered
principally through continuing use.
An entity shall not account for a non-current asset that has been temporarily taken out of
use as if it had been abandoned.
In addition to Ind AS 105, Ind AS 16 states that depreciation does not cease when the
asset becomes idle or is retired from active us unless the asset is fully depreciated.
The Accountant of PB Ltd. has treated the plant as held for sale and measured it at the
fair value less cost to sell. Also, the depreciation has not been charged thereon since the
date of classification as held for sale which is not correct and not in accordance with Ind
AS 105 and Ind AS 16.
Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as
held for sale because its carrying amount will be principally recovered through continuous
use. PB Ltd shall not stop charging depreciation on treat the plant as held for because its
carrying amount will be recovered principally through continuing use to the end of their
economic life.
The working of the same for presenting in the balance sheet will be as follows:
Calculation of carrying amount as on 31st March,2018 `
Purchase Price of Plant 24,00,000
Less: Accumulated depreciation (24,00,000/ 8 years) x 3 years -9,00,000
Carrying amount before impairment 15,00,000
Less: Impairment loss (Refer Working Note) -3,00,000
Revised carrying amount after impairment 12,00,000
228 ACCOUNTS
Balance Sheet extracts as on 31st March 2018

Assets `
Non-Current Assets
Property, Plant and Equipment 12,00,000
Working Note:
Fair value less cost to sell of the Plat = ` 12,00,000
Value in Use (not given) or = Nil (since plant has temporarily not been used for manufacturing
due to decline in demand)
Recoverable amount= higher of above i.e. ` 12,00,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = ` 15,00,000 = ` 12,00,000
= ` 3,00,000
On June 1, 2018, entity D Limited plans to sell a group of assets and liabilities, which
is classified as a disposal group. On July 31, 2018, the Board of Directors approved and
committed to the plan to sell the manufacturing unit by entering into a firm purchase
commitment with entity G Limited.
However, since the manufacturing unit is regulated, the approval from the regulator is
needed for sale. The approval from the regulator is customary and highly probable to be
received by November 30, 2018 and the sale is expected to be completed by
31st March, 2019. Entity D Limited follows December year end. The assets and liabilities
attributable to this manufacturing unit are as under:
(` In lakh)
Particulars Carrying value as on 31st Carrying value as on
December, 2017 31st July, 2018
Goodwill 1,000 1,000
Plant and Machinery 2,000 1,800
Building 4,000 3,700
Debtors 1,700 2,100
Inventory 1,400 800
Creditors (600) (500)
Loans (4,000) (3,700)
Net 5,500 5,200
The fair value of the manufacturing unit as on December 31, 2017 is ` 4,000 lakh and as
on July 31, 2018 is ` 3,700 lakh. The cost to sell is ` 200 lakh on both these dates. The
disposal group is not sold at, the period end i.e., December 31, 2018. The fair value as on
31st December, 2018 is lower than the carrying value of the disposal group as on that date.
Required:
i) Assess whether the manufacturing unit can be classified as held for sale and reasons
thereof. If yes, then at which date?
ii) The measurement of the manufacturing unit as on the date of classification as held
for sale.
iii) The measurement of the manufacturing unit as at the end of the year.
ANSWER
(i) Assessment of manufacturing unit whether to be classified as held for sale
The manufacturing unit can be classified as held for sale due to the following reasons:
(a) The disposal group is available for immediate sale and in its present condition.
The regulatory approval is customary and it is expected to be received in one
year. The date at which the disposal group is classified as held for sale will be
31st July, 2018, i.e. the date at which management becomes committed to the
plan.
(b) The sale is highly probable as the appropriate level of management i.e., board
of directors in this case have approved the plan.
(c) A firm purchase agreement has been entered with the buyer.
(d) The sale is expected to be complete by 31st March, 2019, i.e., within one year
from the date of classification.
(ii) Measurement of the manufacturing unit as on the date of classification as held for
sale
Following steps need to be followed:
Step 1: Immediately before the initial classification of the asset (or disposal group) as
held for sale, the carrying amounts of the asset (or all the assets and liabilities in the
group) shall be measured in accordance with applicable Ind AS.
This has been done and the carrying value of the disposal group as on 31st July, 2018
is determined at ` 5,200 lakh. The difference between the carrying value as on 31st
December, 2017 and 31st July, 2018 is accounted for as per Ind AS 36.
Step 2: An entity shall measure a non-current asset (or disposal group) classified as held
for sale at the lower of its carrying amount and fair value less costs to sell.
The fair value less cost to sell of the disposal group as on 31st July, 2018 is `
3,500 lakh (i.e .` 3,700 lakh - ` 200 lakh). This is lower than the carrying value of ` 5,200
lakh. Thus, an impairment loss needs to be recognised and allocated first towards goodwill
and thereafter pro-rata between assets of the disposal group which are within the scope
of Ind AS 105 based on their carrying value.
230 ACCOUNTS
Thus, the assets will be measured as under:

(` In lakh)
Carrying value
Carrying value – as per Ind AS
Particulars Impairment
31st July, 2018 105 – 31st July,
2018
Goodwill 1,000 -1,000
(Refer WN)
Plant and Machinery
1,800 -229 -1,571
Building
Debtors 3,700 (Refer WN)
Inventory 2,100 -471 3,229
Creditors 800 - 2,100
Loans -500 - 800
-3,700 - -500
5,200 -3,700
-1,700 3,500
Working Note:
Allocation of impairment loss to Plant and Machinery and Building

After adjustment of impairment loss of ` 1,000 lakh from the full value of goodwill, the
balance ` 700 lakh (` 1,700 lakh – ` 1,000 lakh) is allocated to plant and machinery and
Building on proportionate basis.
Plant and machinery – ` 700 lakh x ` 1,800 lakh / ` 5,500 lakh = ` 230 lakh (rounded off)
Building – ` 700 lakh x ` 3,700 lakh / ` 5,500 lakh = ` 470 lakh (rounded off)
1. Measurement of the manufacturing unit as on the date of classification as at the year
end
2. The measurement as at the year-end shall be on similar lines as done above.
EXTRA QUESTIONS
QUESTION 1
Identify whether each of the following scenarios gives rise to a discontinued operation and
/ or classification of assets as held for sale:
S.No Particut Discontinued Assetsheld for

operation Yes/No sale Yes/No
1 MNO disposes of a component of the
entity by selling the underlying assets.
The sales transaction is incomplete at
the reporting date.
2 PQR has ceased activities that meet
the definition of a discontinued
operation without selling any assets.
3 STU ceases activities and has already
completed the sale of the underlying
assets at the reporting date.
4 VWX will sell or has sold assets that
are with in the scope of lnd AS 105,
but does not discontinue any of its
operations.
QUESTION 2
Following is the extract of the consolidated financial statements of A Ltd. for the year ended on:
Asset/ (liability) Carrying amount as on 31st

March, 20X1
(in Rs ‘000)
Attributed goodwill 200
Intangible assets 950
Financial asset measured at fair value through other 300
comprehensive income
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Property, plant & equipment 1100

Deferred tax asset 250
Current assets-inventory, receivables and cash balances 600
Current liabilities (850)
Non-current liabilities – provisions (300)
Total 2,250
On 1 5 t h September 20X1, Entity A decided to sell the business. It noted that the business meets
the condition of disposal group classified as held for sale on that date in accordance with lnd
AS 105. However, it does not meet the conditions to be classified as discontinued operations in
accordance with that standard.
The disposal group is stated at the following amounts immediately prior to reclassification as held
for sale.
Asset/ (Liability) Carry amount.as on 151h September 20X1

(in Rs ‘000)
Attributed goodwill 200

Intangible assets 930
Financial asset measured at fair value 360
through other comprehensive income
Property, plant & equipment 1,020
Deferred tax asset 250
Current assets- inventory, receivables and cash 520
balances
Current liabilities (870)
Non-current liabilities -provisions (250)
Total 2,160
Entity A proposed to sell the disposal group at Rs 19,00,000. It estimates that the costs to sell will be
R s 70,000. This cost consists of professional fee to be paid to external lawyers and accountants.
As at 31st March 20X2, there has been no change to the plan to sell the disposal group and entity
A still expects to sell it within one year of initial classification. Mr. X, an accountant of Entity Are
measured the following assets/ liabilities in accordance with respective standards as on 31st March
20X2:
Available for sale: (In Rs. 000)

Financial assets 410
Deferred tax assets 230
Current assets- Inventory, receivables and cash balances 400
Current liabilities 900
Non- current liabilities- provisions 250
The disposal group has not been trading well and its fair value less costs to sell has fallen
to Rs 16,50,0 000.
Required:
What would be the value of all assets/ liabilities within the disposal group as on the following
dates in accordance with lnd AS 105?
(a) 15 September, 20X1 and
(b) 31st March, 20X2
QUESTION 3
CK Ltd. prepares the financial statement under lnd AS for the quarter year ended 30th
June, 20 X1. During the 3 months ended 30th June, 20X1 following events occurred:
On 1st April, 20X1, the Company has decided to sell one of its divisions as a going concern
following a · recent change in its geographical focus. The proposed sale would involve the
buyer acquiring the non-monetary assets (including goodwill) of the division, With the
Company collecting any outstanding trade receivables relating to the division and settling
any current liabilities.
On 1st April, 20X1, the carrying amount of the assets of the division were as follows:
- Purchased Goodwill – Rs 60,000
- Property, Plant & Equipment (average remaining estimated useful life two years)
Rs 20,00,000
- Inventories- 10,00,000
From 1st April, 20X1 , the Company has started to actively market the division and has
received number of serious enquiries. On 1st April, 20X1 the directors estimated that they
would receive Rs. 32,00,000 from the sale of the division. Since 1st April, 20X1, market
condition has improved and as on 1st August, 20X1 the Company received and accepted a
firm offer to purchase the division for Rs 33,00,000.
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The sale is expected to be completed on 30th September, 20X1 and Rs 33,00,000 can be
assumed to be a reasonable estimate of the value of the division as on 30th June, 20X1.
During the period from 1 st April to 30th June inventories of the division costing Rs
8,00,000 were sold for Rs 12,00 ,000. At 30th June, 20X1, the total cost of the inventories
of the division was Rs 9,00,000. All of these inventories have an estimated net realisable
value that is in excess of their cost.
The Company has approached you to suggest how the proposed sale of the division will be
reported in the interim financial statements for the quarter ended 30th June, 20X1 giving
relevant explanations.
QUESTION 4
Identify which of the following is a disposal group at 31 March 20X1:
(1) On 21 March 20X1, XYZ announced the Board’s intention to sell its shares in a subsidiary
company, Alpha, contingent upon the approval of Alpha’s shareholders. It seems unlikely
that approval will be granted in the near future and no specific potential buyer has
been identified.
(2) PQR has entered into a contract to sell the entire delivery fleet of vehicles operated
from its warehouse to a competitor, ABC, on 14 March 20X1. The assets will be
transferred on 28 April 20X1 from which date the Group will outsource its delivery
activities to another company, LMN.
(3) On 16 January 20X1, DEF’s management and shareholders approved a plan to sell its
retail business in Mumbai and a consultant is hired to manage the .sale. As at 31 March
20X1 heads of agreement had been signed although due diligence and the negotiation
of final terms are still in process. The transaction is expected to be completed in April
20X1.
INDIAN ACCOUNTING STANDARD 116: LEASES 235
INDIAN ACCOUNTING STANDARD 116: LEASES
CONCEPT 1: APPLICATION & OBJECTIVE

Ministry of Corporate Affairs (MCA) has notified new standard on leases i.e Ind AS 116
vide its notification dated 30th March, 2019. Lease accounting has undergone significant
changes on introduction of Ind AS 116 which is fully converged With IFRS 16. This new
standard replaced the erstwhile Ind AS 17 and is effective from financial periods beginning
on or after 1stApril, 2019
Ind AS 17 was based on dual classification model of operating and finance leases with
different classification and measurement guidance for each of team. The dual classification
model did not account for the assets and liabilities associated with the rights and obligations
that arise out of the most “operating leases.
Ind AS 116, Leases, requires most leases to be recognised on the balance sheet and
requires enhanced disclosers. It is believed that will result in more faithful representation
of leases. Assets and liabilities and greater transparency about the lessee’s obligations
and leasing activities However, Ind AS 116 does not make fundamental changes to existing
lessor accounting model.
The objective of this standard is to ensure that lessees and lessors provide relevant
information in a manner that faithfully represents those transactions. This information
gives a basis for users of financial statements to assess the effect that leases have on
the financial position, financial performance and cash flows of an entity, This standard
requires an entity to consider the terms and conditions of contracts and relevant facts
and circumstances, and to apply the standard consistently to contracts with similar
characteristics and in similar circumstances.
CONCEPT 2: ASSETS OUT OF SCOPE

Ind AS 116 shall be applied to ALL LEASES EXCEPT for:
Sr. No. Particulars Reason

1 Leases to explore for or use Within the scope of Ind AS 106
minerals oil, natural gas and similar ‘Exploration for and Evaluation of
non- regenerative resources Mineral Resources
2 Leases of biological assets held by Within the scope of Ind AS 41’
a lessee Agriculture’
3 Service concession arrangements Within the scope of Appendix D of Ind
AS 115 ‘ Revenue from Contracts with
Customers’
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4 Licences of intellectual property Within the scope of Ind AS 115 Revenue

granted by a lessor from Contracts with Customers’
5 Rights held by a lessee under Within the scope of Ind AS 38 ‘

licensing agreements for such Intangible Assets’
items as motion picture films, video
recordings, plays, manuscripts,
patents and copyrights
CONCEPT 3: EXPEMTIONS UNDER IND AS 116

In addition to above scope exclusions, a lessee can elect not to apply Ind AS 116’s recognition
requirements to :
1. Short-term leases; and

2. Leases for which the underlying asset is of low-value
If a lessee elects to apply the above recognition exemption, the lessee shall recognise the
lease payments associated with those leases a an expense on either a straight- line basis
over the lease them or another systematic basis, if that basis is more representative of
the pattern of the lessee’s benefit.
A. SHORT TERM LEASE

A short-term lease is a lease that, at the commencement date, has a lease term of 12
months or less and does not included an option to purchase the underlying asset.
As the determination is made at the commencement date, a lease cannot be classified as

short-term if the lease term is subsequently reduced to lease than 12 months.
GROUP OF ASSETS
The short-term lease exemption can be made by class of underlying asset to which the
right of use related. A class of underlying asset is a grouping of underlying assets of a
similar nature and use in an entity’s operations.
EXAMPLE
An entity which has leased several items of office equipment – some of them for them
than 12 months and some for more than 12 months, with none containing purchase options.
Assuming that the items of office equipment are all considered to be the same class, if
the entity wished to use the short term lease exemption it must apply that exemption for
all of the leases with terms of 12 months or less. The leases with terms longer than 12
months will be accounted for in accordance with the general recognition and measurement
requirements for lessees.
A lessee that makes this election must make certain quantitative and qualitative disclosures
about short-term leases. Once a lessee establishes a policy for a class of underlying assets,
all further short- term leases for that class requires to be accounted for in accordance
with the lessee’s policy.
QUESTION 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 Payment during the extension period are significantly below
market rates. Whether the lessee can take a short-term exemption in accordance with
IndAS 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 lease 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?
SOLUTION
Scenario A:
As the lease is reasonably certain to exercise the extension option (Refer section 3.2 lease
them), the lease term is greater than 12 months (i.e., 13 months) therefore, the lease will
not account for the lease as a short- term lease.
Scenario B:
In this case, the lease term is less than 12 months, i.e., nine months, thus, the lessee may
account for the said lease under the short-term lease exemption, i.e., it recognises lease
payments as an expense on either a straight-line basis over the lease term or another
systematic basis.
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B. LOW VALUE ASSETS

Lessees can also make an election for leases for which the underlying asset is of low value
(i.e. low- value assets).
Though Ind AS 116 does not explicitly define the leases of low-value assets, it provides the
conditions based on which an asset can be treated as of low-value and the said exemption
can be availed accordingly for such low- value asset (s). Following are the conditions:
An underlying asset can be of low value ONLY IF

BOTH the following conditions are satisfied:
The lessee can benefit from use of The underlying asset is not highly dependent
the underlying asset on its own on, or highly interrelated with other assets
EXAMPLE
1. An entity may lease a car for use in the business and the lease included the use of
the tyres attached to the car. To use the tyres for their intended purpose, they
can only be used with the car and as such, they are depended on, or highly
interrelated with car. Therefore, the tyres would not qualify for the low- value
asset exemption.
2. An entity enters into a rental contract for a large number of laptops. Each laptop
within the contract constitutes an identified asset. Entity has considered that the
value of individual laptop would be low, even though the contract for all the laptops
is not. The conditions of Ind AS 116 are satisfied i.e. the entity can benefit from
use of an individual laptop together with other resources that are already available
and each laptop does not need other assets to make it functional. Consequently, each
laptop qualifies as al low value asset and the entity can elect to apply the low-value
exemption to all laptops under the contract.
The exemption for leases of low- value items intends to capture leases that are high
in volume but low in value – e.g. leases of small IT equipment (laptops, mobile phones,
simple printers), leases of office furniture etc. Ind AS 116 is silent on any threshold
to determine the value for classifying any asset as low value assets.
The following boxes depicts the important points regarding the leases of low-value assets:
Value of an underlying asset to be Leases of low-value assets are

assessed based on the value of the asset exempted regardless of whether
when it is new, regardless of the *age of those leases are material to the
the asset being leased lessee
Examples of low-value underlying assets can include:

- Tablet
- Personal computers,
- Small items of office furniture
- telephones
*A lease of an underlying asset does not qualify as a lease of low value asset if the nature
of the asset is such that, when new, the asset is typically not of lows value, for e.g., leases
of cars would not qualify as leases of low –value assets because a new car would typically
not be of low value.
CONCEPT 4: MEANING OF LEASE

At the inception of a contract, an entity shall assess whether the contract is or contains a
lease. For the purpose, a lease is defined as a contract, or part of a contract that conveys
the right to control the use of an identified asset for a period of time in exchange for
consideration.
Ind AS 116 requires customers and suppliers to determine whether a contract is or contains
a lease at the inception of the contract.
The inception date is defined as the earlier of the following dates:

Date of a lease agreement
Date of commitment by the parties to the principal terms and conditions of the lease
A period of time may be described in terms of the amount of use of an identified asset
(for e.g. the number of production units an item of equipment will be used to product). It
includes any non-consecutive periods of time.
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CONCEPT 5: WHETHER AN AGREEMENT CONTAINS LEASE

(VERY IMPORTANT)
No Is there an identified asset?

Yes
Does the customer have right to

obtain substantially all of the economic No
benefits from the use of asset
throughout the period of use?
Yes
Does the customer, the supplier or

Customer neither party have the right to direct Supplier
how and for what purpose the asset is
used throughout the period of use?
Yes
If Predetermined then whether the

customer
Operates the asset?
OR
Designed the asset?
Yes
Contract Contract does not

Contains a lease contains a lease
PART 1: IDENTIFIED ASSET

An Arrangement only contains a lease if there is f identified asset under Ind as 116,
an identified asset can be explicitly specified in a contract or implicitly
specified at the time that the asset is made available for use by the customer.
QUESTION 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 gut, Supplier ABC owns only one rolling stock that is suitable
for Customer XYZ’s use. If the rolling does not operate properly, the contract requires
Supplier ABC to repair or replace the rolling stock.
Whether there is an identified asset?
SOLUTION
Yes, the said rolling stock is an identified asset.
Through the rolling stock is not explicitly specified in the contract (e.g., by serial number),
it is implicitly specified because suppler ABC must use it to fulfil the contract.
QUESTION 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?
SOLUTION
Yes, the said car is an Identified asset.
Though the car cannot be identified at inception of the contract, it is implicitly specified
at the time the same will be made available to Customer XYZ.
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NO LEASE EVEN IF THERE IS AN IDENTIFIED ASSET
CASE I: SUBSTANTIVE SUBSTITUTION RIGHTS

This is a very important concept since without evaluating this condition the condition, as
to whether there is identified asset cannot be attained. So, even if an asset is specified,
an customer dies not have not the use an identified asset if, an inception of the contract,
an supplier has the substantive right to substitute the asset throughout the period of use.
A supplier right to substitute an asset is SUBSTANTIVE when BOTH of the following
conditions are met:
The supplier has the PRACTICAL

ABILITY to substitute alternative assets
throughout the period of use (For e.g.
the customer cannot prevent the supplier
form substituting an asset and alternative
assets are readily available to the supplier
or could be sourced by the supplier within a
reasonable period of time).
Substantive
Substitution
Rights
The supplier would BENEFIT

ECONOMICALLY
From the exercise of its right to substitute
the asset (i.e. the economic benefits
associated with substituting the asset are
expected to exceed the costs associated
with substituting the asset)>
Further, if the supplier has a right or an obligation to substantive the asset only on or after
either a particular date, or the occurrence of a specified event the supplier’s substitution
right is not substantive because the supplier does not have the practical ability to
substitute alternative assets throughout the period of use.
An entity’s evaluation of whether a supplier’s substitution right is substantive is based on
facts and circumstances at inception of the contract. At inception of the contract, an
entity should not consider future events that are not likely to occur. Ind AS 116 provides
the following examples of circumstances that, at inception of the contract, are not likely
to occur and, thus, are excluded from the evaluation of whether a supplier’ s substitution
right is substantive throughout the period of use:
(1) (2)
An agreement by a future customer The introduction of new technology
to pay an above market rate for use that is not substantially developed at
of the asset inception of the contract
(3)
A substantial difference between the
market price of the asset during the period
of use, and the market price considered
likely at inception of the contract
Ind AS 116 further clarifies that a customer should presume that a supplier’s substitution
right is not substantive when the customer cannot readily determine whether the supplier
has a substantive substitution right this requirement is intended to clarify that a customer
is not expected to exert undue effort to provide evidence that a substitution right is not
substantive. However, suppliers should have sufficient information to make a determination
of whether a substitution right is substantive .
QUESTION 4
Substantive Substitution Rights
Scenario A:
A electronic data storage provider (suppler provides services through a centralised data
centre that involve the use of a specified server No. 10) The suppler maintains may identical
servers in a single accessible location and determines, at inception of the contract, that
is permitted to and can easily substitute another server without the customer’s consent
throughout the period of use.
Further, the suppler 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 make clear that is has negotiated right of
substitution as an important rift 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?
244 ACCOUNTS
Scenario B:
Assume the same facts as in Scenario A expect 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?
SOLUTION
Scenario A:
The customer does not have the right to use an identified asset because, at the inception
of the contract the supplier has the practical ability to substitute the server and would
benefit economically form such a substitution. thus there is no identified asset.
However, if the customer could not readily determine whether the supplier had a substantive
substitution right (for e.g., there is insufficient transparency into the supplier’s operations),
the customer would presume the substitution right is not substantive and conclude that
there is an identified asset.
Scenario B:
The substitution right is not substantive, and Server No. 10. Would be an identified asset
because the supplier does not have the practical ability to substitute the asset and there
is no evidence to economic benefit to the supplier for substituting the asset. In this case,
neither of the conditions of a substitution right is met (whereas both the conditions must
be met for the supplier to have a substantive substitution right). Therefore, serve no 10
will be considered as an identified asset.
CASE II: IDENTIFIED ASSET – PHYSICALLY DISTINCT:

An identified asset must be physically distinct. A physically distinct asset may be an entire
asset or a portion of an asset. For example, a building is generally considered physically
distinct, but one floor within the building many also be considered physically distinct if it
can be used independent of the other floors.
The term “ substantially all is not defined in Ind AS 116.
This can be better understood with the help of the following illustrations:
QUESTION 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 cable between Mumbai and Pune. The contract identifies
five of the cable’s 25 fibres for use by Customer XYZ. The five fibres dedicated
solely to Customer XYZ’s data for the duration of the contract team. Assume that
Supplier ABC does not have a substantive substitution right.
QUESTION 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 of 95% of the pipeline s capacity throughout the team of
the arrangement.
Whether there is an identified asset.
Scenario B:
Assume the same facts as in Scenario A, except the Customer XYZ has the right to use
65% of the pipeline‘s capacity throughout the term arrangement
SOLUTION:
Scenario A:
Yes the capacity portion of the pipeline is an identified asset.
While 95% of the pipeline’s capacity is not physically distinct from the remaining capacity
of the pipeline, it represents substantially all of the capacity of the entire pipeline
and thereby provides Customer XYZ with right to obtain substantially all the economic
benefits from of the pipeline.
Scenario B:
No. The capacity portion of the pipeline is NOT an identified asset.
Since 65% XYZ does not have the right to obtain substantially all of the economic
benefits from use of the pipeline.
246 ACCOUNTS
CONCEPT 6: RIGHT TO CONTROL

To assess whether a contract conveys the right to control the use of an identified asset for
a period of time, an entity shall assess whether, throughout the period of use, the customer
has both of the following:
(a) The right to obtain substantially all of the economic from use of the identified asset;
and
(b) The right to direct the use of the identified asset
The right to control the use of an asset may not necessarily be documented, in from, as a
lease agreement. Often, the right to use an identified asset is embedded in an arrangement
that many appear to be a supply arrangement or service contract. Therefore, a reporting
entity should consider all of the terms of an arrangement of determine whether it contains
a lease.
If the customer has the right to control the use of an identified asset for only a portion
of the term of the contract, the contract contains a lease for that portion of the term.
QUESTION 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 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 then 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?
SOLUTION:
In the above, ABC Ltd has the right to control the use the identified asset during the period
of use because they have the power to determine how the warehouse be used during the
contractually defined usage periods. The analysis should focus on the rights and economics
of the use of the warehouse for the specified usage period (May and June). During the
period of use, ABC Ltd has rights to determine how much of a crop to place in storage, and
the timing of placing and removing it from storage. These rights are more significant to
the economics of the use of the asset than the loading and unloading services performed
by XYZ Ltd during the same period. ABC Ltd receives all of the economic benefit from use
of the asset during those specified time period. Therefore, contract contains a lease for
the specified period of team.
A. Right to Obtain Substantially All of the Economic Benefits
The first criterion in the control assessment is to determine whether the customer has the
right to obtain substantially all of the economic benefits from use of the asset throughout
the period of use (for e.g., by having exclusive use of the asset throughout that period).
A customer can obtain economic benefits either directly or indirectly for e.g., by using
holding or subleasing the asset). Economic benefits from use of an asset include:
♦ The asset’s primary outputs (i.e., goods or services )

♦ Any by – products (for e.g., renewable energy credits that are generated through the
use of the asset), including potential cash flows derived from these items.
♦ benefits from using the asset that could be realised from a commercial transaction with
a third party (For e.g., subleasing the asset)
POINTS WHICH DO NOT AFFECT CUSTOMER’ RIGHT

A Right that solely protects the supplier’s interest in the underlying asset (e.g., limits
on the number of miles a customer can drive a supplier’s vehicle) does not, in and of itself,
prevent the customer from obtaining substantially all of the economic benefits from use
of the asset and, therefore, are not considered when assessing whether a customer has
the right to obtain substantially all of the economic benefits.
If a contract requires a customer to pay the supplier or another party a portion of the
cash flows derived from the use of an asset as consideration (For e.g. if the customer is
required to pay the supplier a percentage of sales from use of retail space as consideration
for that use) that requirement does not prevent the customer from having the right to
obtain substantially all of the economic benefits from use of the retail space.
QUESTION 8
(Right to obtain substantially all of the economic benefits):

Company MNO enters into a 15- year contract with power Company PQR 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?
SOLUTION
Company MNO has the right to obtain substantially all of the economic benefit from use of
the solar farm over the 15-yaer period because it obtains:
248 ACCOUNTS
 The electricity produced by the farm over the lease term_ i.e. the primary product
from use of the asset; and
 the renewable energy credits_ i.e. the by product from use of the asset.
Although PQR receives economic benefits from the solar farm in the form of tax credits,
these economic benefits relate to the ownership of the solar farm. The taxcredits do not
relate to use of the soar farm therefore are not considered in this assessment.
B.Right to Direct the use of the identified Asset

The second criterion in the control assessment is to determine whether the customer
has the right to direct the use of the identified asset throughout the period of use.
Decisions about how and for what purpose an asset will be used are the most relevant
factors to consider when assessing which party direct party directs the use of the identified
asset.
How and for what purpose an asset is used is SINGLE CONCEPT (i.e., how an asset is used
is not assessed separately from for what purpose an asset is used).
When evaluating whether a customer has the right to change how and for what purpose
the asset is used throughout the period of use, the focus should be on whether the
customer has the decision making rights will that most affect the economic benefits
that will be derived from the use of the asset. The decision-making rights that are most
relevant are likely to depend on the nature of the asset and the terms and conditions of
the contract.
Ind As 116 provides the following examples of decision- making rights that grant the right
to change how and for what purpose an asset is used:
Particulars Examples
The right to change the type (i) Deciding whether to use a shipping container to
of output that is produced transport goods or for storage
by the asset (ii) Deciding on the mix of products sold from a retail unit
The right to change when Deciding when an item of machinery or a power plant will
the output is produced be used
The right to change where (i) Deciding on the destination of a truck or a ship
the output is produced (ii)
Deciding where a piece of equipment is used or
deployed
The right to change whether Deciding whether to produce energy from a power plant
the output is produced and and how much energy to produce from that power plant
the quantity of that output
IMPORTANT POINTS TO BE CONSIDERED
1. The customer does not need the right to operate the underlying asset to have
the right to direct its use, i.e. the customer may direct the use of an asset that is
operated by supplier’ s personnel.
2. The relevant decisions about how and for what purpose an asset is used are predetermined
then Significant judgement may be required to assess whether a customer designed
the asset (or specific aspects of the asset) in a way that predetermines how and for
what purpose the asset will be used throughout the period of use.
QUESTION 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 operations (for e.g. if it breaks down). Under the contract:
 Customer X operates the vehicle (i.e., drives the vehicle) or directs other to operate
the vehicle (for e.g. hires a driver).
 Customer X decided how to use the vehicle (within contracture limitations). For example,
throughout the period or use, Customer X decides where the vehicle goes, as well as
when or 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 used 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 vehicle throughout the period
of lease?
SOLUTION:
Yes, Customer X has the right to direct the use of the identified vehicle throughout the
period of use because it has the right to change how the vehicle is used, when or whether
the vehicle is used, where the vehicle goes and what the vehicle is used for.
Supplier Y’s limits on certain uses for the vehicle and modifications to it are considered
protective right that define the scope of Customer X’s use of the asset, but do not affect
the assessment of whether Customer X directs the use of the asset.
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QUESTION 10

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 operation 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?
SOLUTION
Entity A does not direct the use of the asset that most significantly drives the economic
benefits because Supplier H determines how and when the equipment is operated once the
contract is signed. Therefore, Supplier H has right to control the use of the identified
asset during the period of use. Although Entity A stipulates the product to be provided and
has input into the initial decisions regarding the use of the asset through its involvement
in the design of the asset, it does not have decision making rights over how and for what
purpose the asset will used over the asset during the period of use. This arrangement is a
supply agreement, not a lease.
QUESTION 11

Entity L enters into a five – year contract with Company A ship over 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 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 right to direct the use of the ship during the period of use?
SOLUTION
Entity L has the right to direct the use of the ship. The contractual restrictions are
protective rights. In the scope of its right of use, Entity L determines how and for what
purpose the ship is used throughout the five year period because it decides where and when
the ship sails, as well as the cargo that it will transport. Entity L has the right to change
these decisions throughout the period of use. Therefore, the contract contains a lease.
CONCEPT 7: SEPARATION OF LEASE

AND NON- LEASE COMPONENTS
A. IDENTIFYING AND SEPARATING LEASE COMPONENTS OF A CONTRACT

Sometimes, there are contracts that contain rights to use multiple assets (For e.g., a
building and an equipment, multiple pieces of equipment, etc.). The right to use each such
asset is considered as a separate’ lease component ONLY IF BOTH the following conditions
are satisfied:
♦ The lessee can benefit from the use of the asset either on its own OR together with
other resources that are readily available to the lessee (i.e., goods or services that
are sold or leased separately, by the lessor or other suppliers, or that the lessee has
already obtained from the leesor or in other transactions or events) AND
♦ The underlying asset is nether dependent on, not highly interrelated with, the other
underlying assets in the contract.
If one or both of these criteria are not met then, the right to use multiple assets is
considered a single lease component, i.e., not a separate lease component. Let us have a look
at the following illustration to have a better understanding:
QUESTION 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
use 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).
SOLUTION:
Scenario A:
The lessee would be unable to benefit from use of the excavator without also using the
accessories. Therefore, the excavator is dependent upon accessories. Thus, from the
perspective of the lessee, the contract contains one lease component.
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Scenario B:
The lessee can benefit from loading truck on its own together with other readily available
resources because the loading truck could be deployed for other uses independent of the
excavator the lessee can also benefit from the use of the excavator on its own or together
with other readily available resources.
Thus, from the perspective of the lessee, the contract contains tow lease components, viz.,
a lease of the excavator (together with the accessories) and a lease of the loading truck.
B. SEPARATING LEASE COMPONENTS FROM NON-LEASE COMPONENTS
There may be many contracts containing a lease coupled with an agreement to purchase
or sell other goods or services (i.e., the non-lease components under Ind AS 116). For
example, a supplier may lease a truck and also operate the leased asset on behalf of
a customer (i.e., provide a driver). This service is not related to securing the use of
the truck. Only items that contribute to securing the output of the asset are lease
components. In this example, only the use of the truck is considered a lease component.
Similarly, costs incurred by a supplier to provide maintenance on an underlying asset, as
well as the materials and supplies consumed as a result of the use of the asset, are not
lease components.
The non-lease components are identified and accounted for separately from the lease
component in accordance with other standards. For e.g., the non-lease components may
be accounted for as executory arrangements by lessees (customers) or as contracts
subject to Ind AS 115 by lessors (suppliers).
Costs related to property taxes and insurance do not involve the transfer of a good or
service. Consequently, if these costs are fixed in the contract, they should be included in
the overall contract consideration to be allocated to the lease and non-lease components.
QUESTION 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?
SOLUTION
There are three components in the arrangement- the building assets (office building and
HVAC) the office furniture, and the maintenance agreement.
The office building and HVAC system are once lease component because they cannot function
independently of each other. The HVAC system was designed and tailored specifically to
integrated into the office building and cannot be removed and used in another building
without incurring substantial costs. These building assets are a lease component because
they are identified assets for which Entity L directs the use.
The office furniture functions independently and can be used on its own. It is also a lease
component because it is a group of distinct asset for which Entity L directs the use.
The office furniture functions independently and can be used on its own, It is also a lease
component because it is a group of distinct assets for which Entity L directs the use.
The maintenance agreement is a non-lease component because it is contract for service and
not for the use of a specified asset.
C.OPTIONAL EXEMPTION OF USING PRACTICAL

EXPEDIENT TO NOT TO SEPARATE NON-LEASE COMPONENT
Ind AS 116 provides a practical expedient that permits lessees to make an accounting
policy election, by CLASS OF UNDERLYING ASSET, to account for each separate
lease component of a contract and any associated non-lease components as a SINGLE
LEASE COMPONENT. It is important to note the such practical expedient is not
permissible for lessor.
Making this election relieves the lessee of the obligation to perform a pricing allocation,
although it will increase the total lease liability to be recorded on its balance sheet. This
expedient is not available for lessors. Lessees that make the policy election to account
for each separate lease component of a contract and any associated non-lease components
as a SINGLE LEASE COMPONENT, allocate ALL of the contract consideration to
the lease component.
D. Determining and allocating the consideration in the contract – Lessee
Lessees that do not make an accounting policy election (by class of underlying asset) to use
the practical expedient, as discussed above, to account for each separate lease component
of a contract and any associated non-lease components as a single lease component, are
required to allocate the consideration in the contract to the lease and non-lease components
on a RELATIVE STAND-ALONE PRICE BASIS.
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Lessess are required to use observable stand-alone prices (i.e., prices at which a customer
would purchase a component of a contract separately) when available if observable stand-
alone prices are not readily available, lessees estimate stand-maximising the use of
observable information.
QUESTION 14
Activities which are not components of a lease contract

A lessee enters into a five-year lease of equipment, with fixed annual Payment of `8,000
for rent, `1,500 for maintenance and ` 500 of administrative tasks, How the consideration
would be allocated?
SOLUTION
The contract contains two components, viz a lease component (lease of equipment) and
a non-lease component (maintenance) the amount paid for administrative task does not
transfer a good service to the lessee.
Assuming that the lessee does not elect to use the practical expedient as per para 15 of
Ind AS 116, both the lessee and the lessor account for lease of equipment and maintenance
components separately and the administration Charge is included in the total consideration
to be allocated between those components, Therefore, the total consideration in the
contract of ` 50,000 will be allocated to the lease component (equipment) and the non-lease
component (maintenance).
QUESTION 15
Allocating contract consideration to lease and non-lease component- Lessees

A lessee enters into a lease of equipment. The contract stipulates the lessor will perform
maintenance of the leased equipment and receive consideration for the at maintenance
service. The contract includes the following fixed prices for the lease and-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 no-
lease component?
SOLUTION
The stand-alone price for the lease component represents 85% (i.e., ` 85,000 / ` 1,00,000)
of total estimated stand-alone prices. The lessee allocated the consideration in contract
(i.e., ` 90,000), as follows:
Lease ` 76,500
Maintenance **` 13,500
Total ` 90,000
• 90,000x85%
• ` 90,000x 15%
E. CONTRACT COMBINATIONS
Ind AS 116 requires that two or more contracts entered into at or near the same time with
the same counterparty (or related parties of the counterparty) be considered a single’
contract IF ANY ONE of the following criteria is met:
The contracts are The amount of The right to use the

negotiated as a consideration to be underlying assets
package with an paid in one contract conveyed in the
overall commercial OR depends on the price OR contracts (or some
objective that cannot or performance of the of the right to use
be understood without other contract underlying assets
considering the conveyed in each of the
contracts together contracts) are a single
lease component
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F. PORTFOLIO APPLICATION
Ind AS 116 applies to individual leases. However, entities that have a large number of leases
of similar assets (for e.g., leases of a fleet of similar rolling stock) may face practical
challenges in applying the leases model on a lease-by-lease basis.
Thus, Ind AS 116 includes a practical expedient that allows entities to use a portfolio
approach for lease with similar characteristics if the entity reasonably expects that the
effects of the financial statements would not differ materially from the application of the
standard to the individual leases in that portfolio.
CONCEPT 8: KEY CONCEPTS
A. INCEPTION AND COMMENCEMENT OF LEASE
Ind AS 116 requires customers and suppliers to determine whether a contract is or contains
a lease at the inception of the contract.
The inception date is defined as the earlier of the following dates:
♦ Date of a lease agreement

♦ Date of commitment by the parties to the principal terms and conditions of the lease
The commencement date is defined as the date on which a lessor makes an underlying asset
available for use by a lessee. Where the underlying asset’ is an asset that is the subject
of a lease, for which the right to use that asset has been provided by lessor to a lessee.
If a lessee takes possession of, or is given control over, the use of the underlying asset
before it begins operations or making lease payments under the terms of the lease, the lease
term has commenced even if lessee is not required to pay rent or the lease arrangement
states the lease commencement date is a later date.
The timing of when lease payments being under the contract does not affect the
commencement date of the lease.
As discussed earlier, inception date is the date when an entity shall assess if the contract
is or contains lease. While the commencement date is relevant because on that date:
(i) a lessee (except where the exemption of short-term lease or low- value asset is taken)
initially recognizes a lease liability and related Right of Use Asset (hereinafter
referred ROU Asset) on the commencement date
(ii) a lessor (for finance leases) initially recognises its net investment in the lease on the
commencement date.
Where, ROU Asset is defined as an asset that represents a lessee’s right to use an
underlying asset for the lease term.
B. LEASE TERM
Determination of lease term is a very curcial step before the calculation of Lease Liability
and the corresponding ROU Asset. In simple terms, lease term is the usummation of the
following:
NON CANCELLABLE Periods covered by an Periods covered by an

PERIOD option to EXTEND the option to TRRMINATE
lease if the lessee is the lease if the lessee is
reasonably certain TO reasonably certain NOT
exercise that option TO exercise that option
QUESTION 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 prices renewal with future lease payment 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 prices 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 eighty years, and that value can only be
realised through continued occupancy of the lease 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?
SOLUTION:
Scenario A:
At the lease commencement date, the lease term is six years (being the non-cancellable
period) the renewal period of two years is not taken into consideration since it is mentioned
that Entity ABC is not reasonably certain to exercise the option.
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Scenario B:
At the lease commencement, Entity XYZ determines that is reasonably certain to exercise
the renewal option because it would suffer a significant economic penalty if it abandoned
the leasehold improvements at the end of the initial non-cancellable period of eight years.
Thus, at the lease commencement, Entity XYZ concludes that the lease term is ten years
(being eight years of no-cancellable period plus the renewal period of two years where the
lessee is reasonable certain to exercise the option
Scenario C:
At the lease commencement date, the lease term is 21 months (three months per year over
the seven annual periods as specified in the contract), i.e., the period over which Entity PQR
controls the right to use underlying asset.
C. CANCELLABLE LEASES
In determining the lease term and assessing the length of the non-cancellable period of
a lease, an entity shall apply the definition of a contract and determine the period for
which the contract is enforceable. A ‘contract’ is defined as an agreement between two
or more parties that creates enforceable rights and obligations.
An arrangement is not enforceable if:
(i) both the lessor and lessee each have the right to terminate the lease without
permission from the other party; AND
(ii) with no more than an insignificant penalty
Any non-cancellable periods (by the lessee and the lessor) in contracts that meet the
definition of a lease are considered part of the lease term. If only the lessor has the
right to terminate a lease, the period covered by the option to terminate the lease is
included in the non-cancellable period of the lease. If only the lessee has the right to
terminate a lease, that right is a termination option that is considered when determining
the lease term.
If both the lessee and the lessor can terminate the contract without more than an
insignificant penalty at any time at or after the end of the non-cancellable term, then
there are no enforceable rights and obligations beyond the non-cancellable term (i.e.,
the lease term is limited to the non- cancellable term). However, if only the lessee
holds a renewal option, there may be other factors to consider determining whether the
lessee is reasonably certain to extend the lease, including economic disincentives (as
discussed above).
This can be understood better with the help of the following illustrative situation:
Suppose the term of a contract is 10 years and the non-cancellable / lock-in period is 6
years. The lease term shall be as follows:
If the termination option If the termination option is If the termination option

is with ‘Lessor’ with ‘Lessee’ is with ‘Both (i.e., any
party can terminate)
The lease term shall be The lease term shall be 10 years The lease term shall be 6
10 years. reasonable certainty. years.
Because even after 6th Because after the expiry of 6th Because after 6th
year, the lessee would year, though the lessee is not year, either party can
be contractually bound contractually bound till 10th year, terminate the contract
refuse to make the i.e., the lessee can refuse to make without the consent
payment till the expiry payment anytime without lessor’s of the other party and
of the contract sand permission but, it is assumed hence, the contract is
also, has the right unless that the lessee is reasonably not enforceable after 6th
lessor terminates the certain that is will not exercise year ONLY in case there
contract. this option to terminate. Hence, is insignificant penalty
though there is no enforceable for termination.
obligation from lessee’s point of
view beyond 6th year but, basis
the said assumption, the lease
term shall be 10) years.
D. REASSESSMENT OF LEASE TERM AND PURCHASE OPTIONS (FOR LESSEES)

After the lease commencement, Ind AS 116 requires lessees to monitor leases for significant
changes that could trigger a change in the lease term. Lessees are required to reassess
the lease term upon the occurrence of either a significant event OR A significant change
in the circumstances that:
Affects whether the lessee is reasonably

IS WITHIN THE certain to exercise / not to exercise
CONTROL OF THE renewal, termination and/or purchase
LESSEE option, not previously included in its
determination of the lease term
Following are some of the examples of significant events or significant changes in

circumstances within the lessee’s control:
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1) Constructing significant leasehold improvements that are expected to have significant

economic value for the lessee when the option becomes exercisable
2) Making significant modifications or customisations to the underlying asset
3) Making a business decision that is directly relevant to the lessee s ability to exercise,
or not to exercise, an option (e.g., extending the lease of a complementary asset or
disposing of an alternative asset)
4) Subleasing the underlying asset for a period beyond the exercise date of the option
QUESTION 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 the case?
SOLUTION:
Ind AS 116 requires a lease to reassess the lease term if there is charge in business
decision of the company which is directly relevant to exercising or not exercising an option
to renew/extent the lease. In the given case, the retailer M at the end of third year has
extended to include another floor in the same building on account of acquiring another
company. As Retailer M has entered into fresh lease of another floor for a seven-year
term, it is reasonably certain to exercise the renewal option of original lease for a further
five-year term. Hence Retailer M will have to reassess the lease term at end of third year.
QUESTION 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 the case?
SOLUTION:
In the given case, as per Ind AS 116, the announcement by the government to discontinue
the use of the underlying asset will prohibit the lessee form exercising the extension option
that was already included in the non- cancellable period by Company N and hence, Company
N will reassess the non-cancellable period to exclude the extension option of 5 years.
Reassessment of lease term and purchase options (for lessors):

Ind AS 116 requires the lessor to revise the lease term to account for the lessee’s exercise
of an option to extend or terminate the lease or purchase the underlying asset, when
exercise of such options was not already included in the lease term.
D. LEASE PAYMENTS
Lease payments are defined as payments made by a lessee to a lessor relating to the right
to use an underlying asset during the lease term, comprising the following:
(a) Fixed payments(includingin-substance fixed payments),less any lease incentives

(b) Variable lease payments that depend on an index or a rate
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise
that option
(d) payments of penalties for terminating the lease, if the lease term reflects the
lessee exercising an option to terminate the lease
For the lessee, lease payments also include amounts expected to be payable by the lessee
under residual value guarantees.
For the lessors, lease payment instead includes residual value guarantees provided by
the lessee, a party related to the lessee or a third party unrelated to the lessor that is
financially capable of discharging the obligations under the guarantee.
Fixed payments
less incentives
Expected
residual
Variable
value
LEASE payments
guarantee
(e.g. CPI/
PAYMENTS
index / rate)
Penalty for
terminating (if Exercise price of
reasonably certain purchase option
(reasonably certain)
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Exclusion of payments for calculating lease liability:
a. Lease payments do not include payments allocated to non-lease components of

a contract, unless the lessee elects to combine non-lease components with a lease
component and to account for team a single lease component.
b. Variable lease payments that do not depend on index or rate.
FIXED LEASE PAYMENTS

Fixed payments’ are defined as payments made by a lessee to a lessor for the right to use
an underlying asset during the lease term, excluding variable lease payments.
Fixed payments can be a fixed amount paid at various intervals in a lease.
QUESTION 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?
SOLUTION
The fixed lease payments are ` 2,00,000. Although real estate taxes are explicitly stated
in the lease contract, they do not represent a separate non-lease component as they do
not provide a separate good or service,. The right to use the office building is the only
component. The annual lease payment of ` 2,00,000 represent payments related to that
single lease component.
IN-SUBSTANCE FIXED LEASE PAYMENTS

As mentioned above, lease payments also include any in substance fixed lease payments
which are the payments that may, in form, contain variability but that, in substance, are
unavoidable. Examples may include:
(a) If there is more than one set of payments that a lessee could make, but only of those
sets of payments is realistic. In such a case, an entity shall consider the realistic set
of payments to be lease payments.
(b) If there is more one realistic set of payments that a lessee could make, but it must
make at least one of those sets of payments. In such a case, an entity shall consider
the set of payments that aggregates to the lowest amount (on a discounted basis) to
be lease payments.
QUESTION 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 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?
SOLUTION:
Q considers the contract and notes that although the lease payments contain variability
based on usage, and there is a realistic possibility that Q may not use the machinery in some
months, a monthly payment of 1,000 unavoidable. Accordingly, this is in –substance fixed
payment, and is included in the measurement of the lease liability.
QUESTION 21
In substance fixed lease payment

Entity P enters into five-year lease for office space with Entity Q. The initial base rent is `
1Lakh 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?
SOLUTION:
In the given case, the lease payments for purposes of classifying the lease are the fixed
monthly payments of ` 1 lakh plus minimum annual increases of 2% of the previous rental
rate. Entity P is require to pay no less than a 2% increase regardless of the level of sales
activity; therefore, this minimum level of increase is in substance fixed lease payment.
QUESTION 22
In substance fixed lease payments

Company N leases a production line. The lease payments depends 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 1,500 hours
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SOLUTION:
The lease contains in substance fixed payments of ` 10,00,000 per year, which are included
in the initial measurement of lease liability, the additional ` 5,00,000 that Company N
expects to pay per year variable payments that do not depend on index or rate but usage.
LEASE INCENTIVES
‘Lease incentives’ is defined as payments made by a lessor to a lessee associated with a
lease, or the reimbursement or assumption by a lessor of costs of a lessee.
A lease agreement with a lessor might include incentives for the lessee to sign the lease,
such as an upfront cash payment to the lessee, payment of costs for the lessee (such as
moving / transportation expenses) or the assumption by the lessor of the lessee’s pre-
existing lease with a third party.
VARIABLE LEASE PAYMENTS THAT DEPEND ON AN INDEX OR A RATE:

‘Variable lease payments’ are defined as the portion of payments made by a lessor for
the right to use an underlying asset during the lease that varies because of changes in
facts or circumstance occurring after the Commencement date, other than the passage
of time.
These may include, for e.g., payments linked to a consumer price index, payments linked
to a benchmark interest rate or payments that vary to reflect changes in market rental
rates. Such payments are included in the lease payments and are measured using the
prevailing index or rate at the measurement date (e.g., lease commencement date for initial
measurement).
Lessees subsequently remeasure the lease liability if there is a change in the cash flows
(i.e., when the adjustment to the lease payments takes effect) for future payments
resulting from a change in index or rate used to determine lease payments.
QUESTION 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 payment 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 or every second year. At the end of year one, CPI is 105. At the end of year two,
the CPI is 108. What should be included in lease payments?
SOLUTION:
At the lease commencement date, the lease payments are ` 1,000 per year for 10 years.
The entity does not take into consideration the potential future changes in the index. At
the end of year one, the payments have not changed and hence, the liability is not updated.
At the end of year two, when the lease payments change, the entity updated the remaining
eight lease payments to ` 1,080 per year (i.e., 1,000/100 x 108).
VARIABLE LEASE PAYMENTS THAT DO NOT DEPEND ON AN INDEX OR A RATE
Variable lease payments that do not depend on an index or rate and are not, in substance,
fixed as discussed above –In-substance fixed lease payments). Examples may include
payments such as those based on performance (for e.g., a percentage of sales) or
usage of the underlying asset (for e.g., the number of hours flown, the number of units
produced), are not included as lease payments. Instead, they are recognized in profit
or loss in the period in which the event that triggers the payment occurs (unless they
are included in the carrying amount of another asset in accordance with other IndAS).
QUESTION 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 consumables.
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 purchase 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 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?
SOLUTION:
There are two components in the arrangement, viz., a lease of equipment and the purchase
of consumables.
266 ACCOUNTS
Even though Customer ABC may believe that it is highly unlikely to purchase lesser than
8,000 units of consumables every year, in this example, there are no lease payment for
purposes of initial measurement (for Entity XYZ and Customer ABC) and lease classification
(for Entity XYZ).
Entity XYZ and Customer ABC would allocate the payments associate with the future
payments to the lese and consumables component of the contract.
QUESTION 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
SOLUTION:
As stated above, payments are due at the end of the year. Entity A elects to apply the
practical expedient not to separate lease and non-lease components.
At the commencement date, Entity A measures the lease liability as the present value of the
fixed lease payments (i.e. five annual payments of 5,00,000) Although Entity A has elected
to apply the practical expedient to combine non-lease components (i.e. water charges) with
the lease component, Entity A excludes the non-lease component form its liability because
they are variable payments that depend on usage. That is, the nature of the costs does no
become fixed just because Entity A has elected not to separate them from the fixed lease
payments. Entity A recognises the payments for water- as a variable lease payment- in
profit or loss when they are incurred.
In contrast, if B does not elect to apply the practical expedient to combine lease and non-
lease components, then it recognises the payments for water as n operating expense in
profit or loss when they are incurred.
EXERCISE PRICE OF A PURCHASE OPTION
In the lessee is reasonably certain to exercise a purchase option, the exercise price is
included as a lease payment, i.e. entities consider the exercise price of asset purchase
option included in lease contracts consistently with the evaluation of lease renewal and
termination options (as discussed earlier).
PENALTIES FOR TERMINATING A LEASE
If it is reasonably certain that the lessee will not terminate as lease , the lease term is
determined assuming that the termination option would not be exercised, and any termination
penalty is excluded from the lease payments. Otherwise, the lease termination penalty is
included as lease payment. The determination of whether to include lease termination
penalties as lease payments is similar to the evaluation of lease renewal options (as discussed
earlier).
RESIDUAL VALUE GUARANTEES (LESSEES)
‘Residual value guarantee’ is defined as a guarantee made to a lessor by a party unrelated

to the lessor that the value (or part of the value) of an underlying asset at the end of a
lease will be at least a specified amount.
For a lessee, lease payments include amounts expected to be payable by the lessee under
residual value grantees. A lessee may provide a guarantee to the lessor that the value of
the underlying asset it returns to the lessor at the end of the lease will be at least of a
specified amount. Such guarantees are enforceable obligation that the lessee has assumed
by entering into the lease. A lessee is required to remeasure the lease liability if there is a
change in the amounts expected to be payable under a residual value guarantee.
QUESTION 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
form selling the asset to another party at the end of the lease. At lease commencement
based on the lessee’ 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?
SOLUTION
The lessee should include the amount of `8,000 as a lease payment because it is expected
that it will one the same to the lessor under the residual value guarantee
Residual value guarantees (lessors):

Ind AS 116 requires lessors to include in the lease payments, any residual value guarantees
provided to the lessor by the lessee, a party related to the lessee,, or a third party unrelated
to the lessor that is financially capable of financially the obligations under the guarantee.
This amount included in the lease payments is different from that fort a lessee which only
includes the amount expected to be payable by lessee only (as discussed above).
268 ACCOUNTS
INITIAL DIRECT COSTS

‘Initial direct costs’ are defined as the incremental costs of obtaining a lease that would
not have been incurred if the lease had not been obtained, except for such costs incurred
by a manufacture or lessor in connection with a finance lease.
Examples of costs included and excluded from initial direct costs is provided below.
Included Excluded
Commission (including payments to Employee salaries
employees acting as selling agents)
Legal fees resulting from execution of the Legal fees for services rendered before
lease the execution of the lease
Lease document preparation costs Negotiating lease term and conditions
incurred after the execution of the lease
Certain payments to existing tenants to Advertising
move out
Consideration paid for a guarantee of a Depreciation and amortization
residual asset by an unrelated third party
Lessees and lessors apply the same definition of initial direct costs. The requirements
under Ind AS 116 for initial direct costs are consistent with the concept of incremental
costs in Ind AS 115, Revenue from Contracts with Customers.
DISCOUNT RATES
Discount rates are used to determine the present value of the lease payments, which are
used to determine Right of use asset and Lease liability in case of a lessee and to measure
a lessor net investment in the lease.
For a Lessee
As per Ind AS 116, the Discount Rate to be used should be:
THE INTEREST RATE If not, then the lease

IMPCLICIT IN THE OR
shall use THE LESEE’S
LEASE, if that rate can INCREMENTAL
be readily determined. BORROWINGS RATE.
Where,
Interest rate implicit in the lease’ is defined as the rate of interest that causes following:
The present The The fair The fair

value of lease unguaranteed value of the value of the
payments residual value underlying underlying
made by the asset asset
lessee for the
right to use
the underlying
asset
Lease payments are discounted using the interest rate implicit in the lease (as above to be
calculated from the perspective of lessor)if the rate can be readily determined. But if that
rate cannot be readily determined then the lessee used the incremental borrowing rate.
As discussed above, the lessee’s incremental borrowing rate is the rate of interest that
- The lessee would, have to pay to borrow over a similar term,
- and with a similar security,
- the funds necessary to obtain an asset of a similar value to the Right of use Asset
- in a similar economic environment.
CONCEPT 9: ACCOUNTING IN THE BOOKS OF LESSEE
STEP 1: INITIAL RECOGNITION AND MEASUREMENT

A lessee’ is defined as an entity that obtains the right to use an underlying asset for a
period of time in exchange for consideration.
At the commencement date, a lessee shall recognise a ROU Asset and a Lease Liability.
Ind AS 116 requires lessees to recognise a liability to make lease payments and an asset
representing the right to use the underlying asset (i.e., the ROU Asset) during the lease
for ALL leases (except for short-term leases and leases of low-value assets, if they choose
to apply such exemptions).
A. MEASURING THE LEASE LIABILITY

At the commencement date, a lessee initially measures the Lease liability at the present
value of the remaining lease payments to be made over the lease term, discounted
using the rate implicit in the lease (or if that rate cannot be readily determined, the
lessee’s incremental borrowing rate).
270 ACCOUNTS
QUESTION 27
Initial measurement of lease liability

Entity L enters into a lease for 10 years, with a single lese payment payable at the beginning
of each year. The initial lease payments ` 100,000 Lease payments will increase by the rate
or 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 lese liability is initially
measure?
B.MEASURING THE RIGHT-OF USE ASSET

A lessee initially measures the ROU Asset at COST, which consists of ALL of the following:
Payments make to lessor

Initial Measurement of before commencement
Lease liability date less lease incentives
received from lessor
Estimate of costs for

Initial direct costs
restoration/ dismantling
incurred by lessee
of underlying asset
On initial measurement, a lessee is required to recognise dismantling, removal and restoration

costs as part of the ROU Asset. Costs may be incurred at lease commencement or during
a particular period as a consequence of having used an underlying asset. Costs that are
incurred during a particular period as a consequence of having used the ROU Asset to
produce inventories are accounted for under Ind AS 2 inventories. The liability associated
with dismantling, removal and restoration costs is recognizes and measured n accordance
with Ind AS 37 Provisions, contingent Liabilities and Contingent Assets.
QUESTION 28
Measuring right-of use asset

Entity Y and Entity Z execute a 12- year lease of a railcar with the following terms on
January 1 2016:
 The lease commencement date is February 1,2016.
 Entity Y must 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 cots, which are payable on February 1, 2016 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 `850,000
How would Lessee Company measure and record this lease?
QUESTION 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 1,00,000 flight hours. At the end of the lease, company H must have a
check performed (or refund the cost to the lessor), irrespective of the actual of fight
hours. What are the lease payments for purposes of calculating ROU asset?
SOLUTION:
In the given case, the legal requirement to perform a check after every 1,00,000 flight hours
does not directly lead to an obligation as it depends on future circumstances. However, as
the check must be carried out at the end of the lease irrespective of the actual number of
flight hours gives rise to an obligation.
As a result, company H has to recognize a provision for the costs of the final check (Present
value of the expected cost”) at the beginning of the lease term. At the same time, these
costs must be included in the cost of the right-of use (ROU) asset pursuant to para 24 (d)
of Ind AS 116.
STEP 2: SUBSEQUENT MEASUREMENT
A. RIGHT – OF USE ASSETS (ROU ASSET)

After the commencement date, the right- of use asset should be measured using a cost
model, unless it applies the revaluation model as specified under Ind AS 16.
Cost model for right – of – use assets:
To follow the cost model, an entity measures a right – of use asset at cost:
(a) Less accumulated depreciation and accumulated impairment losses (recognized in

accordance with Ind As 36, Impairment of Assets); and
(b) Adjusted for re-measurements of the lease liability specified in section 3.4.3
272 ACCOUNTS
Depreciation for right – of use assets

ROU Assets measured under the cost model should be depreciated in accordance with the
depreciation requirements given in Ind AS 16, subject to the following:
- If the lease transfers ownership of the underlying asset to the lessee by the end of
the lease term, or if the cost of the ROU Asset reflects that the lessee will exercise a
purchase option, the ROU Asset should be depreciated from the commencement date to
the end of the useful life of the underlying asset;
- Otherwise the right of use asset should be depreciated from the commencement date to
the earlier of the end of the useful life of the ROU Asset and the end of the lease term.
B. LEASE LIABILITY
A lease Liability should be accounted for in a manner similar to other financial liabilities (i.e.,
on an amortised cost basis). Consequently, the lease liability is accreted using an amount
that produces a constant periodic discount rate on the remaining balance of the liability
(i.e., the discount rate determined at commencement, as long as a reassessment requiring
a change in the discount rate has not been triggered). Lease payments reduce the lease
liability when paid
Thus, after the commencement date, a lessee shall measure the lease liability by:
a. increasing the carrying amount to reflect interest on the lease liability;
b. reducing the carrying amount to reflect the lease payments made; and
c. remeasuring the carrying amount to reflect any reassessment or lease modification or to
reflect revised inn-substance fixed lease payments.
C. EXPENSE RECOGNITION
Lessees recognize the following items in expense for lease:
♦ Depreciation of the ROU Asset
♦ Interest expense on the Lease Liability
♦ Variable lese payment that are not included in the lease liability (for e.g., variable lease
payments that do not depend on an index or rate)
♦ Impairment of the ROU Asset
QUESTION 30
Lessee Accounting
Entity ABC (lessee) inters 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
or 12% (which is Entity ABC’s incremental borrowing rate because the interest rate implicit
in the lease cannot be readily determined). Entity ABC depreciated 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?
QUESTION 31
Subsequent Measurement using cost model

Company EFG enter 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
in the beginning of year with an increase of 3% every year in the beginning thereafter.
The implicit rate of interest is 9.04% Entity H gives Company EFG an incentive of ` 2 lacs
(payable at the beginning of year 2) which is to be used for normal tenant improvement.
Company EFG is reasonably certain to exercise that purchase option. How would EFG measure
the right-of use asset and lease liability over the lease term.
LEASES DENOMINATED IN A FOREIGN CURRENCY

Lessees apply Ind AS 21 the Effects of Changes in Foreign Exchange Rates, to leases
denominated in a foreign currency. Lessees remeasure the foreign currency- denominated
lease liability using the exchange rate at each reporting date, like they do for other
monetary liabilities. Any changes to the lease liability due to exchange rate changes are
recognised in profit or loss. Because the ROU Asset is a non-monetary asset measured at
historical cost, it is not affected by changes in the exchange rate.
This approach could result in volatility in profit or loss from the recognition of foreign
currency exchange gains or losses, but it will be clear to the users of financial statement
that the gains or losses result solely from changes in exchange rates.
STEP III: REMEASUREMENT

Ind AS 116 requires lessees to REMEAURE LEASE LIABILITIETS upon a change in lease
payments on account of ANY of the following:
274 ACCOUNTS
The reassessment of The reassessment of

lease term on account of whether the lessee is In – substance fixed
reasonable certainty to reasonably certain to lease payments
exercise/not exercise exercise an option to
of extension and/or purchase the underlying
termination option asset
The amounts expected to Future lease payments

be payable under residual resulting from a change
value guarantees in an index or rate
When to use the ‘original and a revised’ discount rate?
Revised Discount Rate Original Discount Rate

Lessees use a revised discount rate when Lessees use the original discount rate when
lease payments are updated for lease payments are updated for
-reassessment of the lease term OR -a change in expected amount for residual
-a reassessment of a purchase option. value guarantees AND
The revised discount rate is based on - Payment dependent on an index or rate,

the interest rate implicit in the lese for unless the rate is a floating interest
the lease for the REMAINDER of the rate.
lease term. If that rate cannot be readily - The variability of payments is resolved
determined, the lessee uses its incremental so that they become in –substance
borrowing rate. fixed payments.
QUESTION 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
01/01/2017. The initial term of the lease is 5 years with a renewal option of further
3years. The annual payments for initial terms 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 01/01/18 will be
based on the CPI available at 31/12/17
Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/2020 is
5% and 6% respectively and the CPI at lease commencement date and as at 01/01/2020 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 2020, 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 toext end.
Is Entity W required to remeasure the lease in the first quarter of 2020?
STEP IV: LEASE MODIFICATINS

A lease modification is a change in the scope of a lease, or the consideration for a lease, that
was not part of the original terms and conditions of the lese Fore.g, adding or terminating
the right to use one or more underlying assets, or extending or shortening the contractual
lease term).
The following are examples of lease modifications that may be negotiated after the lease
commencement date:
♦ A lease extension
♦ Early termination of the lease
♦ A change in the timing of lease payments
♦ Leasing additional space in the same building
♦ Surrendering a part of the underlying asset.
If a lease is modified (as stated above), the modified contract is evaluated to determine
whether it is or contains a lease. If a lease continues to exist, lease modification can result in:
♦ A separate lease OR
♦ A change in the accounting for the existing lease (i.e., not a separate lease).
The exercise of an existing purchase or renewal option or a change in the assessment of
whether such options are reasonably certain to be exercised are not lease modifications
but can result in the remeasuremnt of Lease Liabilities and ROU Assets (Remeasurement
– as discussed above).
MODIFICATION – SEPARATE LEASE

A lease modification is accounted for as a separate lease if both:
a. The modification increases the scope of the lease by adding the right to use one or more
underlying assets; and
b. The consideration for the lease increases by an amount commensurate with the standalone
price for the increase in scope.
276 ACCOUNTS
QUESTION 33
Modification that is a separate lease

Lessee enters into a 10-year lease for 2,000 square metresof 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 metresof 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 metresof 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,
marketingcosts).
How should the said modification be accounted for?
SOLUTION:
Lessee accounts for the modification as a separate lease, separate from the original 10-
year lease because the modification grants Lessee an additional right to use an underlying
asset, and the increase in consideration for the lease is commensurate with the stand-
alone price of the additional right-of-use adjusted to reflect the circumstances of
the contract. In this example, the additional underlying asset is the new 3,000 square
metres of office space. Accordingly, at the commencement date of the new lease (at the
end of the second quarter of Year 6), Lessee recognises a ROU Asset and a lease liability
relating to the lease of the additional 3,000 square metres of office space. Lessee does
not make any adjustments to the accounting for the original leaseof2,000 square meters
of office space as a result of this modification.
Modification – Not Separate Lease:

If a lease modification fails the test above (e.g. additional right of use granted, but not at
a standalone price). Or the modification is of any other type (e.g. a decrease in scope from
the original contract), the lessee must modify the initially recognised components of the
lease contract.
The accounting treatment required for lease modifications that are not accounted for
as separate leases is summarised below:
• Remeaserue lease liability using revised discount rate (i)

Decrease in • Decrease right –of- use asset by its relative scope compared to
scope the original lease (2)
• Difference between (1) and (2) recognised in P&L
All other lease • Remeasure lease liability using revised discount rate
modification • Remeasure right of -use asset by same amount
The implicit rate in the lease is to be used. If it cannot be readily determined, the incremental
rate of borrowing is to be used.
The re-measurement above occur as of the effective date of the lease modification on
prospective basis.
In some cases, the lessee and lessor may agree to a modification to the lease contract that
starts at a later date (i.e., the terms of the modification take effect at a date than the
date when both parties agreed to the modification). This can be understood with help of a
following example:
Lease Modification
Change in Consideration Change in lease term Change in scope
Increase Decrease Decrease Increase
- Remeaure the - Derecognise the Consideration not Consideration

lease liability at lease liability and commensurate commensurate
modification date ROU Asset to to stand –alone to stand –
- Make corresponding reflect the partial selling price alone selling
adjustment to ROU or full termination price
Asset of the lease
- Recognise in P&L
the gain or loss on
termination of the
lease
- Remeasure the lease liability - Increase in scope

at modification date of the lease of
- Make corers ponding Underlying asset to
adjustment to ROU Asset be accounted as a new
278 ACCOUNTS
QUESTION 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.
QUESTION 35
Modification that decreases the scope of the lease

lease payments are `50,000 payable at the end of each year the interest rate implicit
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 meters of the original
space staring 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.
QUESTION 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 the commencement date is 6% p.a. 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.
QUESTION 37
Modification that both increases and decreases the scope of the lease
lease payments are ` 1,00,000 payable at the end of each year. The interest rate implicit
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 6and
b) reduce the lease term from 10 years to eight years. The annual fixed payment for
the 3,500 square meters 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.
STEP V: PRESENTATION
ROU Asset and lease liabilities are subject to the same considerations as other assets and
liabilities in classifying them as current and non-current in the balance sheet. The following
table depicts how lease-related amounts and activities are presented in lessees financial
statements:
Balance Sheet Statement of profit or Statement of cash flows

loss
ROU Assets: Depreciation and Principal portion of the
They are presented either: interest: lease liability:
Separately from other Depreciation on Right of
- -
These cash payments are
assets (e.g., owned assets) use asset and interest presented within financing
OR expense accreted on activities
lease liabilities are Interest portion of the lease
presented separately liability
(i.e. they CANNOT be -
These cash payments are
combined). presented within financing
activities
280 ACCOUNTS
-
Together with other This is because interest Short –term leases and
assets as if they were expense on the lease leases of low -value assets:
owned, with disclosures liability is a component -
Lease payments
of the balance sheet line of finance costs. Which pertaining to them (i.e.,
items that include ROU paragraph 82(b) of Ind not recognised on the
Assets and their amounts AS 1 Presentation of balance sheet as per Ind
ROU Assets that meet the Financial Statements AS 116) are presented
definition of investment requires to be presented within operating activities
property are presented as separately in the
Variable lease payments
investment property statement of profit or
not included in the lease
loss.
Lease Liabilities: liability:
The are presented either: -
These are also presented
-
Separately from other within operating activities
liabilities OR - Non- cash activity:
-
Together with other Such activity is disclosed
liabilities with disclosure as supplemental non-cash
of the balance sheet item (e.g., the initial
line items that includes recognition of the lease
lease liabilities and their at commencement)
amounts
STEP VI: DISCLOSURE

Disclosure objective:
The objective of the disclosures is for lessees to disclose information in the notes that,
together with the information provided in the balance sheet, statement of profit and loss
and statement of cash flows, gives a basis for users of financial statement s to assess the
effect that leases have on the financial position, financial performance and cash flows of
the lessee.
Ind AS 116 requires lessess to present All disclosures in:
- A single note OR
- Separate section in the financial statements.
Quantitative Disclosure Requirement

Balance Sheet Statement of profit and Loss Statement of Cash
Flows
- Additions to right-of - Depreciation for assets by class. - Total cash outflow
use assets. - Interest expense on lease for leases.
- Carrying value of right- liabilities
of use assets at the end - Short-term leases expensed.
of the reporting period
- Low-value leases expenses.
by class.
- Income from subleasing.
- Maturity analysis
of lease liabilities - Gains or losses arising from sale
separately from other and leaseback transactions.
liabilities based on Ind
AS 107 requirements.
*These disclosures need not include leases with lease terms of one month or less.
All of the above disclosures are requires to be presented in tabular format, unless another
format is more appropriate. The amounts disclosed include costs that a lessee has included
in the carrying amount of another asset during the reporting period.
Other disclosure requirements also include:
♦ Commitments for short-terms leases if the current period expense is dissimilar to
future commitments.
♦ For right- of use assets that meet the definition of investment property, the disclosure
requirements of Ind AS 40, Investment property, with a few exclusions.
♦ For right –of use assets where the revaluation model has been applied, the disclosure
requirement of Ind AS 16, Property, plant and equipment.
♦ Entities applying the short-term and/or low value lease exemption are required to
disclose the fact.
Qualitative Disclosuer Requirements

- A summary of the nature of the entity’s leasing activates;
-
Potential cash outflows the entity is exposed to the are not included in the measured
lease liability, including
- Variable lease payments;
- Extension options and termination options;
- Residual value guarantee, and
282 ACCOUNTS
- Leases not yet commenced to which the lessee is committed.

- Restrictions or covenants imposed by leases; and
- Sale and lease back transaction information.
CONCEPT 10: LESSOR ACCOUNTING

A lessor is defined as an entity that provides the right to use an underlying asset for a
period of time in exchange for consideration.
At inception, lessors classify all leases as FINANCE LEASE or OPERATING LEASE. Lease
classification is very important because it determined how and when a lessor recognizes
lease income and what assets are recorded. Classification is based on the extent to which
the risk and rewards incidental to ownership of the underlying asset lie with the lessor or
the lessee. it depends on the substance of the transaction rather than the form of the
contract.
Where, a finance lease’ is defined as a lease that transfers substantially all the risks and
rewards incidental to ownership of an underlying asset.
Where, an operating lease’ is defined as a lease that does not transfer substantially all
the risks and rewards incidental to ownership of an underlying asset.
Ind AS 116 lists a number of examples that individually ,or in combination , would normally
lead to a lease being classified FINACE LEASE:
• the lease transfers ownership of the asset to the lessee by the

Ownership
end of the lease term
• The lessee has the option to purchase the asset at a price that is
expected to be sufficiently lower than the fair value at the date
Purchase option
the option become exercisable for it to be reasonably certain, at
the inception date, that the option will be exercised
• The lease term is for the major part of the economic life of the
Lease term
asset even if title is not transferred
PV of Minimum • At the inception date, the present value of the lease payment
Lese Payments amounts to at least substantially all of the fair value of the asset
Speciallised • The asset is of such a specialised nature that only the lessee can
Nature use it without major modifications
Additionally, Ind AS 116 lists the following indicators of situations that, individually or in
combination. Could also lead to a lease being classified as a FINACE LEASE:
Loss on • If the lessee can cancel the lease, the lessor’s losses associated
cancellation with the cancellation are borne by the lessee
• Gains or losses from the fluctuation in the fair value of the

Risk of fair
residual accrue to the lessee (e.g., in the form of a rent rebate
value of the
that is equal to most of the sale proceeds at the end of the
residual asset
lease)
Option to • The lessee has the ability to continue the lease for a secondary
extend lease period at a rent that is substantially lower than market rent
Other considerations that could be made in determining the economic substance of the
lease arrangement include the following:
• Are the lease rentals based on a market rate for use of the asset (which would indicate
an operating lease) or a financing rate of use of the funds, which be indicative of a
finance lease?
• Is the existence of put and call options a feature of the lease? If so, are they exercisable
at a predetermined price or formula (indicating a finance lease) or are they exercisable
at the market price at the time the option is exercised (indicating an operating lease)?
Lease classification test for land and buildings:

For a lease that includes both land and buildings elements, the lessor separately assesses
the classification of each element as a finance lease or an operating lease, having fact
that land normally has an indefinite economic life.
The lessor allocated lease payments between the land and the buildings elements in
proportion to the relative fair values of the leasehold interest in the land element and
buildings element of the lease at the inception date, if the lease payments cannot be
allocated reliably between these two elements, the entire lease is classified as a finance
lease, unless it is clear that both elements are operating leases, in which case, the entire
lease is classified as an operating lease.
284 ACCOUNTS
For a lease of land and building in which the amount for the land element is immaterial to
the lease, the lessor may treat the land and buildings as single unit for the purpose of
lease classification and classify it a s fiancé lease or an operating lease. Ind such a case,
the lessor regards the economic life of the buildings as the economic life of the entire
underlying asset.
Residual value guarantees included in the lease classification test:
In evaluating Ind AS 116’s lease classification criteria, lessors are required to include in the
substantially all test any (i.e., the maximum obligation ) residual value guarantees provided
by both lessees and any other third party unrelated to the lessor.
Reassessment of lease classification:
Lessors are required to reassess the lease classification only if there is a lease modification
(i.e., a change in the scope of a lease, or the consideration for a lease, that was not part
of the original terms and conditions of the lease). Lessors reassess lease classification as
at the effective date of the modification using the modified conditions at that date if a
lease modification results in a separate new lease, that new lease would be classified in the
same manner as any new lease.
Key concepts applied by the lessor:
Gross investment in the lease in the SUM of:
(a) the lease payments receivable by a lessor under a finance lease; AND
(b) Any unguaranteed residual value accruing to the lessor.
‘Net investment in the lease’ is the gross investment in the lease discounted at the
interest rate implicit in the lease.
Unguaranteed residual value is that portion of the residual value of the underlying asset,
the of which by a lessor is not assured or is guaranteed solely by a party related to the
lessor.
UNIT 1: FINANCE LEASES
RECOGNITION
At the commencement date, a lesser shall recognise assets held under a finance lease in
its balance sheet and present them as a receivable at an amount equal to the net investment
in the lease.
INITIAL MEASUREMENT
At lease commencement, a lessor accounts for a fiancé lease, as follows:
Derecognises the carrying amount of the underlying asset

Recognises the net investment in the lease
Recognises, in profit or loss, any selling profit or selling loss
For finance leases other than those involving manufacturer and dealer lessors), initial direct
costs are included in the initial measurement of the fiancé lease receivable. Initial direct
costs are included in the lease, and are not added separately to the net investment in lease.
The present the present value of

value of lease the unguaranteed
payments residual value
Any selling profit or loss in measured as the difference between the fair value of the
underlying asset or the lease receivable, if lower, and the carrying amount of the underlying
asset, net of any undgranteed residual asset.
INITIAL MEASUREMENT MANUFACTURER OR DEALER LESORS

At the commencement date, a manufacturer or dealer lessor recognizes selling profit or
loss in accordance with its policy for outright sales to which Ind AS 115 applies.
Therefore, at lease commencement, a manufacture or dealer lessor recognizes the following
The fair value of the underlying asset as revenue OR the present value of the lease
payments disclosed using a market rate of interest, whichever is lower.
The cost (or carrying amount ) of the asset (less) the present value of the ungaranteed
residual value, as cost of sale.
The selling profit or loss in accordance with the policy for outright sales.
286 ACCOUNTS
AT the commencement date, a manufacturer or dealer lessor recognizes selling profit or

loss on a finance lease, regardless of whether the lessor transfers the underlying asset as
described under Ind AS 115. Costs incurred by a manufacturer or dealer lessor in connection
with obtaining a finance lease are recognised as an expense at the commencement date and
are excluded from the net investment in the lease because they are mainly related to
related to earning the manufacturer or dealer s selling profit.
Accounting for initial direct costs shall be done in the following manner:
By Lessor
Finance Lease:
Ind AS 116 requires lessors (other than manufacturer or dealer lessors )ot include initial
direct costs in the initial measurement of their net investments in finance leases and
reduce the amount of income recginnised over the lease term.
The interest rate implicit in the lease is defined in such a way that the initial direct costs
are included automatically in the net investment in the lease and they are not added
separately. (initial direct costs related to finance leases incurred by manufacturer or
dealer lessors are expenses at lease commencement).
Operating Lease:
Ind AS 116 requires lessors to include initial direct costs in the carrying amont of the
underlying asset in an operating lease. These initial direct costs are recognizes as an
expense over the lease term on the same basis as lease income.
SUBSEQUENT MEASUREMENT
After lease commencement, a lessor accounts for a fiancé lease, as follows:
♦ Recognises finance income in profit or loss) over the lease term in amount that produces
a constant periodic rate of return on the remaining balance of the net investment in
the lease (i.e., using the interest rate implicit in the lease).
• Income is recognised on the components of the net investment in the lease, which
is interest on the lease receivables.
♦ Reduces the net investment in the lease for lease payments received (net of finance
income calculated above)
♦ Separately recognises income from variable lease payments that are not included in
the investment in the lease (e.g., performance – or usage – based variable payments) in
the period in which that income is earned
♦ Recognises any impairment of the net investment in the lease
REMEAUREMENT OF THE NET INVESTMENT IN THE LEASE

After lease commencement, the investment in a lease in NOT REMEASURED UNLESS in
either of the following situations:
♦ The lease in modified (i.e., a change in the scope of the lee, or the consideration for
that lease, that was not part of the original terms and conditions of the lease) and
modified lease is not accounted for as a separate contract
OR
♦ The lease term is revised when is a change in the non-concellable period of the lease.
(Refer section 3.5.4 Modification of lease)
QUESTION 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
specialized 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 easy 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
• 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 lease term or contain an option to purchase the underlying asset
• The interest rate implicit in the lease is10.078%.
How should the Lessor account for the same in its books of accounts?
IMPAIRMENT OF THE NET INVESTMENT IN THE LEASE:

A lessor shall apply the derecognition and impairment requirement in Ind AS 109 to the net
investment in the lease. A lessor shall review regularly estimated unguaranteed residual
values used in computing the gross investment in the lease. If there has been a reduction in
the estimated unguaranteed residual value the lessor shall revise the income allocation over
the lease term and recognise immediately any reduction in respect of amounts accrued.
288 ACCOUNTS
UNIT II: OPERATING LEASES
RECOGNITION AND MEASUREMENT

A lessor shall recognise lease payments from operating leases as income on either a straight-
line basis OR another systematic basis. The lessor shall apply another systematic if that
basis is more representative of the pattern in which benefit derived from the use of the
underlying asset is diminished.
Lessors subsequently recognize lease payments over the lease term on either a straight-
line basis or another systematic and rational basis if that basis better represents the
pattern in which benefit is expected to be derived from the use of the underlying asset.
After lease commencement, lessors recognise variable lease payments that do not depend
on an index or rate (e.g., performance – or usage-based payments) as they are earned.
In AS 116 also requires lessors of operating leases to defer initial direct costs at lease
commencement and recognize them over the lease term on the some basis as lease income.
UNIT III: LEASE MODIFICATIONS

A lease modification is a change in the scope of a lease, or the consideration for a lease,
that was not part of the original terms and conditions of the lease (for e.g., adding or
terminating the right to use one or more underlying assets or extending or shortening the
contractual lease term).
FINANCE LEASE MODIFICATION

A lease modification is accounted for as a separate lease if both:
(a) The modification increases the scope of the adding the right to use or more underlying
assets’ and
(b) The consideration for the lease increases by an amount commensurate with the
standalone price for the increase in scope.
If both criteria are met, a lessor would follow the exiting lessor guidance on initial recognition
and measurement.
The lease would

• Account for the lease modification as a new lease from the
have been
effective date of the modification; and
classified as
• Measure the carrying amount of the underlying asset as the
operating with the
net investment in the lease immediately before the effective
modifications at
date of the lease modification.
the inception date
MODIFICATION – NOT SEPARATE LEASE:

If a lease modification fails the test to be considered as separate lese as mentioned above,
the lessor follows the following guidance;
All other lease

• Apply the requirements of Ind AS 109 Financial Instrument
modification
The re-measurements above occur as of the effective date of the lease modification on a
prospective basis.
OPERATING LEASE MODIFICATION

A lessor shall account for a modification to an operating lease as a new lease from the
effective date of the modification, considering any prepaid or accrued lease payments
relating to the original lease as part of the lease payments for the new lease.
UNIT IV: PRESENTATION

Lessors have the following presentation requirements under Ind AS 116, depending on the
classification of leases:
Finance Leases Operating Leases

Lessors recognize assets held under a finance Lessors are required to present
lease in the balance sheet and present them underlying assets subject to operating
as a receivable at an amount equal to the net leases according to the nature of that
investment in the lease under Ind AS 116. asset in the balance sheet under Ind
In addition, the net investment in the lease is AS 116.
subject to the same considerations as other
assets in classification as current or non-
current assets in a classified balance sheet.
DISCLOSURE
The objective of the disclosure requirements for lessors to disclose information in the
notes that together with information provided in the balance sheet, statement of profit or
loss and statement of cash flows, gives a basis for users of financial statement to assess
the effect that leases have on the financial position, financial performance and cash flows
of the lessor.
290 ACCOUNTS
The lessor disclosure requirements in Ind AS 116 are more extensive to enable users of
financial statements to better evaluate the amount, timing and uncertainty of cash flows
arising from a lessor’s activities.
Quantitative Disclosure Requirements

Finance leases - Selling profit or loss.
- Finance income on the net investment;
- Income from variable lease payments;
- Qualitative and quantitative explanation of changes in the net
investment; and
- Maturity analysis of lease payments receivable
Operating leases - Lease income, separately disclosing variable lease payments;
-
Disclosure requirements of Ind AS 16 for leased asset,
separating leased assets from non-leased assets;
-
Other applicable disclosure requirements based on the nature
of the underlying asset (e.g. Ind AS 36, Ind AS 38, AS 40 and
Ind AS 41); and
- Maturity analysis of lease payments
CONCEPT 11: SUB-LEASES
Recognition and Measurement

A Sub-lease is defined as a transaction for which an underlying asset is re-leased by a
lessee (intermediate lessor) to a third party, and the lease (‘head lese’) between the head
lessor and lessee remains in effect.
Lessees often enter into arrangements to sublease a leased asset to a third party while
the original lease contract is in effect, where, one party acts as both the lessee and lessor
of the same underlying asset. The original lease is often referred to as a head lease’ the
original lessee is often referred to as an intermediate lessor or sub-lessor and the ultimate
lessee is often referred to as the sub lessee
It can be demonstrate with help of a following simple diagram:
Lessor
Sub Head
Original Lessee/intermediate lessor
Lease lease
Lessee/Sub-lessee
In some cases, the sublease is a separate lease agreement while, in other cases, a third
party assumes the original lease but, the original lessee remains the primary under the
original lease.
Intermediate Lessor Accounting:
Where an underlying asset is re-leased by a lessee to a third party and the original lessee
retain the primary obligation under the original lease, the transaction is a sublease, i.e.,
the originallessee generally continues to account for the original lease (the head lease) as a
lessee and accounts for the sublease as the lessor (intermediate lessor).
When the head lease is a short-term lease, the suble3ase is classified as an operating lease.
Otherwise, the sublease is classified using the classification criteria (as discussed earlier)
BUT, it should be by reference to the ROU Asset in the head lease (and NOT the underlying
asset of the head lease). This can be understood better with help of a following illustration:
QUESTION 9
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 aneconomiclifeof40years.EntityABCsubleasesthebuildingforfouryears.
How should the said sublease be classified by Entity ABC?
292 ACCOUNTS
SOLUTION:
The sublease is classified with reference to the ‘ROU Asset’ in the head lease (and NOT
the ‘underlying building’ of the head lease). Hence, when assessing the useful life criterion,
the sublease term of four years is compared with five-year ROU Asset in the head lease
(NOT compared with 40-year economic life of the building) and accordingly may result in
the sublease being classified as a finance lease.
The intermediate lessor accounts for the sublease as follows:
IF THE SUBLEASE IS CLASSIFIED } IF THE SUBLEASE IS CLASSIFIED

AS FINANCE LEASE’ AS AN OPERATING LEASE’
The original lessee derecognizes the ROU The original lessee continues to accounts
Asset on the head lease at the sublease for the lease liability and ROU asset on the
commencement date and continues to head lease like any other lease.
account for the original lease liability inIf the total remaining carrying amount of
accordance with the lessee accounting the Rou asset on the head lease exceeds
model. the anticipated sublease income, this may
The original lessee (as the intermediate indicate that the ROU asset associated
lessor) recognizes a net investment in the with the head lease is impaired (which is
sublease and evaluates it for impairment. assessed for impairment under Ind AS 36).
QUESTION 40
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.
How should the said sublease be classified and accounted for by the Intermediate Lessor?
SOLUTION:
The intermediate lessor classifies the sublease by reference to the ROU Asset arising
from the head lease (i.e., in this case, comparing the three-year sublease with the five-year
ROU Asset in the head lease). The intermediate lessor classifies the sublease as a finance
lease, having considered the requirements of Ind AS 116 (i.e., one of the criteria of ‘useful
life’ for a lease to be classified as a finance lease).
When the intermediate lessor enters into a sublease, the intermediate lessor:
(i) Derecognizes the ROU asset relating to the head lease that it transfers to the
sublessee and recognises the net investment in the sublease;
(ii) Recognises difference between the ROU asset and the net investment in the
sublease in profit or loss, AND
(iii) Retains the lease liability relating to the head lease in its balance sheet, which
represents the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognises both
 finance income on the sublease AND

 Interest expense on the head lease.
QUESTION 41
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?
SOLUTION:
The intermediate lessor classifies the sublease by reference to the ROU Asset arising
from the head lease (i.e., in this case, comparing the two-year sublease with the five-
year ROU Asset in the head lease). The intermediate lessor classifies the sublease as
an operating lease, having considered the requirements of IndAS 116 (i.e., one of the
criteria of ‘useful life’ for a lease to be classified as a finance lease and since, it is not
satisfied, classified the same as an operating lease).
When the intermediate lessor enters into the sublease, the intermediate lessor retains:
- the lease liability AND

- the ROU Asset
both relating to the head lease in its balance sheet.
294 ACCOUNTS
During the term of the sublease, the intermediate lessor:
(a) recognises a depreciation charge for the ROU asset and interest on the lease
liability; AND
(b) recognises lease income from the sublease.
CONCEPT 11: SALE AND LEASEBACK TRANSACTIONS

A sale and leaseback transaction involves the transfer of an asset by an entity (the
seller-lessee) to another entity (the buyer-lessor) and the leaseback of the same asset
by theseller-lessee.
Sale and leaseback transactions would no longer provide lessees with a source of off-
balance sheet financing because under Ind AS 116, lessees are required to recognise
most leases on the balance sheet (i.e., all leases except for leases of low-value assets
and short-term leases depending on the lessee’s accounting policy lection).
Further, both the seller-lessee and the buyer-lessor are required to apply Ind AS 115 to
determine whether to account for a sale and leaseback transaction as a sale and purchase
of an asset.
Transactions in which the transfer of an asset is a SALE

If the transfer of an asset by the seller-lessee satisfied the requirments of Ind AS 115 to
be accounted for as a sale of the asset:
Seller-lessee Buyer-lessor
The seller-lessee shall measure the ROU asset The buyer-lessor shall account for
arising from the leaseback at the proportion of the purchase of the asset, applying
the previous carrying amount of the asset that applicable Ind AS and for the lease,
related to the right of use retained by the applying the lessor accounting
seller-lessee. Accordingly, the seller-lessee requirements under Ind AS 116.
shall recognise only the amount of any gain or
loss that relates to the rights transferred to
Thus, a buyer-lessor accounts for the
the buyer –lessor.
purchase of the asset in accordance
Thus, the seller-lessee will: with other Ind Ass based on the nature
- Derecognise the underlying asset of the asset (for e.g., Ind AS 16 for
-R
ecgongnise the gain or loss, if any, that relates property, plant and equipment).
to the rights transferred to the buyer-lessor
(adjusted for off-market terms)
When a sale occurs, both the seller-lessee and the buyer-lessor account for the leaseback
in the same as any other lease (with adjustment for any off-market terms). Specifically
a seller –lessee recognises a lease liability and ROU asset for the leaseback subject to
the optional exemptions for short-term leases and leases of low-value assets).
An entity shall make the following adjustments to measeure the sale proceeds at fair value
if:
- The fair value of the consideration for the sale of an asset not equal the fair value of
the asset OR
- The payments for the lease are not at market rates:
(a) Any below – market terms shall be accounted for as prepayments of lease payments;
AND
(b) any above – market terms shall be accounted for as an additional financing provided
by the buyer-lessor to the seller –lessee.
The entity shall measure any potential adjustment (‘a’ or ‘b’ as described above) on the basis
of the following (whichever is more readily determinable):
(a) The difference between the fair value of the consideration for the sale and the fair
value of the asset’ OR
(b) The difference between the present value of the contractual payments for the lease
and the present value of payments for the lease at market rates.
The sale transaction and the resulting lease are generally interdepended and negotiated
as a package. Consequently, some transactions could be structured with a negotiated
sales price that is above or below the asset’s fair value and with lease payments for the
resulting lease that are above or below the market rates. These off-market terms could
mislead/ falsify the gain or loss on the sale and the recognition of lease expense and lease
income for the lease. Thus, to ensure that the gain or loss on the sale and the lease-related
assets and liabilities associated with such transactions are NEITHER understated NOR
overstated, Ind AS 116 requires adjustments for any off-market terms of sale and
leaseback transactions, on the more readily determinable basis (as discussed above). Thus
the two possibilities of the sale price OR the present value of the lease payments being less
or greater than the fair value of the asset OR present Value of the market lease payments,
respectively is disclosed in detail:
296 ACCOUNTS
When sale price or Present Value is When sale price or present Value is
LESS GREATER
Using the more readily determinable basis: Using the more readily determinable basis:
When the sale price is LESS than the When the sale price is GREATER than the
underlying asset’s fair value OR underlying asset’s fair Value or
The present value of the lease payments The present value of the lease payments is
is LESS than present value of the market GREATER than the present value of the
lease payments, market lease payments.
A seller-lessee recognizes the difference a seller-lessee recognizes the difference
as an increase to the sales price and the as reduction in the sales price and an
initial measurement of the ROU asset as a additional financing received’ from the
‘lease prepayment’. buyer-lessor.
Buyer-lessors are also required to adjust the purchase price of the underlying
asset for any off-market terms. Such adjustments are recognised as:
- ‘lease prepayments’ made by the seller-lessee OR
- ‘additional financing provided ’to the seller -lessee.
Let us consider an illustration to understand the accounting for a sale and leaseback
transaction:
QUESTION 42
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?
CONCEPT 12: TRANSITION APPROACH

An entity shall apply Ind AS 116 annual reporting periods beginning on or after 01 April
2019.
For the purpose of the requirements of this Transition’ section, the Date of initial
application is the beginning of the annual reporting period in which an entity first applies
Ind AS 116.
Thus, Ind AS 116,s Transition provisions are applied at the beginning of the annual reporting
period in which the entity first apples Ind AS 116 (i.e., the date of initial application). For
e.g., an entity with a reporting date of 31 March 2020, applies the transitions provisions on
10 April 2019
TRANSITION OPTIONS FOR LESSEES

A lessee is required to apply Ind AS 116 its leases in either of the following ways:
Full Retrospective Approach Modified Retrospective Approach

Retrospectively to each prior reporting period Retrospectively with cumulative
presented , applying Ind AS 8, i.e., an entity effect of initially applying Ind AS
applies Ind AS 116 as if it had been applied 116 recognise as an adjustment to the
since the inception of all lease contracts that opening balance of retained earnings
are presented in the financial statements. (or other component of equity, as
If Ind AS 116 is applied at 01 April 2019, this appropriate ) at the ate of the initial
means that, in the 31 March 2020 financial application, therefore, restatement of
statements , the comparative period to 31 comparatives is not required an only
March 2019 must be restated (assuming that Balance sheets for reporting date
this is the only comparative period presented. A and comparative date is required to be
restated opening balance sheet at 01 April 2018 presented
will also need to be discloses a required by Ind
AS 1. Hence the balance sheet for 3 period will
be presented: As at 31 March 2020, 31 March
2019 & 1 April 2018.
A lessee shall apply the elected transition approach consistently to ALL lessees in which it
is lessee.
298 ACCOUNTS
MODIFIED RETROSPECTIVE APPROACH

LEASES PREVIOUSLY CLASSIFIED AS OPERATING LEASES
When applying the modified retrospective approach a lessee does not restante comparative
figures rather, a lessee recognises the cumulative effect of initially applying Ind AS 116 as
an adjustment to the opening balance of retained earnings (or other component of equity,
as appropriate) at the date of initial application.
For lessee previously classified as operating leases under Ind AS 17 a lessee recognises a
lease liability measured at the present value of the remaining lease payments, discounted
using the lessee’s incremental borrowing rate at the date of initial application. A lessee
measured the ROU asset on a lease-by lease basis,u at either
- Its carrying amount as if In AS 116 had allows been applied since the commencement
date, but using a discount rate based on the lessee’s incremental borrowing rate at the
date of initial application (Alternative 1)
- An amount equal to the lease liability, adjusted for previously recognises prepaid or
accrued lease payments (Alternative 2)
A lessee applies Ind AS 36 to ROU asset at the date of initial application unless the lessee
apples the practical expedient for onerous leases (as discussed below).
A lessee is not required to make adjustments on transition for leases of low-value assets
(which is one of the recognition exemptions under Ind AS 116-as discussed earlier).
LEASES PREVIOUSLY CLASSIFIED AS FINANCE LEASES

When applying modified retrospective approach, for leases that were classified as finance
leases applying Ind AS 17.the carrying amount of the ROU asset and the lease liability
at the date of initial application shall be the carrying amount of the lease asset and lease
liability immediately before that date measured applying Ind AS 17. For such leases, a
lessee shall account for the ROU asset and the lease liability applying Ind AS 116 from
the date of initial application. Thus a lessee will not change its initial carrying amounts for
assets and liabilities under finance leases existing at the date of initial application of Ind
AS 116.
Operating Lease Measure at the present value of the remaining lease

Lease liability payments, Discounted using lessee’s Incremental
borrowing rate at the date of initial application
Right – of – Retrospective calculation, using a discount rate based on
use asset lessee’s incremental borrowing rate at the date of initial
application.
Or
Amount of lease liability (adjusted by the amount of any

previously recognised prepaid or accrued lease payments
relating to that lease).
Lessee can chose on of the
Alternatives on a lease-by lease basis.
Finance Lease Lease Carrying amount of the lease liability
liability Immediately before the date of initial application.
Right – of – Carrying amount of the lease asset immediately before the

use asset date of initial application
Application Apply the provisions of this standard to Right of use asset

Ind AS 116 and lease liability from date of initial application.
The standard also prescribes certain practical expedients under Modified retrospective
approach to leases previously classified as operating leases applying Ind AS 17.
QUESTION 43
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 the lessee to dismantle
and remove the underlying asset, restore the site on which it is located or restore the
underlyingassettotheconditionunderthetermsandconditionsofthelease.
What would be the impact for the lessee using all the following transition approaches: Full
Retrospective Approach
Modified Retrospective Approach
- Alternative1
- Alternative2
300 ACCOUNTS
DISCLOSURE
Disclosure requirments vary in accordance with the Transition Approach opted. The lessee
shall disclose the following as required by Ind AS 8 (except that it is impracticable to
determine the amount of the adjustment):
Full Retrospective Approach Modified Retrospective Approach

(a) The title of the Ind AS: (a) The title of the Ind AS;
(b) When applicable that the change in (b) When applicable, that the change in
accounting policy is made in accordance accounting policy is made in accordance
with its transitional provisions: with its transitional provisions;
(c) The nature of the change in accounting (c) The nature of the change in accounting
policy; policy;
(d) When applicable, a description of the (d) When applicable, a description of the
transitional provisions; transitional provisions;
(e) When applicable the transitional (e) When applicable, the transitional
proviso ions that might have an effect provisions that might have an effect
on future periods; on future periods;
(f) For the current period and each (f) The weighted average lessee’s
prior period presented, to the extent incremental borrowing rate applied
practicable, the amount of the to lease liabilities recognises in the
adjustment: balance sheet at the date of initial
(i) For each financial statement line application; and an explanation of any
item affected; and difference between;
(ii)
If Ind AS 33 Earnings per Share (i)
Operating lease commitments
applies to the entity , for and disclosed applying Ind AS 17 at
diluted earnings per share; the end of the annual reporting
period immediately preceding
(g) the amount of the adjustment relating
the date of initial application,
to periods before those presented, to
discounted using the incremental
the extent practicable; and
borrowing rate at the date of
(h) If retrospective application required
initial application; and
by Ind AS 8 is impracticable for
a particular prior period, or for (ii) lease liabilities recognises in the
balance sheet at the date of
periods before those presented,
initial application.
the circumstances that led to the
existence of that condition and a (g) The amount of the adjustment relating
description of how and from when the to periods before those presented, to
change in accounting policy has been the extent practicable; and
applied.
(h) If retrospective application required

by Ind AS 8 is impracticable for
a particular prior period, or for
period before those presented,
the circumstances that led to the
existence of that condition and a
description of how and fro when the
change in accounting policy has been
applied.
Further, if a lessee uses one or more
of the practical expedients (already
discussed above), it shall disclose that
fact.
LESSORS
A lessor is not required to make any adjustments on transition for leases in which it is lessor
and shall account for those leases applying Ind AS 116 from the date of initial application
KEY DIFFERENCES BETWEEN IND AS 116 AND AS 19

The significant differences between Ind AS 116 and 19 are given below:
Sr. No. Particulars Ind AS 116 AS 19
1 Lease definition Under Ind AS 116, the Under Ind AS 116, the
definition of lease is similar definition of lease is similar
to that in AS19. But, in Ind to that in AS 19. However,
AS 116, there is substantial guidance part given therein
change in the guidance of is different.
how to apply this definition.
The changes primarily
relate to the concept of
‘control’ used in identifying
whether a contract contains
a lease or not.
302 ACCOUNTS
2 Modifications: Ind AS 116 brings No such comprehensive

in comprehensive coverage is there
prescription on accounting
of modifications in lease
contracts.
3 Scope Ind AS 116 has no such AS 19 excludes leases of

scope exclusion land from its scope
Ind AS 116 makes a No such distinction has
distinction between been made in AS 19
‘inception of lease’ and
‘commencement of lease’
4 Classification Ind AS 116 eliminates AS 19 requires a lessee to

the requirement of classify leases as either
classification of leases as finance leases or operating
either operating leases or leases
finance leases for a lessee
and instead, introduces a
single lessee accounting
model which requires
lessee to recognise assets
and liabilities for all
leases unless it applies
the recognition exemption
applies.
5 Sale & In Ind AS 116. The approach As per AS 19, if a sale

Leaseback for computation of gain/ and leaseback transaction
transactions loss for a complete sale is results in finance lease,
different. excess, if any of the sale
The amount of gain/loss proceeds over the carrying
should reflect the amount amount sale be deferred
that relates to the right and amortised by the
transferred to the buyer- seller- term in proportion
lessor. to depreciation of the
leased asset.
6 Treatment of
initial direct
costs
Finance
lease lessor
accounting
Non- Either recognised as Interest rate implicit in
manufacturer/ expense immediately or the lease is defined in
Non-dealer allocated against the finance such a way that the initial
income over the lease term. direct costs included
automatically in the finance
lease receivable.
Manufacturer/ Recognised as expenses Same as per AS 19.
dealer immediately.
Operating Either deferred and Added to the carrying

lease-Lessor allocated to income over amount of the leased asset
accounting the lease term in proportion and recognised as expense
to the recognition of rent over the lease term on the
income, or recognized as same basis as lease income.
expense in the period in
which incurred
7 Initial direct Ind AS 116 contains clearer Different guidance given

costs definition of ‘initial direct
costs’
Further, definition of the
term ‘interest rate implicit in
the lease’ has been modified
in Ind AS 116.
8 Presentation As a consequence of Different guidance given

introduction of single lease
model for lessees, there
are many changes in the
presentation in the three
components of financial
statements viz. Balance
sheet, Statement of P&L,
Statement of Cash flows
304 ACCOUNTS
9 Disclosure There are a number of Different guidance given

changes in the disclosure
relating to qualitative
aspects of leasing
transactions. For eg.
Entities are required to
disclose the natureand
risks arising from leasing
transactions. Also, in case
of lessor, there are changes
in the disclosure of maturity
analysis of leases payments
receivable.
MAJOR CHANGES UNDER IND AS 116 FROM IFRS 16
Ind AS 116, like other Ind ASs, has been converged from the global standards, i.e.,
IFRSs, which has been made applicable to the Indian entities (based on the net worth
criteria) in a phased manner via Ministry of Corporate Affairs Roadmap. While converging
from IFRS 16 (which is applicable globally from the reporting periods beginning on or
after 01 January 2019), following are the carve outs given under Appendix 1 to Ind AS
116, keeping in mind, the requirements of other converged Ind AS sand the economic
environment in india:
Sr. No. Particulars IFRS 16 Ind AS 116

1 Subsequent Paragraph 34 of IFRS Paragraph 34 has been deleted
measurement 16 provides that if under Ind AS 116 since Ind AS
of investment lessee applies fair
40 Investment Property does
property value model in IAS
NOT the use of fair value
40 to its investment
model. Consequently, reference
property, it shall
of the same appearing anywhere
apply that fair value
under Ind AS 116 has also been
model to the ROU
deleted.
assets that meet
the definition of
2 Interest Paragraph 50(b) of Ind AS 7 requires interest

portion of IFRS 16 requires paid to be treated as financing
leaseliability to classify cash activity only Accordingly,
– payments for paragraph 50(b) has been
interest portion of modified under Ind AS 116 to
classification
lease liability applying specify that cash payments
in cash flow
requirements of for interest portion of lease
statement
IAS 7 Statement liability will be classified as
of Cash Flows. IAS financing activities applying
7 provides option of Ind AS7.
treating interest
paid as operating or
financing activity.
306 ACCOUNTS
(TEST YOUR KNOWLEDGE)
QUESTIONS
1. 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 pool of similar rail wagons that can be used to
ful fil the requirements of the contract. The rail wagons and engines are
stored at lessor’s premises when they are not being used to transportgoods.
Costsassociatedwithsubstitutingtherailwagonsareminimalforlessor.
Whether the lessor has substantive substitutions rights and whether the
arrangement contains alease?
2. 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?
3. 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 has 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?
4. 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?
5. 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.
To determine the lease term, the lessee considers the following factors:
♦ M
arket 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.
♦ Thelesseeintendstostayinbusinessinthesameareaforatleast20years.
♦ The location of the building is ideal for relationships with suppliers and customers.
WhatshouldbetheleasetermforleaseaccountingunderIndAS116?
6. 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:
♦ T
he 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 15years.
♦ Thecosttoinstallthemachineinlessee’smanufacturingfacilityissignificant.
♦ T
he 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.
♦ L
essee does not expect to be able to use the machine in its manufacturing process
for other types of planes without significant modifications.
♦ Thetotalremaininglifeofthemachineis30years.
What should be the lease term for lease accounting under Ind AS 116?
7. A Company leases amanu facturing 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 20,000hours.
Whether the said payments be included in the calculation of lease liability under Ind
AS 116?
ANSWERS
1. In this case, the rail wagons are stored at lessor’s premises and it has a large pool of
similar rail wagons and substitution costs to be incurred are minimal. Thus, the lessor
has the practical ability to substitute the asset. If at any point, the same become
economically beneficial for the lessor to substitute the wagons, he can do so and
hence, the lessor’s substitution rights are substantive and the arrangement does not
containa lease.
2. In this case, the nature of the solar plant is such that all of the decisions about how
and for what purpose the asset is used are predetermined because:
– the type of output (i.e. energy) and the production location are predetermined in
the agreement; and
308 ACCOUNTS
– when, whether and how much energy is produced is influenced by the sunlight
and the design of the solar plant.
Because M designed the solar plant and thereby predetermined any decisions about
how and for what purpose it is used, M is considered to have the right to direct the
use. Although regular maintenance of the solar plant may increase the efficiency of
the solar panels, it does not give the supplier the right to direct how and for what
purpose the solar plant is used. Hence, M is having a right to control the use of
asset.
3. The customer has the right to direct the use of the ship because the contractual
restrictions are merely protective rights that protect the company’s investment in
the ship and its personnel. In the scope of its right of use, the customer determines
how and for what purpose the ship is used throughout the ten-year period because
it decides whether, where and when the ship sails, as well as the cargo that it will
transport.
The customer has the right to change these decisions throughout the period of use
and hence, the contract contains a lease.
4. The observable stand-alone price for maintenance services is `2,000. There is no
observable stand-alone price for the lease. Further, the insurance cost does not
transfer a goodorservicetothelesseeandtherefore,itisnotaseparateleasecomponent.
Thus, the Lessee allocates ` 8,000 (` 10,000 – ` 2,000) to the lease component.
5. After considering all the stated factors, the lessee concludes that it has a significant
economic incentive to extend the lease.
Thus, for the purpose of lease accounting under Ind AS 116, the lessee uses a lease
term of ten years.
6. The lessee notes that the terms for the optional renewal provide no economic
incentive and the cost to install is significant. The lessee has no incentive to make
significant modifications to the machine after the initial 15-year period. Therefore,
the lessee does not expect to have a business purpose for using the machine after
the non-cancellable lease term of 15years.
Thus, the lessee concludes that the lease term consists of the 15-year non-cancellable
period only.
7. The said lease contains in-substance fixed payments of `2,00,00,000 per year,
which are included in the initial measurement of the lease liability under IndAS116.
However, the additional `2,00,00,000 that the company expects to pay per year are
variable payments that do not depend on an index or rate and, thus, are not included
in the initial measurement of the lease liability but, are expensed when the over-use
occurs.
EXTRA QUESTIONS
LEASE MODIFICATIONS BY LESSOR DUE TO COVID 19 PANDEMIC
QUESTION 1
Lessor L leases retail space to Lessee Z and classifies the lease as an operating lease. The
lease includes fixed lease payments of Rs 10,000 per month.
Due to the COVID-19 pandemic, L and Z agree on a rent concession that allows Z to pay no
rent in 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?
QUESTION 2
Lessor M enters into a 10-year Lease of office space with Lessee K, which commences on 1
April 2015. 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.
QUESTION 3
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.
310 ACCOUNTS
During the COVID-19 pandemic, M’s business has contracted. In June 2020, Land 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.
LEASE MODIFICATIONS BY LESSEE DUE TO COVID 19 PANDEMIC

AS PER AMENDMENTS MADE BY MCA DATED 24.7.2020
QUESTION 4
Revised considerations 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 Rs 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.
QUESTION 5
Consider only payments that were originally due on or before 30 June, 2021
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 2020 to
December 2020 will be added to the rent due in the period July 2021 to December 2021.
Whether the rent deferral is eligible for the practical expedient if the other conditions
are met?
QUESTION 6
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 2020, 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 2020.
Whether the rent deferral is eligible for the practical expedient if the other conditions
are met?
QUESTION 7
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 2020 to June 2020 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?
QUESTION 8
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 2018 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 2020, 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?
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’.
312 ACCOUNTS
Entity X has assessed that the stand-alone price of ‘lease agreement’ is ` 1,20,000 per year
and 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?
ANSWER
Entity X identifies that the contract contains lease of premises and non-lease component
of facilities availed. As Entity X has not elected to apply the practical expedient as
provided in paragraph 15, it will separate the lease and non-lease components and allocate
the total consideration of ` 1,70,000 to the lease and non-lease components in the ratio
of their relative stand-alone selling prices as follows:
Particulars Stand-alone % of total Allocation of

Prices Stand- alone consideration
Price
` `
Building rent 1,20,000 60% 1,02,000
Service charge 80,000 40% 68,000
Total 2,00,000 100% 1,70,000
As Entity X’s incremental borrowing rate is 10%, it discounts lease payments using this rate
and the lease liability at the commencement date is calculated as follows:
Year Lease Payment Present value Present value of lease

(A) factor @ 10% (B) payments (A x B = C)
Year 1 1,02,000 0.909 92,718
Year 2 1,02,000 0.826 84,252
Year 3 1,02,000 0.751 76,602
Year 4 1,02,000 0.683 69,666
Year 5 1,02,000 0.621 63,342
Year 6 1,02,000 0.564 57,528
Year 7 1,02,000 0.513 52,326
Year 8 1,02,000 0.467 47,634

Year 9 1,02,000 0.424 43,248
Lease Liability at 5,87,316

commencement
date
Further, ` 68,000 allocated to the non-lease component of facility used will be recognised
in profit or loss as and when incurred.
Entity X is an Indian entity whose functional currency is Indian Rupee. It has taken a
plant on lease from Entity Y for 5 years to use in its manufacturing process for which
it has to pay annual rentals in arrears of USD 10,000 every year. On the commencement
date, exchange rate was USD = ` 68. The average rate for Year 1 was ` 69 and at the
end of year 1, the exchange rate was ` 70. The incremental borrowing rate of Entity X
on commencement of the lease for a USD borrowing was 5% p.a.
How will entity X measure the right of use (ROU) asset and lease liability initially and at
the end of Year 1?
ANSWER
On initial measurement, Entity X will measure the lease liability and ROU asset as under:
Year Lease Present Value Present Value Conversion INR

Payments factor @ 5% of Lease rate (spot value
(USD) Payment rate)
1 10,000 0.952 9,520 68 6,47,360
2 10,000 0.907 9,070 68 6,16,760
3 10,000 0.864 8,640 68 5,87,520
4 10,000 0.823 8,230 68 5,59,640
5 10,000 0.784 7,840 68 5,33,120
Total 43,300 29,44,400
As per Ind AS 21 The Effects of Changes in Foreign Exchange Rates, monetary assets
and liabilities are restated at each reporting date at the closing rate and the difference
due to foreign exchange movement is recognised in profit and loss whereas non-monetary
assets and liabilities carried measured in terms of historical cost in foreign currency are
not restated.
314 ACCOUNTS
Accordingly, the ROU asset in the given case being a non-monetary asset measured in
terms of historical cost in foreign currency will not be restated but the lease liability
being a monetary liability will be restated at each reporting date with the resultant
difference being taken to profit and loss.
At the end of Year 1, the lease liability will be measured in terms of USD as under: Lease
Liability:
Year Initial Value (USD) Lease Payment Interest @ 5% Closing Value (USD)
(a) (b) (c) = (a x 5%) (d = a + c - b)
1 43,300 10,000 2,165 35,465
Interest at the rate of 5% will be accounted for in profit and loss at average rate of ` 69
(i.e., USD 2,165 x 69) = ` 1,49,385.
Particulars Dr. (`) Cr. (`)

Interest Expense Dr. 1,49,385
To Lease liability 1,49,385
Lease payment would be accounted for at the reporting date exchange rate, i.e. ` 70 at the
end of year 1
Lease liability Dr. 7,00,000

To Cash 7,00,000
As per the guidance above under Ind AS 21, the lease liability will be restated using the
reporting date exchange rate i.e., ` 70 at the end of Year 1. Accordingly, the lease liability
will be measured at ` 24,82,550 (35,465 x ` 70) with the corresponding impact due to
exchange rate movement of ` 88,765 (24,82,550 – (29,44,400 + 1,49,385 – 700,000)
taken to profit and loss.
At the end of year 1, the ROU asset will be measured as under:
Year Opening Balance (`) Depreciation (`) Closing Balance (`)

1 29,44,400 5,88,880 23,55,520
CORPORATE SOCIAL RESPONSIBILITY 1
GUIDANCE NOTE ON CORPORATE SOCIAL RESPONSIBILITY
CONCEPT 1:CORPORATE SOCIAL RESPONSIBILITY (CSR)

“Corporate Social Responsibility (CSR)” means and includes but is not limited to:
1. Projects or programs relating to activities specified in Schedule VII or
2. Projects or programs relating to activities undertaken by the board of directors of a
company (Board) in pursuance of recommendations of the CSR Committee of the Board
as per declared CSR Policy of the company.
WHICH COMPANY TO PERFORM CORPORATE SOCIAL RESPONSIBILITY?
Every company including its holding or subsidiary, and a foreign company defined under
clause (42) of section 2 of the Act having its branch office or project office in India which
fulfils the criteria specified in sub-section (l) of section 135 of the Act shall comply with
the provisions of section 135 of the Act and these rules:
Provided that net worth, turnover or net profit of a foreign company of the Act shall be
computed in accordance with balance sheet and profit and loss account of such company
prepared in accordance with the provisions of clause (a) of sub-section (1) of section 381
and section 198 of the Act.
QUESTION 1 (SELF READING) (LAW ASPECT)
ABC Ltd. is a company which is formed with charitable objects under Section 8 of the
Companies Act, 2013. As a result, the management of the company believes that as all the
activities of the company will be with the intent of charity, the CSR provisions are not ap-
plicable to ABC Ltd. as these activities are activities in normal course of business.
Whether the provisions of CSR are applicable to ABC Ltd. provided it fulfils the criteria of
Section 135 of the Act?
SOLUTION
Section 135 of the Companies Act is applicable to every company meeting the specified cri-
teria. As per section 2(20) of the Companies Act, ‘company’ means a company incorporated
under the Companies Act or under any other previous company law. This would imply that
companies set up for the purposes of CSR/public welfare are also required to comply with
the provisions of CSR.
2 ACCOUNTS
CONCEPT 2: STATUTORY PROVISIONS

In India, the Companies Act, 2013 has statutorily recognised the concept of CSR. Section
135 of the Companies Act, 2013 read with Schedule VII thereto and Companies (Corporate
Social Responsibility Policy) Rules, 2014 are the special provisions under the new company
law regime imposing mandatory CSR obligations.
Important Definitions
a) Any financial year: “Any financial year” referred under sub-section (1) of Section 135
of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘Immediately pre-
ceding financial year’.
b) Average Net Profit: “Average Net Profit” is the amount as calculated in accordance
with the provisions of Section 198 of the Companies Act, 2013.
c) Financial Year: “Financial Year”, in relation to any company or body corporate, means
the period ending on the 31st day of March every year, and where it has been incorpo-
rated on or after the 1st day of January of a year, the period ending on the 31st day of
March of the following year, in respect whereof financial statement of the company or
body corporate is made up.
If a holding company or a subsidiary of a company incorporated outside India follows
a different financial year for consolidation of its accounts outside India, the Tribunal
may allow (on application) any period as its financial year, whether or not that period is
a year, provided it align its financial year as per the Act, within a period of two years.
d) Net Profit: “Net Profit” means the net profit of a company as per its financial statement
prepared in accordance with the applicable provisions of the Act, but shall not include
the following, namely:
(i) any profit arising from any overseas branch or branches of the company, whether
operated as a separate company or otherwise; and
(ii) any dividend received from other companies in India, which are covered under and
complying with the provisions of section 135 of the Act:
e) Net worth:“ Net worth” means the aggregate value of the paid-up share capital and all
reserves created out of the profits and securities premium account, after deducting
the aggregate value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not include
reserves created out of revaluation of assets, write-back of depreciation and amalga-
mation.
f) Turnover: “Turnover” means the aggregate value of the realisation of amount made
from the sale, supply or distribution of goods or on account of services rendered, or
both, by the company during a financial year;
g) Spend: The term ‘spend’ in accounting parlance generally means the liabilities incurred
during the relevant accounting period.
The Companies Act, 2013
A. As per section 135 of the Companies Act 2013
Every company having either
 net worth of ` 500 crore or more, or
 turnover of ` 1,000 crore or more or
 a net profit of ` 5 crore or more
during any financial year shall constitute a Corporate Social Responsibility (CSR) Commit-
tee of the Board consisting of three or more directors (including at least one independent
director).
ABC Ltd. is a company which has a net worth of INR 200 crores, it manufactures rubber
parts for automobiles. The sales of the company are affected due to low demand of its
products.
The previous year’s financials state:
(INR in Crores)
March 31, March 31, 20X3 March 31, March 31, 20X1
20X4 20X2
(current
year)
Net Profit 3.00 8.50 4.00 3.00
Sales (turnover) 850 950 900 800
Required
Does the Company have an obligation to form a CSR committee since the applicability crite-
ria is not satisfied in the current financial year?
SOLUTION
It has been clarified that ‘any financial year’ referred to under sub-section (1) of section
135 of the Act read with Rule 3(2) of Companies CSR Rule, 2014, implies ‘any of the three
preceding financial years’
A company which meets the net worth, turnover or net profits criteria in immediately pre-
ceding financial year, will need to constitute a CSR Committee and comply with provisions of
sections 135 (2) to (5) read with the CSR Rules.
As per the criteria to constitute CSR committee -
4 ACCOUNTS
1) Net worth greater than or equal to INR 500 Crores: This criterion is not satisfied.
2) Sales greater than or equal to INR 1000 Crores: This criterion is not satisfied.
3) Net Profit greater than or equal to INR 5 Crores: This criterion is satisfied in financial
year ended March 31, 20X3.
Hence, the Company will be required to form a CSR committee.
Role of Corporate Social Responsibility (CSR) Committee
The CSR Committee shall—
(a) formulate and recommend to Board-
a. a CSR Policy indicating the activities to be undertaken by the company as specified
in Schedule VII;
b. the amount of expenditure to be incurred on the above activities and
(b) monitor the CSR Policy of the company from time to time.
C. Role of Board
Board shall disclose-
(a) The composition of CSR Committee in its report
(b) Approve the recommended CSR Policy for the company
(c) Disclose the contents of such Policy in its report and place it on the company’s
website
(d) Ensure that the activities included in CSR Policy of the company are duly execut-
ed by the company
(e) Ensure that the company spends, in every financial year, at least two per cent
of the average net profits of the company made during the three immediately
preceding financial years by giving preference to the local area and areas around
it where it operates
(f) In case the company fails to spend such amount, the Board shall specify the rea-
sons for not spending the amount [ and unless the unspent amount relates to any
ongoing project, transfer such unspent amount to a fund specified in Schedule
VII, within a period of six months of the expiry of the financial year]
(g) Any amount remaining unspent, pursuant to any ongoing project, undertaken by a
company in pursuance of its corporate social responsibility policy, shall be trans-
ferred by the company within thirty days from the end of financial year to a spe-
cial Account (opened by the company in that behalf for that financial year in any
scheduled bank) to be called the unspent corporate social responsibility account.
Such an amount shall be spent by the company in pursuance of its obligations to-
wards the corporate social responsibility policy within 3 years from the date of such
transfer, failing which, the company shall transfer the same to a fund specified in
schedule VII within thirty days from the date of completion to third financial year.
Special Note: if a company contravenes the above provisions, the company shall be punish-
able with fine which shall not be less than 50,000 but which may be extended to 25,00,000
and every defaulting officer of such company shall be punishable with imprisonment for a
term upto 3 years or with fine which shall not be less than 50,000 but which may be extend
to 5,00,000 or with both.
ABC Ltd. manufactures consumable goods like bath soap, tooth brushes, soap cases etc. As
part of its CSR policy, it has decided to that for every pack of these goods sold, INR 0.80
will go towards the ‘Save trees foundation’ which will qualify as a CSR spend as per Schedule
VII. Consequently, at the year end, the company sold 25,000 such packs and a total of
INR 20,000 was recognised as CSR expenditure. However, this amount was not paid to the
foundation at the end of the financial year.
Required
Will the amount of INR 20,000 qualify to be a CSR expenditure?
SOLUTION
By earmarking the amount from such sale for CSR expenditure, the company cannot show
it as CSR expenditure. To qualify the amount to be CSR expenditure, it has to be spent.
Hence, INR 20,000 will not be automatically considered as CSR expenditure until and unless
it is spending on CSR activities.
6 ACCOUNTS
CONCEPT 3 : IMPORTANT POINTS ON CSR ACTIVITIES

1. The CSR activities undertaken by the company shall exclude activities undertaken in
pursuance of its normal course of business.
2. A company may collaborate with other companies for undertaking projects or pro-
grams or CSR activities in such a manner that the CSR committees of respective
companies are in a position to report separately on such projects or programs in
accordance with these rules.
How can companies with small CSR funds take up CSR activities in a project/ program mode?
SOLUTION
It has been clarified that companies can combine their CSR programs with other similar
companies by pooling their CSR resources.
As per Rule 4 of the CSR Rules, a company may collaborate with other companies for un-
dertaking projects or for CSR activities in such a manner that the CSR committees of the
relevant companies are in a position to report separately on such projects in accordance
with the prescribed Rules.
3. The CSR projects or programs or activities undertaken in India only shall amount to
CSR expenditure.
Due to immense loss to Nepal in the recent earthquake, one FMCG Company undertakes
various commercial activities with considerable discounts and concessions at the related
affected areas of Nepal for a continuous period of 3 months after earthquake. In the
Financial Statements for the year 20X1-X2, the Management has shown the expenditure
incurred on such activity as expenditure incurred to discharge Corporate Social Responsi-
bility.
Required
State whether the treatment done by the management of management is correct. Explain
with reasons.
SOLUTION
The Companies Act, 2013 mandated the corporate entities that the expenditure incurred
for Corporate Social Responsibility (CSR) should not be the expenditure incurred for the
activities in the ordinary course of business. If expenditure incurred is for the activities
in the ordinary course of business, then it will not be qualified as expenditure incurred on
CSR activities.
8 ACCOUNTS
The statutory guidelines relating to CSR also require the deployment of funds for the ben-
efit of the local area of the Company. Since Nepal is another country the expenditure done
there i.e. in Nepal shall not qualify to be accounted as CSR expenditure.
Further, it is presumed that the commercial activities performed at concessional rates
are the activities done in the ordinary course of business of the company. Therefore, the
treatment done by the Management by showing the expenditure incurred on such commer-
cial activities in its financial statements as the expenditure incurred on activities undertak-
en to discharge CSR, is not correct.
4. The CSR projects or programs or activities that benefit only the employees of the
company and their Families shall not be considered as CSR activities in accordance
with section 135 of the Act.
5. Companies may build CSR capacities of their own personnel as well as those of their
Implementing agencies through Institutions with established track records of at
least three financial years but such expenditure (including expenditure on adminis-
trative overheads) shall not exceed five percent of total CSR expenditure of the
company in one financial year.
6. Contribution of any amount directly or indirectly to any political party, shall not be
considered as CSR activity.
7. The surplus arising out of the CSR projects or programs or activities shall not form
part of the business profit of a company.
8. CSR expenditure shall include all expenditure including contribution to corpus, for
projects or programs relating to CSR activities approved by the Board on the rec-
ommendation of its CSR Committee, but does not include any expenditure on an
item not in conformity or not in line with activities which fall within the purview of
Schedule VII of the Act.
The Board’s Report of a company shall include an annual report on CSR containing
particulars as specified.
ABC Ltd. is a company which comes under the ambit of Section 135 and CSR Rules. The
Board of ABC Ltd did not appropriate the CSR funds and as a result there was no annual
report on CSR in the Board’s report for financial year ended March 31, 20X1.
Required
Is this a non-compliance as per the Act?
SOLUTION
It has been clarified that as per Rule 9 of the CSR Rules, the Board’s Report of a company
qualifying under section 135 shall include an annual report on CSR, containing particulars
specified in Annexure to CSR Rules. Reporting of CSR policy of the company in the Board’s
Report is a mandatory requirement. If the disclosure requirements are not fulfilled, penal
consequences may be attracted under section 134(8) of the Companies Act
CONCEPT 4 :
PERMISSIBLE ACTIVITIES UNDER CORPORATE SOCIAL
RESPONSIBILITY POLICIES: SCHEDULE VII
As per Schedule VII of Companies Act 2013, following activities may be included by compa-
nies in their Corporate Social Responsibility Policies Activities relating to:
1. eradicating hunger, poverty and malnutrition, promoting health care including preven-
tive health care and sanitation including contribution to the Swach Bharat Kosh set-up
by the Central Government for the promotion of sanitation and making available safe
drinking water.
2. promoting education, including special education and employment enhancing vocation
skills especially among children, women, elderly and the differently abled and livelihood
enhancement projects.
3. promoting gender equality, empowering women, setting up homes and hostels for women
and orphans; setting up old age homes, day care centres and such other facilities for
senior citizens and measures for reducing inequalities faced by socially and economically
backward groups;
4. ensuring environmental sustainability, ecological balance, protection of flora and fauna,
animal welfare, agroforestry, conservation of natural resources and maintaining quality
of soil, air and water including contribution to the Clean Ganga Fund set-up by the Cen-
tral Government for rejuvenation of river Ganga;
5. protection of national heritage, art and culture including restoration of buildings and
sites of historical importance and works of art; setting up public libraries; promotion
and development of traditional arts and handicrafts;
6. measures for the benefit of armed forces veteran, war widows and their dependents;
7. training to promote rural sports nationally recognized sports and Olympic sports;
8. contribution to the Prime Minister’s National Relief Fund or any other fund set up by
the Central Government for socio-economic development and relief and welfare of the
Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and wom-
en; and
10 ACCOUNTS
9. contributions or funds provided to technology incubators located within academic insti-

tutions which are approved by the Central Government;
10. rural development projects.
11. slum area development.
Note: Additional items included in Schedule VII or clarified as already being covered
under Schedule VII of the Act is given as Appendix II of the chapter.
CONCEPT 5 : ACCOUNTING FOR CSR TRANSACTIONS

Revenue Expenditure made in the Current Financial Year
Debit (INR) Credit (INR)
CSR Expenditure (profit and loss statement) XXX
To Cash/Vendor XXX
CSR Expenditure is an item of profit and loss statement.
Item 5 (A)(k) of the General Instructions for Preparation of Statement of Profit and Loss
under Schedule III to the Companies Act, 2013, requires that in case of companies covered
under Section 135, the amount of expenditure incurred on ‘Corporate Social Responsibility
Activities’ shall be disclosed by way of a note to the statement of profit and loss.
The treatment of revenue expenditure will be the same under AS and Ind AS.
CSR Expenditure made towards a Capital Asset
In case the expenditure incurred by the company is of such a nature that give rise to an
‘asset’, it should be recognised by the company in its balance sheet, provided the control
over the asset is with the Company and future economic benefits are expected to flow to
the company.
Example
A school building is transferred to a Gram Panchayat for running and maintaining the school,
it should not be recognised as ‘an asset’ in its books and such expenditure would need to be
charged to the statement of profit and loss as and when incurred.
1. Accounting treatment as per AS
Where any CSR asset is recognized in its balance sheet, the same may be classified un-
der natural head (e.g. Tangible assets or Intangible assets) with specific subhead of ‘CSR
Asset’ if the expenditure satisfies the recognition criteria of ‘asset’.
Debit (INR) Credit (INR)
CSR Asset (Balance Sheet) XXX
To Cash/Vendor XXX
2. Accounting treatment as per Ind AS

The accounting entry as given above remains the same. However, there is a difference in
the classification of Non-current asset under Ind AS.
Where any CSR asset is recognized in its balance sheet, the same may be classified under
natural head (e.g. Property plant and equipment, Intangible assets or Investment property)
with specific sub-head of ‘CSR Asset’ if the expenditure satisfies the recognition criteria
of ‘asset’.
The recognition criteria for asset under Ind AS i.e.,
• Ind AS 16 : Property, plant and equipment,
• Ind AS 40 : Investment Property
• Ind AS 38 : Intangible assets
is to be satisfied.
QUESTION 7
A building is used for CSR activities of the company. The same is capitalised as ‘an asset’
in the books and depreciation is charged on the same as per the Companies Act, 2013. The
Company claims the cost of the building as ‘CSR expenditure’ and also the depreciation
thereon.
Required
Is this the correct treatment as per the Act?
SOLUTION
In case the expenditure incurred by the company is of such nature which may give rise to
an ‘Asset’, it should be recognised by the company in its balance sheet, provided the con-
trol over the asset is with the Company and future economic benefits are expected to flow
to the company. Where any CSR asset is recognized in its balance sheet, the same may be
classified under natural head (e.g. Building, Plant & Machinery etc.) with specific sub-head
of ‘CSR Asset’ if the expenditure satisfies the definition of ‘asset’.
For example, a building used for CSR activities where the beneficial interest has not been
relinquished for lifetime by a company and from which any economic benefits flow to a
company, may be recognised as ‘CSR Building’ for the purpose of reflecting the same in the
balance sheet.
12 ACCOUNTS
If an amount spent on an asset has been shown as CSR spend, then the depreciation on such
asset cannot be claimed as CSR spend again. Once cost of the asset is included for CSR
spend, then the depreciation on such asset will not be included for CSR spend even if the
asset is capitalized in the books of accounts and depreciation charged thereon.
Whether any Unspent Amount of CSR Expenditure is to be Provided for?
Facts
• Section 135 (5) of the Companies Act, 2013, requires that the Board of every eligible
company, “shall ensure that the company spends, in every financial year, at least 2% of
the average net profits of the company made during the three immediately preceding
financial years, in pursuance of its Corporate Social Responsibility Policy”. A proviso to
this Section states that “if the company fails to spend such amount, the Board shall, in
its report specify the reasons for not spending the amount”.
• Further, Rule 8(1) of the Companies (Corporate Social Responsibility Policy) Rules,
2014, prescribes that the Board Report of a company under these Rules shall include an
Annual Report on CSR, in the prescribed format.
Analysis
• The above provisions of the Act/Rules clearly lay down that the expenditure on CSR
activities is to be disclosed only in the Board’s Report in accordance with the Rules
made thereunder.
• In view of this, no provision for the amount which is not spent, (i.e., any shortfall in
the amount that was expected to be spent as per the provisions of the Act on CSR ac-
tivities and the amount actually spent at the end of a reporting period) may be made in
the financial statements.
• The proviso to section 135 (5) of the Act, makes it clear that if the specified amount
is not spent by the company during the year, the Directors’ Report should disclose the
reasons for not spending the amount.
• However, if a company has already undertaken certain CSR activity for which a liability
has been incurred by entering into a contractual obligation, then in accordance with the
generally accepted principles of accounting, a provision for the amount representing the
extent to which the CSR activity was completed during the year, needs to be recognised
in the financial statements.
Whether the Excess Amount can be Carry Forward to set off against Future CSR Ex-
penditure?
Where a company spends more than that required under law, a question arises as to wheth-
er the excess amount ‘spent’ can be carried forward to be adjusted against amounts to be
spent on CSR activities in future period.
Facts
As per Section 135 (5) of the Companies Act, the Board shall ensure that the company
spends, in every financial year, at least two per cent of the average net profits of the
company made during the three immediately preceding financial years, in pursuance of its
Corporate Social Responsibility Policy.
Analysis
Since 2% of average net profits of immediately preceding three years is the minimum
amount which is required to be spent under section 135 (5) of the Act, the excess amount
cannot be carried forward for set off against the CSR expenditure required to be spent in
future.
Conclusion under various Indian GAAP
1. Accounting treatment as per AS
It has been clarified that the Board is free to decide whether any unspent amount is to be
carried forward to the next year, and the same shall be over and above the next year’s CSR
allocation equivalent to at least 2% of average net profits of the company. Any shortfall in
spending in CSR shall be explained in the directors’ report and the Board of Directors shall
state the amount unspent and reasons for not spending that amount. Any shortfall is not
required to be provided for in the books of accounts.
2. Accounting treatment as per Ind AS
The query raised to the ITFG was to clarify whether a provision for unspent CSR expendi-
ture is required to be made under Ind AS. The ITFG considered the principles mentioned
in Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets. Under Ind AS 37, a
provision would be recognised when all of the following conditions are satisfied:
• An entity has a present obligation (legal or constructive) as a result of a past event
• It is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation
• A reliable estimate can be made of the amount of the obligation.
• No provision is required to be made in case the above mentioned conditions are not met.
Considering the requirements of the Companies Act, 2013 (Section 135(5)) and Ind AS 37,
the ITFG clarified that the provision for any shortfall in the amount that was expected to
be spent on the CSR activities as per the Companies Act, 2013 on CSR activities and the
amount actually spent at the end of a reporting period, may not be required in the Ind AS
However, if a company has already undertaken certain CSR activity for which an obligation
has been created, for example, by entering into a contractual obligation, or either a con-
structive obligation has arisen during the year, then in accordance with Ind AS 37, a pro-
vision for the amount of such CSR obligation, should be recognised in the Ind AS financial
statements.
14 ACCOUNTS
QUESTION 8
ABC Ltd is a Company which is covered under the ambit of CSR rules. As part of its CSR
contribution an amount of INR 15,00,000 was spent as CSR expense towards the educa-
tion of girl child. The average net profit of the company for the past three years was INR
70,00,000. As the Company incurred a CSR expense in excess of what is required by the
rules, it decided to utilise this expense as a carry forward to the next year and reduce next
year’s CSR spend by INR 1,00,000.
Required
Can the excess expenditure towards CSR be carried forward to next financial year?
SOLUTION
There is no provision for carrying forward the excess CSR expenditure spent in a particular
year. Any expenditure over 2% could be considered as voluntary higher CSR spend for that
year.
Supply of Manufactured Goods/ Services by an Entity
In some cases, a company may supply goods manufactured by it or render services as CSR
activities. In such cases, the expenditure incurred should be recognised when the control
on the goods manufactured by it is transferred or the allowable services are rendered by
the employees.
• The goods manufactured by the company should be valued in accordance with the prin-
ciples prescribed in Accounting Standard (AS) 2, Valuation of Inventories.
• The services rendered should be measured at cost. Indirect taxes (like excise duty,
service tax, VAT or other applicable taxes) on the goods and services so contributed will
also form part of the CSR expenditure.
• Where a company receives a grant from others for carrying out CSR activities, the CSR
expenditure should be measured net of the grant.
QUESTION 9
After the havoc caused by flood in Jammu and Kashmir, a group of companies undertakes
during the period from October, 20X1 to December, 20X1 various commercial activities,
with considerable concessions/discounts, along the related affected areas. The manage-
ment intends to highlight the expenditure incurred on such activities as expenditure in-
curred on activities undertaken to discharge corporate social responsibility, while publish-
ing its financial statements for the year 20X1-20X2.
Required
State whether the management’s intention is correct or not and why?
SOLUTION
Corporate Social Responsibility (CSR) Reporting is an information communiqué with respect
to discharge of social responsibilities of corporate entity. Through ‘CSR Report’ the corpo-
rate enterprises disclose the manner in which they are discharging their social responsibil-
ities. More specifically, it is addressed to the public or society at large, although it can be
squarely used by other user groups also.
Section 135 of the Companies Act, 2013 mandated the companies fulfilling the criteria men-
tioned in the said section to spend certain amount of their profit on activities as specified
in the Schedule VII to the Act. Companies not falling within that criteria can also spend
on CSR activities voluntarily. However, besides the requirements of constitution of a CSR
committee and a CSR policy, the corporate entities should also take care that expenditure
incurred for CSR should not be the expenditure incurred for the activities in the ordinary
course of business. If expenditure incurred is for the activities in the ordinary course of
business, then it will not be qualified as expenditure incurred on CSR activities.
Here, it is assumed that the commercial activities performed at concessional rates are
the activities done in the ordinary course of business of the companies. Therefore, the
intention of the management to highlight the expenditure incurred on such commercial ac-
tivities in its financial statements as the expenditure incurred on activities undertaken to
discharge CSR, is not correct.
CONCEPT 6 : CSR EXPENDITURE IN THE INCOME TAX SCENARIO

1. CSR expenditure, being an application of income, is not incurred wholly and exclusively
for the purposes of carrying on business. As the application of income is not allowed
as deduction for the purposes of computing taxable income of a company, amount
spent on CSR cannot be allowed as deduction for computing the taxable income of the
company.
2. Based on the Explanatory Memorandum to the Bill, the CSR expenditure which is of
the nature described in section 30 to section 36 of the Income-tax Act shall be al-
lowed as deduction under those sections subject to fulfilment of conditions, if any,
specified therein. If the nature of CSR expenditure incurred is not covered under the
aforesaid sections of the Act and is covered under section 37(1) of the Act, being a
general deduction, the same is proposed to be disallowed by the Bill.
QUESTION 10
ABC Ltd. carries out CSR activities from rented premises in Pune. The rent paid for such
premises is disclosed as CSR expenditure and subsequently ABC Ltd. also claimed deduction
of the same under the Income-tax Act. Is this permissible?
16 ACCOUNTS
SOLUTION
Based on the Explanatory Memorandum to the Bill, CSR expenditure which is of the nature
described under the section 30 to 36 of the Income-tax Act shall be allowed as a deduc-
tion. Rent expenses can be claimed under section 30 of the Act and hence it can be claimed
as a deduction.
CONCEPT 7: CESSATION FROM COMPLIANCE OF CSR

Every company which ceases to be a company covered under sub- section (1) of section 135
of the Act for three consecutive financial years shall not be required to –
a) constitute a CSR Committee; and
b) comply with the provisions contained in sub-section (2) to (5) of the said section’ till
such time it meets the criteria specified in sub-section (1) of section 135.
Analysis
Four year lock-in period for a company fulfilling a CSR criterion in one year It may be noted
that once a company has fulfilled the net worth / turnover / net profit criterion for one
year it has to fulfil its CSR obligations for the subsequent three financial years, even if it
does not fulfil any of these criteria in those years.
For example, if ABC Ltd. fulfils the turnover criterion under section 135(1) in the financial
year 20X1-X2, it would continue to be within the scope of section 135(1) for the three fi-
nancial years from 20X2 -X3 to 20X3-X4, irrespective of fulfilment or otherwise of any
criterion in those years. If it has not fulfilled any of the three criteria in the three subse-
quent financial years, it would be outside the scope of CSR in the financial year 20X5-X6.
If in any of the three intermittent years, its average net profit figure is negative, it need
not comply with the CSR requirement for that year.
Particulars F.Y.20X1-X2 F.Y.20X2-X3 F.Y.20X3-X4 F.Y.20X4-X5 F.Y.20X5-X6
Net worth/turnover/ √ X X X X
Net Profit Criterion
Situation I
Average Net Profits Positive Positive Positive Positive Positive
CSR Obligation √ √ √ √ X
Situation II
Average Net Profits Positive Positive Positive Negative Positive
CSR Obligation √ √ √ X X
TEST YOUR KNOWLEDGE

QUESTIONS
1. A property is being constructed to operate CSR activities by a company. At the balance

sheet date, the cost of construction is treated as revenue expenditure. Are there any
additional disclosures required in the financials regarding this?
2. In the year 20X1, XYZ Ltd. falls within the purview of CSR provisions as per the Com-
panies Act, 2013 since its net profit for the financial year exceeded ` 5 crore. The com-
pany discharged CSR obligations in the year 20X2. However, the net profit of the year
20X2 was less than ` 5 crores. Also, it was also not satisfying the other two criteria of
the section 135 for CSR compliance. Therefore, the company stopped performing CSR
activities from the year 20X3 onwards. Comment on the company’s accountability for
CSR.
ANSWERS
1. Item 5 (a) of the General Instructions for Preparation of Statement of Profit and Loss
under Schedule III to the Companies Act, 2013, requires that in case of companies
covered under Section 135, the amount of expenditure incurred on ‘Corporate Social Re-
sponsibility Activities’ shall be disclosed by way of a note to the statement of profit and
loss. The note should also disclose the details with regard to the expenditure incurred
in construction of a capital asset under a CSR project.
2. Once a company has fulfilled the net worth / turnover / net profit criterion for one year
it has to fulfil its CSR obligations for the subsequent three financial years, even if it
does not fulfil any of these criteria in those years.
In the given case XYZ Ltd. falls in the ambit of CSR obligations by fulfilling the criteria of
net profit exceeding ` 5 crores in the year 20X1. So it has to discharge its CSR obligations
by spending two percent of its average profit every year starting from 20X2 till 20X4. It
cannot stop spending on CSR activities as per the Act after 20X2.
18 ACCOUNTS
Appendices
Appendix 1
FORMAT FOR THE ANNUAL REPORT ON CSR ACTIVITIES TO BE INCLUDED IN
THE BOARD’S REPORT
1. A brief outline of the company’ CSR policy, including overview of projects or programs
proposed to be undertaken and a reference to the web-link to the CSR policy and proj-
ects or programs.
2. The Composition of the CSR Committee.
3. Average net profit of the company for last three financial years.
4. Prescribed CSR Expenditure (two per cent. Of the amount as in item 3 above)
5. Details of CSR spent during the financial year.
(a) Total amount to be spent for the financial year.
(b) Amount unspent, if any:
(c) Manner in which the amount spent during the financial year is detailed below.
(1) (2) (3) (4) (5) (6) (7) (8)
S. CSR Sector Projects Amount Amount Cumulative Amount
No Project or in which for pro- outlay spent on the expenditure spent: Direct
activity the grams (1) (budget) projects or upto to the or through
identified Project Local area project or programs reporting implementing
is cov- or other programms Sub-heads: period agency
ered (2) Specify wise
(1) Direct
the State expenditure
and dis- on projects
trict where or programs.
projects or
programs (2) Over-
was under- heads:
taken
Total
* Give details of implementing agency:
6. In case the company has failed to spend the two per cent of the average net profit
of the last three financial years or any part thereof, the company shall provide the
reasons for not spending the amount in its Board report.
7. A responsibility statement of the CSR Committee that the implementation and moni-
toring of CSR policy, is in compliance with CSR objectives and Policy of the company.
Sd/- Sd/- Sd/-
(Chief Executive Officer (Chairman CSR Commit- (Person specified under

or Managing Director or tee) clause (d) of sub-section
Director) (1) of section 380 of the
Act)
(Wherever applicable)
20 ACCOUNTS

QUESTION 1 NEW EXAMINATION MAY-2018
What are the provisions of section 135 of the Companies Act, 2013 regarding constitution
of a Corporate Social Responsibility (CSR) Committee. Also explain the role of Corporate
Social Responsibility (CSR) Committee and Board.
XYZ Limited is a company which has net worth of ` 250 crore. It manufactures parts for
automobiles. The sales of the company are affected due to low demand of the products.
The previous year’s financial state of company are as below:
(` in crore)
31st March 31st March 31st March 31st March

2018 (Cur- 2017 2016 2015
rent Year)
Net Profit 4.25 8.00 3.50 3.25
Turnover 500.00 900.00 400.00 350.00
Examine, whether the company has an obligation to form a CSR committee since the
applicability criteria is not satisfied in the current financial year.
SOLUTION
A. As per section 135 of the Companies Act 2013
Every company having either
 Net worth of ` 500 crore or more, or

 turnover of ` 1,000 crore or more or
 a net profit or ` 5 crore or more
during any financial year shall constitute a Corporate Social Responsibility (CSR)
Committee of Board consisting of three or more directors (including at least one
independent director)
B. Role of Corporate Social Responsibility (CSR) Committee
The CSR Committee shall-
(a) Formulate and recommend to Board-

a. a CSR Policy indicating the activities to be undertaken by the company as spec-
ified in Schedule VII;
b. the amount of expenditure to be incurred on the above activities and
(b) Monitor the CSR Policy of the company from time to time.
C. Role of Board
Board shall disclose-
(a) The composition of CSR Committee in its report
(b) Approve the recommended CSR policy for the company
(c) Disclose the contents of such policy in report and place it on the company’s web-
site
(d) Ensure that the activities included in CSR policy of the company are duly execut-
ed by the company
(e) Ensure that the company spends, in every financial year, at least two percent
of the average net profits of the company made during the three immediately
preceding financial years by giving preference to the local area and areas around
it where it operates
(f) In case the company fails to spend such amount, the Board shall specify the rea-
sons for not spending the amount.
D. In the given scenario
The MCA has clarified that ‘any financial year’s referred to under sub-section (1) of
Section 135 of the Act read with Rule 3 (2) of Companies CSR Rules, 2014, implies
“immediately preceding financial year”
A company which meets the ‘net worth’, ‘turnover’ or ‘net profits’ criteria in immedi-
ately preceding financial year, but which does not meet the criteria in the relevant
financial year, is still required to constitute a CSR Committee and comply with provi-
sions of section 135 of the Companies Act. 2013.
As per the criteria to constitute CSR committee-
1) Net worth greater than or equal to ` 500 Crore: This criterion is not satisfied.
2) Sales greater than or equal to ` 1000 Core: This criterion is not satisfied.
3) Net. Profit greater than or equal to ` 5 Crore: This criteria is satisfied in financial
year ended March 31, 2017 when the net profit was ` 8 crore.
QUESTION 2 NEW EXAMINATION NOV-2018
Baby Limited manufactures consumable goods for infants like bath soap, cream, powder,
oil etc. As part of its CSR policy, it has decided that for every pack of these goods sold, `
0.75 will go towards the “ Swachh Bharat Foundation” which will qualify as a CSR spend as
per Schedule VII. Consequently, at the year end, the company sold 40,000 such packs and
a total of 30,000 was recognized as CSR expenditure. However, this amount was not paid
22 ACCOUNTS
to the Foundation at the end of the financial year. Will the amount of ` 30,000 qualify to
be CSR expenditure?
SOLUTION
Baby Ltd. has earmarked 75 paise per pack to spend as CSR activities. However, only by
earmarking the amount from such sale for CSR expenditure, the company cannot show it as
CSR expenditure. To qualify the amount as CSR expenditure, it has to be spent. Hence, `
30,000 will not be automatically considered as CSR expenditure till the time it is spent on
CSR activities. i.e it is deposited to Swachh Bharat Foundation’.
QUESTION 3
Whether a holding or subsidiary of a company fulfilling the criteria under section 135(1)
has to comply with the provisions of section 135, even if the holding or subsidiary itself
does not fulfil the criteria?
SOLUTION
No, the compliance with CSR requirements is specific to each company. A holding or
subsidiary of a company is not required to comply with the CSR provisions unless the
holding or subsidiary itself fulfils the eligibility criteria prescribed under section 135(1)
stated above. Example: Company A is covered under the criteria mentioned in section
135(1). Company B is holding company of company A. If Company B by itself does not
satisfy any of the criteria mentioned in section 135(1), Company B is not required to
comply with the provisions of section 135.
QUESTION 4
In financial year 20X1-20X2 a company had spent ` 2 crores in excess. In FY 20X2-20X3,

it sets-off ` 50 lakhs from such excess. However, from FY 20X3-20X4, the company is
no longer subject to CSR provisions under section 135(1). Since the company cannot take
the benefit of set off of excess amount spent in the previous financial year because of
non- applicability of CSR
SOLUTION
Yes, the law states that the excess CSR amount spent can be carried forward up to
immediately succeeding three financial years; thus, in case any excess amount is left for
set off, it will lapse at the end of the said period.
In such case, the company may continue to retain the remaining excess CSR of ` 1.50
crores up to FY 20X4-20X5, and thereafter the same shall lapse.
QUESTION 5
Company A is incorporated during financial year 20X1-20X2, and as per eligibility criteria
the company is covered under section 135(1) for FY 20X3-20X4. Whether CSR provisions
apply to a company that has not completed the period of three financial years since its
incorporation?
ANSWER
Yes. If the company has not completed three financial years since its incorporation, but
it satisfies any of the criteria mentioned in section 135(1), the CSR provisions including
spending of at least two per cent of the average net profits made during immediately
preceding financial year(s) are applicable.
Accordingly, the CSR spending obligation under section 135(5) for Company A would be at
least two per cent of the average net profits of the company made during FY 20X1-20X2
and FY 20X2-20X3.
24 ACCOUNTS
NOTES
IND AS-108 OPERATING SEGMENT 25
IND AS-108 OPERATING SEGMENT
CORE PRINCIPLE
An entity shall disclose information to enable users of its financial statements to evaluate
the nature and financial effects of the business activities in which it engages and the
economic environments in which it operates.
Accordingly, the objective of segment reporting is to provide financial information on
the different business activities that an entity engages in and the different economic
environments under which it operates to help users of financial statements to:
(a) better understand the entity’s performance;

(b) better assess its prospects for future net cash flows;
(c) make more informed judgments about the entity as a whole.
SCOPE
This Accounting Standard shall apply to companies to which Indian Accounting Standards
(Ind AS) notified under the Companies Act apply.
If an entity that is not required to apply this Ind AS chooses to disclose information about
segments that does not comply with this Ind AS, it shall not describe the information as
segment information.
If a financial report contains both the consolidated financial statements of a parent that
is within the scope of this Indian Accounting Standard as well as the parent’s separate
fina ncial statements, segment information is required only in the consolidated financial
statements.
Operating Segments
An operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur
expenses
(b) whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is available.
An operating segment may engage in business activities for which it has yet to earn
revenues, for example, start-up operations may be operating segments before earning
revenues. Not every part of an entity is necessarily an operating segment or part of
an operating segment.
26 ACCOUNTS
For example: A corporate headquarters or some functional departments may not earn
revenues or may earn revenues that are only incidental to the activities of the entity and
would not be operating segments. For the purposes of this Ind AS, an entity’s post-
employment benefit plans are not operating segments.
Reportable Segments
An entity shall report separately information about each operating segment that:
(a) has been identified or results from aggregating two or more of segments, and
(b) exceeds the quantitative thresholds as specified in the standard.
Aggregation Criteria
Operating segments often exhibit similar long-term financial performance if they have
similar economic characteristics.
Type or class of
customers
Nature of production Methods used to
processes distribute
Nature of product and Aggregation Nature of regulatory

services criteria envoirnment
Quantitative Thresholds
An entity shall report separately information about an operating segment that meets any of
the following quantitative thresholds:
(a) Its reported revenue, including both sales to external customers and intersegment
sales or transfers, is 10 per cent or more of the combined revenue, internal and
external, of all operating segments.
(b) The absolute amount of its reported profit or loss is 10 per cent or more of the
greater, in absolute amount, of
(i) the combined reported profit of all operating segments that did not report a
loss and
(ii)
the combined reported loss of all operating segments that reported a loss.
(c) Its assets are 10 per cent or more of the combined assets of all operating segments.
Note:
1. Operating segments that do not meet any of the quantitative thresholds may be
considered reportable, and separately disclosed, if management believes that
information about the segment would be useful to users of the financial statements.
2. An entity may combine information about operating segments that do not meet the
quantitative thresholds with information about other operating segments that do
not meet the quantitative thresholds to produce a reportable segment only if the
operating segments have similar economic characteristics and share a majority of
the aggregation criteria listed in paragraph 12.
3. If the total external revenue reported by operating segments constitutes less than
75 per cent of the entity’s revenue, additional operating segments shall be identified
as reportable segments (even if they do not meet the criteria in paragraph 13) until
at least 75 per cent of the entity’s revenue is included in reportable segments.
General Information
The Standard requires an entity to report a measure of operating segment profit or loss
and of segment assets. It also requires an entity to report a measure of segment liabilities
and particular income and expense items if such measures are regularly provided to the
chief operating decision maker. It requires reconciliations of total reportable segment
revenues, total profit or loss, total assets, liabilities and other amounts disclosed for
reportable segments to corresponding amounts in the entity’s financial statements.
The Standard requires an entity to report information about the revenues derived from
its products or services (or groups of similar products and services), about the countri
es in which it earns revenues and holds assets, and about major customers, regardless of
whether that information is used by management in making operating decisions. However,
the Standard does not require an entity to report information that is not prepared for
internal use if the necessary information is not available and the cost to develop it would
be excessive.
The Standard also requires an entity to give descriptive information about the way
the operating segments were determined, the products and services provided by the
segments, differences between the measurements used in reporting segment information
and those used in the entity’s financial statements, and changes in the measurement of
segment amounts from period to period.
28 ACCOUNTS
Major Changes in Ind AS 108 vis a vis Notified AS 17
(i) Identification of Segments: Identification of segments under Ind AS 108 is based

on ‘management approach’ i.e. operating segments are identified based on the internal
reports regularly reviewed by the entity’s chief operating decision maker. Existing
AS 17 requires identification of two sets of segments; one based on related products
and services, and the other on geographical areas based on the risks and returns
approach. One set is regarded as primary segments and the other as secondary
segments.
(ii) Basis of Measurement for Amounts to be Reported in Segments: Ind AS 108
requires that the amounts reported for each operating segment shall be measured on
the same basis as that used by the chief operating decision maker for the purposes
of allocating resources to the segments and assessing its performance. Existing AS
17 requires segment information to be prepared in conformity with the accounting
policies adopted for preparing and presenting the financial statements. Accordingly,
existing AS 17 also defines segment revenue, segment expense, segment result,
segment assets and segment liabilities.
(iii) Aggregation Criteria: Ind AS 108 specifies aggregation criteria for aggregation
of two or more segments and also requires the related disclosures in this regard.
Existing AS 17 does not deal specifically with this aspect.
(iv) Single Reportable Segment: An explanation has been given in the existing AS 17
that in case there is neither more than one business segment nor more than one
geographical segment, segment information as per this standard is not required
to be disclosed. However, this fact shall be disclosed by way of footnote. Ind AS
108 requires certain disclosures even in case of entities having single reportable
segment.
(v) Interest Expense: An explanation has been given in the existing AS 17 that interest
expense relating to overdrafts and other operating liabilities identified to a
particular segment should not be included as a part of the segment expense. It
also provides that in case interest is included as a part of the cost of inventories and
those inventories are part of segment assets of a particular segment, such interest
should be considered as a segment expense. These aspects are specifically dealt with
keeping in view that the definition of ‘segment expense’ given in AS 17 excludes
interest. Ind AS 108 requires the separate disclosures about interest revenue and
interest expense of each reportable segment, therefore, these aspects have not
been specifically dealt with.
(vi) Disclosures: Ind AS 108 requires disclosures of revenues from external
customers for each product and service. With regard to geographical information,
it requires the disclosure of revenues from customers in the country of domicile
and in all foreign countries, non-current assets in the country of domicile and all
foreign countries. It also requires disclosure of information about major customers.
Disclosures in existing AS 17 are based on the classification of the segments as
primary or secondary segments. Disclosure requirements for primary segments are
more detailed as compared to secondary segments.
QUESTION NO 1
Rajesh Ltd. has ten segments. The share of revenue, profit/loss and assets of each of these
ten segments is given below. The company has identified segments H,I and J for reporting.
Comment on the adequacy of reporting, assuming there are no inter segment revenues.
Segments Revenues Profit (Loss) Assets

A,B,C,D,E,F,G, 5% each=35% 5% each=35% 8%each=56%
H,I, 20% each=40% 25% each=50% 20% each=40%
J 25% 15% 4%
QUESTION NO 2
Information relating to five segments of Sharma Ltd. is as under: (Rs. in lakhs)
Segment A B C D E Total
Segment revenue 150 200 200 50 300 900
Segment results 50 (70) 80 10 (25) 45
Segment assets 40 65 140 20 35 200
The company wishes to know which of the segments need to be reported. Advise.
QUESTION NO 3
ICS Ltd. has the following business / geographical segments. Examine which of these are
reportable Segments under IND AS-108. (information in Rs.’000)
Segments Revenue Profit and loss Assets

A 9,600 1,750 4,100
B 300 180 450
C 100 70 450
30 ACCOUNTS
QUESTION NO 4
Larson Ltd. has eight Segments A,B,C,D,E,F,G and H. The following information is available
in relation to these Segments. (information in Rs. lakhs)
Particulars A B C D E F G H Total
Segment
Revenue:
External Nil 510 30 20 30 100 40 70 800
Internal 200 120 60 10 nil nil 10 nil 400
Total revenue 200 630 90 30 30 100 50 70 1200
Segment
result:
profit(Loss) 10 (180) 30 (10) 16 (10) 10 14 (120)
Segment
Assets 45 141 15 33 9 15 15 27 300
Identify which of the above constitute reportable Segment if you were informed that
A,B,C and E were the reported Segments in the last financial year.
QUESTION NO 5
Following is the data regarding six Segments of Garg Ltd. (Rs in lakhs)
Segment A B C D E F
Segment revenue 150 310 40 30 40 30
Segment results 25 (95) 5 5 (5) 15
Segment assets 20 40 15 10 10 5
The finance director is of the view that it is sufficient that Segments A and B alone are
reported. Advice.
QUESTION NO 6
From the following information of Kristen Ltd. having two primary Segments, prepare a
statement classifying the same under appropriate heads: (Rs. in lakhs)
Particulars Segment Alpha Segment Beta Unallocated

Segment revenue 27,100 3,280
(See note)
Segment profit 4,640 (197)
Capital expenditure 1,300 16
Non cash expense 114 16
excluding
depreciation
Liabilities 3,430 770 2,200
Assets 19,450 2,700 6,550
Depreciation 110 15
Dividend income 285

Interest expenses 35
Tax provision 1675
Note: Segment revenue for Alpha includes inter Segment revenue of 50.
QUESTION NO 7
V Ltd. group has three divisions A,B and C. Details of their turnover, results and net assets
are given below (in Rs.’000) prepare a Segmental report.
Division A:
(a) Sales to division B Rs.3050

(b) Local sales Rs.60
(c) Export sales Rs.4090
Division B:
(a) sales to division C Rs.30

(b) export sales to Europe Rs.200
Division C:
(a) Export sales to USA Rs.180

32 ACCOUNTS
Other information:
Particulars Head A B C
office
Profit or loss before tax 160 20 (8)
Re allocated cost from Head office 48 24 24
Interest costs 4 5 1
Fixed assets 50 200 40 120
Net current assets 48 120 40 90
Long term liabilities 38 20 10 120
QUESTION NO 8
Prepare a Segmental report for publication in Diversifiers Ltd. from the following details of
the company’ Segment three divisions and he head office.
Rs.’000
Forging shop division
Sales to Bright Bar division 4,575
Other domestic sales 90
Export sales 6,135
10,800
Bright Bar division:
Sales to fitting division 45
Export sales to Rwanda 300
345
Fitting division:
Export sales to Maldives 270
Particulars Head Forging shop Bright bar Fitting

office division division division
Rs.’000 Rs.’000 Rs.’000
Pre tax operating results 240 30 (12)
Head office cost reallocated 72 36 36
Interest costs 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long term liabilities 57 30 15 180
QUESTION NO 9
Following details are given for Cheer Ltd. for the year ended 31.3.2003:
Rs.‘000 Rs. ‘000

Sales:
Food products 5650
Plastic and packaging 625
Health and scientific 345
Others 162 6782
Expenses:
Food products 3335
Others 200 4182
General corporate expenses 562
Income from investments 132
Identifiable Assets:
Food products 7320
Others 665 10355
General corporate Assets 722
Other information:
(a) Inter Segment sales are as below:
a.
Food products 55000
34 ACCOUNTS
b. Plastic and packaging 72000

c. Health and scientific 21000
d.
Others 7000
(b) Operating profit included Rs.33000 on inter Segment sales.
(c) Information about inter Segment expenses are not available.
You are required to prepare a statement showing financial information about Cheer Ltd.
operations in different industry segments.
QUESTION NO 10
Rekfor Fontry Ltd. has 2 products making servers and making other software. Most of the
risk and reward factors are common. But the CODM wants to classify them as segment.
Comment as per IND AS-108 and Ind AS-108.
SOLUTION:
Ind AS-108: Ind AS-108 requires identification of ‘operating segments’ based on internal
management reports that are regularly reviewed by the entity’s “chief operating decision
maker” for the purposes of allocating resources to the segments and assessing their
performance. If as per the CODM the 2 products are 2 segments then yes the entity
should follow Segment reporting. Also one should check the 10% criteria.
QUESTION NO 11
Microtech Ltd. produces batteries for scooters, cars, trucks and specialized batteries for
invertors and UPS. Are these products different business segments or a part of the same
business segment.
SOLUTION
We can not aggregate the given products because all the given products are different by
nature. The production process and class of customers is totally different of each product
from other product.
QUESTION NO 12
Superb Ltd. is a multinational company having registered office in Mumbai. The following
details are available from the books and other records of the company for the year ended
31st March, 2014:
Rs.(‘000) Rs. (’000)

Sales:
Domestic 7,625
Europe 1,676
America 2,325
Australia 766 12,392
Inter-unit sales between geographic areas (not included above)

Domestic 523
Europe
Operating Profit:
Domestic
Europe
America 1,262
Australia 344 5,943
Other Items:
General corporate expenses 362
Income from Investment 166
Identifiable assets:
Domestic 10,620
Europe 5,635
America 3,205
Australia 1,560 21,020
General corporate assets 750

Investments 675
Prepare a statement showing financial information about the operations of Superb Ltd. in
different geographical segments.
36 ACCOUNTS
SOLUTION:
Information about Superb Ltd.’s Operations in Different Geographical Segments.
Geographical Segments
(Fig. in Rs.’000)
Item Domestic Europe America Australia Inter-Area Consolidated

Eliminations figs.
Revenues:
Sales to
unaffiliated
Customers 7,625 1,676 2,325 766 12,392
Inter Unit
Sales
between 523 760 (1,283)
geographic
areas
Total 8,148 2,436 2,325 766 (1,283) 12,392
Revenue
Item Domestic Europe America Australia Inter-Area Consolidated

Eliminations figs.
Operating 3,575 762 1,262 344 5,943
Profit
Other Items:
General (362)
Expenses
Interest
(274)
expenses
Income from
165
Investments
Net Profit 5,472

Assets
Identifiable to
geographical
10,620 5,635 3,205 1,560 21,020
area
General
corporate 750
assets
Investments 675
Total assets 22,445
QUESTION NO 13
A multinational enterprise by the name of Torrential International has business activities

located in three segments. The relevant details are as follows:
Allocation of net income and net assets
Location Relevant Percentage for Allocation of:

Revenue & Costs Assets & Liabilities (See note 2)
% %
Europe 60 40
North America 20 40
Asia 20 20
The allocation percentage to be applied to revenue and cost for net of inter-group revenue
(see note 3).
1. Details relating to head office

The head office procures all necessary finance for the enterprise’s activities and
allocates this finance to operating units through current accounts. Some costs, assets
and liabilities relate solely to head office and cannot be allocated to segments on a
rational basis. These amounts are as follows:
• Operating costs of Rs. 80 Lakhs at 31st March 2015
• Non current financial assets
38 ACCOUNTS
• Bank balance of Head Office is Rs. 140 Lakhs at 31st March 2015.
• All liabilities except trade payables.
2. Inter group revenues – year to 31st March 2015
Selling Inter Group Inter-Group Sales made to

Segment Sales
Europe North America Asia
Rs. ‘000 Rs.’000 Rs.’000 Rs.’000
Europe 16,000 11,200 4,800
North America 12,800 8,800 4,000
Asia 10,400 5,600 4,800
Total 14,400 16,000 8,800
Extracts from the consolidated financial statements of Torrential International for the
year ended 31st March 2015:
Statement of Comprehensive Income –
year ended 31st Mach 2015
Rs.’000
Revenue 532,000
Cost of Sales (249,600)
Gross Profit 282,400
Distribution Costs (79,200)
Administrative expenses (94,400)
Profit from operations 1,08,800
Income from Investments 4,800
Finance Costs (20,000)
Profit before tax 93,600
Income tax expenses (22,400)
Profit after tax 71,200
Non Controlling interest (64,00)
Net Profit for the period 64,800
Statement of Financial position as at 31st March 2015
Rs.’000 Rs.’000
Assets
Non-Current Assets
Property, Plant & Equipment 272,000
Financial Assets 40,000 312,000
Current Assets
Inventories 60,000
Trade receivables 83,200
Bank Balances 19,200 162,400
474,400

Capital and Reserves
Issued Capital 120,000
Accumulated profits 144,000 264,000
Non-current liabilities
Interest bearing borrowings 112,000
Deferred Tax 28,800 1,40,800
Current Liabilities
Trade and other payables 56,000
Short term borrowings 13,600 69,600
474,400
Required: Prepare a segment report for Torrential International for the year ended 31st
March, 2015 that complies with IND AS-108.
40 ACCOUNTS
SOLUTION:
Segment report for Torrential International
Amount in Rs.’000
Europe North America Asia Total

REVENUE
External Sales (60:20:20) 319,200 106,400 106,400 532,000
Inter-Segment Sales 16,000 12,800 10,400 39,200
Total Revenue 335,200 119,200 116,800 571,200
RESULT
Segment Result (W1) 71,680 20,160 24,960 116,800
Unallocated corporate (8,000)

expenses (H O Operating
Cost)
Profit from operations 1,08,800
Investment income 4,800
Finance cost (20,000)
Income taxes (22,400)
Non controlling interest __(6,400)
Net Profit 64,800
OTHER INFORMATION
Segment assets (WZ) 168160 168,160 84,080 420,400
Unallocated corporate assets 54,000
(40,000 + 14,000)
Consolidated assets 474,400
Segment liabilities (W3) 22,400 22,400 11,200 56,000
Unallocated corporate 154,400
Liabilities (140,800+13,600*)
Consolidated liabilities 210,400

* Total bank balance – amount allocated to segments =Rs. 19,200 – Rs. 5,2000 = Rs.14,000
(000)
Working (all figures in Rs.’000)
W 1 Segment result
Europe North America Asia Total

Segment Revenue 335,200 118,200 116,800 571,200
Segment Cost (249,120) (83,040) (83,040) (415,200)
External*
Inter-Group (14,400) (16,000) (8,800) (39,200)
(Note 2 to question)
Segment Result 71,680 20,160 24,960 116,800
* Total operating costs (excluding Inter-group items) are 423,200 (249,600 + 79,200 +
94,400)
Head Office costs are 8,000
So costs to be allocated are 415,200 in the ratio (60:20:20)
W2 : Segment Assets all allocated in the ratio 40:40:20

Property, Plant & equipment (272,000) 108,800 108,800 54,400
Inventories (60,000) 24,000 24,000 12,000
Trade receivables (83,2000 33,280 33,280 16,640
Bank Balance (5,200) 2,080 2,080 1,040
168,160 168,160 84,080
W3: Segment liabilities all allocated in the ratio 40:40:20

Trade Payable (56,000) 22,400 22,400 11,200
42 ACCOUNTS
QUESTION NO 14 (STUDY MATERIAL)
X Ltd. is operating in coating industry. Its business segment comprises coating and others
consisting of chemicals, polymers and related activities. Certain information for financial
year 20X1-20X2 is given below.
(` in lakhs)
Segments External Tax Other operating Result Asset Liabilities

sale Liabilities
Income
Coating 2,00,000 5,000 40,000 10,000 50,000 30,000
Others 70,000 3,000 15,000 4,000 30,000 10,000
Additional information:
1. Unallocated revenue net of expenses is ` 30,00,00,000

2. Interest and bank charges is ` 20,00,00,000
3. Income tax expenses is ` 20,00,00,000 (current tax ` 19,50,00,000 and deferred tax
` 50,00,000)
4. Investments ` 1,00,00,00,000 and unallocated assets ` 1,00,00,00,000.
5. Unallocated liabilities, Reserve & surplus and share capital are ` 2,00,00,00,000,
` 3,00,00,00,000 & ` 1,00,00,00,000 respectively.
6. Depreciation amounts for coating and others are ` 10,00,00,000 and ` 3,00,00,000
respectively
7. Capital expenditure for coating and others are ` 50,00,00,000 and ` 20,00,00,000
respectively.
8. Revenue from outside India is ` 3,00,00,00,000 and segment asset outside India
` 1,00,00,00,000
Based on the above information, how X Ltd. would disclose information about reportable
segment revenue, profit or loss, assets and liabilities for financial year 20X1-20X2?
PAST EXAMINATIONS QUESTIONS
QUESTION 1 : NEW EXAMINATION MAY-2018
Seeds Ltd. is operating in oil industry. Its business segments comprise crushing and refining.
Certain information for financial year 2017-18 is given below:
(₹ in lakh)
Segments E x t e r n a l Tax O t h e r Results Assets Liabilities

Sale Operating
Income
Crushing 1,00,000 2,500 20,000 5,000 25,000 15,000
Refining 35,000 1,500 7,500 2,500 15,000 5,000
Additional information: (₹ in lakh)
- Unallocated revenue net of expenses is ₹ 1,500.

- Interest and bank charges is ₹ 1,000
- Income-tax expense is 1,000 (current tax ₹ 975 and deferred tax ₹ 25)
- Investments ₹ 5,000 and unallocated assets ₹ 5,000
- Unallocated liabilities, Reserves & Surplus and Share capital are ₹ 10,000; ₹ 15,000
and ₹ 5,000 respectively.
- Depreciation amounts for crushing and refining are ₹ 500 and ₹ 150 respectively.
- Capital expenditure for crushing and refining are ₹ 2,500 and ₹ 1,000 respectively.
- Revenue from outside India is ₹ 15,000 and segment assets outside India ₹ 5,000.
Based on the above information, how Seeds Ltd. would disclose information about
reportable segment revenue, profit or loss, assets and liabilities for financial year
2017-18?
SOLUTION
Segment revenues, results and other information
(₹ in lakh)
Revenue Coating Others Total
1 External sales (gross) 1,00,000 35,000 1,35,000
Tax -2,500 -1,500 -4,000
External sales (net) 97,500 33,500 1,31,000

44 ACCOUNTS
Other operating income 20,000 7,500 27,500
Total Revenue 1,17,500 41,000 1,58,500
2 Results
Segment results 5,000 2,000 7,000
Unallocated income (net of unallocated

1,500
expenses)
Profit from operation before interest,

8,500
taxation and exceptional items
Interest and bank charges -1,000
Profit before exceptional items 7,500
Exceptional items Nil
Profit before taxation 7,500
Less: Income Taxes
Current taxes -975
Deferred taxes -25
Profit after taxation 6,500
Other information
3 Assets
Segment Assets 25,000 15,000 40,000
Investments 5,000
Unallocated assets 5,000
Total Assets 50,000
(b) Liabilities/Shareholder’s funds
Segment liabilities 15,000 5,000 20,000
Unallocated liabilities 10,000
Share capital 5,000

Reserves and surplus 15,000
Total liabilities/ shareholder’s funds 50,000

(c) Other
Capital Expenditure 2,500 1,000 3,500
Depreciation 500 150 650
(2) Geographical information
(₹ in lakh)
India Outside India Total
Revenue 1,43,500 15,000 1,58,500
Segment assets 35,000 5,000 40,000
Capital expenditure 3,500 - 3,500

Note: Segment revenue, results, assets and liabilities include the respective amounts
identifiable to each of the segments.
46 ACCOUNTS
EXTRA QUESTIONS
NEW QUESTIONS ADDED IN STUDY MATERIAL
QUESTION 1
An entity uses the weighted average cost formula to assign costs to inventories and cost of
goods sold for financial reporting purposes, but the reports provided to the chief operating
decision maker use the First-In, First-Out (FIFO) method for evaluating the performance
of segment operations. Which cost formula should be used for Ind AS 108 disclosure
purposes?
QUESTION 2
ABC Limited has 5 operating segments namely A, B, C, D and E. The profit/ loss of respective
segments for the year ended March 31, 20X1 are as follows:
Segment Profit/(Loss) (` in crore)

A 780
B 1,500
C (2,300)
D (4,500)
E 6,000
Total 1,480
Based on the quantitative thresholds, which of the above segments A to E would be

considered as reportable segments for the year ending March 31, 20X1 ?
QUESTION 3
The CEO along with other Board members do a review of financial information about various
business segments and take decisions on the basis of discrete information available for
these segments and are correctly identified as Chief Operating Decision Maker (CODM).
Review of only revenue information is done for decision making about those segments by the
CODM. As per CODM, many segments require minimal costs due to centralization of costs.
Whether review of only the revenue related information is sufficient for these segments to
be considered as operating segments for the purposes of Ind AS 108 ‘Operating Segments’?
QUESTION 4
CODM of XY Ltd. receives and reviews multiple sets of information when assessing the
businesses’ overall performance to take a decision on resources allocation. It receives the
information as under:
- Level 1 Report: Summary report for all 4 regions
- Level 2 Report: Summary report for 20 Sub-regions within those regions
- Level 3 Report: Detailed report for 50 Branches within the sub-regions
What factors and level should be considered for determining an operating segment?
QUESTION 5
XY Ltd. has operations in France, Italy, Germany, UK and India, it wishes to apply aggregation
criteria on geographical basis.
How will the aggregation criteria apply for reporting segments in the given scenario?
QUESTION 6
T Ltd is engaged in transport sector, running a fleet of buses at different routes. T Ltd has
identified 3 operating segments:
- Segment 1: Local Route
- Segment 2: Inter-city Route
- Segment 3: Contract Hiring
The characteristics of each segment are as under:
Segment 1: The local transport authority awards the contract to ply the buses at different
routes for passengers. These contracts are awarded following a competitive tender process;
the ticket price paid by passengers are controlled by the local transport authority. T Ltd
would charge the local transport authority on a per kilometer basis.
Segment 2: T Ltd operates buses from one city to another, prices are set by T Ltd on the
basis of services provided (Deluxe, Luxury or Superior).
Segment 3: T Ltd also leases buses to schools under a long-term arrangement.
While Segment 1 has been showing significant decline in profitability, Segment 2 is
performing well in respect of higher revenues and improved margins. The management of
the company is not sure why is the segment information relevant for users when they should
only be concerned about the returns from overall business. They would like to aggregate
the Segment 1 and Segment 2 for reporting under Operating Segment’
48 ACCOUNTS
Required:
Whether it is appropriate to aggregate Segments 1 and 2 with reference to Ind AS 108
‘Operating Segments’? and
Discuss, in the above context, whether disclosure of segment information is relevant to an
investor’s appraisal of financial statements?
QUESTION 7
An entity has branches in different parts of the country - catering to different customers
and selling local made products (a product of one region is not sold in any other region). No
region or product contributes more than 5% to total revenue of the entity.
Discuss how many segments are reportable?
QUESTION 8
GH Ltd. has four distinct operating segments. The management of GH is concerned as it

is unsure on how common costs be reasonably allocated to different operating segments.
They intend to allocate management charges, interest costs of internal funding, cost of
management of properties and pension costs.
Whether such costs need to conform to the accounting policies as used to prepare the
financial statements?
INDIAN ACCOUNTING STANDARD 20 49
INDIAN ACCOUNTING STANDARD 20
GOVERNMENT GRANTS AND DISCLOSURE

OF GOVERNMENT ASSISTANCE
QUESTION NO 1
Government gives a grant of ` 10,00,000 for research and development of H1N1 vaccine to
A Pharmaceuticals Limited. There is no condition attached to the grant. Examine how the
Government grant be realized.
SOLUTION
The entire grant should be recognized immediately in profit or loss.
QUESTION NO 2
Government gives a grant of 10,00,000 for research and development of H1N1 vaccine to
A Pharmaceuticals Limited even though similar vaccines are available in the market but are
expensive. The entity has to ensure by developing a manufacturing process over a period
of 2 year that the costs come down by at least 40% Examine how the Government grant be
realized.
SOLUTION
The entire grant should be recognized immediately as deferred income and charged to
profit or loss over a period of two years.
QUESTION NO 3
A Village of artisans in a district got devastated because of an earthquake. A Limited was

operating in that district and was providing employment to the artisans. The government
gave a grant of ` 10,00,000/- to A Limited so that 100 artisans are rehabilitated over a
period of 3 years. Government grant be realized.
SOLUTION
A limited will recognize ` 10,00,000 as government grant and set it up as a deferred income
and will recognize it in its profit or loss over the period of three years as per the principles
enuniciated in Ind AS 20.
50 ACCOUNTS
Once a government grant is recognized, any related contingent liability or contingent

asset is treated in accordance with Ind AS 37, Provisions, Contingent Liabilities and
Contingent Assets.
The manner in which a grant is received does not affect the accounting method to
be adopted in regard to the grant. Thus a grant is accounted for in the same manner
whether it is received in cash or as a reduction of a liability to the government or in
the form of non monetary asset.
QUESTION NO 4
A Limited received from the government a loan of 50,00,000 @ 5% payable after 5 years
in a bulleted payment. The prevailing market rate of interest is 12%. Interest is payable
regularly at the end of each year. Calculate the amount of government grant and Pass
necessary journal entry. Also examine how the Government grant be realized.
SOLUTION
The fair value of the loan is calculated at ` 37,38,328
Year Opening Interest Interest paid Closing Balance

Balance Calculated @ @ 5% on `
12% 50,00,000+
principal paid
(a) (b) (c) = (b) x 12% (d) (e) = (b) + (c) – (d)
1 37,38,328 4,48,600 2,50,000 39,36,928
2 39,36,928 4,72,431, 2,50,000 41,59,359
3 41,59,359 4,99,123 2,50,000 44,08,482
4 44,08,482 5,29,018 2,50,000 46,87,500
5 46,87,500 5,62,500 52,50,000 Nil
A Limited will recognize ` 12,61,672 (` 50,00,000 - ` 37,38,328 as the government grant

and will make the following entry on receipt of loan
Bank Account Dr. 50,00,000
To Deferred Income 12,61,672
To Loan Account 37,38,328
` 12,61,672 is to be recognized in profit or loss on a systematic basis over the periods in
which A Limited recognized as expenses the related costs for which the grant is intended
to compensate ( see QUESTION NO 5 in this regard)
QUESTION NO 5
Continuing with the facts given in the Question 4, state how the grant will be recognized in
the statement of profit or loss assuming.
a) The loan is an immediate relief measure to rescue the enterprise

b) The loan is a subsidy for staff training expenses, incurred equally, for a period of 4
years
c) The loan is to finance a depreciable asset.
SOLUTION
` 12,61,672 is to be recognized in profit or loss on a systematic basis over the periods in

which A Limited recognized as expenses the related costs for which the grant is intended
to compensate.
Assuming (a) the Loan is an immediate relief measure to rescue the emprises. ` 12,61,672
will be recognized in profit or loss immediately.
Assuming (b) the loan is a subsidy for staff training expenses, incurred equally, for a period
of 4 years ` 12,61,672 will be recognized in profit or loss over a period of 4 years.
Assuming (c), the loan is to finance a depreciable asset. 12,61,672 will be recognized in
profit or loss on the same basis as depreciation.
QUESTION NO 6
A Limited wants to establish a manufacturing unit in a backward area and requires 5
acres of land. The government provides the land on a leasehold basis at a nominal value
of ` 10,000 per acre. The fair value of the land is ` 100,000 per acre. Calculate the
amount of the Government grant to be recognized by an entity.
SOLUTION
A limited will recognize ` 450,000 ( ` 100,000 — ` 10,000) x 5) as government grant.
QUESTION NO 7
A Limited establishes solar panels to supply solar electricity to its manufacturing plant.
The cost of solar panels is ` 1,00,00,000 with a useful life of 10 years. The depreciation
is provided on straight line method basis. The government gives ` 50,00,000 as a
subsidy. Examine how the Government grant be realized.
52 ACCOUNTS
SOLUTION
A Limited will set up ` 50,00,000 as deferred income and will credit ` 5,00,000 equally to
its statement of profit and loss over next 10 years.
QUESTION NO 8
Continuing with the facts given in the Illustration 7 above, state how the same will be
disclosed in the Statement of cash flows.
SOLUTION
A Limited will show ` 1,00,00,000 being acquisition of solar panels as outflow in investing
activities. The receipt of ` 50,00,000 from government will be shown as inflow under
financing activities.
TEST YOUR KNOWLEDGE
QUESTION NO 1
ABC Ltd. has received the following grants from the Government of Delhi for its newly
started pharmaceutical business:
• ` 20 Lakhs received for immediate start-up of business without any condition

• ` 50 Lakhs received for research and development of drugs required for the treatment
of cardiovascular diseases with following conditions:
• That drugs
• the drugs should be in accordance with quality prescribed by the World Health
Organization [WHO].
• Two acres of land (fair Value: ` 10 Lakhs) received for set up plant.
• ` 2 lakhs received for purchase of machinery of ` 10 lakhs. Useful life of machinery is
5 years. Depreciation on this machinery is to be charged on straight-line basis.
How should ABC Ltd. recognise the government grants in its books of accounts?
QUESTION NO 2
A Limited received from the government a loan of ` 1,00,00,000 @5% payable after 5
years in a bulleted payment. The prevailing market rate of interest is 12%. Interst is
payable regularly at the end of each year. Calculate the amount of government grant
and Pass necessary journal entry. Also examine how the Government grant be realized.
Also state how the grant will be recognized in the statement of profit or loss assuming
that the loan is to finance a depreciable asset.
54 ACCOUNTS
Major Changes in Ind AS 20 vis-à-vis Notified AS 12
(i) Government Assistance which does not fall within the Definition of Government Grants:
Ind AS 20 deals with the other forms of government assistance which do not fall within the
definition of government grants. It requires that an indication of other forms of government
assistance from which the entity has directly benefited should be disclosed in the financial
statements. However, AS 12 does not deal with such government assistance.
(ii) Grant in respect of Non Depreciable Assets: AS 12 requires that in case the grant is
in respect of non-depreciable assets, the amount of the grant should be shown as capital
reserve which is a part of shareholders‘ funds. It further requires that if a grant related to
a non-depreciable asset requires the fulfilment of certain obligations, the grant should be
credited to income over the same period over which the cost of meeting such obligations is
charged to income. AS 12 also gives an alternative to treat such grants as a deduction
from the cost of such asset.
As compared to the above, Ind AS 20, is based on the principle that all government
grants would normally have certain obligations attached to them and these grants
should be recognised as income over the periods which bear the cost of meeting the
obligation. It, therefore, specifically prohibits recognition of grants directly in the
shareholders‘ funds .
(iii) Government Grants in the Nature of Promoters Contribution: AS 12 recognises that some
government grants have the characteristics similar to those of promoters‘ contribution.
It requires that such grants should be credited directly to capital reserv e and treated
as a part of shareholders‘ funds. Ind AS 20 does not recognise government grants of
the nature of promoters‘ contribution. As stated at (ii) above, Ind AS 20 is based on the
principle that all government grants would normally have certain obl igations attached to
them and it, accordingly, requires all grants to be recognised as income over the periods
which bear the cost of meeting the obligation.
(iv) Valuation of Non-monetary Grants given Free or at a Concessional Rate: AS 12 requires
that government grants in the form of non-monetary assets, given at a concessional rate,
should be accounted for on the basis of their acquisition cost. In case a non-monetary asset
is given free of cost, it should be recorded at a nominal value. Ind AS 20 requires to value
non-monetary grants at their fair value, since it results into presentation of more relevant
information and is conceptually superior as compared to valuation at a nominal amount.
(v) Accounting for Grant Related to Assets including Non-monetary Grant: Existing AS 12
gives an option to present the grants related to assets, including non-monetary grants at
fair value in the balance sheet either by setting up the grant as deferred income or by
deducting the grant from the gross value of asset concerned in arriving at its book value.
Ind AS 20 requires presentation of such grants in balance sheet only by setting up the
grant as deferred income. Thus, the option to present such grants by deduction of the
grant in arriving at its book value is not available under Ind AS 20.
(vi) Government Assistance: Ind AS 20 includes Appendix A which deals with Government
Assistance—No Specific Relation to Operating Activities.
(vii) Loans at Concessional Rate: Ind AS 20 requires that loans received from a government that
have a below-market rate of interest should be recognised and measured in accordance with
Ind AS 109 (which requires all loans to be recognised at fair value, thus requiring interest to
be imputed to loans with a below-market rate of interest) whereas AS 12 does not require
so.
56 ACCOUNTS
EXTRA QUESTIONS TO BE COVERED
QUESTION NO 1
Ram Ltd. purchased a Machinery for Rs.1.00 Crore. The State Government granted the
Company a subsidy of Rs.40 Lakhs to meet partial cost of Machinery. The Company credited
the Subsidy received from the State Government to its Profit and Loss Account for the
year ended 31st March. Comment on the above.
SOLUTION
1. Principle: Where a Government Grant is received towards a specific depreciable Fixed

Asset, it should be accounted for either under Cost Reduction Method or Deferred
Income Method.
2. Conclusion: The accounting treatment of the Company, i.e. crediting P&L A/c. is
incorrect.
QUESTION NO 2
Haribhakti Ltd. acquired the Fixed Asset of Rs. 100 Lakhs on which it received a Grant of
Rs. 10 Lakhs. What will be the cost of the Fixed Assets as per IND AS 20 and how it will
be disclosed in the Financial Statements?
SOLUTION
Principle: Where a Government Grant is received towards a specific depreciable Fixed
Assets, it should be accounted for either under Cost Reduction Method or Deferred Income
Method. The accounting will be as under:-
1. Asset Reduction Method: Cost Rs. 100 Lakhs Less Grant Rs. 10 Lakhs = Rs. 90 Lakhs
will be the Carrying Amount, and written off over its useful life.
2. Deferred Income Method: Rs. 10 Lakhs in Deferred Income Account shall be shown
in Balance Sheet separately under an appropriate head. A portion of this Rs. 10
Lakhs will be credited to P&L A/c. every year, over the useful life of the asset.
QUESTION NO 3
Gowri Shankar Ltd. purchased a special machinery on 1st April of a Financial year, for Rs. 25
Lakhs. It received a Government Grant for 20% of the Price. The machine has an effective
life of 10 years. Advise the Company of the accounting treatment under both methods.
QUESTION NO 4
Kripanidhi Ltd. purchased a Fixed Asset for Rs. 75 Lakhs, which has an estimated useful
life of 5 years, with the Salvage Value of Rs. 7,50,000. On Purchase of the Asset, the
Government have the Company a grant of Rs. 15 Lakhs. Pass the necessary journal entries
in the books of the Company for the first two years under both methods which are specified
in ind as 20.
QUESTION NO 5
Supriya Ltd. received a grant of Rs. 2,500 Lakhs from the Government during the last
accounting year for welfare activities to be carried on by the Company for its Employees.
The Grant prescribed conditions for its utilization. However, during the current year, it
was found that the conditions of Grants wee not complied with and the Grant had to be
refunded to the Government in full. Explain the accounting treatment, under ind as 20.
SOLUTION
1. The above Grant is in the nature of Revenue Grant, since it is for welfare activities for
its Employees. Therefore, when received, it should have been credited to P&L Account.
2. Therefore, in the event of refund, the amount refunded should be debited to P&L
account.
QUESTION NO 6
Neelakanta Ltd. purchased a Machinery for Rs. 40 Lakhs (Useful Life 4 years and Residual
value Rs. 8 Lakhs). Government Grant received is Rs. 16 Lakhs. Due to non- compliance of
certain condition, the Grant become refundable in 3rd year to the extent of Rs. 12 Lakhs.
Show the Journal Entry to be passed at the time of refund of Grant and the value of the
Fixed Assets, if (a) the Grant is credited to Fixed Assets (b) the Grant is credited to
Deferred Grant A/c.
QUESTION NO 7
Srikanta Ltd. received a specific grant of Rs. 30 Lakhs for acquiring the Plant of Rs.150
Lakhs during 2010-11 having useful life of 10 years. The Grant received was credited to
Deferred Income in the Balance Sheet. During 2013-14, due to non-compliance of conditions
laid down, for the grant, the Company had to refund the whole grant to the Government
Balance in the Deferred Income on that date was Rs. 21 Lakhs and Written Down Value of
Plant was Rs. 105 Lakhs.
58 ACCOUNTS
SOLUTION
If Grant is credited to Deferred Grant A/c. (i.e. Deferred Income Method)
Particulars Dr. (Rs.) Cr.(Rs.)
Deferred Government Grant A/c. Dr.(given) 21,00,000
Profit and Loss A/c. Dr.(balancing figure) 9,00,000
To Bank A/c. 30,00,000

(Being Grant refunded to Government, and excess provided
from Profit & Loss A/c).
Note: There will not be any change in the carrying Amount

of the Asset. Depreciation will be charged on the same
basis as charged in the earlier years.
QUESTION NO 8
Markandeya Ltd. applied for a Government Grant for purchase of a special machinery.
The machinery costs Rs. 80 Lakhs and the Grant was Rs. 30 Lakhs. The Machinery has a
useful life of 10 years and the Company follows SLM Depreciation. The Grant was promptly
received but certain conditions regarding production were attached to it. Four years later,
an amount of Rs. 4 Lakhs become refundable to the Government since the Company did not
adhere to the conditions imposed earlier. Explain the accounting treatment.
QUESTION NO 9
On 1st April 2010, Sundaram Ltd. received a Government Grant of Rs. 300 Lakhs for
acquisition of a Machinery costing Rs. 1,500 Lakhs. The Grant was credited to the cost of
the Asset. The life of the Machinery is 5 years. The Machinery is depreciated at20% on
WDV basis. The Company had to refund the Grant in May 2013 due to non-fulfillment of
certain conditions. How you would deal with the refund of Grant?
QUESTION NO 10
A Ltd. has set up its business in a designated backward area with an investment of Rs.200
Lakhs. The Company is eligible for 25% subsidy and has received Rs.50 Lakhs from the
Government. Explain the treatment of the Capital Subsidy received from the Government
in the books of the Company.
SOLUTION
The Government Grants may be in the nature of Promoters’ Contribution i.e. -
(a) they are given with reference to the Total Investment in an undertaking, or
(b) by way of contribution towards its Total Capital Outlay,(e.g. Central Investment
Subsidy Scheme).
The correct treatment is to credit the Subsidy to Profit & Loss Statement immediately.
60 ACCOUNTS
QUESTION 1 NEW EXAMINATION NOV-2018
How will you recognize and present the grants received from the Government in the following
cases as per Ind AS 20?
(i) A Ltd. received one acre of land to setup a plant in backward area (fair value of land ₹
12 lakh and acquired value by Government in ₹ 8 lakhs.)
(ii) B. Ltd. received an amount of loan for setting up a plant at concessional rate of interest
from the Government.
(iii) D. Ltd. received an amount of ₹ 25 lakh for immediate start-up a business without any
condition.
(iv) S Ltd. received ₹ 10 lakh for purchase of machinery costing ₹ 80 lakh. Useful life of
machinery is 10 years. Depreciation on this machinery is to be charged on straight line
basis.
(v) Government gives a of grant ₹ 25 lakh to U Limited for research and development of
medicine for breast cancer, even though similar medicines are available in the market
but are expensive. The company is to ensure by developing a manufacturing process
over a period of two years so that the dost comes down at least to 50%
SOLUTION
(i) The land and government grant should be recognized by A Ltd. at fair value of ₹
12,00,000 and this government grant should be presented in the books as deferred
income. (Refer footnote 1)
(ii) As per para 10A of Ind AS 20 ‘Accounting for Government Grants and Disclosure of
Government Assistance’, loan at concessional rates of interest is to be measured at
fair value and recognised as per Ind AS 109. Value of concession is the difference
between the initial carrying value of the loan determined in accordance with Ind AS
109, and the proceeds received. The benefit is accounted for as Government grant.
(iii) ₹ 25 lakh has been received by D Ltd. for immediate start-up business. Since this
grant is given to provide immediate financial support to entity, it should be recognised
in the Statement of Profit and Loss immediately with disclosure to ensure that its
effect is clearly understood, as per para 21 of Ind AS 20.
(iv) ₹ 10 lakh should be recognized by S Ltd. as deferred income and will be transferred
to profit and loss over the useful life of the asset. In this case, ₹ 1,00,000 [₹ 10 lakh/
10 years] should be credited to profit and loss each year over period of 10 years.
Alternatively, Asset Reduction method can also be followed.
(v) As per para 12 of Ind AS 20, the entire grant of ₹ 25 lakh should be recognized
immediately as deferred income and charged to profit and loss over a period of two
years based on the related costs for which the grants are intended to compensate
provided that there is reasonable assurance that U Ltd. will comply with the conditions
attached to the grant.
QUESTION 2 NEW EXAMINATION MAY-2019
Mediquick Ltd. has received the following grants from the Central Government for its newly
started pharmaceutical business:
• ₹ 50 lakh received for immediate start-up of business without any condition.
• ₹ 70 lakh received for research and development of drugs required for the treatment
of cardiovascular diseases with following conditions:
(i) That drugs should be available to the public at 20% cheaper from current market
price and
(ii) The drugs should be in accordance with quality prescribed by the Govt. Drug
Control department.
• Three acres of land (fair value; ₹ 20 lakh) received for set up of plant.
• ₹ 4 lakh received for purchase of machinery of ₹ 10 lakh. Useful life of machinery is 4

years. Depreciation on this machinery is to be charged on straight-line basis.
How should Mediquick Ltd. recognize the government grants in its books of accounts as per
relevant Ind AS?
SOLUTION
Mediquick Ltd. should recognise the grants in the following manner:
• ₹ 50 lakhs have been received for immediate start-up of business. This should be
recognised in the Statement of Profit and Loss immediately as there are no conditions
attached to the grant.
• ₹ 70 lakhs should be recognised in profit or loss on a systematic basis over the periods
in which the entity recognises as expenses the related costs for which the grants are
intended to compensate. However, for this compliance, there should be reasonable
assurance that Mediquick Ltd. complies with the conditions attached to the grant.
62 ACCOUNTS
• Land should be recognised at fair value of ₹ 20 lakhs and government grants should be
presented in the balance sheet by setting up the grant as deferred income.
Alternatively, since the land is granted at no cost, it may be presented in the books
at nominal value.
• ₹ 4 lakhs should be recognised as deferred income and will be transferred to profit
and loss account over the useful life of the asset. In this cases, ₹ 1,00,000 [ ₹ 4 lakhs/
4 years] should be credited to profit and loss account each year over the period of 4
years.
Alternatively, ₹ 4,00,000 will be deducted from the cost of the asset and depreciation
will be charged at reduced amount of ₹ 6,00,000 (₹ 10,00,000 – ₹ 4,00,000) i.e. ₹
1,50,000 each year.
EXTRA QUESTIONS
QUESTION 1
A Ltd. received a government grant of ` 10,00,000 to defray expenses for environmental

protection. Expected environmental costs to be incurred is ` 3,00,000 per annum for
the next 5 years. How should A Ltd. present such grant related to income in its financial
statements?
SOLUTION:
As per Ind AS 20, Grants related to income are presented as part of profit or loss, either
separately or under a general heading such as ‘Other income’; alternatively, they are
deducted in reporting the related expense.
In accordance with the above, presentation of grants related to income under both the
methods are as follows :
Method 1: Credit in the statement of profit and loss

The entity can recognise the grant as income on a straight line basis i.e., ` 2,00,000 per
year in the statement of profit and loss either separately or under the had ‘Other Income’.
The supporters of this method consider it inappropriate to present income and expense
items on a net basis and that ‘separation of the grant from the expense facilities comparison
with other expenses not affected by a grant’.
Method 2: As a deduction in reporting the related expense

Since the grant relates to environmental expenses incurred / to be incurred by the entity,
it can present the grant by reducing the grant amount every year from the related expense
i.e., environmental expense of ` 1,00,000 (i.e., net expense ` 3,00,000 - ` 2,00,000).
QUESTION 2
A Ltd. has received a grant of ` 10,00,00,000 in the year 20X1-20X2 from local government
in the form of subsidy for selling goods at lower price to lower income group population in
a particular area for two years. A Ltd. had accounted for the grant as income in the year
20X1-20X2. While accounting for the grant in the year 20X1-20X2, A Ltd. was reasonably
assumed that all the conditions attached to the grant will be complied with. However, in the
year 20X5-20X6, it was found that A ltd. has not complied with the above condition and
64 ACCOUNTS
therefore notice of refund of grant has been served to it. A ltd. has contested but lost in
court in 20X5-20X6 and now grant is fully repayable. How should A Ltd. reflect repayable
grant in its financial statements ending 20X5-20X6?
QUESTION 3
ABC Ltd. is a government company and is a first-time adopter of Ind As. As per the previous
GAAP, the contributions received by ABC ltd. from the government (which holds 100%
shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been
recognised in capital reserve and treated as part of shareholders’ funds in accordance with
the provisions of AS 12, Accounting for Government Grants.
State whether the accounting treatment of the grants in the nature of promoters’
contribution as per AS 12 is also permitted under Ind AS 20 Accounting for Government
Grants and Disclosure of Government Assistance.
SOLUTION:
Ind AS 20, “Accounting for Government Grants and Disclosure of Government Assistance”
inter alia states that the Standard does not deal with government participation in the
ownership of the entity.
Since ABC Ltd. is a Government company, it implies that government has 100% shareholding
in the entity. Accordingly, as per Ind AS 20, the entity needs to determine whether the
payment is provided as a shareholder contribution or as a government.
Equity contributions will be recorded in equity while grants will be shown in the Statement
of Profit and Loss.
Ind AS 20 does not permit promoter contribution grant to be taken to Capital Reserve as
we transfer in AS 12. Under IND AS 20, such grant is to be transferred to Profit & Loss
Account as an income.
QUESTION 4
Rainbow Limited is carrying out various projects for which the company has either received
government financial assistance or is in the process of receiving the same. The company
has received two grants of ` 1,00,000 each, relating to the following ongoing research and
development projects :
(i) The first grant relates to the “Clean river project” which involves research into
the effect of various chemicals waste from the industrial area in Madhya Pradesh.
However, no major steps have been completed by Rainbow limited to commence this
research as at 31st March, 20X2.
(ii) The second grant relates to the commercial development of a new equipment that
can be used to manufacture eco-friendly substitutes for existing plastic products.
Rainbow Limited is confident about the technical feasibility and financial viability of
this new technology which will be available for sale in the market by April 20X3.
In September 20X1, due to the floods near one of its factories, the entire production was
lost and Rainbow Limited had to shut down the factory for a period of 3 months. The State
Government announced a compensation package for all the manufacturing entities affected
due to the floods. As per the scheme, Rainbow Limited is entitled to a compensation based on
the average of previous three months’ sales figure prior to the floods, for which the company
is required to submit an application from on or before 30th June, 20X2 with necessary
figures. The financial statements of Rainbow Limited are to be adopted on 31st May, 20X2,
by which date the claim form would not have been filed with the State Government.
Suggest the accounting treatment of, if any, for the two grants received and the flood-
related compensation in the books of accounts of Rainbow Limited as on 31st March, 20X2.
SOLUTION:
Accounting treatment for:
(a) First Grant

The first grant for ‘Clear River Project’ involving research into effects of various
chemicals waste from the industrial area in Madhya Pradesh, seems to be unconditional
as no details regarding its refund has been mentioned. Even though the research has
not been started nor any major steps have been completed by Rainbow Limited to
commence the research, yet the grant will be recognised immediately in profit or loss
for the year ended 31st March, 20X2.
Alternatively, in case, the grant is conditional as to expenditure on research, the
grant will be recognised in the books of Rainbow Limited over the year the expenditure
is being incurred.
(b) Second Grant
The second grant related to commercial development of a new equipment is a grant
related to depreciable asset. As per the information given in the question, the equipment
will be available for sale in the market from April, 20X3. Hence, by that time, grant
relates to the construction of an asset and should be initially recognised as deferred
income.
The deferred income should be recognised as income on a systematic and rational
basis over the asset’s useful life.
The entity should recognise a liability on the balance sheet for the years ending 31st
March, 20X2 and 31st March, 20X3. Once the equipment starts being used in the
66 ACCOUNTS
manufacturing process, the deferred grant income of ` 100,000 should be recognised

over the asset’s useful life to compensate of depreciation costs.
Alternatively, as per Ind As 20, Rainbow Limited would also be permitted to offset
the deferred income of ` 100,000 against the cost of the equipment as on 1st April,
20X3.
(c) For flood related compensation
Rainbow Limited will be able to submit an application form only after 31st May, 20X2
i.e. in the year 20X2-20X3. Although flood happened in September, 20X1 and loss was
incurred due to flood related to the year 20X1-20X2, the entity should recognise the
income from the government grant in the year when the application form related to it
is submitted and approved by the government for compensation.
Since, in the year 20X1-20X2, the application form could not be submitted due to
adoption of financials with respect to sales figure before flood occurred, Rainbow
Limited should not recognise the grant income as it has not become receivable as on
31st March, 20X2.
QUESTION 5
An entity opens a new factory and receives a government grant of ` 15,000 in respect of
capital equipment costing ` 1,00,000. It depreciates all plant and machinery at 20% per
annum on straight-line basis. Show the statement of profit and loss and balance sheet
extracts in respect of the grant for first year under both the methods as per Ind As 20.
QUESTION 6
A company receives a cash grant of ` 30,000 on 31st March 20X1. The grant is towards the
cost of training young apprentices. Training programme is expected to last for 18 months
starting from 1st April 20X1. Actual costs of the training incurred in 20X1-20X2 was
` 50,000 and in 20X2-20X3 ` 25,000. State, how this grant should be accounted for?
QUESTION 7 (RTP NOV 2020….ALREADY DISCUSSED IN RTP VIDEOS)

Entity A is awarded a government grant of ` 60,000 receivable over three years
(` 40,000 in year 1 and ` 10,000 in each of years 2 and 3), contingent on creating 10
new jobs and maintaining them for three years. The employees are recruited at a total
cost of ` 30,000, and the wage bill for the first year is ` 1,00,000, rising by ` 10,000
in each of the subsequent years. Calculate the grant income and deferred income to be
accounted for in the books for year 1, 2 and 3.
ANSWER
The income of ` 60,000 should be recognised over the three year period to compensate
for the related costs.
Calculation of Grant Income and Deferred Income:
C Labour Grant Deferred

Cost Income Income
` ` `
1 1,30,000 21,667 60,000 x (130/360) 18,333 (40,000 – 21,667)
2 1,10,000 18,333 60,000 x (110/360) 10,000 (50,000 – 21,667 –

18,333)
3 1,20,000 20,000 60,000 x (120/360) - (60,000 – 21,667 –
18,333
– 20,000)
3,60,000 60,000
Therefore, Grant income to be recognised in Profit & Loss for years 1, 2 and 3 are ` 21,667,
` 18,333 and ` 20,000 respectively.
Amount of grant that has not yet been credited to profit & loss i.e; deferred income is
to be reflected in the balance sheet. Hence, deferred income balance as at year end 1, 2
and 3 are ` 18,333, ` 10,000 and Nil respectively.
68 ACCOUNTS
NOTES
IND AS-24 RELATED PARTY DISCLOSURES 69
IND AS-24 RELATED PARTY DISCLOSURES
UNSOLVED QUESTIONS
QUESTION NO 1
Entity P limited has a controlling interest in subsidiaries SA limited and SB limited and SC
limited. SC limited is a subsidiary of SB limited. P limited also has significant influence over
associates A1 and A2. Subsidiary SC limited has significant influence over associate A3
limited.
Examine related party relationship of various entities.
QUESTION 2
Mr. X has a 100% investment in A limited. He is also a member of the key management
personnel (KMP) of C limited. B limited has a 100% investment in C limited.
Required:
(a) Examine related party relationship from the perspective of C limited for A limited
(b) Examine related party relationship from the perspective of C limited for A limited if
Mr. X is a KMP of B limited and not C limited.
(c) Will outcome in (a) & (b) would be different if Mr. has joint control over A limited
(d) Will the outcome in (a) & (b) would be different if Mr. X has significant influence over
A limited.
QUESTION NO 3
Mr. X has an investment in A limited and B limited

Required:
(1) Examine when can related party relationship be established

a. From the perspective of A limited financial statement
b. From the perspective of B limited financial statement
(2) Will A limited and B limited be related parties if Mr. has only significant influence
over both A limited and B limited
70 ACCOUNTS
QUESTION NO 4
Government G directly controls entity 1 and entity . It indirectly controls Entity A and
Entity B through Entity 1, and Entity C and Entity D through Entity 2. Person X is a member
of the key management personnel in Entity 1.
Required
Examine the entity to whom the exemption for disclosure to be given and for transaction
with whom.
QUESTION NO 5
Power limited is a producer of electricity. Transmission limited regularly purchases

electricity from Power limited. Power limited whose financial year ends on march 31, 20X2,
acquired 100% shareholding of Transmission Limited on July 15, 20X1 , However, the entire
shareholding is disposed of on March 21, 20X2 power Limited and Transmission Limited has
transactions when Transmission Limited was a subsidiary of power Limited and also in the
period when it was not a subsidiary or power Limited.
Required:
For which period related party disclosure should power Limited make in its financial
Statements for the year ended March 31, 20X2 with respect to transactions with
transmission Limited
QUESTION 6
A Limited has both (i) Joint control over B Limited and (ii) Joint control or significant
influence over C Limited
Required
(a) Examine related party relationship from the perspective of C Limited’s financial
Statements:
(b) Examine related party relationship from the perspective of B Limited’s financial
Statements:
SOLVED QUESTIONS FOR SELF READING
QUESTION NO 1
Will transactions with Related Parties, for services provided/received free of cost, be
required to be disclosed?
Adhiram Ltd. has a Corporate Communications Department, which centralizes the Pubic
Relations functions for the whole group of Adhiram Ltd. and its Subsidiaries. No charges
are however, levied by Adhiram Ltd. on its Subsidiaries and accordingly, these transactions
are not given accounting recognition. Would these constitute Related Party Transactions
requiring disclosure under IND AS 24 in the Separate Financial Statements of Adhiram
Ltd.?
SOLUTION
1. Principle: As per IND AS 24, a Related Party Transaction is ‘a transfer of resources or

obligations between related parties, regardless of whether or not a price is charged”.
2. Conclusion: In the given example, there is a transfer of resources from Adhiram Ltd.
to its Subsidiaries even though no price is charged for the same. These transactions
would require disclosure under IND AS 24 in the Separate Financial Statements of
Adhiram Ltd.
QUESTION NO 2
Bhima Ltd. sold to Arjun Ltd. goods having a Sale Value of rs. 25 Lakhs during a Financial
Year. Mr. Strength, the Managing Director and Chief Executive of Bhima Ltd. owns nearly
100% of the Capital of Arjun Ltd. The Sales were made to Arjun Ltd at the normal Selling
Price of Bhima Ltd. The Chief Accountant of Bhima Ltd. does not consider that these Sales
should be treated any differently from any other sale made by the Company despite being
made to a Controlled Company, because the sales were made at normal and, that too, at
arms length price. Comment.
SOLUTION
It should be treated a related party transaction because Bhima and Arjun limited are
related parties because they a common person Mr. Strength.
QUESTION NO 3
A husband and wife are controlling 34% of voting power in Mathura Limited. They have
a separate Partnership Firm, which supplies the main Material to the Company. The
72 ACCOUNTS
Management says that the above transaction need not be disclosed. How will you deal with
the above situation?
SOLUTION
In the given case, Partnership firm and Mathura limited should be considered as related
parties because these entities have common person. So these transactions should be
reported in related party report.
QUESTION NO 4
Strong Ltd. holding 60% of the Equity Shares in Weak Ltd. purchased goods worth Rs. 60
Lakhs from Weak Ltd. during the Financial year. The Managing Director of Strong Ltd. is
of the opinion that it is normal business activity and there is no need to disclose the same
in the final accounts of the Company. Give your views of the above.
SOLUTION
1. Strong Ltd. is the Holding Company of Weak Ltd., as is holds more than 50% of the
voting power of Weak Ltd. and thus should be treated as Related Parties as per IND
AS 24.
2. As per IND AS 24, in the case of Related Party Transactions following facts should
be disclosed -
(a) Related Party Relationship, Name and Nature of Relationship.
(b) If there is transaction between the Related Parties then a description of the
Nature of Transaction, Volume of the Transaction outstanding at the Balance
Sheet date etc.
3. In the instant case, since there is Related Party Transaction, the contention of the
Managing Director of Strong Ltd is not correct. The Auditor should insist to make
proper disclosure as required by IND AS 24 and if the Management refuses, the
Auditor should express a qualified opinion.
QUESTION NO 5
A Firm of a Father and Son received Rs. 2 Lakhs towards job work done for Rama Ltd.
during the year ended 31st March. The total Job Work Charges paid by Rama Ltd. during
the year are over Rs. 50 Lakhs. The father is a Managing Director of Rama Ltd. having
substantial holding. The Managing Director told the Auditor that since he is not involved in
the activities of the Firm, and since the amount paid to it is insignificant there is no need to
disclose the transaction He further contended that such a payment made in the last year
was not disclosed. Is the M.D. right in his approach?
SOLUTION
Analysis and Conclusion: In the above case, the Managing Director of Rama Ltd. is a Partner
in the Firm with his son, and the Firm has been paid Rs. 2Lakhs as Job Work Charges. The
Managing Director has a substantial holding in the Firm. The Managing Director is also a
Key Management Personnel of Rama Ltd. Hence, there is a Related Party relationship &
transaction requiring disclosure under IND AS 24.
QUESTION NO 6
Is a Non-Executive Director on the Board of Directors of a Company, a Key Management

Person?
Can a Non-Executive Director be considered as a Related Party, when he participates in the
financial and/or operating policy decisions of the Reporting Enterprise?
Vamana Ltd. has two Non-Executive Directors in its Board. State whether IND AS 24
is applicable if – (1) A, a Non-Executive Director is in a position to exercise significant
influence by virtue of owning an interest in the voting power in the Company. (2) B, a Non-
Executive Director does not enjoy the authority and responsibility for planning, directing
and controlling the activities of the Company.
SOLUTION
1. Principles: IND AS 24 applies to Non-Executive Director as under:
IND AS 24 not applicable IND AS 24 applicable

(a) A Non-Executive Director of a A Non-Executive Director would be covered
Company should not be considered as by IND AS 24 if he is a Key Management
Key Management Person under IND Person when –
AS 24 by virtue of his merely being a
(a) he has the authority and responsibility
Director, directing and controlling the
for planning, directing and controlling
activities of the Reporting Enterprise.
the activities of the Reporting
(b) IND AS 24 should not be applied in Enterprise, or
respect of a Non-Executive Director
(b) he is in a position to exercise or
even if be participates in the financial
significant influence by virtue of
and/or operating policy decision, of the
owning an interest in the voting power.
Enterprise (Note: Mere participation
is different from authority to plan/
direct/control).
2. Conclusion for Vamana Ltd.’s case: Disclosure under IND AS 24 will be required only
for Director A, and not for Director B.
74 ACCOUNTS
QUESTION NO 7
Is Remuneration paid to Key Management Personnel or Non-Executive Director on the Board

of Directors, a Related Party Transaction?
SOLUTION
1. As per IND AS 24, Key Management Personnel are “Related Parties”. Hence,
remuneration paid to Key Management Personnel will be a related Party transaction
requiring disclosure under IND AS 24.
2. Non-Executive Directors on th Bard of Directors of a Company are not “related
parties” (See Question above) Hence, remuneration paid to Non-Executive Directors
will not be considered as a Related Party Transaction.
QUESTION NO 8
Arun Ltd. owns 60% of the voting power of Baskar Ltd. which in turn owns 60% voting
interest in Chandru Ltd. Karuna Ltd. owns the remaining voting share in Chandru Ltd. and is
considered to exercise significant influence over Chandru Ltd. During the reporting period,
Karuna Ltd. enters into transactions in the ordinary course of business with Arun Ltd.
Would Karuna Ltd. be a Related Party of Arun Ltd.?
SOLUTION
1. Analysis: Karuna Ltd. is not related to Arun Ltd. as co-investors/co-venturers are not
considered related parties.
2. Conclusion: Hence, Arun Ltd. and Karuna Ltd. are not considered as related party for
the purpose of IND AS 24.
QUESTION NO 9
A Ltd. owns 30% of the Equity Capital of B Ltd. B Ltd. in turn owns 35% of the Equity
Capital of C Ltd. and 40% of Equity Capital in D Ltd. Answer the following questions -
(1) is B Ltd. a Related Party to A Ltd.? (2) Is C Ltd. a Related Party to A Ltd.?
(3) Are C Ltd. and D Ltd. are Related Parties?
SOLUTION
1. Associates and Joint Ventures of the Reporting Enterprise are Related Parties. Since
A Ltd. holds more than 20% of the voting power in B Ltd. by virtue of this, it has
substantial interest and significant influence in B Ltd. So B Ltd. is an Associate, and
hence is Related Party to A Ltd.
2. An Associate of an Associate is not a Related Party.

3. C Ltd. and D Ltd. are Co-Associates. The case of Co-Associates, this common control
is missing, and therefore, they are not Related Parties.
QUESTION NO 10
Two Companies A and B have a common Executive Chairman As per IND AS 24, would these
Companies be considered to be Related parties on this account?
SOLUTION
1. Role: The Executive Chairman is one of the Key Management Personnel of both the
Companies as he is one of “those persons who have the authority and the responsibility
for planning, directing and controlling the activities of the Reporting Enterprise”.
2. Requirement: In the context of significant influence, mere existence of relationship
is not sufficient to classify enterprises as Related Parties. The ability to exercise
significant influence should exist during the reporting period.
3. Conclusion: Just because two Companies have a common Executive Director, they shall
not be regarded as Related Parties. There must be exercise of significant influence of
one of the other.
QUESTION NO 11
Is an Associate of an Associate a Related Party?

Anand Ltd. owns 30% of Share Capital of Bhanu Ltd. while Bhanu Ltd. own 25% of Share
Capital of Chandni Ltd. Would Chandni Ltd. be considered a Related Party in the Financial
Statements of Anand Ltd.?
SOLUTION
1. Principle: IND AS 24 refers to “Associates and Joint Ventures of the Reporting

Enterprise and the investing party or Venturer of which the Reporting Enterprise is
an Associate or a Joint Ventrue” as a Related Party relationship.
2. Conclusion: In the above case, Chandni Ltd. is not a Related Party of Anand Ltd. An
Associate of an Associate cannot be regarded as a Related Party only by virtue of this
relationship.
76 ACCOUNTS
QUESTION NO 12
Would Co-Associates be considered to be Related parties?

Asha Ltd. has two Associates Basu Ltd. and Charan Ltd. and owns 25% of the voting power
of Basu Ltd. and 30% of the voting power of Charan Ltd. Would Basu Ltd be considered a
Related Party in the Financial Statements of Charan Ltd.?
SOLUTION
1. Analysis: Both Basu Ltd. and Charan Ltd. are ‘Associates’ of Asha Ltd. However, as
Basu Ltd is not an associate of Charan Ltd. nor is it being controlled directly, by
Charan Ltd. or is not so controlling Charan Ltd. it is not a Related Party of C Limited.
2. Conclusion: Co-Associates cannot be regarded as Related Parties only by virtue of this
relationship.
QUESTION NO 13
In respect of a Key Supplier who is dependent on the Company for its existence
and the Company enjoys influence over the prices of the Supplier (which may not
be formally demonstrable), can the Supplier and the Company be considered to be
Related Parties?
SOLUTION
1. Principle: IND AS 24 states that “a single customer, Supplier, Franchiser, Distributor

or General Agent with whom an enterprise transacts or significant volume of business
merely by virtue of the resulting economic dependence” would not be deemed to be
Related Parties.
2. Conclusion: As the conditions for being classified as a Related Party are not satisfied
in the above case, the Supplier cannot be said to be related to the Company.
Format for disclosure under IND AS 24

List any 5 Related Party transactions which require disclosure under IND AS 24.
Particulars of Holding Subsi- Fellow Asso- Key Mgt Relatives Total

Related Party Co. diaries Subsi- ciates Personnel of Key
Transactions diaries Mgt.
Personnel
Purchases of
Goods
Sale of Goods
Purchase of
Fixed assets
Sale of Fixed
Assets
Rendering of
Services
Receiving of
Services
Agency
Arrangements
Leasing or
Hire Purchase
arrangements
Particulars of Holding Subsi- Fellow Asso- Key Mgt Relatives Total

Related Party Co. diaries Subsi- ciates Personnel of Key
Transactions diaries Mgt.
Personnel
Tender of
R&D
Licence
Agreements
Finance
(including
Loans & Equity
Contributions
in cash or in
kind)
78 ACCOUNTS
Guarantees &
Collaterals
Management
Contracts incl.
deputation of
employees
Note:
Names of Related Parties and description of relationship:
1. Holding Company A Ltd.

2. Subsidiaries B Ltd. and C (P) Ltd.
3. Fellow Subsidiaries D Ltd. and Q Ltd.
4. Associates X Ltd. Y Ltd and Z (P) Ltd.
5. Key Management Personnel Mr. Y and Mr. Z
6. Relatives of Key Management Personnel Mrs. Y (wife of Mr. Y),
Mr. F (Father of Mr. Z)
Major Changes in Ind AS 24 vis-à-vis

IAS 24 Not Resulting in Carve Outs
1. Confidentially: In Ind AS 24, disclosures which conflict with confidentiality requirements

of statute/regulations are not required to be made since Accounting Standards cannot
override legal/regulatory requirements.
2. Additional Clarificatory Guidance Regarding Aggregation of Transactions: Paragraph 24A
(reproduced below) has been included in the Ind AS 24. It provides additional clarificatory
guidance regarding aggregation of transactions for disclosure.
―24A Disclosure of details of particular transactions with individual related parties
would frequently be too voluminous to be easily understood. Accordingly, items of a
similar nature may be disclosed in aggregate by type of related party. However, th is
is not done in such a way as to obscure the importance of significant transactions.
Hence, purchases or sales of goods are not aggregated with purchases or sales of
fixed assets. Nor a material related party transaction with an individual party is
clubbed in an aggregated disclosure.
3. Modification of Paragraph 14: Paragraph 14 of Ind AS 24 has been modified to explain the
rationale for disclosing related party relationship when control exists.
4. Management Contracts Including for Deputation or Employees: In Ind AS 24, ‗(k)
management contracts including for deputation or employees‘ has been added in the example
of transactions that are disclosed if they are with related party.
5. Definition of Close Members of the Family of a Person: ‘Definition of close members
of the family of a person‘ has been amended to include brother, sister, father and mother
in the category of family members who may be expected to influence, or be influenced.
80 ACCOUNTS
TEST YOUR KNOWLEDGE

QUESTION 1
Mr. X is a domestic partner of Ms. Y. Mr. X has an investment in A Limited and Ms. Y has
an investment in B Limited.
Required
Examine when can a related party relationship is established, from the perspective of A
Limited’s financial statements:
Examine when can related party relationship is established, from the perspective of B
Limited’s financial statements:
Will A Limited and B Limited be related parties if Mr. X has only significant influence over
A Limited and Ms. Y also significant influence over B Limited:
QUESTION 2
A Limited has both (i) joint control over B Limited and (ii) joint control or significant
influence over C Limited
Required
Examine related party relationship from the perspective of C Limited’s financial statements.
Examine related party relationship from the perspective of B Limited’s financial statements.
QUESTION 3
ABC Ltd. is a long-standing customer of XYZ Ltd. Mrs. P whose husband is a director in
XYZ Ltd. purchased a controlling interest in entity ABC Ltd. on 1st June, 20X1. Sales of
products from XYZ Ltd. to ABC Ltd. in the two-month period from 1st April 20X1 to 31st
May 20X1 totalled ₹ 8,00,000. Following the share purchase by Mrs. P, XYZ Ltd. began to
supply the products at a discount of 20% to their normal selling price and allowed ABC Ltd.
three month’s credit (previously ABC Ltd. was only allowed one month’s credit, XYZ Ltd.’s
normal credit policy). Sales of products from XYZ Ltd. to ABC Ltd. in the ten month period
from 1st June 20X1 to 31st March 20X1 totalled ₹ 60,00,000. On 31st March 20X2, the trade
receivables of XYZ Ltd. included ₹ 18,00,000 in respect of amounts owing by ABC Ltd.
Analyse and show (where possible by quantifying amounts) how the above event would be
reported in the financial statements of XYZ Ltd. for the year ended 31st March 20X2 as per
Ind AS. You are required to mention the disclosure requirements as well.
QUESTION 4
Mr. Atul is an independent director of a company X Ltd. He plays a vital role in the Management
of X Ltd. and contributes in major decision making process of the organisation. X Ltd. pays
sitting fee of ₹ 2,00,000 to him for every Board of Directors’ (BOD) meeting he attends.
Throughout the year, X Ltd. had 5 such meetings which was attended by Mr. Atul
Similarly, a non-executive director, Mr. Naveen also attended 5 BOC meetings and charged ₹
1,50,000 per meeting. The Accountant of X Ltd. believes that they being not the employees
of the organisation, their fee should not be disclosed as per related party transaction in
accordance with Ind AS 24.
Examine whether the sitting fee paid to independent director and non-executive director
is required to be disclosed in the financial statements prepared as per Ind AS?
82 ACCOUNTS
EXTRA QUESTIONS
QUESTION 1
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, 20X2 to the
managing director Mr. Y for approval. Mr. Y, who is not an accountant, had raised following
query from Mr. X after going through the draft financial statements:
One of the notes to the financial statements gives details of purchases made by ABC Ltd.
from PQR Ltd. during the period 20X1-20X2. Mr. Y owns 100% of the shares in PQR Ltd.
However, he feels that there is no 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.
Provide answers to the query raised by the Managing Director Mr. Y as per Ind AS.
QUESTION 2
Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in ABC
Limited. PQR Limited has two subsidiaries namely P Limited and Q Limited. ABC Limited
has two subsidiaries namely A Limited and B Limited. Mr. KM is one of the Key management
personnel in PQR Limited.
(a) Determine the entity to whom exemption from disclosure of related party transactions
is to be given. Also examine the transactions and with whom such exemption applies.
(b) What are the disclosure requirements for the entity which has availed the exemption?
QUESTION 3
S Ltd., a wholly owned subsidiary of P Ltd is the sole distributor of electricity to consumers
in a specified geographical area. A manufacturing facility of P Ltd is located in the said
geographical area and, accordingly, P Ltd is also a consumer of electricity supplied by S Ltd.
The electricity tariffs for the geographical area are determined by an independent rate-
setting authority and are applicable to all consumers of S Ltd, including P Ltd. Whether the
above transaction is required to be disclosed as a related party transaction as per Ind AS
24, Related Party Disclosures in the financial statements of S Ltd.?
INTEGRATED REPORTING 83
INTEGRATED REPORTING
CONCEPT 1: ORGANISATIONAL STRUCTURE/ ISSUING AUTHORITY

Integrated Reporting (<IR>) is a concept first introduced in South Africa. Later on, this
concept travelled to many countries like German, France, Spain, Brazil and UK and integrated
reporting was made along with their financial statements in one or the other manner. In
2010, the International Integrated Reporting Council (IIRC) was set up which aims to create
the globally accepted integrated reporting framework.
The International Integrated Reporting Council (IIRC) is a global coalition of:
• Regulators
• Investors
• Companies
• Standard setters
• The accounting profession and NGOs
Together, this coalition shares the view that communication about value creation should
be the next step in the evolution of corporate reporting. With this purpose they issued the
International Integrated Reporting (IR) Framework. The framework has been developed
keeping in mind the greater flexibility to be given to the entity and the management in the
reporting but at the same time should target to report the value created by the organisation
through various capital.
Integrated Reporting as the name suggest will integrate both financial and non- financial
information. In future, it will become the only report to be issued by the organisation.
CONCEPT2: INTEGRATED REPORTING <IR>?

Integrated reporting is a concept that has been created to better articulate the broader
range of measures that contribute to long -term value and the role organizations play in
society. Integrated Reporting is enhancing the way organizations think, plan and report the
story of their business. Central to this is the proposition that value is increasingly shaped
by factors additional to financial performance, such as reliance on the environment, social
reputation, human capital skills and others.
This value creation concept is the backbone of integrated reporting and is the direction
for the future of corporate reporting. In addition to financial capital, integrated reporting
examines five additional capitals that should guide an organization’s decision-making and
long-term success — its value creation in the broadest sense.
84 ACCOUNTS
“Integrated Reporting reflects how our company thinks and does business. This approach
allows us to discuss material issues facing our business and communities and show how we
create value, for shareholders and for society as a whole. ”Dimitris Lois, CEO, Coca-
Cola HBC
Organizations are using <IR> to communicate a clear, concise, integrated story that explains
how all of their resources are creating value. <IR> is helping businesses to think holistically
about their strategy and plans, make informed decisions and manage key risks to build
investor and stakeholder confidence and improve future performance.
Integrated Reporting (<IR>) promotes a more cohesive and efficient approach to corporate
reporting and aims to improve the quality of information available to providers of financial
capital to enable a more efficient and productive allocation of capital.
Integrated Reporting (<IR>) is shaped by a diverse coalition including business leaders and
investors to drive a global evolution in corporate reporting.
An integrated report is a concise communication about how an organization’s:
• Strategy
• Governance
• Performance And
• Prospects
in the context of its external environment
It leads to the creation of value over:
• Short
• Medium And
• Long term
It’s a portal by which the organisation communicates a holistic view of:

• Its Current position
• Where it’s going And
• How it intends to get there
The report enables readers to make an assessment of the organisation’s ability to create
value in the future, with value creation referring to the value created for both the
organisation and for others.
PURPOSE OF INTEGRATED REPORTING

The primary purpose of an integrated report is to explain to providers of financial capital
how an organization creates value over time.
An integrated report benefits all stakeholders interested in an organization’s ability to
create value over time, including:
• Employees
• Customers
• Suppliers
• Business partners
• Local communities
• Legislators
• Regulators and
• Policy-makers
CONCEPT 3: THE CAPITALS

The capitals are stocks of value that are increased, decreased or transformed through the
activities and outputs of the organization.
This is interrelated with the value the organization creates for stakeholders and society
at large through a wide range of activities, interactions and relationships. When these are
material to the organization’s ability to create value for itself, they are included in the
integrated report.
The concept of capitals seeks to assist an organisation in identifying all the resources and
relationships it uses and affects to report in a comprehensive manner.
The Framework has categorise the capital into 6 main forms. However, at the same time,
it stresses upon that not necessary the same categorisation of capital be followed by the
entities in their integrated reporting.
CAPITAL
Financial Manufactured Intellectual Human Social and Relationship Natural

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Financial Capital
The pool of funds
• available to an organization for use in the production of goods or the provision of services
• obtained through financing, such as:
 Debt, equity or grants; or
 Generated through operations or investments
Manufactured Capital
Manufactured physical objects (as distinct from natural physical objects) that are available
to an organization for use in the production of goods or the provision of services, including:
• Buildings
• Equipment
• Infrastructure (such as roads, ports, bridges, and waste and water treatment plants)
Note: Manufactured capital is often created by other organizations, but includes assets
manufactured by the reporting organization for sale or when they are retained for its
own use.
Intellectual Capital
Organizational, knowledge-based intangibles, including:
• Intellectual property, such as patents, copyrights, software, rights and licences
• “Organizational capital” such as tacit knowledge, systems, procedures and protocols
Human Capital
People’s competencies, capabilities and experience, and their motivations to innovate,
including their:
• Alignment with and support for an organization’s governance framework, risk management
approach, and ethical values
• Ability to understand, develop and implement an organization’s strategy
• Loyalties and motivations for improving processes, goods and services, including their
ability to lead, manage and collaborate
Social and Relationship Capital

The institutions and the relationships within and between communities, groups of
stakeholders and other networks, and the ability to share information to enhance individual
and collective well-being.
Social and relationship capital includes:
• Shared norms, and common values and behavior
• Key stakeholder relationships, and the trust and willingness to engage that an organization
has developed and strives to build and protect with external stakeholders
• Intangibles associated with the brand and reputation that an organization has developed
• An organization’s social licence to operate
Natural Capital
All renewable and non-renewable environmental resources and processes that provide goods
or services that support the past, current or future prosperity of an organization.
It includes:
• Air, water, land, minerals and forests
• Biodiversity and eco-system health
Note: Not all capitals are equally relevant or applicable to all organizations. While most
organizations interact with all capitals to some extent, these interactions might be
relatively minor or so indirect that they are not sufficiently important to include in the
integrated report.
CONCEPT 4: CONTENTS OF INTEGRATED REPORTING

An integrated report includes the eight Content Elements.
The Content Elements are fundamentally linked to each other and are not mutually exclusive.
The order of the Content Elements is not the only way they could be sequenced.
The Content Elements are not intended to serve as a standard structure for an integrated
report with information about them appearing in a set sequence or as isolated, standalone
sections. Rather, information in an integrated report is presented in a way that makes the
connections between the Content Elements apparent.
The content of an organization’s integrated report will depend on the individual circumstances
of the organization. The Content Elements are therefore stated in the form of questions
rather than as checklists of specific disclosures. Accordingly, judgement needs to be
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exercised in applying the Guiding Principles to determine what information is reported, as

well as how it is reported.
The eight content elements suggested by the Framework are:
Organizational Overview and External Environment

Question to be answered through this element in the integrated reporting is
“What does the organisation do and what are
the circumstances under which it operates?”
Organisational Overview
An integrated report identifies the organization’s mission and vision, and provides essential
context by identifying matters such as:
A. The organization’s:
• Culture, ethics and values
• Ownership and operating structure
• Principal activities and markets
• Competitive landscape and market positioning (considering factors such as the threat
of new competition and substitute products or services, the bargaining power of
customers and suppliers, and the intensity of competitive rivalry)
• Position within the value chain
B. KQI: Key quantitative information

Example:
• Number of employees
• Revenue
• Number of countries in which the organization operates
• Highlighting, in particular, significant changes from prior periods
C. Significant factors
• Significant factors affecting the external environment and the organization’s response
External Environment
Significant factors affecting the external environment include aspects of:
• Legal
• Commercial
• Social
• Environmental
• Political context
That affects the organization’s ability to create value in the short, medium or long term
Legal
Environmental Commercial
Inventories
are assets
Political Social
Note: They can affect the organization directly or indirectly (e.g., by influencing the
availability, quality and affordability of a capital that the organization uses or affects).
Governance
“How does the organisation’s governance structure support
its ability to create value in the short, medium and long term?”
An integrated report provides insight about how such matters as the following are linked to
its ability to create value:
• The organization’s leadership structure, including the skills and diversity (e.g., range of
backgrounds, gender, competence and experience) of those charged with governance
and whether regulatory requirements influence the design of the governance structure.
• Specific processes used to make strategic decisions and to establish and monitor the
culture of the organization, including its attitude to risk and mechanisms for addressing
integrity and ethical issues
• Particular actions those charged with governance have taken to influence and monitor
the strategic direction of the organization and its approach to risk management
• How the organization’s culture, ethics and values are reflected in its use of and
effects on the capitals, including its relationships with key stakeholders.
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• Whether the organization is implementing governance practices that exceed legal

requirements
• The responsibility those charged with governance take for promoting and enabling
innovation
• How remuneration and incentives are linked to value creation in the short, medium
and long term, including how they are linked to the organization’s use of and effects on
the capitals.
Business Model
“What is the organisation’s business model?”
An integrated report describes the business model, including key:
• Inputs
• Business activities
• Outputs
• Outcomes
Business
Activities
Inputs Business Outputs

Model
Outcomes
Inputs
An integrated report shows how key inputs relate to the capitals on which the organization
depends, or that provide a source of differentiation for the organization, to the extent
they are material to understanding the robustness and resilience of the business model.
Business Activities
An integrated report describes key business activities. This can include:
• How the organization differentiates itself in the market place?
Example
Through product differentiation, market segmentation, delivery channels and marketing

• The extent to which the business model relies on revenue generation after the initial
point of sale
Example
Extended warranty arrangements or network usage charges
• How the organization approaches the need to innovate?
• How the business model has been designed to adapt to change?
Outputs
An integrated report identifies an organization’s key products and services. There might
be other outputs, such as by -products and waste (including emissions), that need to be
discussed within the business model disclosure depending on their materiality.
Outcomes
An integrated report describes key outcomes, including:
• Both internal outcomes (e.g., employee morale, organizational reputation, revenue and
cash flows) and external outcomes (e.g., customer satisfaction, tax payments, brand
loyalty, and social and environmental effects)
• Both positive outcomes (i.e., those that result in a net increase in the capitals and
thereby create value) and negative outcomes (i.e., those that result in a net decrease
in the capitals and thereby diminish value).
Risks and Opportunities

“What are the specific risks and opportunities that affect
the organisation’s ability to create value over the short, medium
and long-term, and how is the organisation dealing with them?”
An integrated report identifies the key risks and opportunities that are specific to the
organization, including those that relate to the organization’s effects on, and the continued
availability, quality and affordability of, relevant capitals in the short, medium and long
term.
Strategy and Resource Allocation

“Where does the organisation want to go and
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how does it intend to get there?”

An integrated report ordinarily identifies:
• The organization’s short, medium and long term strategic objectives
• The strategies it has in place, or intends to implement, to achieve those strategic
objectives
• The resource allocation plans it has to implement its strategy
• How it will measure achievements and target outcomes for the short, medium and long
term.
Performance
“To what extent has the organisation achieved its strategic objectives for the
period and what are its outcomes in terms of effects on the capitals?”
An integrated report contains qualitative and quantitative information about performance
that may include matters such as:
• Quantitative indicators with respect to targets and risks and opportunities, explaining
their significance, their implications, and the methods and assumptions used in compiling
them
• The organization’s effects (both positive and negative) on the capitals, including
material effects on capitals up and down the value chain
• The state of key stakeholder relationships and how the organization has responded to
key stakeholders’ legitimate needs and interests
• The linkages between past and current performance, and between current performance
and the organization’s outlook
Outlook
“What challenges and uncertainties is the organisation likely
to encounter in pursuing its strategy, and what are the potential
implications for its business model and future performance?”
An integrated report ordinarily highlights anticipated changes over time and provides
information, built on sound and transparent analysis, about:
• The organization’s expectations about the external environment the organization is
likely to face in the short, medium and long term
• How that will affect the organization
• How the organization is currently equipped to respond to the critical challenges and
uncertainties that are likely to arise.
Basis of Preparation and Presentation

“How does the organization determine what matters to include in the
integrated report and how are such matters quantified or evaluated?”
An integrated report describes its basis of preparation and presentation, including:
• A summary of the organization’s
 Materiality determination process
• A description of:
 Reporting boundary and how it has been determined
• A summary of
Significant frameworks and methods used to quantify or evaluate material matters

General Reporting Guidance

The following general reporting matters are relevant to various Content Elements:
 Disclosure of Material matters
 Disclosures about Capitals
 Time frames for short, medium and long term
 Aggregation and disaggregation
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SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SEBI vide its circular no. SEBI/HO/CFD/CMD/CIR/P/2017/10 February 6, 2017 has advised
top 500 companies [to whom Business Responsibility Report (‘BRR’) have been mandated
under Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirements)
Regulations 2015 (“SEBI LODR”)], to adopt Integrated Reporting on a voluntary basis from
the financial year 2017-18.
The objective behind recommending voluntary adoption of Integrated Reporting is to improve
disclosure standards. An integrated report aims to provide a concise communication about
how an organisation’s strategy, governance, performance and prospects create value over
time so that interested stakeholders may make investment decisions accordingly. Today an
investor seeks both financial as well as non-financial information to take a well-informed
investment decision.
Therefore, towards the objective of improving disclosure standards, in consultation with
industry bodies and stock exchanges, the listed entities are advised to adhere to the
following:
(a) The information related to Integrated Reporting may be provided in the annual report
separately or by incorporating in Management Discussion & Analysis or by preparing a
separate report (annual report prepared as per IR framework).
(b) In case the company has already provided the relevant information in any other report
prepared in accordance with national/international requirement / framework, it may
provide appropriate reference to the same in its Integrated Report so as to avoid
duplication of information.
(c) As a green initiative, the companies may host the Integrated Report on their website
and provide appropriate reference to the same in their Annual Report.
TEST YOUR KNOWLEDGE
Theoretical Questions
1. State the categories defined in the International IR Framework for capitals. Comment
whether an organisation has to follow these categories rigidly.
2. Can a Not-for Profit organisation do the Integrated Reporting as per the Framework?
3. Can an integrated reporting be done in compliance to the requirements of the local laws
to prepare a management commentary or other reports?
Answer to Theoretical Questions
1. Various categories of capital are:

 Financial
 Manufactured
 Intellectual
 Human
 Social and Relationship
 Natural
Organizations preparing an integrated report are not required to adopt this
categorization or to structure their report along the above lines of the capitals.
2. The Framework is written primarily in the context of private sector, for-profit
companies of any size but it can also be applied, adapted as necessary, by public sector
and not-for-profit organizations.
3. An integrated report may be prepared in response to existing compliance requirements.
For example, an organization may be required by local law to prepare a management
commentary or other report that provides context for its financial statements. If
that report is also prepared in accordance with this Framework it can be considered
an integrated report. If the report is required to include specified information beyond
that required by this Framework, the report can still be considered an integrated
report if that other information does not obscure the concise information required by
this Framework.
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QUESTION 1
Does an integrated report need to be a stand-alone document?
ANSWER
No. An integrated report can be either a stand-alone report or included as a distinguishable,
prominent and accessible part of another report or communication. For example, it may
be included at the front of a report that also includes the organization’s full financial
statements.
IND AS-41 AGRICULTURE 97
IND AS-41 AGRICULTURAL ACTIVITIES
Ind AS 41 addresses following key issues:

(a) When should a biological asset or agricultural produce be recognised on the Balance
sheet?
(b) At what value should a recognised biological asset or agricultural produce be
measured?
(c) How should the differences in value of a recognised biological asset or agricultural
produce
(d) What should be the key disclosures?
CONCEPT 1: COVERAGE OF IND AS 41

This standard shall be applied to account for the following when they relate to agricultural
activity:
(a) Biological assets;

(b) Agricultural produce at the point of harvest: and
(c) Government grants
CONCEPT 2: OUT OF SCOPE OF IND AS 41
(a) Land related to agricultural activity: for example, the land on which the biological
assets grow, regenerate and/or degenerate (Ind AS 16 property, plant and Equipment
and Ind As 40 investment property);
(b) Bearer plants relate to agricultural activity. Such bearer plants covered within the
scope of Ind AS 16, property, plant and Equipment as accounted as per the provisions
of that standard. However, this standard applies to the produce on those bearer
plants.
(c) Intangible assets associated with the agricultural activity. For licenses and rights
are covered under Ind AS 38 intangible assets and provisions of this standard will be
applicable.
This standard is applied to agricultural produce. Which is the harvested product of the
entity’s biological assets, only at the POINT of harvest. Thereafter, Ind AS 2 or another
applicable standard is applied
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Example:
Processing of grapes into wine by a vintner who has grown the grapes while such processing
may be a logical and natural extension of agricultural activity. And the events place may
dear some similarity to biological transformation, such processing is not included within
the definition of agriculrtrual activity in this standard.
Example:
Agriculture produce after the point of harvest, for example wool, ,eat, frit rubber, logs
that are processed subsequently are not covered within Proview of this standard and Ind
as 2 inventories will apply.
The table below provides examples of biological assets. , agricultural produce, and products
that are the result of processing after harvest:
Biological assets Agricultural produce Products that the result

of processing after
harvest
Sheep Wool Felled Trees Yarn, carpet
Trees in a timber plantation Felled Trees Logs, lumber
Dairy cattle Milk Cheese
Pigs Carcass Sausages, cured hams
Cotton plants Harvested cotton Thread, clothing
Sugarcane Harvested cane Sugar
Tobacco plants Picked leaves Cured tobacco
Tea bushes Picked leaves Tea

Grape vines Picked grapes Wine
CONCEPT 3: DEFINITIONS
The following are the key agriculture-related definitions:
(a) Agricultural activity refers to the management by an entity of the biological

transformation and harvest of biological assets for sale or for conversion into
agricultural produce or into additional assets.
(b) Biological Asset is defined as a living animal or plant.
(c) Biological transformation comprises the processes of growth, degeneration, production,
and procreation that cause qualitative or qualitative changes in biological asset.
Biological Transformation
Processes
(Causing Qualitative Quantitative
changes in Biological Asset)
Growth Degeneration Production Procreation
An increase A decrease in
Of agricultural
in quantity or the quantity or Creation of
produce such as
improvement in deterioration in additional living
latex, tea leaf
quality of an quality or an animals or plants
wool, milk
animal or plant) animal or plant
(d) Agricultural produce is the harvested product of the entity’s biological assets.
(e) Harvest is the detachment of produce form a biological asset or the cessation of a
biological asset’s life processes.
(f) Fair value is the price that would be received to sell an asset or paid to transfer a
date.(the definition of Fair is as given in Ind AS 113, Fair value measurement)
(g) Costs to sell are the incremental costs directly attributable to the disposal of an
asset. excluding finance costs and income taxes.
(h) Bearer plant may be defined as a living plant that:
I. is used in the production of supply of agricultural produce:
II. is expected to bear produce for more than one period; and
III. has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.
For example , tea bushes, grape vines, oil palms and rubber trees, usually meet the definition
of a bearer plant and are outside the scope Ind AS 41 and covered under Ind AS 16.
EXAMPLE
ABC Ltd grows vines, harvests the grapes and produces wine. Which of these activities are
in the scope of Ind AS 41?
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SOLUTION
The grape vines are bearer plants that continually generate corps of grapes which are
covered by Ind AS 16, property, plant and Equipment.
When the entity harvests the grapes, their biological transformation ceases and they
become agricultural produce covered by Ind AS 41, Agriculture.
Vine involves a lengthy maturation period. This process is similar to the conversion of raw
materials to a finished product rather than biological transformation hence treated as
inventory in accordance with Ind As 2, inventories.
CONCEPT 4: RECOGNITION OF BIOLOGICAL ASSETS

Entities are required to recognise a biological asset or agricultural produce when, and only
when, all of the following conditions are met:
a) the entity controls the assent as a result of past events; (Control over biological assets
or agricultural produce may be evidenced by legal ownership or rights to control, for
example legal ownership of cattle and the branding or otherwise marking of the cattle
on acquisition, birth, or weaning)
b) it is probable that future economic benefits associated with the asset will to the
entity and
Future economic benefits are expected to flow is its ownership or control of the
asset. The future benefits are normally assessed by measuring the significant physical
attributes.
c) The fair value or cost of the asset con be measured reliably.
CONCEPT 5: MEASUREMENT OF BIOLOGICAL ASSETS

Biological Asset should be measured on initial recognition and at the end of each reporting
period at its value less costs to sell, except for the case where the fair value cannot be
measured reliably.
There is a presumption that fair value can be measured reliably for a biological assent.
In the following cases biological asset should be measured at it cost less any accumulated
depreciation. And any accumulated impairment losses in accordance with Ind AS 16 AS 36:
• quoted market prices are not available for the biological assets unreliable
• alternative fair value measurements are determined to be clearly unreliable.
Once the fair value of such a biological asset becomes reliably measurable, an entity shall
measure it at its fair value costs to sell.
The presumption can be rebutted only on initial recognition. An entity that has previously
measured a biological asset at its fair value less costs to sell continues to measure the
biological asset at its fair value costs to sell until disposal.
In all cases, an entity measures agricultural produce at the point of harvest at its fair
value less costs to sell. This standard reflects the view that the value of agricultural
produce at the point of harvest can always be measured reliably.
CONCEPT 6: MEASUREMENT OF AGRICULTURAL PRODUCE

Agricultural produce harvested from an entity’s biological assents should be measured at
its fair value less costs to sell at the point of harvest. Such measurement is the cost at
that date when applying Ind AS 2 or another applicable Standard.
The fair value measurement of a biological asset or agricultural produce may be facilitated
by grouping biological assets or agricultural produce according to significant attributes; for
example, by age or quality. An entity selects the selects the attributes corresponding to
the attributes used in the market as a basis for pricing.
The fair value less cost to sell of a biological asset can change due to both physical changes
and price changes in the market.
Entities often inter into contacts to sell their biological assets or agricultural produce at a
future date. Contract prices are not necessarily relevant in measuring fair value, because
fair value reflects the current market conditions in which market participant buyers and
sellers would enter
Into a transaction. As a result, the fair value of a biological asset or agricultural produce is
not adjusted because of the existence of a contract.
Cost may sometimes approximate fair value, particularly when:
(a) little biological transformation has taken place since initial cost incurrence (for
example, for fruit tree seedlings planted immediately prior to the end of a reporting
period or newly acquired livestock):or
(b) the impact of the biological transformation on price is not expected to be material
(for example, for initial growth in a 30- year pine plantation cycle)
Biological assets are often physically attached to land (for example, trees in a plantation
forest).There may be no separate market for biological assets that are attached to
the land but an active market may exist for the combined assets, that is, the biological
assets, raw land, and land improvements, as a package. An entity may use information
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regarding the combined assets to measure the fair value of the biological assets. For
example, the fair value of raw land and land improvement may be deducted from the
fair of the combined assets to arrive at the fair value of biological assets.
QUESTION NO 1
A farmer owned a dairy herd, of three years old cattle as at April 1, 20X1 With a fair value
of ` 13,750 and the number of cattle in the herd was 250.
The fair value of three year cattle as at March 31, 20X2 was `60 per cattle. The fair of
four year cattle as at March 31,20X2 is ` 75 per cattle.
Calculate the measurement of group of cattle as at March 31, 20X2 Stating price and
physical change separately.
QUESTION NO 2
XYZ ltd, on 1 December 20X3, purchased 100 sheep’s from a market for ` 500,000 with a
transaction cost of 2% on market price of sheep was incurred which was paid by the seller.
sheep’s fair value increased from ` 500,000 to ` 600,000 on 31 March 20X4. Transaction
cost would have to be incurred by the seller to get sheep to the relevant market.
Determine the fair value on the date of purchase and reporting date and pass journal
entries thereon.
CONCEPT 7: GAINS AND LOSSES
1) Biological Asset:
A gain or loss arising on initial recognition of a Biological Asset at fair val8ue less casts to
sell and from a change in fair value less costs to sell of a biological asset shall be included
in profit or Loss for the period in which it arises.
A loss may arise on initial recognition of a biological asset, because cost to sell are deducted
in determining fair value less cost to sell of a biological asset. A gain may arise on initial
recognition of a biological asset, such as when a calf is born,
EXAMPLE:
During the reporting period 20X1-20X2, an entity is having a cow which has given birth to a
calf. The fair value less estimated cost to sell for a calf is ` 5,000. The amount of ` 5,000
is, therefore, immediately recognised in Statement of profit or Loss,
2) Agriculture produce:
A gain or loss arising on initial recognition of Agricultural produce at Fair value less costs
to sell shall be included in profit of Loss for the period in which it arises.
A gain or loss may arise on initial recognition of agricultural produce as result of harvesting.
CONCEPT 8: GOVERNMENT GRANTS
1) Biological Asset measured at fair value less cost to sell.

a) Unconditional Grant
An unconditional government grant related to a biological asset measured at its
fair value less costs to sell shall be recognised in profit or Loss when, and only
when, the government grant becomes receivable.
b) Conditional Grant:
If a government grant related to a biological asset measured at its fair value less
costs to sell is conditional, including when a government grant requires an entity
not to engage to in specified agricultural activity, an entity shall recognise the
government grant in profit or loss when, and only when, the conditions attaching
to the government grant are met.
Terms and conditions of government grants vary. For example, a grant may require
an entity to farm in a particular location for five years. And require the entity to
return the entire grant if it farms for a period shorter than five years. In this
case, the grant is not recognised in profit or Loss until the five years have passed.
However, If the terms of the grant allow part of it to be retained according to
the time elapse, the entity recognises that part in profit or loss as time passes.
EXAMPLE:
Sun Ltd cultivated huge plot of land.The government offers a grant of ` 10 core under the
condition that the land is being cultivated for 5 years. If the land will be cultivated for
a shorter period, the entity is required to return the entire grant.
Therefore, the government grant will be recognised as income only after 5 years of
cultivation. The situation would be different if the returning obligation referred to the
years of not cultivating the land is with respect to retention of grant for the period
tell which the entity has cultivated the land. In this case, the amount of ` 10 crore
would be recognised as income, proportionately with the time period, meaning ` 2
crore per annum.
2) Biological Asset measured at its cost:-

If a government grant relates to a Biological asset measured at its cost less any
accumulated depreciation and accumulated impairment losses. i.e (i.e inability to
measure fair value reliably), Ind AS 20 is applied.
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Biological Asset
Measured at fair value less cast to sell Measured at Cost
Conditional Grant
Unconditional Grant
Condition attaching to
Government Grant Ind AS 20
the government grant
Becomes Receivable
are Met
CONCEPT 8:DISCLOSURE
1) Description of biological assets and activates.

The entity is required to a description of each group of biological assent. This disclosure
may take the form of a narrative or quantified description. An entity is encouraged
to provide a quantified description of each group of biological asset, distinguishing
between consumable and bearer biological assets or between mature and immature
biological assets, as appropriate.
2) Gains and losses recognised during the period
An entity shall disclose the aggregate gain or loss arising during the current period on
initial recognition of biological assets and agricultural produce and from the change in
fair value less costs to sell of biological assets.
3) Reconciliation of changes in biological assets.
A detailed reconciliation is required of changes in the carrying in the carrying amount
of biological assets between the beginning and the end of the current period, which
includes:
a) gain or loss arising from changes in fair value less costs to sell;
b) Increases arising from purchases;
c) Decreases attributable to sales and biological assets classified as held for sale
(or included in a disposal group that is classified as held for sale) in accordance
with Ind AS 105;
d) Decreases due to harvest;
e) Increases resulting from business combinations;
f) net exchange differences arising on the translation of financial statements into
a different presentation currency, and on the translation of foreign operation
into the presentation currency to the reporting entity; and
g) Other changes.
4) Restricted assets, commitments and risk management strategies.

The entity should disclose:
a) The existence and carrying amounts of biological assets whose title is restricted,
and the carrying amount of biological assets pledged as security for liabilities;
b) The amount of commitments for the development or acquisition of biological
assets; and
c) Financial risk management strategies related to agricultural activity.
5) Additional disclosures when fair value cannot be measured reliably.
If biological assets within the scope of Ind AS 41 are measured at cost less any
accumulated depreciation and any accumulated impairment losses at the end of the
period, the following disclosures are required:
a) A description of the biological assets;
b) An explanation of why fair value cannot be measured reliably;
c) The range of estimates within which fair value is highly likely to lie;
d) The depreciation method use;
e) The useful lives or the depreciation rates used; and
f) The gross carrying amount and the accumulated depreciation and impairment
losses at the beginning and end of the period.
6) Government grants
The following disclosures are required for government grants relating to agricultural
activity;
a) The nature and extent of government grants recognised;
b) Unfulfilled conditions and other contingencies attaching to government grants;
and
c) Significant decreases expected in the level of government grants.
QUESTION NO 3
Moon Ltd prepares financial statements to 31 march each year. On 1 April 20X1 the company
carried out the following transactions:
 Purchased a land for ` 50 Lakhs.

 Purchased 200 dairy cows (average age at 1 April 20X1 two years) for ` 10 Lakhs.
 Received a grant of ` 1 million towards the acquisition of the cows. This grant was
nonrefundable.
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For the year ending 31 march 20X2, the company has incurred following costs:
 ` 6 Lakh to maintain the condition of the animals (food and protection).

 ` 4 lakh as breeding fee to a local farmer.
On 1 October 20X1, 100 calves were born. There were no changes in the number of animals
during the year ended 31 March 20X2, Moon Ltd had 3,000 liters of unsold milk in inventory.
Item Fair value less cost to sell
1 April 20X1 1 October 20X1 31 march 20X2

` ` `
Land 50 Lakhs 60 Lakhs 70 Lakhs
New born claves (per calf) 1,000 1,100 1,200
Six month old cows (per calf) 1,100 1,200 1,300
two year old cows (per cow) 5,000 5,100 5,200
Three year old cow (per cow) 5,200 5,300 5,500
Milk (per litre) 20 22 24
Prepare extracts from the balance Sheet and Statement of Profit & Loss that would be
reflected in the financial statements of the entity for the year ended 31 March 20X2.
QUESTION NO 4
An entity on adoption of Ind AS-41 has reclassified certain assets as biological assets. The
total value of the group’s forest assets is ` 2,000 lakhs comprising:
Amt. (Thousands)
Freestanding trees 1,700
Land under trees 200
Roads in forests 100
2,000
Show how the forests would be classified in the financial statements.
QUESTION NO 5
An entity is considering the valuation of its harvested coffee beans. Industry Practice is
to value the coffee beans at market value the national accounting body has always used
this practice and uses as its source of reference “Accounting for successful Farms” a local
publication. The entity wishes to adopt Ind AS- 41 but does not know what the impact will
be on its inventory of coffee beans.
SOLUTION
AS PER THE PROVISIONS OF IND AS 41, VALUATION OF INVENTORIES SHOULD BE
MADE AT FAIR VALUE LESS COST TO SELL AT THE POINT OF HARVEST. THEREAFTER,
VALUATION WILL BE DONE AS PER IND AS 2
QUESTION NO 6
Company X purchased 100 sheep at an auction for ` 60,000 on 31st December 2015. The
transportation cost amounting to be ` 1500 and the auctioneer’s fees amounted to be 1% of
purchase price. The same expenses are expected at the time of sale of sheep. Fair value at
balance sheet date 65,000.
At what value biological assets shall be recognized at the time of initial recognition and also
find out balance sheet measurement?
QUESTION NO 7
A herd of 15, 4-year old animals valued at ` 250 thousands were held in Marigold farms
as at 1st January 2016.The following transactions took place during the year. On 1st
July 2016:
♦ One animal aged 4.5 year was purchased for ` 260 thousand
♦ One animal was born.
♦ No animal was sold or disposed of
The per-unit fair values less cost of sell were as follows:

` In Thousand
4-year old animal on 1st January 2016 250
New born animal on 1st July 2016 200
4.5 year old animal on 1st July 2016 260
New born animal on 31st December 2016 205
108 ACCOUNTS
0.5 year old animal on 31st December 2016 220

4 year old animal on December 2016 258
4.5 year old animal on 31st December 2016 270
5 year animal on 31st December 2016 280
EXTRA QUESTIONS ON IND AS – 41

QUESTION 1
ABC Ltd grows vines, harvests the grapes and produces wine. Which of these activities are
in the scope of Ind AS 41?
SOLUTION
The grape vines are bearer plants that continually generate crops of grapes which are
covered by Ind AS 16, Property, Plant and Equipment.
When the entity harvests the grapes, their biological transformation ceases and they
become agricultural produce covered by Ind AS 41, Agriculture.
Wine involves a lengthy maturation period. This process is similar to the conversion of raw
materials to a finished product rather than biological transformation hence treated as
inventory in accordance with Ind AS 2, Inventories.
QUESTION 2
As at 31st March, 20X1, a plantation consists of 100 Pines trees that were planted 10
years earlier. The tree takes 30 years to mature, and will ultimately be processed into
building material for houses or furniture. The enterprise’s weighted average cost of
capital is 6% p.a.
Only mature trees have established fair values by reference to a quoted price in an
active market. The fair value (inclusive of current transport costs to get 100 logs to
market) for a mature tree of the same grade as in the plantation is:
As at 31st March, 20X1: 171
As at 31st March, 20X2: 165
Assume that there would be immaterial cash flow between now and point of harvest. The
present value factor of ` 1 @ 6% for
19th year = 0.331 20th year = 0.312
State the value of such plantation as on 31st March, 20X1 and 20X2 and the gain or loss to
be recognised as per Ind AS.
SOLUTION
As at 31st March, 20X1, the mature plantation would have been valued at 17,100 (171 x
100). As at 31st March, 20X2, the mature plantation would have been valued at 16,500
(165 x 100).
110 ACCOUNTS
Assuming immaterial cash flow between now and the point of harvest, the fair value (and
therefore the amount reported as an asset on the statement of financial position) of the
plantation is estimated as follows:
As at 31st March, 20X1: 17,100 x 0.312 = 5,335.20.
As at 31st March, 20X2: 16,500 x 0.331 = 5,461.50.
Gain or loss
The difference in fair value of the plantation between the two year end dates is 126.30
(5,461.50 – 5,335.20), which will be reported as a gain in the statement or profit or loss
(regardless of the fact that it has not yet been realised).

QUESTION 1 (NEW EXAMINATION NOV-2019)
Arun Ltd. is an entity engaged in plantation and farming on a large scale and diversified
across India. On 1st April, 2018, the company has received a government grant for ₹ 20
lakh subject to a condition that it will continue to engage in plantation of eucalypts tree
for a coming period of five years.
The management has a reasonable assurance that the entity will comply with condition
of engaging in the plantation of eucalyptus trees for specified period of five years and
accordingly it recognizes proportionate grant for ₹ 4 lakh in Statement of Profit and
Loss as income following the principles laid down under Ind AS 20
Accounting for Government Grants and Disclosure of Government Assistance.
Required:
Evaluate whether the above accounting treatment made by the management is in
compliance with the applicable Ind AS. If not, advise the correct treatment.
SOLUTION
Arun Ltd. is engaged in plantation and farming on a large scale. This implies that it has
agriculture business. Hence, Ind AS 41 will be applicable.
Further, the government grant has been given subject to a condition that it will continue
to engage in plantation of eucalyptus tree for a coming period of five years. This implies
that it is conditional grant.
In the absence of the measurement base of biological asset, it is assumed that “ Arun
Ltd measures its Biological Asset at fair value less cost to sell”
(i) As per Ind AS 41, the government grant should be recognised in profit or loss when,
and only when, the conditions attaching to the government grant are met ie continuous
plantation of eucalyptus tree for coming period of 5 years. In this case the grant shall
not be recognised in profit or loss until the five years have passed. The entity has
recognised the grant in profit and loss on proportionate basis, which is incorrect.
(ii) However, if the terms of the grant allow of it to be retained according to the time
elapsed, the entity recognises that part in profit or loss as time passes. Accordingly,
the entity can recognise the proportionate grate for 4 lakh in the statement of profit
and Loss based on the terms of the grant.
112 ACCOUNTS
EXTRA QUESTIONS
QUESTION 1
XY Ltd. is a farming entity where cows are milked on a daily basis. Milk is kept in cold
storage immediately after milking and sold to retail distributors on a weekly basi. s. On 1
April 20X1, XY Ltd. ad a herd of 500 cows which were all three years old.
During the year, some of the cows became sick and on 30 September 20X1 , 20 cows died.
On 1 October 20X1, XY Ltd. purchased 20 replacement cows at the market for Rs21,000
each. These 20 cows were all one year old when they were purchased.
On 31 March 20X2, XY Ltd. had 1,000 litres of milk in cold storage which had not been sold
to retail distributors. The market price of milk at 31 March 20X2 Rs. 20 per litre. When
selling the milk to distributors, XY Ltd. incurs selling costs of 1 per litre. These amounts did
not change during March 20X2 and are not e expected to change during April 20X2.
Information relating to fair value and costs to sell is given below:
Date Fair value of a dairy cow (aged) Costs to sell a cow
1 year 1.5 years 3 years 4 years
1st April 20X1 20,000 22,000 27,000 25,000 1,000
1st October 20X1 21,000 23,000 28,000 26,000 1,000
31st March 20X2 21,500 23500 29,000 26,500 1,100
You can assume that fair value of a 3.5 years old cow on 1st October 20X1 is Rs. 27,000.
Pass necessary journal entries of above transactions with respect to cows in the financial
statements of XY Ltd. for the year ended 31st March, 20X2? Also show the amount lying
in inventory if any.
QUESTION 2
Company X purchased 100 beef cattle at an auction for Rs 1,00,000 on 30 September 20X1.
Subsequent transportation costs were Rs 1,000 that is similar to the cost X would have to
incur to sell the cattle at the auction. Additionally, there would be a 2% selling fee on the
market price of the cattle to be incurred by the seller.
On 31 March 20X2, the market value of the cattle in the most relevant market increases
to Rs 1, 10,000. Transportation costs of Rs 1, 000 would have to be incurred by the seller
to get the cattle to the relevant market. An auctioneer’s fee of 2% on the market price of
the cattle would be payable by the seller.
On 1 June 20X2, X sold 18 cattle for Rs 20,000 and incurred transportation charges of
Rs 150. In addition, there was a 2% auctioneer’s fee on the market price of the cattle paid
by the seller.
On 15 September 20X2, the fair value of the remaining cattle was Rs 82,820. 42 cattle
were slaughtered on that day, with a total slaughter cost of Rs 4,200. The total market
price of the carcasses on that day was Rs 48, 300, and the expected transportation cost to
sell the carcasses is Rs 420. No other costs are expected.
On 30 September 20X2, the market price of the remaining 40 cattle was Rs 44,800. The
expected transportation cost is Rs 400. Also, there would be a 2% auctioneer’s fee on the
market price of the cattle payable by the seller.
Pass Journal entries so as to provide the initial and subsequent measurement for all above
transactions. Interim reporting periods are of 30 September and 31 March and the company
determines the fair values on these dates for reporting.
QUESTION 3
On 1st November, 20X1, C Agro Ltd. purchased 100 goats of special breed from a market
for ` 10,00,000 with a transaction cost of 2%. Goats fair value decreased from ` 10,00,000
to ` 9,00,000 as on 31st March, 20X2.
Determine the fair value on the date of purchase and as on financial year ended 31st
March, 20X2 under both the cases viz-
(i) the transaction costs are borne by the seller and

(ii) the transaction costs are incurred by the seller and purchaser both.
Also pass journal entries under both the situations on both dates.
ANSWER
As per para 12 of Ind AS 41, a biological asset shall be measured on initial recognition
and at the end of each reporting period at its fair value less costs to sell. Therefore,
regardless of who bears the transaction costs, the transaction costs of 2% are the costs
to sell the goats on 1st November 20X1, and therefore, the goats should be measured at
their fair value less costs to sell on initial recognition date, i.e., ` 9,80,000.
114 ACCOUNTS
Journal Entry
As on 1st November 20X1:
(i) Where transaction costs are borne by the seller:
Biological assets (Goats) A/c Dr. 9,80,000

Loss on purchase of biological assets (Goats) A/c Dr. 20,000
To Bank A/c 10,00,000
Where transaction costs are borne by the buyer:
Biological assets (Goats) A/c Dr. 9,80,000

Loss on purchase of biological asset (Goats) A/c Dr. 40,000
To Bank A/c 10,20,000
As on 31 March 20X2 – under both the scenarios:
Loss on fair valuation of biological assets A/c Dr. 98,000
To Biological assets (Goats) A/c 98,000
[9,80,000 - (9,00,000 - 18,000)]
QUESTION 4 (RTP MAY 21…..ALREADY DISCUSSED IN RTP VIDEO)
Analyse whether the following activities fall within the scope of Ind AS 41 with proper
reasoning:
 Managing animal-related recreational activities like Zoo

 Fishing in the ocean
 Fish farming
 Development of living organisms such as cells, bacteria and viruses
 Growing of plants to be used in the production of drugs
 Purchase of 25 dogs for security purpose of the company’s premises.
ANSWER
Activity Whether in Remarks

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

ocean from unmanaged sources. There is no management
of biological transformation since fish grow
naturally in the ocean. Hence, it will not fall in the
scope of the definition of agricultural activity.
Fish farming Yes Managing the growth of fish and then harvest for
sale is agricultural activity within the scope of
Ind AS 41 since there is management of biological
transformation of biological assets for sale or
additional biological assets.
Development of Analysis The development of living organisms for research

living organisms required purposes does not qualify as agricultural activity, as
such as cells, those organisms are not being developed for sale,
bacteria or for conversion into agricultural produce or into
viruses additional biological assets. Hence, development
of such organisms for the said purposes does not
fall under the scope of Ind AS 41.
However, if the organisms are being developed for

sale or use in dairy products, the activity will be
considered as agricultural activity under the scope
of Ind AS 41.
116 ACCOUNTS
Growing of Yes If an entity grows plants for using it in production

plants to be of drugs, the activity will be agricultural activity.
used in the Hence it will come under the scope of Ind AS 41.
production of
drugs
Purchase No Ind AS 41 is applied to account for the biological

of 25 dogs assets when they relate to agricultural activity.
for security Guard dogs for security purposes do not qualify
purposes of as agricultural activity, since they are not being
the company’s kept for sale, or for conversion into agricultural
premises produce or into additional biological assets. Hence,
they are outside the scope of Ind AS 41.
IND AS-33 : EARNING PER SHARE 117
IND AS-33 : EARNING PER SHARE
Objective
The objective of this Standard is to prescribe principles for the determination and
presentation of Earnings per share, so as to improve performance comparisons between
different entities in the same reporting period and between different reporting peri-
ods for the same entity.
Even though earnings per share data have limitations because of different accounting
policies that may be used for determining „earnings‟, a consistently determined denomina-
tor enhances financial reporting.
The focus of this Standard is on the denominator of the earnings per share calculation.
Scope
This Indian Accounting Standard shall apply to companies that have issued ordinary
shares to which Indian Accounting Standards (Ind ASs) notified under the Companies
Act apply.
An entity that discloses earnings per share shall calculate and disclose earnings per share
in accordance with this Standard.
When an entity presents both consolidated financial statements and separate financial
statements prepared in accordance with Ind AS 110, „Consolidated Financial Statements‟,
and Ind AS 27, „Separate Financial Statements‟, respectively, the disclosures required
by this Standard shall be presented both in the consolidated financial statements and
separate financial statements.
1. In consolidated financial statements such disclosures shall be based on consolidated

information and in separate financial statements such disclosures shall be based on
information given in separate financial statements.
2. An entity shall not present in consolidated financial statements, earnings per share
based on the information given in separate financial statements and shall not present
in separate financial statements, earnings per share based on the information given
in consolidated financial statements.
118 ACCOUNTS
Measurement
Basic Earnings Per Share
An ordinary share is an equity instrument that is subordinate to all other classes of

equity instruments.
A potential ordinary share is a financial instrument or other contract that may entitle
its holder to ordinary shares.
Examples of potential ordinary shares are:

a. financial liabilities or equity instruments, including preference shares, that are con-
vertible into ordinary shares;
b. options and warrants;
c. shares that would be issued upon the satisfaction of conditions resulting from con-
tractual arrangements, such as the purchase of a business or other assets.
An entity shall calculate basic earnings per share amounts for profit or loss attributable
to ordinary equity holders of the parent entity and, if presented, profit or loss from con-
tinuing operations attributable to those equity holders.
Basic earnings per share shall be calculated by:
Profit or loss attributable to ordinary equity holders of the parent entity

Weighted average number of ordinary shares outstanding during the period
For the purpose of calculating basic earnings per share, the amounts attributable to or-
dinary equity holders of the parent entity in respect of:
a. profit or loss from continuing operations attributable to the parent entity; and
b. profit or loss attributable to the parent entity
adjusted for the after-tax amounts of preference dividends, differences arising on
the settlement of preference shares, and other similar effects of preference shares
classified as equity.
Where any item of income or expense which is otherwise required to be recognised in

profit or loss in accordance with Indian Accounting Standards is debited or credited
to securities premium account/other reserves, the amount in respect thereof shall be
deducted from profit or loss from continuing operations for the purpose of calculating
basic earnings per share.
For the purpose of calculating basic earnings per share, the number of ordinary shares
shall be the weighted average number of ordinary shares outstanding during the period.
The weighted average number of ordinary shares outstanding during the period and for
all periods presented shall be adjusted for events, other than the conversion of potential
ordinary shares that have changed the number of ordinary shares outstanding without a
corresponding change in resources.
Ordinary shares may be issued, or the number of ordinary shares outstanding may be
reduced, without a corresponding change in resources. Examples include:
Diluted Earnings Per Share
An entity shall calculate diluted earnings per share amounts for profit or loss attribut-
able to ordinary equity holders of the parent entity and, if presented, profit or loss from
continuing operations attributable to those equity holders.
For the purpose of calculating diluted earnings per share, an entity shall ADJUST profit
or loss attributable to ordinary equity holders of the parent entity, and the weighted
average number of shares outstanding, for the effects of all dilutive potential ordinary
shares.
Diluted EPS shall be calculated by:

Adjusted Profit/loss attributable to ordinary Equity holders of the parent entity Adjusted
Weighted average number of ordinary shares outstanding during the period
For the purpose of calculating diluted earnings per share, an entity shall adjust profit
or loss attributable to ordinary equity holders of the parent entity, as calculated in ac-
cordance with Basic EPS, by the after-tax effect of:
a. any dividends or other items related to dilutive potential ordinary shares deducted
in arriving at profit or loss attributable to ordinary equity holders of the parent
entity;
b. any interest recognized in the period related to dilutive potential ordinary shares;
and
c. Any other changes in income or expense that would result from the conversion of
the dilutive potential ordinary shares.
120 ACCOUNTS
For the purpose of calculating diluted earnings per share, the number of ordinary shares
shall be the weighted average number of ordinary shares plus the weighted average
number of ordinary shares that would be issued on the conversion of all the dilutive
potential ordinary shares into ordinary shares.
Potential ordinary shares shall be treated as dilutive when, and only when, their conversion
to ordinary shares would decrease earnings per share or increase loss per share from
continuing operations.
Presentation
An entity shall present in the statement of profit and loss basic and diluted earnings per
share for profit or loss from continuing operations attributable to the ordinary equity
holders of the parent entity and for profit or loss attributable to the ordinary equity
holders of the parent entity for the period for each class of ordinary shares that has a
different right to share in profit for the period.
An entity shall present basic and diluted earnings per share with equal prominence for all
periods presented.
An entity that reports a discontinued operation shall disclose the basic and diluted amounts
per share for the discontinued operation either in the statement of profit and loss or in
the notes.
(a) An entity that reports a discontinued operation shall disclose the basic and dilut-
ed amounts per share for the discontinued operation either in the statement of
profit and loss or in the notes.
(b) An entity shall present basic and diluted earnings per share, even if the amounts
are negative (i.e. a loss per share).
Retrospective Adjustments
If the number of ordinary or potential ordinary shares outstanding increases as a result of
a capitalisation, bonus issue or share split, or decreases as a result of a reverse share split,
the calculation of basic and diluted earnings per share for all periods presented shall be
adjusted retrospectively. If these changes occur after the reporting period but before the
financial statements are approved for issue, the per share calculations for those and any
prio r period financial statements presented shall be based on the new number of shares.
Major Changes in Ind AS 33 vis-à-vis IAS 33 Not Resulting in Carve Outs
1. Consolidated Financial Statements and Separate Financial Statements: IAS 33

provides that when an entity presents both consolidated financial statements and
separate financial statements, it may give EPS related information in consolidated
financial statements only, whereas, Ind AS 33 requires EPS related information to be

disclosed both in consolidated financial statements and separate financial statements.
2. Applicability of the Standard: Paragraph 2 of IAS 33 requires that the entire
standard applies to:
(1) the separate or individual financial statements of an entity:
(i) whose ordinary shares or potential ordinary shares are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter mar-
ket, including local and regional markets) or
(ii) that files, or is in the process of filing, its financial statements with a
Securities Regulator or other regulatory organisation for the purpose of
issuing ordinary shares in a public market; and
(2) the consolidated financial statements of a group with a parent:
(i) whose ordinary shares or potential ordinary shares are traded in a public
market (a domestic or foreign stock exchange or an over-the-counter mar-
ket, including local and regional markets) or
(ii) that files, or is in the process of filing, its financial statements with a
Securities Regulator or other regulatory organisation for the purpose of
issuing ordinary shares in a public market.
It also requires that an entity that discloses earnings per share shall calculate and disclose
earnings per share in accordance with this Standard.
The above requirements have been deleted in the Ind AS as the applicability or exemptions
to the Ind ASs are governed by the Companies Act and the Rules made there under.
3. Usage of Information: Paragraph 4 has been modified in Ind AS 33 to clarify that

an entity shall not present in separate financial statements, earnings per share based
on the information given in consolidated financial statements, besides requiring as in
IAS 33, that earnings per share based on the information given in separate financial
statements shall not be presented in the consolidated financial statements.
4. Adjustment of Securities Premium: In Ind AS 33, a paragraph has been added after
paragraph 12 on the following lines -
“Where any item of income or expense which is otherwise required to be recognized in

profit or loss in accordance with Indian Accounting Standards is debited or credited
to securities premium account/other reserves, the amount in respect thereof shall be
deducted from profit or loss from continuing operations for the purpose of calculating
basic earnings per share.”
122 ACCOUNTS
5. Amortisation of Discount or Premium: In Ind AS 33 paragraph 15 has been amended

by adding the phrase, „irrespective of whether such discount or premium is debited
or credited to securities premium account‟ to further clarify that such discount or
premium shall also be amortised to retained earnings.
6. Disclosure of Amounts of per Share using a Reported Component : IAS 33 requires
disclosure of amounts of per share using a reported component, basic and diluted
earnings per share and basic and diluted earnings per share for discontinued opera-
tions in the separate income statement, where separate income statement is pre-
sented. This requirement is not provided in Ind AS 33 consequential to the removal
of option regarding two statement approach in Ind AS 1. Ind AS 1 requires that the
components of profit or loss and components of other comprehensive income shall be
presented as a part of the statement of profit and loss.
Major Changes in Ind AS 33 vis a vis Notified AS 20
(i) Options held by the Entity on its Shares: Existing AS 20 does not specifically deal
with options held by the entity on its shares, e.g., purchased options, written put op-
tion etc. Ind AS 33 deals with the same.
(ii) Presentation of Basic and Diluted EPS from Continuing and Discontinued Opera-
tions: Ind AS 33 requires presentation of basic and diluted EPS from continuing and
discontinued operations separately. However, existing AS 20 does not require any
such disclosure.
(iii) Disclosure of EPS with and without Extraordinary Items: Existing AS 20 requires
the disclosure of EPS with and without extraordinary items. Since as per Ind AS 1,
„Presentation of Financial Statements‟, no item can be presented as extraordinary item,
Ind AS 33 does not require the aforesaid disclosure.
PRACTICAL QUESTIONS ON BASIC EPS
CONCEPT RELATED WITH PREFERENCE SHARES
QUESTION NO 1 (CONCEPT OF PREFERENCE DIVIDEND)
Genistar Tubes Inc had issued 10% Preference shares of face value $ 10. Premium on re-
demption will be 20% on the date of redemption (after 5 years). Net Profits after Tax $
750 million and $ 790 million for 20-16 and 2017 respectively. Number of equity shares
16 million and preference shares 3 million. Compute Basic EPS. (hit IRR for Cash flows =
11.59%).
QUESTION 2 (EARLY BUY BACK/REDEMTION OF PSC)
ABC Ltd. issues 9% preference shares of fair value of ` 10 each on 1.4.20X1. Total value of
the issue is 10,00,000. The shares are issued for a period of 5 years and would be redeemed
at the end of 5th year. The shares are to be redeemed at ` 11 each.
At the end of the year 3, i.e. on 31.3.20X4, company finds that it has earned good returns
than expected over last three years and can make the redemption of preference shares
early. To compensate the shareholders for two years of dividend which they need to forego,
company decided to redeem the shares at ` 12 each instead of original agreement of ` 11.
Comment on the impact of early conversion of preference shares at a premium on earnings
for the year 20X3-20X4 attributable to ordinary equity holders of ABC Ltd. for basic EPS.
Ignore the EIR impact in the solution and answer on the basis of Ind AS 33 only.
QUESTION 3 (DIFFERENT CASES RELATED WITH PREFERENCE SHARES
An entity has following preference shares in issue at the end of 20X4:

• 5% redeemable, non-cumulative preference shares: These shares are classified as li-
abilities. During the year, a dividend was paid on the 5% preference shares- ` 100,000.
• Increasing–rate, cumulative, non-redeemable preference shares issued at a discount
in 20X0, with a cumulative dividend rate from 20X5 of 10%: The shares were issued
at a discount to compensate the holders, because dividend payments will no commence
until 20X5. The accrual for the discount in the current year, calculated using the effec-
tive interest method amounted to, say, ` 18,000. These shares are classified as equity
– ` 200,000.
• 8% non-redeemable, non- cumulative preference shares: At the beginning of the
year, the entity had ` 100,000 8% preference shares outstanding but, at 30 June 20X4,
it repurchased ` 50,000 of these at a discount of ` 1,000 – ` 50,000.
124 ACCOUNTS
• 7% cumulative, convertible preference shares (converted in the year): These shares

were classified as equity, until their conversion into ordinary shares at the beginning of
the year. No dividend was accrued in respect of the year, although the previous year’s
dividend was paid immediately prior to conversion. To induce conversion, the terms of
conversion of the 7% convertible preference shares were also amended, and the revised
terms entitled the preference shareholders to an additional 100 ordinary shares on
conversion with a fair value of ` 300 – Nil.
The profit after tax for the year 20X4 is ` 150,000.
Determine the adjustments for the purpose of calculating EPS.
QUESTION NO 4 (ITEMS ROUTED THROUGH SECURITIES PREMIUM)
X Ltd. earns net profit post tax for 2015-16 Rs. 33,000. During the year underwriting com-
mission is incurred Rs. 2,000 on issue of prefence shares. The same is adjusted in securities
premium a/. WANES = 1000 shares. Compute EPS for 2015-16.
CALCULATION OF WANS
QUESTION NO 5
Calculate the weighted average number of shares on the basis of following table:-
No of shares No of shares No of shares
issued bought back outstanding
1st January 99 Opening balance 1800 - 1800
31.5.99 Issue of shares - 2400

for cash
1.11.99 Buy back of 300 2100

shares
31.12.99 Balance at the 2100

end of year
SOLUTION
Computation of weighted average as per para 17 of IND AS 33 (refer point 20.2-1).
(1800x5/12) + (2400 x 5/12) + (2100 x 2/12) = 2100 shares.
The weighted average number of shares can alternatively be computed as follows:
(1800x12/12) + (600 x 7/12) – (300x2/12) = 2100 shares
QUESTION NO 6
Following is the data for company XYZ in respect of number of equity shares during the
financial year 20X1-20X2. Find out the number of shares for the purpose of calculation of
basic EPS as per Ind AS 33.
S.No Date Particulars No of shares
1 1-Apr-20X1 Opening balance of outstanding equity shares 100,000
2 15- Jun-20X1 Issue of equity shares 75,000
3 8- Nov- 20X1 Conversion of convertible preference shares 50,000

in Equity
4 22- Feb- 20X2 Buy back of shares (20,000)
5 31-Mar-20X2 Closing balance of outstanding equity shares 205,000
(ASSUME 365 DAYS IN A YEAR)
QUESTION NO 7
Given below are the details of equity share capital of ABC Limited for the year 2001:
Particulars No of shares in Face value:
lacs amount (Rs. in
lacs)
Balance if fully paid up equity as on 1.1.2001 100 1000
Convertible debentures converted into fully paid up

equity shares on 1.7.2001
50 500
Equity shares bought back on 1.11.2001
30 300
Net profit after tax Rs.240 Lacs.
ADJUSTMENT OF BONUS SHARES
QUESTION 8
On 31 March, 20X2 the issued share capital of a company consisted of ` 100,000,000 in

ordinary shares of ` 25 each and ` 500,000 in 10% cumulative non-redeemable preference
shares (classified as equity) of Re 1 each. On 1 October, 20X2, the company issued 1,000,000
126 ACCOUNTS
ordinary shares fully paid by way of capitalisation of reserves in the proportion 1:4 for the
year ended 31 March, 20X3.
Profit for 20X1-20X2 and 20X2-20X3 is ` 450,000 and ` 550, 000 respectively.
Calculate the basic EPS for 20X1-20X2 and 20X2-20X3.
QUESTION 9
X Ltd.
1 January 1,000,000 shares in issue
28 February Issued 200,000 shares at fair value
31 August Bonus issue 1 share for 3 shares held
30 November Issued 250, 000 shares at fair value
Calculate the number of shares which would be used in the basic EPS calculation. Consider
reporting date as December end.
QUESTION NO 10 (BONUS ISSUE)
Net profit for the year 2000 Rs.18,00,000
Net profit for the year 2001 Rs.60,00,000
No of equity shares outstanding until 20,00,000

30.9.2001
2 equity shares for each equity share out-
Bonus issue 1.10.2001 standing at 30.9.2001
(ANSWER: BASIC EPS 2001:1, BASIC EPS RESTATED 2000:.3 PAISE)
QUESTION NO 11 (BOUNS ISSUE)
Given below equity shares capital details of XYZ Limited for the year 2000 and 2001:
Details No of shares Amount
Equity shares of Rs.10 each fully paid up on 1.1.2001 10,00,000 1,00,00,000
Bonus issue on 1.6.2001 10,00,000 1,00,00,000

Net profit 2000- Rs.45,00,000, Net profit 2001-Rs.60,00,000.
(ANSWER: BASIC EPS 2001:3, BASIC EPS RESTATED 2000:2.25)

QUESTION NO 12 (BONUS ISSUE)
As a statutory auditor for the year ended 31.3.2020 how would you deal with the follow-
ing: As on 31.3.2019 the equity share capital of Q Ltd. is Rs.10crores divided into shares
of Rs.10 each. During the financial year 2019-20, it has issued bonus shares in the ratio of
1:1. The net profit after tax for the years 31.3.2019 and 31.3.2020 is Rs.8.50crores and
Rs.11.50crores respectively. The EPS disclosed in the accounts for two years is Rs.8.50 and
5.75 respectively.
QUESTION NO 13
Calculate from the following information basic earning per share.

* Net Profit Rs. 50 Lakhs
* 10% preference share of Rs. 100 Lakhs
* Number of equity shares in the beginning of the year 10 Lakhs
* No. of Bonus shares issued in the middle of the year 5 Lakhs
ANS. RS. 2.67
ADJUSTMENT OF RIGHT SHARES
QUESTION 14
At 31 December 20X1, the issued share capital of a company consisted of 1.8 million ordinary
shares of ` 10 each, fully paid. The profits for the year ended 31 December 20X1 and 20X2
amounted to ` 630,000 and ` 875,000 respectively. On 31 March 20X2, the company made
a rights issue on a 1 for 4 basis at ` 30. The market price of the shares immediately before
the rights issue was ` 60.
Calculate BASIC EPS.
128 ACCOUNTS
QUESTION NO 15 (RIGHT ISSUE)

Accounting Year is Calendar year
Net profit Year 2000: Rs.11,00,000
Year 2001: Rs.15,00,000
No of shares outstanding prior to right issue 5,00,000 shares
Right issue One new share for each five outstanding

(i.e., 1,00,000 new shares)
Right issue price:Rs.15 last date to
exercise rights: 1st March 2001
Fair value of one equity share immediately Rs.21

prior to exercise of rights on 1st March 2001
QUESTION NO 16 (RIGHT ISSUE)
Given below are the details of equity shares of MN Limited during 2000 and 2001:
Details No of shares Amount
(in lacs) (Rs. in lacs)

Equity shares fully paid up on 1.1.2000 1,000 10,000
Right issue on 1.7.2001 1,000 2,000
 Closing market price on 30.6.2001 : Rs.35

 Price of right : Rs.20
 Net profit after tax (Rs. in lacs) for the year ended 31.12.2000 :2200
 Reported basic EPS for the year ended 31.12.2000 : Rs.2.20
 Net profit after tax (Rs.in lacs ) for the year ended 31.12.2001 :2400
ADJUSTMENT OF PARTLY PAID UP SHARES
QUESTION 17
An entity issues 100, 000 ordinary shares of Re 1 each for a consideration of 2.50 per share.
Cash of ` 1.75 per share was received by the balance sheet date. The party paid shares are
entitled to participate in dividends for the period in proportion to the amount paid.
Calculate number of shares for calculation of Basis EPS.
QUESTION NO 18
Particulars No. Amount

Equity shares of Rs.10 each fully paid up on 1.4.2020 10,00,000 99,00,000
Calls in arrears on 1.4.2020 1,00,000
Calls in arrears received on 1.6.2020 50,000
New issue (10 each) amount paid up on 1.10.2020 Rs.7.5 10,00,000 75,00,000
Calls in arrears received on 1.3.2021 50,000
PBT for the year ended on 31.3.2021: Rs.2,62,00,000, Tax provision: Rs.30,00,000. 10%
preference share capital issued on 1.7.2000: Rs.20,00,000.
QUESTION NO 19 (DIFFERENT DIVIDEND RIGHTS)
XYZ Limited has the following different classes of equity shares of Rs.10 each, outstanding
as at March 31, 2020 having disproportionate rights with respect to voting and dividends:
Number of shares Rights as to share in net profit to the ex-
tent of capital
1,00,000 “A” class equity shares Proportionate to capital
30,000 “B” class equity shares In the proportion of 3:2 with respect to “A”
class shares
30,000 “C” class equity shares In the proportion of 5:2 with respect to “A”
class share.
40,000 “D.” class equity shares In the proportion of 3:1 with respect to “A”
class shares.
Profit for the year ended March 31, 2020 was Rs.8,00,000. Calculate basic eps for each
class of shares
ADJUSTMENT OF SHARE SPLIT/SHARE CONSOLIDATION
QUESTION NO 20 (SHARE SPLIT/SHARE CONSOLIDATION)
COSY COMFORTS Limited earns a Net Profit for the year 2006-2007 Rs. 20, 00,000 after
tax. The corresponding figure for the last year was Rs. 16,00,000. Its Capital Structure
contains 80,000 Shares of Rs. 10 each. On 07.11.2006 it has decided to consolidate the
shares from Rs. 10 each to Rs. 100 each. Calculate Basic EPS and Restated EPS.
130 ACCOUNTS
ADJUSTMENT OF SHARES ISSUED IN BUSINESS COMBINATION
QUESTION NO 21 (ACQUISITION OF BUSINESS)
Given below information relating to equity shares of A Limited and B Limited. Two compa-
nies amalgamated w.e.f. 1-10-2020. A Limited issued the required No. of shares on the basis
of the agreed valuation.
A Limited B Limited
No of outstanding equity shares as on 1.4.2020 (No. 500 200

in lakhs)
Agreed value per share for acquisition

Date of acquisition 1-10-2020 120 30
Profit after tax (Rs. In lakhs) 500 200
Profit after tax during 1-10-2020—31-3-2021 (Rs. In lakhs) 1200
QUESTION NO 22 (ACQUISITION OF BUSINESS)
On June 30, 2020, A limited acquired B limited

The following is the relevant information for the year ended 31st March 2021:
Particulars A Limited B Limited
Net profit (Rs.)

Until Acquisition 5,00,000 2,00,000
After Acquisition to year end 8,00,000
(March 31, 2021)

Number of shares (Rs.10 each)
At the start of the year 6,000 4,000
On the date of Acquisition 6,000 4,000

At year end (March 31, 2021) 10,000
Compute the E.P.S of A Limited at the year end, i.e., March 31, 2021
ADJUSTMENT OF CONVERTIBLE DEBENTURES
QUESTION 23
Entity A has in issue 25,000 4% debentures with a nominal value of Re 1. The debentures
are convertible to ordinary shares at a rate of 1: 1 at any time until 20X9. The entity’s
management receives a bonus based on 1% of profit before tax.
Entity A’s results for 20X2 showed a profit before tax of ` 80,000 and a profit after tax
of ` 64,000 (for simplicity, a tax rate of 20% is assumed in this example).
Calculate Earnings for the purpose of diluted EPS.
(Note: The given debentures are not mandatory convertible)
QUESTION 24
ABC Ltd. has 1,000,000 ` 1 ordinary shares and 1,000 ` 100 10% convertible bonds (issued
at par), each convertible into 20 ordinary shares on demand, all of which have been in issue
for the whole of the reporting period.
ABC Ltd.‘s share price is ` 4.50 per share and earnings for the period are ` 500,000. The
tax rate applicable to the entity is 21%
Calculate basis EPS, earnings per incremental share for the convertible bonds and diluted
EPS.
QUESTION 25
At 30 June 20X1, the issued share capital of an entity consisted or 1,500,000 ordinary
shares of ` 1 each. On 1 October 20X1, the entity issued ` 1,250,000 of 8% convertible loan
stock for cash at par. Each ` 100 nominal of the loan stock may be converted, at any time
during the years ended 20X6 to 20X9, into the number of ordinary shares set out below:
30 June 20X6: 135 ordinary shares;
30 June 20X7: 130 ordinary shares;
30 June 20X8: 125 ordinary shares; and
30 June 20X9: 120 ordinary shares.
If the loan stocks are not converted by 20X9, they would be redeemed at par.
This illustration assumes that written equity conversion option is accounted for as a derivative
liability and marked to market through profit or loss. The change in the option ‘fair value
reported in 20X2 and 20X3 amounted to losses of ` 2,500 and ` 2,650 respectively. It is
assumed that there are no tax consequences arising from these losses.
The profit before interest, fair value movements and taxation for year ended 30 June
20X2 and 20X3 amounted to ` 825,000 and ` 895,000 respectively and relate wholly to
132 ACCOUNTS
continuing operations. The rate of tax both periods is 33%

Calculate Basic and Diluted EPS.
QUESTION 26
An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three-
year term, and are issued at par with a face value of ` 1,000 per bond, giving total proceeds
of ` 2,000,000. Interest is payable annually in arrears at a nominal annual; interest rate of
6 per cent. Each bond is convertible at any time up to maturity into 250 ordinary shares.
The entity has an option to settle the principal amount of the convertible bonds in ordinary
shares or in cash.
When the bonds are issued, the prevailing market interest rate for similar debt without a
conversion option is 9 per cent. At the issue date, the market price of one ordinary share
is ` 3. Income tax is ignored.
Calculate basic and diluted EPS when
Profit attributable to ordinary equity holders of the parent entity Year1 ` 1,000,000
Ordinary shares outstanding 1,200,000
Convertible bonds outstanding 2,000
ADJUSTMENT OF PARTICIPATING EQUITY INSTRUMENTS
QUESTION 27
An entity has two classes of shares in issue:

• 5,000 non- convertible preference shares
• 10,000 ordinary shares
The preference shares are entitled to a fixed dividend of ` 5 per share before any dividends
are paid on the ordinary shares. Ordinary dividends are then paid in which the preference
Shareholders do not participate. Each preference share then participates in any additional
ordinary dividend above ` 2 at a rate of 50% of any additional dividend payable on an
ordinary share.
The entity’s profit for the year is ` 100,000, and dividends or ` 2 per share are declared
on the ordinary shares.
Compute the allocation of earnings for the purpose of calculation of Basic EPS when an
entity has ordinary shares & participating equity instruments that are not convertible into
ordinary shares.
QUESTION 28
(This illustration does not illustrate the classification of the components of convertible
financial instruments as liabilities and equity or the classification of related interest and
dividends as expenses and equity as required by Ind AS 32).
Profit attributable to equity holders of the parent entity ` 100,000
Ordinary shares outstanding 10,000

Non-convertible preference shares 6,000
Non-cumulative annual dividend on preference shares (before any ` 5.50 per share
dividend is paid on ordinary shares)
After ordinary shares have been paid a dividend or ` 2.10 per share,
the preference shares participate in any additional dividends on a
20:80 ratio ordinary shares.
Compute the allocation of earnings for the purpose of calculation of Basic EPS when an
entity has ordinary shares & participating instruments that are not convertible into ordinary
shares.
ADJUSTMENT OF CONTINGENTLY ISSUABLE SHARES
QUESTION 29
Contingently issuable shares

Ordinary shares outstanding during 20X1 1,000,000 (there were no options, warrants or
Convertible instruments outstanding during period)
An agreement related to a recent business combination provides for the issue of additional
ordinary shares based on the following conditions:
5,000 additional ordinary shares for each new retail site opened during 20X1
1,000, additional ordinary shares for each ` 1,000 of Consolidated profit in excess of `
2,000,000 for the year ended 31 December 20X1
Retail sites opened during the year: One on 1 May 20X1
One on 1 September 20X1
Consolidated year-to-date profit ` 1,100,000 as of 31 March 20X1
attributable to ordinary equityholders of the parent entity:
` 2,300,000 at of 30 June 20X1
` 1,900,000 as of 30 September 20X1 (including a
134 ACCOUNTS
` 450,000 loss from a discontinued operation)

` 2,900,000 as of 31 December 20X1
Calculate basic and diluted EPS.
QUESTION NO 30
ABC Company has issued contingently issuable on 1st January 20X1. The condition to be sat-
isfied is the average turnover of the company for last three quarters must exceed ` 100
million. If the condition is satisfied the company will issue the shares within a period of 6
months. The conditions will be effective from the quarter ending 31st March 20X1. Company
achieves the said target on ending 31st December 20X1.
ADJUSTMENT OF EMPLOYEE STOCK OPTION PLAN
QUESTION 31
Effects of share options on diluted earnings per share

Profit attributable to ordinary equity holders of the parent entity for ` 1,200,000
year 20X1
Weighted average number of ordinary shares outstanding during year 500,000 shares
20X1
Average market price of one ordinary share during year 20X1 ` 20.00
Weighted average number of shares under option during year 20X1 100,000 shares
Exercise price for shares under option during year 20X1 ` 15.00
ADJUSTMENT OF WRITTEN OPTION CONTRACTS
QUESTION 32
At 31 December 20X7 and 20X8, the issued share capital of an entity consisted of
4,000,000 ordinary shares of ` 25 each. The entity has granted options that give holders
the right to subscribe for ordinary shares between 20Y6 and 20Y9 at ` 70 per share.
Options outstanding at 31 December 20X7 and 20X8 were 630,000. There were no grants,
exercises or lapses of options during the year. The profit after tax, attributable to ordinary
equity holders for the years ended 31 December 20X7 and 20X8, amounted to ` 500,000
and ` 600,000 respectively (wholly relating to continuing operations).
Average market price of share:
Year ended 31 December 20X7 = ` 120
Year ended 31 December 20X8 = ` 160
QUESTION NO 33 (CALL OPTIONS)
K Limited has 4,00,000 ordinary shares outstanding of face value Rs. 2 each. The company
has written call options on own shares 6,000. Premium is already received on all option Rs.
12. The strike price was Rs. 100. The average market price Rs. 120. Total maturity of the
option is 3 months. Net profit to ordinary shareholder is Rs. 20,00,000. The option will be
settled gross delivery based. Compute EPS.
QUESTION NO 34 (PUT OPTIONS)
Cherry Berry Corp. has written put options on own shares 20,000 options. Premium is al-
ready received on option Rs. 75. The strike price was rs. 400. The average market price
Rs. 250. Net Profit for the year 2015-16 for ordinary shareholder is Rs. 76,42,000. On
1/4/2015 7,00,000 ordinary shares outstanding of face value Rs. 100 each. The options will
be settled gross delivery based. Compute EPS.
QUESTION NO 35 (PUT OPTIONS)
Global Paints Ltd. has purchased 60000 put options on own equity shares @ Rs. 600. The
Fair Value of the shares Rs. 450. Net Profit attributable to the equity shareholders Rs. 36
crores. WANES 9,00,000.
ANSWER:
No need to calculate diluted EPS because it would be Anti – dilutive. It’s a case of pur-
chased options.
EPS CALCULATION IN CONSOLIDATED FINANCIAL STATEMENT
QUESTION NO 36 (CFS & SFS)
M Limited is a parent company of subsidiary H Limited wit 80% stake. For the year 2015-16
M Limited earns net profit for equity Rs. 7,00,000 and H earns profits of Rs. 2,00,000. M
Limited has 25,000 equity shares and H Ltd. has 10,000 equity shares. Compute EPS in the
books of 1) M Limited both as per SFS and CFS 2) H Limited only as per SFS.
136 ACCOUNTS
QUESTION 37
Calculate Subsidiary’s and Group’s Basic EPS and Diluted EPS, when
Parent:
Profit attributable to ordinary equity ` 12,000 (excluding any earnings of, or
holders of the parent entity dividends paid by, the subsidiary)
Ordinary shares outstanding 10,000
Instruments of subsidiary owned by the 800 ordinary shares
parent
30 warrants exercisable to purchase
ordinary shares of subsidiary
300 convertible preference shares
Subsidiary:
Profit ` 5,400
Ordinary shares 1,000
outstanding
Warrants 150, exercisable to purchase ordinary shares of the subsidiary
Exercise price ` 10
Average market price of ` 20
one ordinary share
Convertible preference 400,each convertible into one ordinary share
shares
Dividend on preference Re 1 per share
shares
No inter – company elimination or adjustments were necessary except for dividends.
Ignore income taxes. Also, ignore classification of the components of convertible financial
instruments as liabilities and equity or the classification of related interest and dividends
as expenses and equity as required by Ind AS 32.
TEST YOUR KNOWLEDGE

QUESTION 1
ABC 1 January 20X1 Shares in issue 1,000,000

31 March 20X1 (a) Rights issue 1 for 5 at 90 paise
(b) Fair value of shares Re 1 (cum-rights price)
Calculate the number of shares of use in the EPS calculation for the calendar year.
QUESTION 2
1 January Shares in issue 1,000,000

5% Convertible bonds ` 100,000
(terms of conversion 120 ordinary shares for ` 100)
31 March Holders of ` 25,000 bonds converted to ordinary shares.
Profit for the year ended 31 December ` 200,000
Tax rate 30%
Calculate basic and diluted EPS. Ignore the need to split the convertible bonds into liability
and equity elements.
QUESTION 3
1 January Shares in issue 1,000,000

Profit for the year ended 31 December ` 100,000
Average fair value during period ` 8
The company has in issue 200,000 options to purchase equity ordinary shares
Exercise price ` 6
Calculate the diluted EPS for the period.
QUESTION 4
Calculate Basic EPS for period ending 20X0, 20X1 and 20X2, when
20X0 20X1 20X2
Profit attributable to ordinary equity ` 1,100 ` 1,500 ` 1,800
holders of the parent entity
Shares outstanding before rights issue 500 shares
138 ACCOUNTS
Rights issue One new share for each five outstanding shares
Exercise price ` 5.00
Date of rights issue 1 January 20X1

Last date to exercise rights 1 March 20X1
Market price of one ordinary share im- ` 11.00
mediately before exercise on 1 March
20X1:
Reporting date 31 December
QUESTION NO 5 (DILUTED EPS IN LOSS MAKING COMPANY)
How would Diluted EPS be calculated for a loss making enterprise? To illustrate, at Decem-
ber 31, 20X2, a company has 2,000 shares of face value of Rs.10 each. The stock options
outstanding at December 31,20X2 were for 400 shares of face value Rs.10 each. The net
loss for the year 20X2 was Rs.1,200,000. The fair value of the shares on the date of grant
and the exercise price were Rs.100 and Rs.60 per share, respectively.
QUESTION NO 6
Undivided Ltd. having a net profit of Rs.40,000 from continuing operations and net loss of
Rs. 30,000 from discontinuing operations. The company has 20,000 equity shares and 500
Potential equity shares.
Compute Basic EPS & Dilutive EPS of Undivided Ltd.
EXTRA QUESTIONS
QUESTION 1
Assume the following facts for Company XY:

Income from continuing operations: INR 30,00,000
Loss from discontinued operations: (INR 36,00,000)
Net loss: (INR 6,00,000)
Weighted average Number of shares outstanding 10,00,000
Incremental common shares outstanding relating to stock options 2,00,000
(a) You are required to calculate the basic and diluted EPS for Company XY from the
above information.
(b) Assume, if in above case, Loss from continued operations is ` 10,00,000 and income
from discontinued operations is ` 36,00,000 calculate the diluted EPS.
QUESTION 2 (RTP MAY 2020….ALREADY DISCUSSED IN RTP VIDEOS)

CAB Limited is in the process of preparation of the consolidated financial statements of
the group for the year ending 31st March, 20X3 and the extract of the same is as follows:
Particulars Attributable to Non-controlling Total

CAB Limited interest (` in ‘000)
Profit for the year 39,000 3,000 42,000
Other Comprehensive Income 5,000 Nil 5,000

Total Comprehensive Income 44,000 3,000 47,000
The long-term finance of the company comprises of the following:
(i) 20,00,00,000 equity shares at the beginning of the year and the company has issued
5,00,00,000 shares on 1st July, 20X2 at full market value.
(ii) 8,00,00,000 irredeemable preference shares. These shares were in issue for the
whole of the year ended 31st March, 20X3. The dividend on these preference shares
is discretionary.
140 ACCOUNTS
(iii) ` 18 crores of 6% convertible debentures issued on 1st April, 20X1 and repayable on
31st March, 20X5 at par. Interest is payable annually. As an alternative to repayment
at par, the holder on maturity can elect to exchange their convertible debentures for
10 crores ordinary shares in the company. On 1st April, 20X1, the prevailing market
interest rate for four-year convertible debentures which had no right of conversion
was 8%. Using an annual discount rate of 8%, the present value of ` 1 payable in four
years is 0.74 and the cumulative present value of ` 1 payable at the end of years one
to four is 3.31.
In the year ended 31st March, 20X3, CAB Limited declared an ordinary dividend of 0.10 paise
per share and a dividend of 0.05 paise per share on the irredeemable preference shares.
Compute the following:
• the finance cost of convertible debentures and its closing balance as on 31st March,
20X3 to be presented in the consolidated financial statements.
• the basic and diluted earnings per share for the year ended 31st March, 20X3. Assume
that income tax is applicable to CAB Limited and its subsidiaries at 25%.
ANSWER
Calculation of the liability and equity components on 6% Convertible debentures:
Present value of principal payable at the end of 4th year (` 1,80,000 thousand x 0.74)
= ` 1,33,200 thousand
Present value of interest payable annually for 4 years (` 1,80,000 thousand x 6% x 3.31)
= ` 35,748 thousand
Total liability component = ` 1,68,948 thousand
Therefore, equity component = ` 1,80,000 thousand – ` 1,68,948 thousand = ` 11,052
thousand
Calculation of finance cost and closing balance of 6% convertible debentures
Year Opening Finance cost Interest paid Closing balance

balance @ 8% @ 6% ` in ’000
` in ’000 ` in ’000 ` in ’000
a b = a x 8% c d=a+b-c
31.3.20X2 1,68,948 13,515.84 10,800 1,71,663.84

31.3.20X3 1,71,663.84 13,733.11 10,800 1,74,596.95
Finance cost of convertible debentures for the year ended 31.3. 20X3 is ` 13,733.11
thousand and closing balance as on 31.3. 20X3 is ` 1,74,596.95 thousand.
Calculation of Basic EPS ` in ’000
Profit for the year 39,000

Less: Dividend on preference shares (80,000 thousand x ` 0.05) (4,000)
Profit attributable to equity shareholders 35,000
Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)}

= 23,75,00,000 shares or 2,37,500 thousand shares
Basic EPS = ` 35,000 thousand / 2,37,500 thousand shares
=
` 0.147
Calculation of Diluted EPS ` in ’000

Less: Dividend on preference shares (80,000 x 0.05) (4,000)
Add: Finance cost (as given in the above table) 13,733.11 35,000
Less: Tax @ 25% (3,433.28) 10,299.83
45,299.83
Weighted average number of shares

= 20,00,00,000 + {5,00,00,000 x (9/12)} + 10,00,00,000
= 33,75,00,000 shares or 3,37,500 thousand shares
Diluted EPS = ` 45,299.83 thousand / 3,37,500 thousand shares
=
` 0.134
142 ACCOUNTS
NOTES
SCHEDULE III 143
SCHEDULE III
Financial Statements for a company whose financial statements are drawn up in
compliance of the Companies (Indian Accounting Standards) Rules, 2015.
GENERAL INSTRUCTIONS FOR PREPARATION OF FINANCIAL

STATMENT OF A COMPANY
REQUIRED TO COMPLY WITH Ind AS

1. Every company to which Indian Accounting Standards apply, shall prepare its financial
statements in accordance with this Schedule or with such modification as may be
required under certain circumstances.
2. Where compliance with the requirements of the Act including Indian Accounting
Standards (except the option of presenting assets and liabilities in the order of
liquidity as provided by the relevant Ind AS) as applicable to the companies require
any change in treatment or disclosure including addition, amendment substitution or
deletion in the head or sub-head or any changes inter se, in the financial statements or
statements forming part thereof, the same shall be made and the requirements under
this Schedule shall stand modified accordingly.
3. The disclosure requirements specified in this Schedule are in addition to and not
in substitution of the disclosure requirements specified in the Indian Accounting
Standards. Additional disclosures specified in the Indian Accounting Standards shall
be made in the Notes or by way of additional statement or statements unless required
to be disclosed on the face of the Financial Statements. Similarly, all other disclosures
as required by the Companies Act, 2013 shall be made in the Notes in addition to the
requirements set out in this Schedule.
4. (i) Notes shall contain information in addition to that presented in the Financial
Statements and shall provide where required-
(a) narrative description or disaggregation of items recognised in those statements;
and
(b) information about items that do not qualify for recognition in those statements.
ach item on the face of the Balance Sheet, Statement of Changes in Equity and
E
Statement of Profit and Loss shall be cross-referenced to any related information
in the Notes. In preparing the Financial Statements including the Notes, a balance
shall be maintained between providing excessive detail that may not assist users of
Financial Statements and not providing important information as a result of too much
aggregation.
144 ACCOUNTS
5. Depending upon the turnover of the company, the figures appearing in the Financial
Statements shall be rounded off as below:
Turnover Rounding off

(i) less than one hundred crore rupees To the nearest hundreds, thousands, lakhs
or millions, or decimals thereof
(ii) one hundred crore rupees or more To the nearest, lakhs, millions or crores, or
decimals thereof.
Once a unit of measurement is used, it should be used uniformly in the Financial

Statements.
6. Financial Statements shall contain the corresponding amounts (comparatives) for the
immediately preceding reporting period for all items shown in the Financial Statement
including Notes except in the case of first Financial Statements laid before the
company after incorporation.
7. Financial Statements shall disclose all ‘material’ items, i,e, the items if they could.
individually or collectively, influence the economic decisions that users make on the
basis of the financial statements. Materiality depends on the size or nature of the
item or a combination of both, to be judged in the particular circumstances.
8. For the purpose of this Schedule, the terms used herein shall have the same meanings
assigned to them in Indian Accounting Standards.
9. Where any Act or Regulation requires specific disclosure to be made in the standalone
financial statement of a company, the said disclosure shall be made in addition to those
required under this Schedule.
Note: This Schedule sets out the minimum requirements for disclosure on the face of the
Financial Statements, i.e, Balance Sheet, Statement of Changes in Equity for the period,
the Statement of profit and Loss for the period (The term ‘Statement of Profit and Loss’
has the same meaning as Profit and Loss Account) and Notes. Cash flow statement shall
be prepared, where applicable, in accordance with the requirement of the relevant Indian
Accounting Standard.
Line items, sub-line items and sub-totals shall be presented as an addition or substitution on
the face of the Financial Statements when such presentation is relevant to an understanding
of the company’s financial position or performance to cater to industry or sector-specific
disclosure requirements or when required for compliance with the amendments to the
Companies Act, 2013 or under the Indian Accounting Standards.
SCHEDULE III 145
PART I - BALANCE SHEET

Name of the Company....................
Balance Sheet as at ......................
(Rupees in.........)
Particular Note Figures as Figures as at

No. at the end the end of
of current the previous
reporting reporting
period period
1 2 3 4
(1) ASSETS
Non-current assets
(a) Property, Plant and Equipment
(b) Capital work-in-progress
(c) lnvestment Property
(d) Goodwill
(e) Other Intangible assets
(f) Intangible assets under development
(g) B
iological Assets other than bearer
plants
(h) Financial Assets
(i) Investments
(j) Trade receivables
(k) Loans
(c) Deferred tax assets (net)
(d) Other non-current assets
(2) Current assets
(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Cash and cash equivalents
146 ACCOUNTS
(iv) Bank balances other than (iii) above

(v) Loans
(vi) Others (to be specified)
(c) Current Tax Assets (Net)
(d) Other current assets
Total Assets
Equity and liabilities
Equity
(a) Equity Share capital
(b) Other Equity
(1) Liabilities
(a) Financial Liabilities
(i) Borrowings
(ii) Trade payables
Other financial liabilities (other than those
specified in item (b), to be specified)
(b) Provision
(c) Deferred tax liabilities (Net)
(d) Other non-current liabilities
(2) Current liabilities
(a) Borrowigns
(a) Trade payables
(a) ther findnical liabilities (other
O
than those specified in item (C)
(b) Other current liabilities
(c) Provision
(d) Current Tax Liabilities (Net)
Total Equity and Liabilities

SCHEDULE III 147
see accompanying notes to the financial statements
STATEMENT OF CHANGES IN EQUITY
Name of the Company..............

Statement of Changes in Equity for the period ended ............
A. Equity Share Capital
Balance at the beginning of Changes in equity share capital Balance at the end of the
the reporting period during the year reporting period
A. Other Equity
148
Reserve and Surplus Debt in-

strument
Share Equity Capital Secu- Other Retained through Equity Effec- Re- Exchange Other Money Total
applica- compo- Re- rities Re- Earning other Instru- tive valuation differ- items of re-
tion on nent of serve Premium serve compre- ment portion Surplus ence on other ceived
money com- Reserve (Spec- hensive through of cash translat- compre- against
pending pound ify income other flow ing the hensive share
allot- financial nature) compre- hedges financial income capital
ment instru- hensive state- (Specify
ment income ment nature )
Balance at the
beginning of the
reporting period
Changes in
accounting policy
or prior period
errors
Restated balance
at the beginning
of the reporting
period
Total
comprehensive
Income for the

year
Dividends
Transfer to
retained earnings
Any other change

(to be specified)
ACCOUNTS
Balance at the
end of the
reporting period
SCHEDULE III 149
Note: Re-measurement of defined benefit plans and fair value changes relating to own
credit risk of financial liabilities designated at fair value through profit or loss shall be
recognised as a part of retained earning with separate disclosure of such items alongwith
the relevant amounts in the Notes.
150 ACCOUNTS
GENERAL INSTRUCTIONS FOR

PREPARATION OF BALANCE SHEET
1. An entity shall classify an asset as current when-

(a) it expects to realise the asset, or intends to sell or consume it, in its normal
operating cycle;
(b) it holds the asset primarily for the purpose of trading;
(c) it expects to realise the asset within twelve months after the reporting period;
or
(d) the asset is cash or a cash equivalent unless the asset is restricted from being
exchanged or used to settle a liability for at least twelve months after the
reporting period.
An entity shall classify all other assets as non-current.
2. The operating cycle of an entity is the time between the acquisition of assets for
processing and their realisation in cash or cash equivalents, when the entity’s normal
operating cycle is not clearly identifiable, it is assumed to be twelve months.
3. An entity shall classify a liability as current when-
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period;
or
(d) it does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period. Terms of a liability that could,
at the option of the counterparty, result in it settlement by the issue of equity
instruments do not affect its classification.
An entity shall classify all other liabilities as non-current.
4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount
due on account of goods sold or services rendered in the normal course of business.
5. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due
on account of goods purchased or services received in the normal course of business.
6. A company shall disclose the following in the Notes:
A. Non-Current Assets
l. Property. Plant and Equipment:

(i) Classification shall be given as:
(a) Land
SCHEDULE III 151
(b) Buildings
(c) Plant and Equipment
(d) Furniture and Fixtures
(e) Vehicles
(f) Office equipment
(g) Bearer Plants
(h) Others (specify nature)
(ii) Assets under lease shall be separately specified under each class of assets
(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions
through business combinations and other adjustments and the related depreciation
and impairment losses or reversals shall be disclosed separately.
al. Investment Property:

A reconciliation of the gross and net carrying amounts of each class of property at the
beginning and end of the reporting period showing additions, disposals, acquisitions through
business combinations and other adjustments and the related depreciation and impairment
losses or reversals shall be disclosed separately.
BI. Goodwill:
A reconciliation of the gross and net carrying amount of goodwill at the beginning and end
of the reporting period showing additions, impairments, disposals and other adjustments.
IV. Other Intangible assets
(i) Classification shall be given as:

(a) Brands or trademarks
(b) Computer software
(c) Mastheads and publishing titles
(d) Mining rights
(e) Copyright, patents, other intellectual property rights, services and operating
rights
(f) Recipes, formulae, models, designs and prototypes
(g) Licenses and franchises
(h) Others (specify nature)
152 ACCOUNTS
(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the
beginning and end of the reporting period showing additions, disposals, acquisitions
through business combinations and other adjustments and the related amortization
and impairment losses or reversals shall be disclosed separately.
V. Biological Assets other than bearer plants:

A reconciliation of the carrying amounts of each class of assets at the beginning and end of
the reporting period showing additions, disposals, acquisitions through business combinations
and other adjustments shall be disclosed separately.
VI. Investment
(i) Investments shall be classified as:

(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of the bodies corporate that
are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities, in whom investments have been made and the nature and
extent of the investment so made in each such body corporate (showing separately
investments which are partly-paid). lnvestment in partnership firms alongwith
names of the firms, their partners, total capital and the shares of each partner
shall be disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amount of quoted investment and market value thereof:
(b) Aggregate amount of unquoted investment: and
Aggregate amount of impairment in value of investment
SCHEDULE III 153
VII. Trade Receivables:
(i) Trade receivables shall be sub-classified as;

(a) Secured, considered good;
(b) Unsecured considered good; and
(c) Doubtful.
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or private companies
respectively in which any director is a partner or a director or a member should be
separately stated.
VIII. Loans;
(i) Loans shall be classified as-

(a) Security Deposits;
(b) Loans to related parties (giving details thereof); and
(c) Other loans (specify nature).
The above shall also be separately sub-classified as-
(b) Unsecured, considered good; and
(c) Doubtful. Allowance for bad and doubtful loans shall be disclosed under the relevant
heads separately.
(iv) Loans due by directors or other officers of the company or any of them either severally
or jointly with any other persons or amounts due by firms or private companies
separately stated.
IX. Bank deposits with more than 12 months maturity shall be disclosed under ‘Other
financial assets’;
X. Other non-current asset: Other non-current assets shall be classified as-

(i) Capital Advances; and
(ii) Advances other than capital advances;
154 ACCOUNTS
Advances other than capital advances shall be classified as

(b) Advances to related parties (giving details thereof; and
(c) Other advances (specify nature).
(2) Advances to directors or other officers of the company or any of them either severally
or jointly with any other persons or advances to firms or private companies respectively
in which any director is a partner or a director or a member should be separately
stated, ln case advances are of the nature of a financial asset as per relevant Ind AS,
these are to be disclosed under other financial assets separately.
(bi) Others (specify nature).
B. Current Assets
I. Inventories:
(i) Inventories shall be classified as-

(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.
II. Investment;
(i) Investments shall be classified as-

(a) Investments in Equity lnstruments;
(b) lnvestment in Preference Shares;
(c) lnvestment in government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) lnvestment in partnership firms; and
(g) Other investments (specify nature).
SCHEDULE III 155
Under each classification, details shall be given of names of the bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments have been made and the nature and extent of the investment so made
in each such body corporate (showing separately investments which are partly-paid)
(ai) The following shall also be disclosed

(a) Aggregate amount of quoted investments and market value thereof;
(b) Aggregate amount of unquoted investments;
(c) Aggregate amount of impairment in value of investments,
III. Trade Receivables
(i) Trade receivables shall be sub-classified as:

(b) Unsecured considered good; and
(c) Doubtful.:
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads
separately.
(iii) Debts due by directors or other officers of the company or any of them either
severally or jointly with any other person or debts due by firms or. private companies
separately stated.
IV. Cash and cash equivalents:

Cash and cash equivalents shall be classified as-
a. Balances with Banks (of the nature of cash and cash equivalents);
b. Cheques, drafts on hand;
c. Cash on hand; and
d. Others (specify nature).
V. Loans:
(i) Loans shall be classified as:

156 ACCOUNTS
(a) Security deposits;

(b) Loans to related parties (giving details thereof); and
(c) others (specify nature).
(ii) The above shall also be sub-classified as-
(b) Unsecured, considered good; and
(c) Doubtful.
(iii) Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers of the company or any of them either
severally or jointly with any other person or amounts due by firms or private companies
respectively in which any director is a partner or a director or a member shall be
separately stated.
VI. Other current assets (specify nature): This is an all-inclusive heading, which
incorporates current assets that do not fit into any other asset categories. Other
current assets shall be classified as-
(i) Advances other than capital advances

(1) Advances other than capital advances shall be classified as:
(b) Advances to related parties (giving details thereof);
(c) Other advances (specify nature)
(2) Advances to directors or other officers of the company or any of them either
severally or jointly with any other persons or advances to firms or private companies
separately stated.
(a) Earmarked balances with banks (for example. for unpaid dividend) shall be
separately stated.
(b) Balances with banks to the extent held as margin money or security against the
borrowings, guarantees, other commitments shall be disclosed separately.
D. Repatriation restrictions, if any, in respect of cash and bank balances shall be separately
stated Equity
SCHEDULE III 157
I. Equity Share Capital: For each class of equity share capital:
(a) the number and amount of shares authorised;

(b) the number of shares issued, subscribed and fully paid, and subscribed but not fully
paid;
(c) par value per Share;
(d) a reconciliation of the number of shares outstanding at the beginning and at the end
of the period;
(e) the rights, preferences and restrictions attaching to each class of shares including
restrictions on the distribution of dividends and the repayment of capital;
(f) shares in respect of each class in the company held by its holding company or its
ultimate holding company including shares held by subsidiaries or associates of the
holding company or the ultimate holding company in aggregate;
(g) shares in the company held by each shareholder holding more than five per cent.
shares specifying the number of shares held;
(h) shares reserved for issue under options and contracts or commitments for the sale of
shares or disinvestment, including the terms and amounts;
(i) for the period of five years immediately preceding the date at which the Balance
Sheet is prepared aggregate number and class of shares allotted as fully paid up
pursuant to contract without payment being received in cash;
• aggregate number and class of shares allotted as fully paid up by way of bonus
shares; and
• aggregate number and class of shares bought back;
(j) terms of any securities convertible into equity shares issued along with the earliest
date of conversion in descending order starting from the farthest such date;
(k) calls unpaid (showing aggregate value of calls unpaid by directors and officers);
(l) forfeited shares (amount originally paid up).
II. Other Equity:
(i) Other Reserves’ shall be classified in the notes as-

(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) others- (specify the nature and purpose of each reserve and the amount in respect
thereof);
158 ACCOUNTS
(Additions and deductions since last balance sheet to be shown under each of the
specified heads)
(ii) Retained Earnings represents surplus i.e. balance of the relevant column in the
Statement of Changes in Equity;
(iii) A reserve specifically represented by earmarked investments shall disclose the fact
that it is so represented;
(iv) Debit balance of Statement of Profit and Loss shall be shown as a negative figure
under the head ‘retained earnings’. Similarly, the balance of ‘Other Equity’, after
adjusting negative balance of retained earnings, if any, shall be shown under the head
‘Other Equity’ even if the resulting figure is in the negative; and
(v) Under the sub-head ‘Other Equity’, disclosure shall be made for the nature and amount
of each item.
E. Non-Current Liabilities
I. Borrowings:
(i) borrowings shall be classified as-

(a) Bonds or debentures
(b) Term loans
(I) from banks
(II) from other Parties
(c) Deferred payment liabilities
(d) Deposits.
(e) Loans from related parties
(f) Long term maturities of finance lease obligations
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case.
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed;
(iv) bonds or debentures (along with the rate of interest, and particulars of redemption
or conversion, as the case may be) shall be stated in descending order of maturity or
conversion, starting from farthest redemption or conversion date, as the case may be,
where bonds/debentures are redeemable by installments, the date of maturity for
this purpose must be reckoned as the date on which the first installment becomes due;
SCHEDULE III 159
(v) particulars of any redeemed bonds or debentures which the company has power to
reissue shall be disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amount of default as on the balance sheet date in repayment of borrowings
and interest shall be specified separately in each case.
III. Provisions: The amounts shall be classified as-
(a) Provision for employee benefits; and

(b) Others (specify nature).
IV. Other non-current liabilities;
(a) Advances; and

(b) Others (specify nature).
F. Current Liabilities
I. Borrowings:
(i) Borrowings shall be classified as-

(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of
security shall be specified separately in each case;
(iii) where loans have been guaranteed by directors or others, the aggregate amount of
such loans under each head shall be disclosed; period and amount of default as on
the balance sheet date in repayment of borrowings and interest, shall be specified
separately in each case
II. Other Financial Liabilities: Other Financial liabilities shall be classified as-
(a) Current maturities of long-term debt;

(b) Current maturities of finance lease obligations;
160 ACCOUNTS
(c) Interest accrued;

(d) Unpaid dividends;
(e) Application money received for allotment of securities to the extent refundable and
interest accrued thereon;
(f) Unpaid matured deposits and interest accrued thereon;
(g) Unpaid matured debentures and interest accrued thereon; and
(h) Others (specify nature).
‘Long term debt is a borrowing having a period of more than twelve months at the time of
origination.
III. Other current liabilities:

The amounts shall be classified as-
(a) revenue received in advance;

(b) other advances (specify nature); and
(c) others (specify nature);
IV. Provisions: The amounts shall be classified as-
(i) provision for employee benefits; and

(ii) others (specify nature)
G. The presentation of liabilities associated with group of assets classified as held for
sale and non-current assets classified as held for sale shall be in accordance with the
relevant Indian Accounting Standards (Ind ASs)
H. Contingent Liabilities and Commitments: (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
Commitments shall be classified as
(a) estimated amount of contracts remaining to be executed on capital account and
not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).
SCHEDULE III 161
I. The amount of dividends proposed to be distributed to equity and preference

shareholders for the period and title related amount per share shall be disclosed
separately. Arrears of fixed cumulative dividends on irredeemable preference shares
shall also be disclosed separately.
J. Where in respect of an issue of securities made for a specific purpose the whole or
part of amount has not been used for the specific purpose at the Balance sheet date,
there shall be indicated by way of note how such unutilised amounts have been used or
invested.
7. When a company applies an accounting policy retrospectively or makes a restatement of
items in the financial statements or when it reclassifies items in its financial statements,
the company shall attach to the Balance Sheet, a “Balance Sheet” as at the beginning
of the earliest comparative period presented.
8. Share application money pending allotment shall be classified into equity or liability in
accordance with relevant Indian Accounting Standards. share application money to the
extent not refundable shall be shown under the head Equity and share application money
to the extent refundable shall be separately shown under ‘Other financial liabilities’.
9. Preference shares including premium received on issue, shall be classified and presented
as ‘Equity’ or ‘Liability’ in accordance with the requirements of the relevant Indian
Accounting Standards. Accordingly, the disclosure and presentation requirements in
that regard applicable to the relevant class of equity or liability shall be applicable
mutatis mutandis to the preference shares. For instance, redeemable preference
shares shall be classified and presented under ‘non-current liabilities’ as ‘borrowings’
and the disclosure requirements in this regard applicable to such borrowings shall be
applicable mutatis mutandis to redeemable preference shares.
10. Compound financial instruments such as convertible debentures, where split into equity
and liability components, as per the requirements of the relevant Indian Accounting
Standards, shall be classified and presented under the relevant heads in ‘Equity’ and
‘Liabilities’
11. Regulatory Deferral Account Balances shall be presented in the Balance Sheet in
accordance with the relevant Indian Accounting Standards.
162 ACCOUNTS
PART II - STATEMENT OF PROFIT AND LOSS

Name of the Company.........................
Statement of Profit and Loss for the period ended................
Particulars Note Figures as at the end Figures for

No. of current reporting the Previous
period reporting Period
I Revenue from operations
II Other Income
III Total Income (l + Il)
IV EXPENSES
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished
goods, Stock-in -Trade and work-in-
progress
Employee benefits expense
Finance costs
Depreciation
And amortization
expenses
Other expenses
Total expenses (lV)
V Profit/(loss) before exceptional
items
and tax (I-IV)
VI Exceptional Items
VII Profit/ (loss) before exceptions
items
and tax(V-VI)
VIII Tax expense:
(1) Current tax
(2) Deferred tax
SCHEDULE III 163
IX Profit (Loss) for the period from

continuing operations (VlI - VlII)
X Profit/(loss) from discontinued
operations
XI Tax expenses of discontinued
operations
XII Profit /(loss) from Discontinued
operations (after tax) (X-XI)
XIII Profit (loss) for the period (IX-
XII)
XIV Other Comprehensive Income
A. (i) Items that will not
be reclassified to
profit or loss
(ii) Income tax relating
to items that will not
be reclassified to
profit or loss
B (i) Item that will be
reclassified to profit
or loss
(ii) lncome tax relating
to items that will be
reclassified to profit
or loss
XV Total Comprehensive Income

for the period (XIII+XIV)
Comprising Profit (Loss) and other
comprehensive Income for the
period )
XVI Earnings per equity share (for
continuing operation):
(1) Basic
(2) Diluted
164 ACCOUNTS
XVII Earnings per equity share (for

discontinued operation)
(1) Basic
(2) Diluted
XVIII Earning per equity share for
discontinued & continuing
operation)
(1) Basic
(2) Diluted
GENERAL INSTRUCTIONS FOR PREPARING

OF STATEMENT OF PROFIT AND LOSS
1. The provisions of this Part shall apply to the income and expenditure account, in like
manner as they apply to a Statement of Profit and Loss,
2. The Statement of Profit and Loss shall include:
(1) Profit of loss for the Period;
(2) Other Comprehensive Income for the period
The sum of (1) and (2) above is “Total Comprehensive Income”
3. Revenue from operations shall disclose separately in the notes
(a) sale of products (including Excise Duty);
(b) sale of services; and
(c) other operating revenues.
4. Finance Costs: Finance costs shall be classified as-
(a) interest;
(b) dividend on redeemable preference shares;
(c) exchange differences regarded as an adjustment to borrowing costs; and
(d) other borrowing costs (specify nature).
5. Other income: other income shall be classified as-
(a) interest Income;
(b) dividend Income; and
(c) other non-operating income (net of expenses directly attributable to such income)
SCHEDULE III 165
6. Other Comprehensive Income shall be classified into-

(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Re-measurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at
fair value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the
extent not to be classified into profit or loss; and
(vi) Others (specify nature).
(B) Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the financial statements of a foreign
operation;
(ii) Debt instruments through Other Comprehensive Income;
(iii) The effective portion of gains and loss on hedging instruments in a cash flow
hedge;
(iv) Share of other comprehensive income in Associates and Joint Ventures, to the
extent to be classified into profit or loss; and
(v) Others (specify nature)
7. Additional Information: A Company shall disclose by way of notes, additional information
regarding aggregate expenditure and income on the following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii)
contribution to provident and other funds, (iii) share based payments to employees,
(iv) staff welfare expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds one per cent of the revenue from
operations or ` 10,00,000, whichever is higher, in addition to the consideration of
‘materiality ‘as specified in clause 7 of the General Instructions for Preparation
of Financial Statements of a Company;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
166 ACCOUNTS
(h) net gain or loss on foreign currency transaction and translation (other than
considered as finance cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company
law matters, (d) for other services, (e) for reimbursement of expenses;
(j) in case of companies covered under section 135, amount of expenditure incurred
on corporate social responsibility activities; and
(k) details of items of exceptional nature;
8. Changes in Regulatory Deferral Account Balances shall be presented in the Statement
of Profit and Loss in accordance with the relevant Indian Accounting Standards
PART III - GENERAL INSRUCTIONS FOR

THE PREPARATION OF CONSOLIDATED
FINANCIAL STATEMENTS
1. Where a company is required to prepare Consolidated Financial Statements, i.e,,
consolidated balance sheet, consolidated statement of changes in equity and
consolidated statement of profit and loss, the company shall mutatis mutandis follow
the requirements of this Schedule as applicable to a company in the preparation of
balance sheet, statement of changes in equity and statement of profit and loss .ln
addition, the consolidated financial statements shall disclose the information as per
the requirements specified in the applicable Indian Accounting Standards notified
under the Companies (lndian Accounting Standards) Rules 2015, including the following,
namely:
(i) Profit or loss attributable to ‘non-controlling interest ‘and to ‘owners of the
parent’ in the statement of profit and loss shall be presented as allocation for
the period Further, ‘total comprehensive income for the period attributable
to ‘non-controlling interest’ and to ‘owners of the parent shall be presented in
the statement of profit and loss as allocation for the period. The aforesaid
disclosures for ‘total comprehensive income shall also be made in the statement
of changes in equity. In addition to the disclosure requirements in the Indian
Accounting Standards, the aforesaid disclosures shall also be made in respect of
‘other comprehensive Income
(ii) ‘Non-controlling interests’ in the Balance Sheet and in the Statement of Changes
in Equity, within equity, shall be presented separately from the equity of the
‘owners of the parent’.
(iii) Investments accounted for using the equity method.
2. In Consolidated Financial Statement, the following shall be disclosed by the way of additional information
Name of the Net Asset i.e. total Share in profit or Share in other Share in total
entity in the assets minus total loss comprehensive income comprehensive income
Group liabilities
As % of Amount As % of Amount As % of Amount As % of total Amount
consolidated consolidated consolidated comprehensive
SCHEDULE III
net assets profit or other income

loss comprehensive
income
Parent
subsidiaries
Indian
1.
2.
3.
Foreign
1.
2.
3.
Non-
Controlling
Interest in
alls ubsidiaries
Associates
(Investmentas
per the equity
167
method) Indian
Name of the Net Asset i.e. total Share in profit or Share in other Share in total
168
entity in the assets minus total loss comprehensive income comprehensive income
Group liabilities
Indian
1.
2.
3.
Foreign
1.
2.
3.
Joint Venture
(Investment as
per the equity
method) Indian
1.
2.
3.
Foreign
1.
2.
3.
ACCOUNTS
Total
SCHEDULE III 169
3. All subsidiaries, associates and joint venture (whether Indian or Foreign) will be covered
under consolidated financial statement.
4. An entity shall disclose the list of subsidiaries or associates or joint venture which have
been consolidated in the consolidated financial statement along with the reason of not
consolidating.
170 ACCOUNTS
NOTES
QUESTIONS ON SCHEDULE 3 171
QUESTIONS ON SCHEDULE 3
QUESTION 1
What happens when requirements of schedule 3 contradicts with the Provisions of IND
AS?
SOLUTION:
Where compliance with the requirements of the Act including IND AS applicable to the
companies require any change in treatment or disclosure including addition, amendment,
substitution or deletion in the head or sub-head or any changes, in the financial statements
or statements forming part thereof, the same shall be made and the requirements of this
Schedule shall stand modified accordingly. The disclosure requirements specified in this
Schedule are in addition to and not in substitution of the disclosure requirements specified
in the prescribed under the Companies Act, 2013. Additional disclosures specified in the
IND AS shall be made in the notes to accounts or by way of additional statement unless
required to be disclosed on the face of the Financial Statements.
NOTE: This part of Schedule sets out the minimum requirements for on the face of the
Balance Sheet, and the Statement of Profit and Loss (hereinafter referred to as —Financial
Statements || for the purpose of this Schedule) and Notes. Line items, sub-line items and
sub-totals shall be presented as an addition or substitution on the face of the Financial
Statements when such presentation is relevant to an understanding of the company’s financial
position or performance or to cater to industry/sector-specific disclosure requirements or
when required for compliance with the amendments to the Companies Act or under the
Accounting Standards.
QUESTION 2
ICAI Ltd provides you the following information :
1. Raw material stock holding period : 3 months

2. Work –in-progress holding perios : 1 month
3. Finished goods holding period : 4 monjths
4. Debtors collection period : 6 months
You are required to compute the operating cycle.
172 ACCOUNTS
SOLUTION
According to Schedule III “an operating cycle is the time between the acquisition of assets
for processing and their realization in cash or cash equivalents”.
Operating Cycle = Raw material stock holding period+work-in-progress holding period +
Finished goods holding period+Debtors Collection period = 3+1+4+6=14 months.
QUESTION 3
State giving reason whether the Trade Receivables are Current Assets or Non-Current
Assets as per Schedule III in the following cases.
Case Operating Cycle Period Expected Realization period

1 11 months 10 months
2. 11 months 12 months
SOLUTION
Case Current Assets or Reason

Non-Current Assets
1 Current Assets Expected Realization period
- Is less than the Operating Cycle period and
- Is within 12 months
2. Current Assets Expected Realization Period within 12 months although
it is more than the Operating Cycle period
3. Non-Current Assets Expected Realization period is more than the
Operating Cycle Period and 12 months Period.
4. Current Assets Expected Realization period is less than the Opeating
Cycle period although it is more than the 12 months
period.
5. Non-Current Assets Expected Realization period is more than the operating
cycle period and the 12 months period.
QUESTION 4
State giving reason whether the Trade payables are Current Liabilities or Non-Current
Liabilities as per schedule III in the following cases :
Case Operating Cycle Period Expected Payment Period

SOLUTION:
Case Operating Cycle Expected Payment Period

Period
1 Current Liabilities Expected Payment Period
- Is less than the Operating Cycle period and
- Is within 12 months
2. Current Liabilities Expected Payment period is within 12 months although

it in more than the Operating Cycle period.
3. Non-Current Expected Payment period is more than the operating
Liabilities Cycle period and 12 months period.
4. Non-Current Expected Payment period is more than the Operating
Liabilities Cycle Period and the 12 months period.
QUESTION 5 (MAY 14 8MARKS)
ICAI Ltd. Is in the process of finalizing its accounts for year ended 31st March, 2015 and
furnishes the following information:
i) Finished goods normally are held for 1 month before sale.

ii) Sales realization from Debtors usually takes 2 months from date of credit invoice.
iii) Raw materials are held in stock to cover 1 month’s production requirements.
iv) Packing materials, being specifically made for the company and having lead time of 3
months is held in stock for 3 months.
174 ACCOUNTS
v) Being a monopoly KAY Ltd. Enjoys a credit period of 12.5 months from its suppliers
who sometimes at the end of their credit opt for conversion of their dues into long
term debt of KAY Ltd.
You are required to compute the operating cycle of ICAI Ltd. As per Schedule III of The
Companies Act, 2013. As the suppliers of the company are paid off after a credit period of
12.5 months should this be part of Current Liability ? Would your answer be the same if the
creditors are settled in 330 days ?
SOLUTION:
Operating Cycle: 1+1+3++2=7 months
(Credit Period given by Suppliers should not be deducted while computing operating cycle
as per Schedule 3)
a) When Credit period is 12.5 months : It will be treated as non-current liability since it
is not due to be settled within 12 months after the reporting date.
b) When credit period is 330 days (i.e. 11 months approx.) : It will be treated as current
liability since it is due to be settled within 12 months after the reporting date.
QUESTION 6
X Ltd. Provides you the following Information.

1. Raw material stock holding period : 4 months.
2. Work-in-progress holding period : 2 months.
3. Finished goods holding period : 3 months.
4. Debtors collection period : 4 months
You are required to compute the operating Cycle.
SOLUTION:
As per Schedule III “An operating Cycle is the time between the acquisition of Assets for
processing and their realization in cash or cash equivalents”.
Statement showing calculation of Operating Cycle
Raw material stock holding period =4 months
+ work-in-progress holding period =2 month
+ Finished goods holding period =3months
+ Debtors collection period =4months
---------------
13 months
---------------
QUESTION 7
H Ltd. engaged in the business of manufacturing lotus wine. The process of manufacturing
this wine takes around 18 months. Due to this reason H Ltd. has prepared its financial
statements considering its operating cycle as 18 months and accordingly classified the raw
material purchased and held in stock for less than 18 months as current asset. Comment
on the accuracy of the decision and the treatment of asset by H Ltd. As per Schedule III.
SOLUTION
• s per Schedule III, one of the criteria for classification of an asset as a current
A
asset is that the asset is expected to be realised in the company’s operating cycle or
is intended for sale or consumption in the company’s normal operating cycle.
• urther, Schedule III defines that an operating cycle is the time between the
F
acquisition of assets for processing and their realization in cash or cash equivalents.
• owever, when the normal operating cycle cannot be identified, it is assumed to
H
have duration of 12 months. As per the facts given in the question, the process of
manufacturing of lotus wine takes around 18 months; therefore, its realisation into
cash and cash equivalents will be done only when it is ready for sale i.e. after 18
months.
• his means that normal operating cycle of the product is 18 months. Therefore,
T
the contention of the company’s management that the operating cycle of the
product lotus wine is 18 months and not l2 months is correct. H. Ltd. will classify
the raw material purchased held in stock as current asset.
QUESTION 8
How can a liability be classified as a current liability?
SOLUTION:
(a) It is expected to be settled in the company normal operating cycle; or
(b) It is held primarily for the purpose of being traded; or
(c) It is due to be settled within twelve months after the reporting date; or
(d) The company does not have an unconditional right to defer settlement of the liability
for least twelve months after the reporting cm Terms of a liability that could, at the
option the counterparty, result in its settlement by the issue of equity instruments
do not affect its classification.
176 ACCOUNTS
QUESTION 9
How can a liability be classified as a non current liability?
SOLUTION
The liability other than Current liability shall be classified as Non-Current.
QUESTION 10
Explain the meaning of share warrants?
SOLUTION
Meaning: A share warrant is a bearer document of title to shares and can be issued only by
public limited companies and that to against fully paid up shares only.
A share warrant cannot be issued by a private company, because the share warrant states
that its bearer is entitled to a number of shares mentioned there in. It is a negotiable
document and is easily transferable by mere delivery to another person. The holder of the
share warrant is entitled to receive dividend as decided by the company.
A share warrant is accompanied by attached coupons for the payment of future dividends.
There are three parts of a share warrant:
(1) The counter foil.
(2) Share Warrant proper.
(3) The dividend coupons.
Conditions for the issue of a share warrant:
(1)
Only public limited companies: Share warrant can be issued by the public limited
companies. It cannot be issued by private companies.
(2)
Against share certificate of fully paid up shares: A share warrant is only issued
against share certificate of fully paid up shares.
(3)
Provision in the Articles: There must be a provision in the Articles of Association
regarding the issue of share warrant. If there is a provision, the company can issue
a share warrant. If there is no provision in the Articles, the company cannot issue a
share warrant.
(4)
Permission of the Central Government: Prior permission from the Central Government
is necessary for the issue of share warrant.
(5)
Share warrant not issued originally: Share warrant are not issued originally at the
time of initial issue.
(6)
AT the request of the share holder: A share warrant is issued at the request of
the Shareholders / member and not by the company at its own initiative.
In simple terms, a warrant is like an option issued by a company that gives the
holder the right to buy stock from the company at a specified price within a certain
designated time period. Generally speaking, warrants are issued by the company whose
stock underlies the warrant and when an investor exercises a warrant, he or she
buys stock from the company. A stock warrant is a way for a company to raise money
through equity (stocks). A stock warrant is a smart way to own shares of a company
because a warrant usually is offered at a price lower than that of a stock option. ^1
Like an option, a warrant does not represent actual ownership in the stock of the company
and it is simply the right (but not the obligation) to buy shares at a certain price in the
future.
The main difference between warrants and call options is that warrants are issued and
guaranteed by the company, whereas options are exchange instruments and are not issued
by the company. Also, the lifetime of a warrant is often measured in years, while the
lifetime of a typical option is measured in months
1.
A share warrant can be issued only when the shares are fully paid up whereas a share
certificate can be issued at any stage without the shares being fully paid up.
2. A share warrant is a negotiable instrument but a share certificate is not.
3.
A share certificate is a document showing prima facie title to the shares represented
thereby but a share warrant is the share security itself capable of easy transfer.
4.
A holder of a share certificate is a member of the company but the holder of a share
warrant is not, unless the articles otherwise provide.
5.
A share certificate can be issued both by a public and a private company but a share
warrant is issued only by a public company.
QUESTION 11
The following trial balance has been extracted from the books of A Ltd as at 31 March
2017:
` 000 ` 000
Administration expenses 250
Distribution costs 295
Share capital (all ordinary shares of 1 each) 270
Share Premium
80
178 ACCOUNTS
Revaluation surplus
20
Dividend paid 27
Cash at bank and in hand 3
Receivables 233
Interest paid 25
Dividends received
15
Interest received
1
Land and buildings at cost (land 380, buildings 100) 480
Land and buildings: accumulated depreciation 30
Plant and machinery at cost 400
Plant and machinery accumulated depreciation 170
Retained earnings account (at 1 April, 2016) 235
Purchases 1,260
Sales
2,165
Inventrouy at 1 April, 2016 140
Trade payables
27
Bank loan
100
3,113 3,113
Additional Information
(1) Inventory at 31 March, 2017 was valued at a cost of ` 95,000. Included in this
balance were goods that had cost ` 15,000. These goods had become damaged during
the year and it is considered that following remedial work the goods could be sold for
` 5,000.
(2) Depreciation for the year to 31 March, 2017 is to be charged against cost of sales as
follows:
Building 5% on cost (straignt line)
Plant and machinery 30% on carrying amount (reducing balance)
(3) Income tax of ` 165,000 is to be provided for the year to 31 March, 2017
(4) Land is be revalued upwards by ` 100,000.
Prepare the statement of profit or loss and other comprehensive inocme,

Statement of changes in equity and Balance sheet for year ended 31March 2017
QUESTION 12
The following trial balance related to B at 31 March 2017:

Dr. Cr
Revenue ` 000 ` 000
Cost of sales
5,300
Dividends received 1,350
Administration expenses
210
Distribution costs 490
Interest paid 370
Prepayments 190
Dividends paid 25
Property, Plant and equipment 390
Short-term investments 4,250
Inventory at31 March 2017 2,700
Trade receivables 114
Cash and cash equivalents 418
Trade payables 12
Lon-team loans (repayable 2025) 136
Share capital
1,200
Share premium
1,500
Retained earnings at 31 March, 2016 800

1,163
10,309 10,309
The following information should also taken into account:
(1) The tax charger for the year has been estimated at ` 4,70,000.
(2) The directors declared a final dividend of ` 2,70,000 on 3 April, 2017.
Required:
Prepare, the statement of profit or loss and other comprehensive income Balance Sheet and
statement of changes in equity for the year ended 31 March, 2017.
180 ACCOUNTS
QUESTION 13 (MISTAKE IN FINAL ACCOUNTS)
Following are the Financial statements of SL Parvati Industries Ltd:

Balance Sheet
Particulars Note As at March 31, 20X1

(INR in million)
Equity And Liabilities

Shareholder’s funds
Share Capital 1,000
Reserves and Surplus 2,000
Non- current liabilities
Long-term borrowings 1 5,555
Deferred tax liabilities 2 200
Current liabilities
Trade payables 3 300
Short-term provisions 250
Other current liabilities 4 150
TOTAL 9,455
ASSETS
Non-current assets
Fixed assets 5,655
Deferred Tax Assets A 500
Current assets
Inventories 1,000
Trade receivables 6 1,100
Cash and bank balances 7 1,200
TOTAL 9,455
Statement of Profit & Loss
Particulars Note Year ended March 31, 20X1

Revenue from operations 5,500
Expenses
Employee Benefit Expense 1,200
Operating Costs 2,200
Depreciation 999
Total Expenses 4,399
Profit before Tax 1,101
Tax Expense (150)
Profit after tax 951
Notes to Accounts:
Note: Reserves and surplus (INR in millions)

Capital Reserves 500
Surplus from P & L
Opening Balance 49
Additions 951 1,000
Reserve for foreseeable loss 500
Total 2,000
Note 1: Long Term Borrowings
Term loan from Bank 5,555

Total 5,555
Note 2: Deferred Tax
Deferred Tax asset 500

Deferred Tax Liability (200)
Total 300
182 ACCOUNTS
Note 3: Trade payables
MSME vendors 5
Other vendors 295
Total 300
Note 4: Other Current liabilities
Unclaimed Dividends 3
Billing in Advance 147
Total 150
Note 5: Trade Receivables
Considered Goods (outstanding within 6 months) 1,065

Considered doubtful (due from past 1 year) 40
Provision for doubtful debts (5)
Total 1,100
Note 6: Cash and Cash Equivalents
Balance with Banks 1,065

Cash on Hand 5
Earmarked balances with Banks 130
Total 1,200
Additional Information:
(a) Share capital comprises of 100 million shares of INR 10 each
(b) Term Loan from bank for INR 5555 million also includes interest accrued and due of
INR 555 million as on the reporting date.
(c) Reserve for forseeable loss is created against a service contract due within 6 months.
Required:
1. Identify and report the errors and misstatements in the above extract, if any: and
2. Prepare the corrected Balance Sheet & Statement of Profit and Loss
QUESTION NO 14
Inventory or trade receivables of X Ltd. are normally realized in 15 months. How should X
Ltd. classify such inventory/trade receivables: current or non-current or non-current if
these are expected to be realized within 15 months?
SOLUTION:
These should be classified as current.
QUESTION NO 15
B Ltd. produces aircrafts. The length of time between first purchasing raw materials to
make the aircrafts and the date the company completes the production and delivery is 9
months. The company receives payment for the aircrafts 7 months after the delivery.
(a) What is the length of operating cycle?
(b) How should it treat its inventory and debtors?
SOLUTION:
(a) The length of the operating cycle will be 16 months.
(b) Assuming the inventory and debtors will be realized within normal operating cycle,
i.e., 16 months, both the inventory as well as debtors should be classified as current.
QUESTION NO 16
X Ltd provides you the following information:

Raw material stock holding period : 3 months
Work-in-progress holding period : 1 months
Finished goods holding period : 5 months
Debtors collection period : 5 months
You are requested to compute the operating cycle of X Ltd.
SOLUTION:
The operating cycle of X Ltd. will be computed as under:
Raw material stock holding period ÷ Work-in progress holding period ÷ Finished goods holding
period ÷ Debtors Collection period = 3 + 1 + 5 + 5 = 14 months.
184 ACCOUNTS
NOTES
CONTENTS
S.No. TOPIC Page no.
1. INDIAN ACCOUNTING STANDARD 34 1 — 18
GUIDANCE NOTE ON INTERIM FINANCIAL

2. 19 — 22
REPORTING
5. IND AS 10: EVENTS AFTER THE REPORTING PERIOD 77 — 98
6. Ind AS 115: Revenue form Contracts with Customers 99 — 180
8. IND AS 102: SHARE BASED PAYMENT 201 — 214
11. IND AS 103: BUSINESS COMBINATION 261 — 350


INTERIM FINANCIAL REPORTING
CONCEPT 1: INTRODUCTION
Interim financial Reporting applies when an entity prepares an interim financial report. In AS
34 does not mandate an entity as when to prepare such a report. Timely and reliable interim
financial reporting improves the ability of investors, creditors, and others to understand
an entity’s capacity to generate earnings and cash, flows and its financial conditions and
liquidity. Permitting less information to be reported than in annual financial statements (on
the basis of providing an update to those financial statements), the standard outlines the
recognition, measurement and disclosure requirements for interim reports.
CONCEPT 2:OBJECTIVE
The objective of this standard is to prescribe
a) the minimum content of an interim financial report

b) the principles for recognition and measurement in complete or condensed financial
statements for an interim period.
CONCEPT 3:SCOPE
• This Standard does not mandate which entities should be required to publish interim
financial reports, how frequently, or how soon after the end of an interim period.
• This standard applies if an entity is required or elects to publish an interim financial
report in accordance with Indian Accounting Standards (Ind AS)
• Each financial report, annual or interim, is evaluated on its own for conformity to Ind
AS. The fact that an entity may not have provided interim financial reports during a
particular financial year or may have provided interim financial reports that do not
comply with this Standard does not prevent the entity’s annual financial statements
from conforming to Ind AS if they otherwise do so.
• If an entity’s interim financial report is described as complying with Ind AS, it must
comply with all of the requirements of this Standard.
2 ACCOUNTS
CONCEPT 4:DEFINITIONS
1. Interim period is financial reporting period shorter than a full financial year.
2. Interim financial report means a financial report containing either a complete set of
financial statements (as described in Ind AS 1, Presentation of financial Statements,
or a set of condensed financial statements (as described in this Standard) for an
interim period.
CONCEPT 5:CONTENTS OF AN INTERIM FINANCIAL REPORT
• An interim financial Report shall include the following:
A condensed balance sheet

A condensed statement of profit and loss
A condensed statement of changes in equity
A Condensed statement of cash flows
Notes, comprising significant accounting policies and other
explanatory information
• In the interest of timeliness and cost considerations and to avoid repetition of

information previously reported, an entity may be required to or may elect to provide
less information at interim dates as compared with its annual financial statements.
• The interim financial report focuses on new activities, events, and circumstances and
does not duplicate information previously reported.
• Nothing in this Standard is intended to prohibit or discourage an entity from publishing
a complete set of financial statements (as described in Ind AS 1) in its interim financial
report, rather than condensed financial statements and selected explanatory notes. Nor
does this Standard prohibit or discourages an entity from including in condensed interim
financial statements more than the minimum line items or selected explanatory notes as
set out in this Standard.
Significant events and transactions
• An entity shall include in its interim financial report an explanation of events and
transactions that are significant to an understanding of the changes in financial position
and performance or the entity since the end of the last annual reporting period.
• Information disclosed in relation to those events and transactions shall update the
relevant information presented in the most recent annual financing report.
• A user of an entity’s interim financial report will have access to the most recent annual
financial report of that entity. Therefore, it is unnecessary for the notes to an interim
financial report to provide relatively insignificant updates to the information that was
reported in the notes in the most recent annual financial report.
The following is a list of events and transactions for which disclosures would be
required if they are significant: the list is not exhaustive.
1. the write-down of inventories to net realisable value and the reversal of such
write-down;
2. recognition of a loss from the impairment of financial assets, property, plant
and equipment, intangible assets, or other assets, and the reversal of such an
impairment loss;
3. the reversal of nay provisions for the costs restructuring;
4. acquisitions and disposals of items of property, plant and equipment;
5. commitments for the purchase of property, plant and equipment;
6. litigation settlement;
7. corrections of prior period errors;
8. changes in the business or economic circumstances that affect the fair value
of the entity’s financial assets and financial liabilities, whether those assets or
liabilities are recognised at fair value or amortised cost;
9. any loan default or breach of a loan agreement that has not been remedied on or
before the end of the reporting period;
10. related party transactions;
11. transfers between levels of the fair value hierarchy used in measuring the fair
value of financial instrument;
12. changes in the classification of financial assets as a result of a changes in the
purpose or use of those assets; and
13. Changes in contingent liabilities or contingent assets.
• Individual Ind AS provide guidance regarding disclosure requirements for many of the
items listed above. When an event of transaction is significant to an understanding of the
changes in an entity’s financial position or performance since the last annual reporting
period, its interim financial report should provide an explanation of and an update to the
relevant information included in the financial statements of the last annual reporting
period.
4 ACCOUNTS
Other disclosures
The information shall normally be reported on a financial year-to-date basis. In addition
to disclosing significant events and transactions, an entity shall include the following
information, in the notes to its interim financial statements. the following disclosures shall
be given either in the interim financial statements or incorporated by cross-refernce from
the interim financial statements to some other statement (such as management commentary
or risk report) that is available to users to the financial statements on the same terms as
the interim financial statements and at the same time. If users of the financial statements
do not have access to the information incorporated by cross-reference on the same terms
and at the same time, the interim financial report is incomplete.
a) a statement that the same accounting policies and methods of computation are followed
in the interim financial statement. If those recently used policies or methods have
been have been changed, a description of the nature and effect of the change should
also be given.
b) explanatory comments about the seasonality or cyclicality of interim operations.
c) the nature and amount of items affecting asset, liabilities, equity, net income or cash
flows that are unusual because of their nature, size or incidence.
d) the nature and amount of changes in estimates of amounts reported in prior interim
periods of the current financial year or changes in estimates of amount reported in
financial years.
e) issues, repurchases and repayments of debt and equity securities.
f) dividends paid (aggregate or per share) separately for ordinary shares and other
shares.
g) the following segment information (disclosure of segment information is required in an
entity’s interim financial report only if Ind AS 108, Operating Segments, requires that
entity to disclose segment information in its annual financial statements):
i. revenues from external customers, if included in the measure of segment profit
or loss reviewed by the chief operating decision maker or otherwise regularity
provide to the chief operating decision maker.
ii. Intersegment revenues, if included in the measure of segment profit or loss
reviewed by the chief operating decision maker or otherwise regularly provided
to the chief operating decision maker.
iii. a measure of segment profit or loss.
iv. a measure of total assets and liabilities of a particular reportable segment if such
amount are regularly provided to the chief operating decision maker and if there
has been a material change from the amount disclosed in the last annual financial
statements for that reportable segment.
v. a description of differences from the last annual financial statements in the

basis of segmentation or in the basis of measurement of segment profit or loss.
vi. a reconciliation of the total of the reportable segments’ measures of profit or loss
to the entity’s profit or loss before tax expense (tax income) and discontinued
operations. However, if an entity allocates to reportable segments items such as
tax expense (tax income), the entity may reconcile the total of the segment’s
measures of profit or loss to profit or loss after those items. Material reconciling
items shall be separately identified and described in that reconciliation.
h) events after the interim period that have not been reflected in the financial statements
for the interim period.
i) the effect of changes in the composition of the entity during the interim period,
including business combination, obtaining or losing control of subsidiaries and long-
term investments, restructurings, and discontinued operation. In the case of business
combinations, the entity shall disclose the information required by Ind AS 103,
Business Combinations.
j) for financial instrument, the disclosures about fair value of Ind AS 113, Fair Value
Measurement, and Ind AS 107, Financial Instruments: Disclosures.
K) for entities becoming, or ceasing to be, investment, entities, as defined in Ind AS
110, consolidated Financial Statements, the Disclosures in Ind AS 112, Disclosure of
Interests in Other Entities.
Periods for which interim financial statements are requited to be presented

Interim reports shall include interim financial statements (condensed or complete) for
periods as follows:
(a) balance sheet as of the end of the current interim period and a comparative balance
sheet as of the end of the immediately preceding financial year.
(b) statements of profit and loss for the current interim period and cumulatively for the
current financial year to date, with comparative statements of profit and loss for the
comparable interim periods (current and year-to-date )of the immediately preceding
financial year.
(c) statement of changes in equity cumulatively for the current financial year to date, with
a comparative statement of the comparable year-to date period of the immediately
preceding financial year.
(d) statements of cash flows cumulatively for the financial year to date, with a comparative
statement of the comparable year-to-date period of the immediately preceding
financial year.
6 ACCOUNTS
For an entity whose business is highly seasonal, financial information for the twelve months
up to the end of the interim period and comparative information for the prior twelve-month
period may be useful.
CONCEPT 6: RECOGNITION AND MEASUREMENT
S. No. Criteria Recognition and Measurement

1 Same 1. An entity shall apply the same accounting policies in its
accounting interim financial statements as are applied in its annual
policies as financial statements, except for accounting policy changes
annual made after the date of the most recent annual financial
statements that are to be reflected in the next annual
2. The frequency of an entity’s reporting (annual, half-
yearly, or quarterly)shall not affect the measurement of
its annual results.
3. To achieve that objective, measurements for interim
reporting purposes shall be made on a year-to-date basis.
4. Year-to-date measurements may involve changes in
estimates of amounts reported in prior interim periods of
current financial year. But the principles for recognising
assets, liabilities, income, and expenses for interim periods
are the same as in annual financial statements.
2 Revenues 1. Revenues that are received seasonally, cyclically, or

received occasionally within a financial year shall not be anticipated
cyclically, or deferred as an interim date if anticipation or deferral
occasionally would not be appropriate at the end of the entity’s financial
or seasonally year. Examples include dividend revenue, royalties, and
government grants.
2. Certain entities earn more revenue in certain interim
periods of a financial year than other interim periods.
Such revenues are recognised when they occur.
Example seasonal revenues of retailers.
3 Costs Costs that are incurred unevenly during an entity’s financial

incurred year shall be anticipated or deferred for interim reporting
unevenly purposes if, and only if, it is also appropriate to anticipate or
during the defer that type of cost at the end of the financial year.
financial year
EXAMPLES:
Employer payroll taxes and insurance contributions

If employer payroll taxes or contributions to government-sponsored insurance funds are
assessed on an annual basis, the employer’s related expense is recongised in interim period
using an estimated average annual effective payroll tax or contribution rate, even though a
Large portion of the payments may be made early in the financial year. A common example
is an employer payroll tax or insurance contribution that is imposed up to a certain maximum
level of earnings per employee. For higher income employees, the maximum income is reached
before the end of the financial year, and the employer makes no further payments through
the end of the year.
Provisions
A provision is recognised when an entity has no realistic alternative but to make a transfer of
economic benefits as a result of an event that has created a legal or constructive obligation.
The amount of the obligation is adjusted upward or downward, with a corresponding loss
or gain recognised in profit or loss, if the entity’s best estimate of the amount of the
obligation changes.
This Standard requires that an entity apply the same criteria for recognising and
measuring a provision at an interim date as it would at the end of its financial Year.
The existence or non- existence of an obligation to transfer benefits is not a function of
the length of the reporting period. It is a question of fact.
Year-end bonuses
The nature of year-end bonuses varies widely. Some are earned simply by continued
employment during a time period. Some bonuses are earned on a monthly, quarterly, or
annual measure of operating result. They may be purely discretionary, contractual, or based
on years of historical precedent. A bonus is anticipated for interim reporting purposes
if, and only if, (a) the bonus is a legal obligation or past practice would make the bonus a
8 ACCOUNTS
constructive obligation for which the entity has no realistic alternative but to make the
payments, and (b) a reliable estimate of the obligation can be made. Ind AS 19, Employee
Benefits provides guidance.
Intangible assets
An entity will apply the definition and recognition criteria for an intangible asset in the
same way in an interim period as in an annual period, Costs incurred before the recognition
criteria for an intangible asset are met are recognised as expense. Costs incurred after the
specific point in time at which the criteria are met are recognised as part of the cost of an
intangible asset. Deferring’ costs as assets in an interim balance sheet in the hope that the
recognition criteria will be met later in the financial year is not justified.
Vacations, holidays, and other short-term compensated absences

Accumulating compensated absences are those that are carried forward and can be used in
further periods if the current period’s entitlement is not used in full. Ind AS 19, Employee
Benefits requires that an entity measure the expected cost of and obligation for accumulating
compensated absences at the amount the entity expects to pay as a result of the unused
entitlement that has accumulated at the end of the report period. That principle is also
applied at thee the of interim financial reporting periods. Conversely, an entity recognised
no expense or liability for non-accumulating compensated absences at the end of an interim
reporting period, just as it recongnises none at the end of an annual reporting period.
Measuring interim income tax expense

Interim period income tax expense is accrued using the tax rate that would be applicable
to expected total annual earnings, that is, the estimated average annual effective income
tax rate applied to the pre-tax income of the interim period.
This is consistent with the basic concept set out in the Standard that the same accounting
recognition and measurement principles shall be applied in an interim financial report as
are applied in annual financial statements. Income taxes are assessed on an annual basis.
Interim period Income tax expense is calculated by applying to an interim period’s pre-tax
income the tax rate that would be applicable to expected total annual earnings, that is, the
estimated average annual effective income tax rate. That estimated average annual rate
would reflect a blend of the progressive tax rate structure expected to be applicable to
the full year’s earnings including enacted or substantively enacted changes in the income
tax rates scheduled to take effect later in the financial year. Ind AS 12, Income Taxes
provides guidance on substantively enacted changes in tax rates. Consistent with paragraph
28 of this Standard. The Standard requires disclosure of a significant changes in estimate.
To the extent practicable, a separate estimated average annual effective income tax rate
is determined for each taxing jurisdiction and applied individually to the interim period
pre-tax income of each jurisdiction. Similarly, if different income tax rates apply different
categories of income (such as capital gains or income earned in particular industries), to the
extent practicable a separate rate is applied to each individual category of interim period
pre-tax income. While that degree of precision is desirable, it may not be achievable in all
case and a weighted average of rates across jurisdictions or across categories of income is
used if it is a reasonable approximation of the effect of using more specific rates.
Depreciation and amortisation

Depreciation and amortisation for an interim period is based only on assets owned during
that interim period. It does not take into account asset acquisitions or dispositions planned
for late in the financial year.
Inventories
Inventories are measured for interim financial reporting by the same principles as at financial
year- end. Ind AS 2, Inventories establishes standards for recognising and measuring
inventories. Inventories pose particular problems at the end of any financial reporting
period because of the need to determine inventory quantities, cost, and net realisable
values, Nonetheless, the same measurement principals are applied for interim inventories.
To save cost and time, entities often use estimates to measure inventories at interim dates
to a greater extent than at the end of annual reporting periods. Following are examples of
how to apply the net realisable value test at an interim date and how to treat manufacturing
variances at interim dates.
Net realisable value of inventories

The net realisable value of inventories is determined by reference to selling prices and
related costs to complete and dispose at interim dates. An entity will reverse a write-donn
to net realisable value in a subsequent interim period only if it would be appropriate to do
so at the end of the financial year.
10 ACCOUNTS
QUESTION 1
Company A has reported Rs 60,000 as pre profit in first quarter and expects a loss of `
15,000 each in the subsequent quarters. It has a corporate tax slab of 20 percent of the
first ` 20,000 of annual earnings and 40 per cent on all additional earnings. Calculate the
amount of tax to be shown in each quarter.
SOLUTION:
Amount of income tax expense reported en each quarter would be as below:
Expected total Income = ` 15,000 [60,000 – (15,000 x 3)]

Expected tax as per slabs = 15,000 x 20% = ` 3,000
Average Annual Income tax rate = 3,000/15,000 = 20%
Q 1 Q 2 Q 3 Q4
Profit before tax 60,000 (15,000) (15,000) (15,000)
Tax expense 12,000 (3,000) (3,000) (3,000)
INTERIM FINANCIAL REPORTING AND IMPAIRMENT

An entity is required to assess goodwill for impairment at the end of each reporting period,
and, if required, to recognise an impairment loss at that date in accordance with Ind AS 36,
However, at the end of a subsequent reporting period, conditions may have so changes that
the impairment loss would have been reduced or avoided had the impairment assessment
been made only at that date.
Accordingly, an entity shall not reverse an impairment loss recognisd in a previous interim
period in respect of goodwill.
QUESTION 2
ABC Limited manufactures automobile parts. ABC Limited has shown a net profit of
` 20,00,000 for the third quarter of 20X1
Following adjustments are made while computing the net profit:
(i) Bad debts of ` 1,00,000 incurred during the quarter. 50% of the bad debts have been
deferred to the next quarter.
(ii) Extraordinary loss of ` 3,00,000 incurred during the quarter has been fully recognised
in this quarter.
(iii) Additional depreciation of ` 4,50,000 resulting from the change in the method of
depreciation.
(iv) ` 5,00,000 expenditure on account of administrative expenses pertaining to the third
quarter is deferred on the argument that the fourth quartet will have more sales;
therefore fourth quarter should be debited by higher expenditure. The expenditures
are uniform throughout all quarters.
Ascertain the correct net profit to be shown in the Interim Financial of third quarter to be
presented to the Board of Directors.
SOLUTION:
In the instant case, the quarterly net profit has not been correctly stated.
As per Ind AS 34, Interim Financial reporting, the quarterly net profit should be adjusted
and restated as follows:
Bad debts of ` 1,00,000 have been incurred during current quarter. Out of this, the company
has deferred 50% (i.e.) ` 50,000 to the next quarter. This treatment is not correct as the
expenses incurred during an interim reporting period should be recognised in the same
period unless conditions mentioned in paragraph 39 of Ind AS 34 are fulfilled. Accordingly,
` 50,000 should be deducted form ` 20,00,000
The treatment of extra-ordinary loss of ` 3,00,000 being recognised in the same quarter
is correct.
Recognising additional depreciation of ` 4,50,000 in the same quarter is correct and is in
tune with Ind AS 34.
AS per Ind AS 34 the income and expense should be recognised when they are earned and
incurred respectively. As per para 39 of Ind AS 34, the costs should be anticipated to
deferred only when:
(i) it is appropriate to anticipate or defer that type of cost at the end of the financial
year, and
(ii) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of ` 5,00,000 is not correct as

expenditures are uniform throughout all quarters.
Thus considering the above, the correct net profit to be shown in interim financial Report
of the third quarter shall be ` 14,50,000 (` 20,00,000 - ` 5,00,000 - ` 50,000).
12 ACCOUNTS
QUESTION 3
On 30.6.2020, Jatin Ltd. incurred Rs. 2,00,000, Net Loss from disposal of a business
segment. Also, on 30.7.2020, the company paid Rs. 60,000 for Property taxes Assessed for
the calendar year 2020. How the above transactions should be included in determination of
Net Income of Jatin Ltd. for the six months interim period ended on 30.9.2020.
SOLUTION:
According IND AS 34 “Interim Financial Reporting”, Jatin Ltd., would report the entire
Rs. 2,00,000 loss on the disposal of its business segment since the loss was incurred during
interim period.
A cost charged as an expense in an annual period should be allocated to Interim periods on
accrual basis. Since Rs. 60,000 Property Tax payment relates to entire calendar year 2020,
Rs. 30,000 would be reported as an expense for six months ended on 30th September,
2020.
QUESTION 4
An enterprise’s financial reporting year ends 30 September and its reports quarterly. Its
year as per taxation laws ends 31 March. For the financial year that begins 1 October, Year
1 ends 30 September of Year 2 the enterprise earns rs. 100 lakhs pre-tax each quarter.
The estimated weighted average annual income tax rate is 30 per cent in Year 1 and 40 per
cent in Year 2. Calculate amount of tax expesne for each quarter.
QUESTION 5
Intelligent Corp. (I-Corp.) is dealing in seasonal products. The quarterly sales pattern of
the products is given below:
Quarter Qtr. - I Qtr.-II Qtr. - III Qtr. - IV

Ending on 31st March 30th June 30th September 31st December
% of Sales 15% 15% 50% 25%
For the First Quarter ending 31st March, 2020, I-Corp. gives you the following information:
Rs. Crores
Sales 50
Salary and other expenses 30
Advertisement expenses (routine) 02
Administrative and selling expenses 08
While preparing interim financial report for the first quarter ‘I-Corp.’ wants to defer Rs. 21
crore expenditure to third quarter on the argument that third quarter is having more sales,
therefore third quarter should be debited by higher expenditure. Considering the seasonal
nature of business, the expenditure are uniform throughout all quarters.
Calculate the result of first quarter as per IND AS 34 and comment on the company’s view.
QUESTION 6
How should the following be recognized and measured in the interim financial statements :
(i) Year end bonus

(ii) Income-tax expense
(iii) Provisions
(iv) Foreign currency translation gains and losses.
SOLUTION:
(i) Year end bonus :- Anticipate only, if there is a legal or other obligation and a reliable
estimate can be made.
(ii) Income-tax expense :- Apply estimated average annual effective income-tax rate to
the pre-tax income of the interim period.
(iii) Provisions :- Same criteria as is used for year end estimates.
(iv) Foreign currency translation gains and losses :- Apply same principles as are applied at
year end.
QUESTION 7
ABC India Ltd. has Rs. 1,02,000 net income for the quarter ended 31 December, 2020
including the following items:
(a) Rs. 60,000 extraordinary gain received on July 30, 2020, was allocated equally to the
second, third and fourth quarter of financial year 2020-2021.
(b) Rs. 16,000 cumulative effect loss resulting from during change in method of inventory
valuation method was recognized on November 2, 2020. Out of this loss Rs. 10,000
relates to the previous quarters.
Compute the profit as per IND AS 34 for the quarter ended 31st December, 2020 of ABC
India Ltd.
14 ACCOUNTS
QUESTION 8
Kataka Ltd. shows Net profit of Rs. 7,20,000 for Quarter III after incorporating the
following -
(1) Bad debts of Rs. 40,000 incurred during this period, 50% of the bad debts have been
deferred to the next quarter.
(2) Extra- ordinary Loss of Rs. 35,000 incurred during the quarter has been fully recognised
in this quarter.
(3) Additional Depreciation of Rs. 45,000 resulting from the change in the method of
charge of depreciation.
Ascertain the correct quarterly income.
QUESTION 9
Jatin limited expects to receive dividend income of Rs. 100 crores on its investments in
the quarter October to December, 2020. It proposes to recognise Rs. 25 crores dividend
income in interim financial statement of each quarter. Is this justified.
QUESTION 10
An enterprise reports quarterly, earns Rs. 150 lakhs per-tax profit in the first quarter
but expects to incur losses of Rs. 50 lakhs in each of the three remaining quarters (thus
having zero income for the year), and is governed by taxation laws according to which its
estimated average annual income tax rate is expected to be 35 per cent. Calculate amount
of tax expense for each quarter.
QUESTION 11
The accounting year of X Ltd. ends on 30th September, 2020 and it makes its reports
quarterly. However for the purpose of tax, year ends on 31st March every year. For the
Accounting year beginning on 1.10.2019 and ends on 30.9.2020, the quarterly income is as
under:-
1st Quarter ending on 31.12.2019 Rs. 200 crores
2nd Quarter ending on 31.3.2020 Rs. 200 crores
3rd Quarter ending on 30.6.2020 Rs. 200 crores
4th Quarter ending on 30.9.2020 Rs. 200 crores
Total Rs. 800 crores
Weighted Average tax rate for the financial year ending on 31.3.2006 is 20% and for
financial year ending 31.3.2007 is 30%. Calculate tax expense for each quarter.
TEST YOUR KNOWLEDGE
Practical Question
Company A expects to earn ` 15,000 pre-tax profit each quarter and has a corporate tax
slab of 20 percent on the first ` 20,000 of annual earnings and 40 per cent on all additional
earnings. Actual earnings match expectations. Calculate the amount of income tax to be
shown in each quarter.
Answer to practical question

The following table shows the amount of income tax expense that is reported in each
quarter:
Expected total Income = 15,000 x 4 = ` 60,000

Expected Tax as per slabs = 20,000 x 20% + 40,000 x 40% = ` 20,000
Average annual Income tax rate = 20,000/ 60,000 x 100 = 33.33%
Amt (`)
Q1 Q3 Q3 Q4
Profit before tax 15,000 15,000 15,000 15,000
Tax expense 5,000 5,000 5,000 5,000
16 ACCOUNTS
NEW QUESTIONS ADDED IN STUDY MATEIRAL

QUESTION 1
Fixed production overheads for the financial year is ` 10,000. Normal expected production
for the year, after considering planned maintenance and normal breakdown, also considering
the future demand of the product is 2,000 MT. It is considered that there are no quarterly
/ seasonal variations. Therefore, the normal expected production for each quarter is 500
MT and the fixed production overheads for the quarter are ` 2,500.
Actual production achieved Quantity (in MT)
First quarter 400
Second quarter 600
Third quarter 500
Fourth quarter 400
Total 1,900
Presuming that there are quarterly / seasonal variation, calculate the allocation of fixed
production overheads for all the four quarters as per Ind AS 34 read with Ind AS 2.
QUESTION 2 (RTP NOV 2020…….ALREADY DISCUSSED IN RTP VIDEO)
An entity’s accounting year ends is 31st December, but its tax year end is 31st March.
The entity publishes an interim financial report for each quarter of the year ended 31st
December, 2019. The entity’s profit before tax is steady at ` 10,000 each quarter, and
the estimated effective tax rate is 25% for the year ended 31st March, 2019 and 30% for
the year ended 31st March, 2020.
How the related tax charge would be calculated for the year 2019 and its quarters.
ANSWER
Table showing computation of tax charge:
Quarter Quarter Quarter Quarter Year

ending 31st ending ending 30th ending 31st ending 31st
March, 30th June, September, December, December,
2019 2019 2019 2019 2019
` ` ` ` `
Profit before 10,000 10,000 10,000 10,000 40,000
tax
Tax charge (2,500) (3,000) (3,000) (3,000) (11,500)
7,500 7,000 7,000 7,000 28,500
Since an entity’s accounting year is not same as the tax year, more than one tax
rate might apply during the accounting year. Accordingly, the entity should apply the
effective tax rate for each interim period to the pre-tax result for that period.
18 ACCOUNTS
NOTES
GUIDANCE NOTE ON INTERIM FINANCIAL REPORTING 19
GUIDANCE NOTE ON MEASUREMENT OF INCOME

TAX EXPENSE FOR INTERIM FINANCIAL REPORTING
Income tax expense is an important item of interim and annual financial reports. Hence,
correct measurement of income tax expense is very important for reporting purposes. This
Guidance Note deal with various aspects in the measurement of income tax expense for the
purpose of interim financial reporting.
General principles for recognition and measurement as per AS 25
• An enterprise should apply the same accounting policies in its interim financial
statements as are applied in its annual financial statements, except for accounting
policy changes made after the date of the most recent annual financial statements that
are to be reflected in the next annual financial statements. However, the frequency
of an enterprise’s reporting (annual, half yearly, or quarterly) should not affect the
measurement of its annual results. To achieve that objective, measurements for interim
reporting purposes should be made on a year-to-date basis.
• Requiring an enterprise to follow the same accounting principle in interim financial
statement as in its annual financial statements suggest that each interim period may be
considered as standalone reporting period.
• Income tax expense is recognised in each interim period based on the best estimate
of the weighted average annual income tax rate expected for the full financial year.
Amounts accrued for income tax expense in one interim period may have to be adjusted
in a subsequent interim period of that financial year if the estimate of the annual income
tax rate changes.
Measurement of income tax expense

The various steps involved in the measurement of income tax expense for the purpose of
interim financial reports are as below:
STEP 1: ESTIMATE THE ANNUAL ACCOUNTING INCOME
• Estimate the annual accounting income.

• Take into account all the probable future events and transactions expected to occur
during the financial year.
Such an estimate would be on prudent basis, for eg.- depreciation on expected expenditure
on acquisition of fixed assets, profits from sale of fixed assets/investments, etc.
20 ACCOUNTS
Such future events and transactions should be taken into account only if there is a
reasonable certainty that the same would take place during the financial year.
STEP 2: ESTIMATE THE NET TAX LIABILITY FOR THE FINANCIAL YEAR
• Estimate the taxable income for the year.

• Apply the enacted or the substantively enacted tax rate on the taxable income, to
arrive at an estimate of the current tax for the year.
• The estimates of tax liability should be based on the estimated deductions, allowances,
etc., provided there is a reasonable certainty for the same.
• Estimate deferred tax assets/liabilities as per AS 22
Special considerations
(a) Where brought forward losses exist from the previous financial year (when deferred
tax asset was not recognised on considerations of prudence as per AS 22):
In such a situation, for estimating the current tax liability, the brought forward losses
would have to be deducted from the estimated annual accounting income.
Since such carried forward losses will get set-off during the year, these would not
have any tax consequence in future periods.
(b) Where brought forward losses exist (when deferred tax asset was recognised on the
considerations of prudence as per AS 22):
In such a situation, current tax would be computed in the same manner as explained in
(a) above.
However, in the determination of deferred tax, the tax expense arising from the
reversal of the deferred tax asset recognised previously, to the extent of reversal of
deferred tax asset in the current year, would also be considered.
STEP 3: CALCULATE THE WEIGHTED AVERAGE ANNUAL EFFECTIVE TAX RATE
• Determine the weighted average annual effective tax rate by dividing the estimated
tax expense (calculated in Step 2 above) by the estimated annual accounting income
(calculated in Step 1 above).
• Where different tax rates are applicable to different portions of the estimated annual
accounting income, e.g., normal tax rate and a different tax rate for capital gains,
calculate the weighted average annual effective tax rate separately for such portions
of estimated annual accounting income.
GUIDANCE NOTE ON INTERIM FINANCIAL REPORTING 21
Step 4: Determine Income Tax Expense for Interim Financial Reports

Apply the weighted average annual effective tax rate to the accounting income for the
interim period for determining the income tax expense to be recognised in the interim
financial reports.
Note:
Tax expense recognised under AS 25 ‘Interim Financial Statement’ is based on Integral
approach ie. the interim period is part of the whole accounting year. According to this
approach, the said rate is determined on the basis of the taxable income for the whole
year, and applied to the accounting income for the interim period in order to determine
the amount of tax expense for that interim period.
Question 1 : When progressive rates of tax are applicable

Estimated annual income ` 1 lakh
Tax Rates:
On first ` 40,000 30%
On the balance income 40%
Estimated income of each quarter is ` 25,000
Determine the amount of tax expense to be recognised in each of the quarterly financial
reports.
Question 2: When different rates of tax are applicable to different portions of the
estimated annual accounting income
Estimated annual income ` 1 lakh
(inclusive of Estimated Capital Gains (earned in Quarter II) ` 20,000)
Tax Rates On Capital Gains 10%
On other income:
First ` 40,000 30%
Balance income 40%
Estimated income of each quarter is ` 25,000
Income of ` 25,000 for 2nd Quarter includes capital gains of ` 20,000.

Assuming there is no difference between the estimated taxable income and the estimated
accounting income, calculate the tax expense for each quarter.
22 ACCOUNTS
NOTES

ACCOUNTING POLICES, CHANGES
IN ACCOUNTING ESTIMATES AND ERRORS
QUESTION NO 1
An entity starts a business in July 2005. The business was small in nature and therefore
the entity did not follow any specific accounting standards for valuation of inventory.
Over the decade the entity flourishes, becomes a big company and decided to apply
Ind AS 2 on inventories from the financial year 2016-2017. It decided to follow the
weighted average method for valuation of inventory. Now following questions will arise.
i. Shall entity do such valuation retrospectively or prospectively?
ii. What is meant by retrospective application?
iii. If it is to be applied as if it was applied from July 2005, then what about the accounts
already presented? Does entity need to change all the accounts?
iv. How would the effect be given?
SOLUTION
(i) It will depend upon whether the company is following the standard as per the new
guidelines of institute or is to applying voluntarily? In the above case. The entity
itself is taking the decision to apply the standard and therefore it will be treated as
voluntary application. If it falls under voluntary application then, the Ind AS 8 states
that the policy should be applied retrospectively.
(ii) As per definition, retrospective application assumes that the policy had always been
applied. If does not state any specific period. ‘Had always been applied’ indicates that
policy was applied right from the day 1, i.e. from July 2005.
(iii) The entity is not supposed to change the accounts which are already presented.
However it needs to give the effect of the change in policy while presenting the
accounts for the year in which new policy is adopted. In the current case, the new
policy is adopted from the F.Y. 2016-2017. Therefore , the effect will be given to the
concerned items, in the financial statements of F.Y. 2016-2017.
(iv) Ind AS 8 states that the entity shall adjust the opening balance of each affected
component of equity for the earliest prior period presented and the other comparative
amounts disclosed for each prior period presented.
When an entity applies a new accounting policy retrospectively, it applies the new accounting
policy to comparative information for prior periods as far back as is practicable.
24 ACCOUNTS
Retrospective application to a period period is not practicable unless it is practicable to

determine the cumulative effect on the amounts in both the opening and closing balance
sheets for that period.
The amount of the resulting adjustment relating to periods before those presented in the
financial statements is made to the opening balance of each affected component of equity
of the earliest prior period presented. Usually the adjustment is made to retained earnings.
However, the adjustment may be made to another component of equity to comply with an
Ind As.
Any other information about prior periods, such as historical summaries of financial data, is
also adjusted as far back as is practicable.
QUESTION NO 2
Continuing the above illustration, assume that company might be following the weighted
average method of valuation of stock right from July 2005. In reality, company might have
applied other methods like specific identification, LIFO or FIFO etc. company might have
changed also the method during the period as it was not following any specific standard
at that time. However, now, in F.Y. 2016-2017, the company decided to follow Ind AS and
accordingly decides the weighted average method of valuation. Analyse
SOLUTION
The company needs to calculate the closing inventory of every year since 2005-2006
assuming that it was following the said method from day 1.
This will change the figure of gross profit and net profit as inventory valuation will make
direct impact on the profits of the company. Net profits will affect the equity as well.
Similarly, the closing balances of inventory from year to year will also change. Thus, company
will make the calculations from the year 2005-2006 to 2015-2016.
The provisions further state that company will adjust the opening balances of equity and
other related amounts for the earliest prior period presented. It means, if company is
presenting the accounts for F.Y. 2016-2017, it need to give comparative figures for F.Y.
2015-2016 also. Therefore, the earliest prior period presented will be F.Y. 2015-2016 in
the above mentioned case. Thus the net effect on profit of last 11 years (from F.Y. 2005-
2006 to F.Y. 2015-2016) will be adjusted through the equity and inventory balances of the
year 2015-2016.
Thereafter the new policy will be continued and every year the valuation f inventory will be
done using weighted average method.
QUESTION 3
1. During 2012, Beta Ltd. discovered that some products that had been sold during 2011
were incorrectly included in inventory at March 31, 2011 at ` 6,500.
2. Beta’s accounting records for 2012 shows sales of ` 1,04,000, cost of goods sold of
` 86,500 (including ` 6,500 for the error in opening inventory), and income taxes of
` 5,250.
3. In 2011, Beta Ltd. reported:
* Sales of ` 73,500
* Cost of goods sold of ` 53,500
* Profit before income taxes of ` 20,000
* Income taxes of ` 6,000
* Profit of ` 14,000
4. 2011 opening retained earnings was ` 20,000 and closing retained earnings of ` 34,000
5. Beta’s income tax rate was 30 per cent for 2012 and 2011. It had no other income or
expenses.
6. Beta Ltd. had ` 5,000 of share capital throughout, and no other components of equity
except for retained earnings. Its shares are not publicaly traded and it does not
disclose earnings per share.
SOLUTION
You are required to prepare relevant extract from the statement of profit and loss and
statement of changes in equity. Also what should be disclosed in the notes.
Beta ltd.
Extract from the statement of profit and loss.
(Amount in `)
2012 Restated 2011

Sales 104,000 73,500
Cost of goods sold 80,000 60,000
Profit before income taxes 24,000 13,500
Income taxes 7,200 4,050
Profit 16,800 9,450
26 ACCOUNTS
Beta Ltd.
Statement of changes in equity
(Amount in `)
Share Retained Total

Capital Earnings
Balance as at March 31,2010 5,000 20,000 25,000
Profit for the year ended March 31, 2011 as -------- 9,450 9,450
restated
Balance as at March 31, 2011 5,000 29,450 34,450
Profit for the year ended March 31, 2012 ------- 16,800 16,800
Balance as at March 31, 2012 5,000 46,250 51,250
TEST YOUR KNOWLEDGE
QUESTION 1
During 2012, Delta Co. changed its accounting policy for depreciating property, plant and
equipment, so as to apply much more fully a components approach, whilst at the same time
adopting the revaluation model.
In years before 2012, Delta’s asset records were not sufficiently detailed to apply a
components approach fully. At the end of 2011, management commissioned an engineering
survey, which provided information on the components held and their fair values, useful
lives, estimated residual values and depreciable amounts at the beginning of 2012. However,
the survey did not provide a sufficient basis for reliably estimating the cost of those
components that had not previously been accounted for separately, and the existing records
before the survey did not permit this information to be reconstructed.
Delta’s management considered how to account for each of the two aspects of the accounting
change. They determined that it was not practicable to account for the change to a fuller
components approach retrospectively, or to account for that change prospectively from any
earlier date than the start of 2012. Also, the change from a cost model to a revaluation
model is required to be accounted for prospectively. Therefore, management concluded
that it should apply Delta’s new policy prospectively from the start of 2012.
(i) Delta’s tax rate is 30 per cent
(ii) Particulars Property, plant and equipment at the end of 2011:

Cost: ` 25,000
Depreciation ` 14,000
Net book value ` 11,000
(iii) Prospective depreciation expenses for 2012 (old basis) ` 1,500
(iv) Some results of the engineering survey:
Valuation ` 17,000
Estimated residual value ` 3,000
Average remaining asset life 7 Years
Depreciation expense on exiting property,
plant and equipment for 2012 (new basis) ` 2,000
You are required to prepare relevant note for disclosure in accordance with Ind AS 8
ANSWER
Extract from the notes
From the start of 2012, Delta Co. changed its accounting policy for depreciating
property, plant and equipment, so as to apply much more fully a components approach,
whilst at the same time adopting the revaluation model. Management takes the view
that this policy provides reliable and more relevant information because it deals more
accurately with the components of property, plant and equipment and is based on
up-to-date values. The policy has been applied prospectively from the start of 2012
because it was not practicable to estimate the effects of applying the policy either
retrospectively, or prospectively from any earlier date. Accordingly, the adoption
of the new policy has no effect on prior years. The effect on the current year is to
increase the carrying amount of property, plant and equipment at the start of the
year by ` 6,000; increase the opening deferred tax provision by ` 1,800; create a
revaluation surplus at the start of the year of ` 4,200; increase depreciation expense
by ` 500; and reduce tax expense by ` 150.
28 ACCOUNTS
EXTRA QUESTIONS ON IND AS - 8

QUESTION 1
Can an entity voluntarily change one or more of its accounting policies?
SOLUTION
A change in an accounting policy can be made only if the change is required or permitted by
Ind AS 8.
As per para 14 of Ind AS 8, entity shall change an accounting policy only if the change:
(a) is required by an Ind As; or
(b) Results in the financial statements providing reliable and more relevant information
about the effects or transactions. Other events or conditions on entity’s financial
position, financial performance or cash flows.
Para 15 of the standard states that the users of financial statements need to be able to
compare the financial statements of an entity over time to identify trends in its financial
position financial performance and cash flows, Therefore, the same accounting policies are
applied within each period and from one period to the next unless a change in accounting
policy meets one of the above criteria.
Paragraph 14 (b) lays down two requirements that must be complied with in order to make a
voluntary change in an accounting policy. First, the information resulting from application of
the changed (i.e., the new accounting policy must be reliable. Second, the changed accounting
policy must result in more relevant information being presented in the financial statements.
Whether a changed accounting policy results in reliable and more relevant financial
information is a matter of assessment in the particular facts circumstances of each case in
order to ensure that such an assessment is made judiciously (such that a voluntary change
in an accounting policy does not effectively become a matter of free choice), paragraph 29
of Ind AS requires an entity making a voluntary change in an accounting policy to disclose,
inter alia, the reasons why applying the new accounting policy provides reliable and more
relevant information,
QUESTION 2
Entity ABC acquired a building for its administrative purposes and presented the same as
property, plant and equipment (PPE) in the financial year 20X1 – X2. During the financial year
20X2 – X3, it relocated the office to a new building and leased the said building to a third
party, Following the change in the usage of the building entity ABC reclassified it from PPE
to investment property in the financial year 20X2 X3. Should Entity ABC account for the
change as a change as change in policy?
SOLUTION
Paragraph 16 (a) of Ind AS 8 provides that the application of an accounting policy for
transactions, other events or conditions that differ in substance from those previously
occurring are not changes in accounting policies.
As per Ind AS 16, property, plant and equipment are tangible items, that:
(a) Are held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
(b) Are expected to be used during more than one period
As per Ind 40, investment property is property (land or a building or part of building or
both) held (by owner or by the lessee as a right-of use asset) to earn rentals or for capital
appreciation or both, rather than for;
(a) Use in the production or supply or goods of services or for administrative purposes;
or
(b) Sale in the ordinary course of business.
As per the above definitions whether a building is an ties of property, plant and equipment
(PPE) or an investment property for an entity depends on the purpose for which it is held
by the entity it is thus possible that due to a change in the purpose for which it is held,
a building that was previously classified as an item of property, plant and equipment may
warrant reclassification as an investment property, or vice versa. Whether a building is
in the nature of PPE of investment Property is determined by applying the definitions of
these terms from the perspective of that entity Thus, the classification of a building as
an item of property plant and equipment or as an investment property is not a matter of an
accounting policy choice. Accordingly, a change in classification of a building from property,
plant and equipment to investment property due to change in the purpose for which it is
held by the entity is not a change in an accounting policy.
QUESTION 3
Whether change in functional currency of an entity represents a change in accounting

policy?
SOLUTION
Paragraph 16 (a) of Ind AS 8 provides that the application of an accounting policy for
transactions other events or conditions that differ in substance from those previously
occurring are not changes in accounting policies.
30 ACCOUNTS
As per Ind AS 21, functional currency is the currency of the primary economic environment
in which the entity operates.
Paragraphs 9-12 of Ind AS 21 list factors to be considered by an entity in determining
its functional currency It is recognises that there may be cases whether the functional
currency is not obvious. In such cases, Ind AS 21 requires the management to use it
judgments to determine the
Functional currency that most faithfully represents the economic effects to the underlying
transactions, events and conditions
Paragraph 13 of Ind AS 21 specifically notes that an entity s functional currency reflects
the underlying transactions, events and conditions that are relevant to it. Accordingly,
once determined, the functional currency is not changes unless there is a change in those
underlying transactions, events and conditions Thus, functional currency of an entity is not
a matter of an accounting policy choise.
In view of the above, an change in functional of an entity does not represent a change in
accounting policy and Ind AS 8, therefore does not apply to such a change. Ind 21 requires
that when there is a change in an entity s functional currency, the entity shall apply the
translation procedures applicable to the new functional currency prospectively from the
date of the change
QUESTION 4
An entity developed one of its accounting policies by considering a pronouncement of an

overseas national standard-setting body in due accordance with Ind AS 8. Would it be
permissible for the entity to change the said policy to reflect a subsequent amendment in
that pronouncement?
SOLUTION
In the absence of an Ind AS that specifically applies to a transaction, other event of
condition, management may apply an accounting policy from the most recent pronouncements
of International Accounting Standards Board and in absence thereof those of the other
standard-setting bodies that use a similar conceptual framework to develop accounting
standards. If following an amendment of such a pronouncement, the entity chooses to
change an accounting policy, that change is accounted for and disclosed as a voluntary
changes in accounting policy As such a change is a voluntary change in accounting policy, it
can be made only if it results in information that is reliable and more relevant (and does not
conflict with the sources in Ind AS 8).
QUESTION 5
Whether an entity can change its accounting policy of subsequent measurement of property,
plant and equipment (PPE) from revaluation model to cost model?
SOLUTION
Paragraph 29 of Ind AS 16 provides that an entity shall chose either the cost model or the
revaluation model as its accounting policy for subsequent measurement of an entity class
of PPE.
A change from revaluation model to cost model for a class of PPE can be made only if
it meets the condition specified in Ind AS 8 paragraph 14 (b) i.e. the change results in
the financial statements providing reliable and more relevant information to the users of
financial statements. For example, an unlisted entity planning IPO may change its accounting
policy from revaluation model to cost model for some or all classes of PPE to align the
entity‘s accounting policy with that of listed markets participants within the industry so an
to enhance the comparability of its financial statement with those of other listed market
participants within the industry. Such a change- from revaluation model to cost model is
not expected to be frequent.
Where the change in accounting policy from revaluation model to cost model is considered
permissible in accordance with Ind AS 8 paragraph 14 (b), it shall be accounted for
retrospectively, in accordance with Ind AS 8.
QUESTION 6
Whether an entity is required to disclose the impact of any new Ind AS which is issued but
not yet effective in its financial statements as prepared as per Ind AS?
SOLUTION
Paragraph 30 of Ind AS 8 Accounting Policies, Changes in Accounting Estimate and Errors,
states as follows:
“When an entity has not applied a new Ind AS that has been issued but is not yet effective,
the entity shall disclose;
(a) This fact; and
(b) Known or reasonably estimable information relevant to assessing the possible impact
that application of the new Ind AS have on the entity s financial statement in the period
of initial application.
Accordingly, it may be noted that an entity is required to disclose the impact of Ind AS
which has been issued but is not yet effective.
32 ACCOUNTS
QUESTION 7
Whether a change in inventory cost formula is a change in accounting policy or a change in

accounting estimate?
SOLUTION
As per Ind AS 8, accounting policies are the specific principles, bases, conventions, rules
and practices applied by an entity in preparing and presenting financial statements, Further,
paragraph 36 (a) of Ind AS 2, Inventories, specifically requires disclosure of cost formula
used’ as a part of disclosure of accounting policies adopted in measurement of inventories.
Accordingly, a change in cost formula is a change in accounting policy.
QUESTION 8
An entity has presented certain material liabilities as non-current in its financial statements
for periods upto 31st March, 20X1 While preparing annual financial statements for the
year ended 31st March, 20X2 management discovers that these liabilities should have been
classified as current. The management intends to restated the comparative amounts for the
prior period presented (i.e., as at 31st March, 20X1). Would this reclassification of liabilities
from non-current to current in the comparative amounts be considered to be correction of
an error under Ind AS 8? Would the entity need to present a third balance sheet?
SOLUTION
As per paragraph 41 of Ind AS, errors can arise in respect of the recognition measurement,
presentation or disclosure of elements of financial statements do not company with Ind AS
if they contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity s financial position, financial performance or cash flow.
Potential current period errors discovered in that period are corrected before the financial
statements are approved for issue. However, material errors are sometimes not discovered
until a subsequent period, and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period.
In accordance with the above, the reclassification of liabilities from non-current to current
would be considered as correction of an error under Ind AS 8. Accordingly, in the financial
statements for the year ended 31st March, 20X2, the comparative amounts as at 31st March,
20X1 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the
preceding period in addition to the minimum comparative financial statements, if, inter
alia, it makes a retrospective restatement of items in its financial statements and the
restatements has a material effect on the information in the balance sheet at the beginning
of the preceding period.
Accordingly, the entity should present a third balance sheet as at the beginning of the
preceding period i.e., 1st April, 20X0 in addition to the comparatives for the financial year
20X0-X1.
QUESTION 9
An entity charged off certain expenses as fiancé costs in its financial statements for the
year ended 31st March, 20X1. While preparing annual financial statements for the year ended
31st March, 20X2 management discovered that these expenses should have been classified
as other expenses instead of finance cost, the error occurred because the management
inadvertently misinterpreted certain facts. The entity intends to restate the comparative
amounts for the prior period presented in which the error occurred (i.e., year ended 31st
March, 20X1). Would this reclassification of expenses from financé costs to other expenses
in the comparative amounts be considered to be correction of an error under Ind AS 8?
Would the entity need to present a third a balance sheet?
SOLUTION
As per paragraph 41 of Ind AS 8 errors can arise in respect of the recognition, measurement,
presentation of disclosure of elements of financial statements, Financial statements do not
comply with Ind AS if they contain either material errors or imaterial errors or immaterial
errors made intentionally to achieve a particular presentation of an entity s financial
position, financial performance or cash flows. Potential current period errors discovered in
that period are corrected before the financial statements are approved for issue. However,
material errors are sometimes not discovered until a subsequent period and these period
errors rare corrected in the comparative information presented in the financial statements
for the subsequent period.
In accordance with the above, the reclassification of expenses from finance cost to other
expenses would be considered as correction of an error under Ind AS 8. Accordingly, in the
financial statements for the year ended 31st March, 20X2 the comparative amounts for the
year ended 31st March, 20X1 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the
preceding period in addition to the minimum comparative financial statements if, inter
alia, it makes a retrospective restatement of items in its financial statements and the
restatement has a material effect on the information in the balance sheet at the beginning
of the preceding period.
In the given case, the retrospective restatement of relevant items in statement of profit
and loss has no effect on the information in the balance sheet at the beginning of the
preceding period (1st April, 20X0). Therefore, the entity is not required to present to
present a third balance sheet.
34 ACCOUNTS
QUESTION 10
While preparing the annual financial statements for the year ended 31st March 20X3 an entity
discovers that a provision for constructive obligation for payments of bonus to selected
employees in corporate office (material in amount) which was required to be recognised in
the annual financial statements for the year ended 31st March, 20X1 was not recognises
due to oversight of facts. The bonus was paid during the financial year ended 31st March,
20X2 and was recognised as an expense in the annual financial statements for the said year.
Would this situation require retrospective restatement of comparatives considering that
the error was material?
SOLUTION
As per paragraph 41 of Ind 8, errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statement. Financial statements do not
comply with Ind AS if they contain either material errors made intentionally to achieve a
particular presentation of an entity s financial performance or cash flows. Potential current
period errors discovered in that period are corrected before the financial statements
are approved for issue. However, material errors are sometimes not discovered unitil
a subsequent period and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at
the beginning of the preceding period in addition to the minimum comparative financial
statements if, inter alia, it makes a retrospective restatement of items in its financial
statements and the retrospective restatement has a material effect on the information in
the balance sheet at the beginning of the preceding period.
In the given case, expenses for the year ended 31st March 20X1 and liabilities as at 31st
March, 20X1 were understated because of non-recognition of bonus expense and related
provision. Expenses for the year ended 31st March, 20X2, on the other hand, were overstated
to the same extent because of recognition of the aforesaid bonus as expense for the year.
To correct the above errors in the annual financial statements for the year ended 31st
March, 20X3 the entity should:
(a)
Restate the comparative amounts (i.e. those for the year ended 31st March, 20X2) in
the statement of profit and loss, and
(b)
Present a third balance sheet as at the beginning of the preceding period (i.e., as at
1st April, 20X1) wherein it should recognise the provision for bonus and restate the
retained earnings.
QUESTION 11
While preparing interim financial statements for the half-year ended 30th September, 20X1
an entity notes that there has been an under-accrual of certain expenses in eh interim
financial statements for the first quarter ended 30Th June, 20X1 the amount of under
accrual is assessed to be material in the context of interim financial statements However,
it is expected that the amount would be immaterial in the context of the annual financial
statements. The management is of the view that there is not need to correct the error in
the interim financial statements considering that the amount is expected to be immaterial
from the point of view of the annual financial statements. Whether the management’s view
is acceptable?
SOLUTION
Paragraph 41 of Ind AS 8, inter alia, states that financial statements do not comply with
Ind AS if they contain either material errors or immaterial errors made intentionally to
achieve a particular presentation of an entity s financial position financial performance or
cash flows.
As regards the assessment of materiality of an item in preparing interim financial statements,
paragraph 25 of Ind AS 34, interim Financial Statements, states as follows:
While judgement is always required in assessing materially, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons
of understand ability of the interim figures. Thus, for example, unusual terms, changes
in accounting policies or estimates, and errors are recognises and disclosed on the basis
of materiality in relation to interim period date to avoid misleading inferences that might
result from nondisclosure, The overriding goal is to ensure that an interim financial report
included all information that is relevant to understanding an entity’s financial position and
performance during the interim period.
As per the above while materially judgements always involve a degree to subjectivity, the
overriding goal is to ensure that an interim financial report includes all the information
that is relevant to an understanding of the financial position and performance of the entity
during the interim period. It is therefore not appropriate to base quantitative assessments
of materiality on projected annual figures when evaluating errors in interim financial
statements.
Accordingly, the management is required to correct the error in the interim financial
statements since it is assessed to be material in reaction on to interim period date.
36 ACCOUNTS
QUESTION 12
ABC Ltd has an investment property with an original cost of ` 1,00,000 which it inadvertently
omitted to depreciate in previous financial statements. The property was acquired on 1st April,
20X1 How should the error be corrected in the financial statements for the year ended
31st March, 20X4 assuming the impact of the same is considered material, the property has
useful life of 10 years and is depreciated using straight line method. Estimated residual
value at the end of 10 year is Nil. For simplicity, ignore tax effects.
IND AS 8: ACCOUNTING POLICES,

ESTIMATES & ERRORS
QUESTION 1
A carpet retail outlet sells and fits carpets to the general public. It recognize revenue when
the carpet is fitted, which on an average is six weeks after the purchase of the carpet.
It then decides to sub-contract the fitting of carpets to self-employed fitters. It now
recognizes revenue at the point-of-sale of the carpet.
Whether this change in recognising the revenue is a change in accounting policy as per the
provision of Ind AS 8 ?
SOLUTION:
This is not a change in accounting policy as the carpet retailer has changed the way that
the carpets are fitted.
Therefore, there would be no need to retrospectively change prior period figures for
revenue recognized.
QUESTION 2
ABC Ltd. changed its method adopted for inventory valuation in the year 20X2-20X3. Prior
to the change, inventory was valued using the first in the first out method (FIFO). However,
it was felt that in order to match current practice and to make the financial statements
more relevant and reliable, a weighted average valuation model would be more appropriate.
The effect of the change in the method of valuation of inventory was as follows :
• 31st March, 20X1 – Increase of ` 10 million

Profit or loss under the FIFO valuation model are as follows :
20X2-20X3 20X1-20X2
Revenue 324 296
Cost of goods sold (173) (164)
Gross Profit 151 132
Expenses (83) (74)
Profit 68 58
38 ACCOUNTS
Retained earnings at 31st March, 20X1 were ` 423 million.

Present the change in accounting policy in the profit or loss and produce an extract of the
statement of changes in equity in accordance with Ind AS 8.
SOLUTION
Profit or loss under weighted average valuation method is as follows:
20X2-20X3 20X1-20X2
(Restated)
Revenue 324 296
Cost of goods sold (168) (159)
Gross Profit 156 137
Expenses (83) (74)
Profit 73 63
Statement of changes in Equity (extract)
Retained Retained
earnings earnings
(Original)
At 1st April, 20X1 423 423
Change in inventory valuation policy 10 —
At 1st April, 20X1 (Restated) 433 —
Profit for the year 20X1-20X2 63 58
At 31st March, 20X2 496 481
Profit for the 20X2-20X3 73 68
At 31st March, 20X3 569 549
QUESTION 3
During 20X4-X5, Cheery Limited discovered that some products that had been sold
during 20X3-X4 were incorrectly included in inventory at 31st March, 20X4 at ` 6,500.
Cheery Limited’s accounting records for 20X4-X5 show sales of ` 104,000, cost of
goods sold of ` 86,500 (including ` 6,500 for the error in opening inventory), and
income taxes of ` 5,250.
In 20X3-X4, Cheery Limited reported:
`
Sales 73,500
Cost of goods sold (53,500)
Profit before income taxes 20,000
Income taxes (6,000)
Profit 14,000
Basic and diluted EPS 2.8
The 20X3-X4 opening retained earnings was ` 20,000 and closing retained earnings was
` 34,000. Cheery Limited’s income tax rate was 30% for 20X4-X5 and 20X3-X4. It had
no other income or expenses.
Cheery Limited had ` 50,000 (5,000 shares of ` 10 each) of share capital throughout,
and no other components of equity except for retained earnings.
State how the above will be treated /accounted in Cheery Limited’s Statement of profit
and loss, statement of changes in equity and in notes wherever required for current period
and earlier period(s) as per relevant Ind AS.
ANSWER
Cheery Limited
Extract from the Statement of profit and loss
20X4-X5 (Restated) 20X3-X4
` `
Sales 1,04,000 73,500
Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
40 ACCOUNTS
Income taxes (7,200) (4,050)

Profit 16,800 9,450
Basic and diluted EPS 3.36 1.89
Cheery Limited
Statement of Changes in Equity
Share Retained Total

capital earnings
Balance at 31st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31st March, 20X4 — 9,450 9,450
as restated
Profit for the year ended 31st March, 20X5 16,800 16,800
EXTRACT FROM THE NOTES

Some products that had been sold in 20X3-X4 were incorrectly included in inventory at
31 st March, 20X4 at ` 6,500. The financial statements of 20X3-X4 have been restated
to correct this error. The effect of the restatement on those financial statements is
summarized below:
Effect on 20X3-X4
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses 1,950
(Decrease) in profit (4,550)
(Decrease) in basic and diluted EPS (0.91)
(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)
There is no effect on the balance sheet at the beginning of the preceding period i.e. 1st
April, 20X3.
In 20X3-20X4, after the entity’s 31 March 20X3 annual financial statements were
approved for issue, a latent defect in the composition of a new product manufactured by
the entity was discovered (that is, a defect that could not be discovered by reasonable
or customary inspection). As a result of the latent defect the entity incurred ` 100,000
in unanticipated costs for fulfilling its warranty obligation in respect of sales made
before 31 March 20X3. An additional ` 20,000 was incurred to rectify the latent
defect in products sold during 20X3-20X4 before the defect was detected and the
production process rectified, ` 5,000 of which relates to items of inventory at 31
March 20X3. The defective inventory was reported at cost ` 15,000 in the 20X2-20X3
financial statements when its selling price less costs to complete and sell was estimated
at ` 18,000. The accounting estimates made in preparing the 31 March 20X3 financial
statements were appropriately made using all reliable information that the entity could
reasonably be expected to have been obtained and taken into account in the preparation
and presentation of those financial statements.
Analyse the above situation in accordance with relevant Ind AS.
ANSWER
Ind AS 8 is applied in selecting and applying accounting policies, and accounting for
changes in accounting policies, changes in accounting estimates and corrections of prior
period errors.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a
liability, or the amount of the periodic consumption of an asset. This change in accounting
estimate is an outcome of the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities. Changes in accounting
estimates result from new information or new developments and, accordingly, are not
corrections of errors.
Further, the effect of change in an accounting estimate, shall be recognised prospectively
by including it in profit or loss in: (a) the period of the change, if the change affects that
period only; or (b) the period of the change and future periods, if the change affects
both.
Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of,
reliable information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
42 ACCOUNTS
Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.
On the basis of above provisions, the given situation would be dealt as follows:
The defect was neither known nor reasonably possible to detect at 31 March 20X3 or
before the financial statements were approved for issue, so understatement of the
warranty provision ` 1,00,000 and overstatement of inventory ` 2,000 (Note 1) in the 31
March 20X3 financial statements are not a prior period errors.
The effects of the latent defect that relate to the entity’s financial position at 31
March 20X3 are changes in accounting estimates.
In preparing its financial statements for 31 March 20X3, the entity made the warranty
provision and inventory valuation appropriately using all reliable information that the
entity could reasonably be expected to have obtained and had taken into account the
same in the preparation and presentation of those financial statements.
Consequently, the additional costs are expensed in calculating profit or loss for 20X3-
20X4.
Working Note:
Inventory is measured at the lower of cost (ie ` 15,000) and fair value less costs to
complete and sell (ie ` 18,000 originally estimated minus ` 5,000 costs to rectify latent
defect) = ` 13,000.

STATEMENT OF CASH FLOWS
MEANING Of STATEMENTS OF CASH FLOWS

Cash flow statement, in simple is a statement, which provides the details about how the cash
is generated by entity during the particular reporting period and how it is applied. While
doing so, it takes into consideration the opening balances of cash and cash equivalents, adds
the cash generated, deducts the cash payments and reconciles it with closing balances of
cash and cash equivalents. The cash flows are classified into following three main categories:
(a) Cash flow from Operating Activities

(b) Cash flow from investing Activities
(c) Cash flow from Financing Activities
From Operating
Activities
From Investing Cash Flows From Financing

Activities Activities
OBJECTIVE
Ind AS 7, has specified the following objectives of Statements of Cash Flows:
to provide information about historical changes in cash and cash equivalents

Cash flow statement aims at providing the information about how the cash has been
generated during the year and for what purpose has it been utlised. The information will be
provided for current year and immediate previous year.
to assess the ability to generate cash and cash equivalents

Cash flow statement is intended to provide the stakeholders about the efficiency of the
company in generating cash and cash equivalents. Some companies’ may look profitable as
per profit and loss account but whether they have enough cash for payment of their debts
and creditors has to be assessed by using cash flow statement.
44 ACCOUNTS
To understand the timing and certainty of their generation

The historical analysis of statements of cash flow can set a trend regarding the years in
which company could generate fair amount of cash flows and the probability of generating
it.
BENEFITS OF CASH FLOW STATEMENT
Provides information enabling evaluation of changes in net assets

and financial structure (Liquidity and solvency)
Cash flow statement reconciles the opening balances of cash and cash equivalent s with the
closing balances of cash and cash equivalents, giving the reasons for the changes happened
during the year. Thus it provides a clear picture of cash inflows and out flows that have
taken place during the reporting period.
Assesses the ability to manage the cash

The stakeholders get an idea about what is the source of generation of cash and how it is
used for. The information gives a fair idea about the efficiency and ability of the company
to generate cash.
For example, suppose there is negative cash flow from operations. It denotes that company
is unable to generate cash from its main business activity, which is not a favourable
situation.
Cash flow statements can also thro light on whether company could generate sufficient cash
or not.
For example, company wants to expand its production capacity The cash flow statements
can indicate whether company could generate the require cash from their operations, or
whether company has generated the funds from share capital or whether company has
taken a loan for the same.
Assess And compare the present value of future cash flows

The past trends of cash flows will help the company to predict about future cash flows.
Such information is useful while evaluating the projects on capital budgeting or valuation of
shares. Thus it forms the base for future projects and can be discounted using discounting
techniques.
Compares the efficiency of different entities

Accounting profits of various entities may have different assumptions, policies and
definitions. However, cash flows will be calculated by using the same technique and finally all
differing assumptions across the companies will melt down and entity will reach to a common
comparable base of cash and cash equivalents.
SCOPE
An entity shall prepare a statement of cash flows in accordance with the requirements of
this Standard and shall present it as an integral part of its financial statements of each
period for which financial statements are presented.
The Standard requires all entities to present a statement of cash flows.
Every organisation, whether it is small or big in size, whether it’s a manufacturing
organisation or trading concern or service organisation, needs cash for running its business.
The cash is also needed for future investments. Cash would be needed for payment of
dividends, repayment of loans as well. Thus any organisation is required to generate the
cash continuously.
Banks and Financial institutions are also not an exception to the same. Even if they deal with
financial products, accept deposits and give loans day in and day out, they need to generate
the cash profit for their own organisation. They need to make investments in terms of new
branches, set ups etc. thus statement of cash flow is equally important for banking and
Financial Institutions as well.
DEFINITIONS
The following terms are used in this Standard with the meanings specified:
1. Cash comprises cash on hand and demand deposits.

2. Cash equivalents are short-term, highly liquid investments that are readily convertible
to know amount of cash and with are subject to an insignificant risk of changes in
value.
3. Cash flows are inflows and outflows of cash and cash equivalent.
4. Operating activities are the principal revenue-producing activates of the entity and
other activities that are not investing or financing activities.
5. Investing activities are the acquisition and disposal of loan-term assets and other
investments not included in cash equivalents.
6. Financing activities are activities that result in changes in the size and composition of
the contributed equity and borrowings of the entity.
46 ACCOUNTS
CASH AND CASH EQUIVALENTS

Cash Equivalent means which is actually not in a form of cash in hand but can assumed as
cash for the purpose of statement of cash flows, depending upon its nature and purpose.
1. Purpose: Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes.
2. Liquidity and Risk: For an investment to qualify as a cash equivalent it must be readily
convertible to a known amount of cash and be subject to an insignificant risk of changes
in value. Therefore, an investment normally qualifies as a cash equivalent only when it
has a short maturity of, say three months or less from the date of acquisition
3. Equity investments are excluded from cash equivalents unless they are, in substance,
cash equivalents.
For example in the case of preference shares acquired within a short period of
their maturity and with a specified redemption date.
4. Bank borrowings are generally considered to be financing activities. However, where

bank overdrafts which are repayable on demand form an integral Part of an entity’s
cash management, bank overdrafts are included as a component of cash and cash
equivalents. A characteristic of such banking arrangements is that the bank balance
often fluctuates from being positive to overdrawn.
5. Cash Management: Cash flows exclude movements between items that constitute
cash or cash equivalents because these components are part of the cash management
of an entity rather than part of its operating, investing and financing activities. Cash
management includes the investment of excess cash in cash equivalents.
QUESTION 1
Company has provided the following information regarding the various assets held by
company on 31st March 2017. Find out, which of the following items will be part of cash and
cash equivalents for the purpose of preparation of cash flow statement as per the guidance
provided in Ind AS 7:
Sr.no. Name of the Security Additional Information

1. Fixed deposit with SBI 12% 3years maturity on 1st Jan 2020
2. Fixed deposit with HDFC 10%,original term was for 2 years, but due for
maturity on 30.06.2017
3. Redeemable preference The redemption is due on 30th April 2017

shares in ABC Ltd
4. Cash balances at various All branches of all banks in India
banks
5. Cash balances at various All international branches of Indian banks
banks
6. Cash balances at various Branches of foreign banks outside India
banks
7. Bank overdraft of SBI Temporary O/d, which is payable on demand
Fort branch
8. Treasury Bills 90 days maturity
SOLUTION:
Sr.no. Name of the Security Additional Information Decision

1. Fixed deposit with SBI 12%, 3years maturity on 1st Jan Not to be
2020 considered
2. Fixed deposit with HDFC 10%, original term was for 2 Not to be
years, but due for maturity on considered
30.06.2017
3. Redeemable preference The redemption is due on 30th Include as due in
shares in ABC ltd April 2017 90 days
4. Cash balances at various All branches of all banks in India Include
5. Cash balances at various All international branches of Include
banks India banks
6. Cash balances at various Branches of foreign banks Include
outside India
7. Bank overdraft of SBI Temporary O/d, which is payable Include
fort branch on demand
8. Treasury Bills 90 days maturity Include
48 ACCOUNTS
PRESENTATION OF STATEMWSNT OF CASH FLOWS

The statement of cash flows shall cash flows during the period classified by operating,
investing and financing activities.
Activities
Operating Investing Financing
Are the principal revenue- Are the acquisition Are activities that result
producing activities of the and disposal of long – in changes in the size
entity and other activities term assets and other and composition of the
that are not investing or investments not included in contributed equity and
financing activities cash equivalents borrowings of the entity
Operating Activities
• Cash flows from operating activities are primarily derived from the principal revenue
producing activities of the entity. Therefore, they are, in general, the result of the
transactions and events that enter into the determination of profit or loss.
Examples of cash flows operating activities are:
Operating Cash Inflows Operating Cash Outflows

Cash receipts from sale of goods and the Cash payments to suppliers for goods and
rendering of services services
Cash receipts from royalties, fee, Cash payments to and on behalf of
commission and other revenue employees
Cash receipts and cash payment of an Cash payment or refunds of income taxes
insurance entity for premiums and claims, unless they can be specifically identified
annuities and other policy benefits with financing and investing activities
Cash receipts and payments from
contracts held for dealing or trading
purposes
QUESTION 2
From the following transactions, identify with transactions will be qualified for the calculation
of operating cash flows, if company is into the business of trading of mobile phones
Sr. No. Nature of transaction

1 Receipt from sale of mobile phones
2 Purchases of mobile phones from various companies
3 Employees expenses paid
4 Advertisement expenses paid
5 Credit sales of mobile
6 Misc. charges received from customers for repairs of mobiles
7 Warranty claims received from the companies
8 Loss due to decrease in market value of the closing stock of mobile phones
9 Payment to suppliers of mobile phones
10 Depreciation on furniture of sales showrooms
11 Interest paid on cash credit facility of the bank
12 Profit on sale of old computers and printers, in exchange of new laptop and
printer
13 Advance received from customers
14 Sales Tax and excise duty paid
15 Proposed dividend for the current financial year
SOLUTION:
Sr. No. Nature of Transaction Included/Excluded with reason

1 Receipt from sale of mobile Include-main revenue generating activity
phones
2 Purchase of mobile phones Included –expenses related to main operations
from various companies of business
3 Employees expenses paid Include- expenses related to main operations
of business
4 Advertisement expenses paid Include – expenses related to main operations
of business
50 ACCOUNTS
5 Credit sales of mobile Do not include – Credit transaction will not be

included in cash flow (receipts from customers
will be included)
6 Misc. Charges received from Include – supplementary revenue generating
customers for repairs of activity
mobiles
7 Warranty claims receive form Include – supplementary revenue generating
the companies activity
8 Loss due to decrease in Do not include – Non cash transaction
market value of the closing
stock of old mobile phones
9 Payment to supplies of mobile Include – cash outflow related to main
phones operations of business
10 Depreciation on furniture of Do not include – non cash item
sales showrooms
11 Interest paid on cash credit Do not include – cost of finance
facility of the bank
12 Profit on sale of old computers Do not include – non cash item
and printers, in exchange of
new laptop and printer
13 Advance received from Include – Related to operations of business
customers
14 Sales tax and excise duty paid Include – related to operations of business
15 Proposed dividend for the Do not include – cost of finance
current financial year
• The amount of cash flows arising from operating activities is a key indicator of the extent
of which the operations of the entity have generated sufficient cash flows or not. If
the cash flow from operations is positive, it will be treated as positive indicator whereas
negative cash flow from operations will denote that company’s ability to generate the
revenue from its main operations is very weak. The companies in the initial stage of their
business or the companies which are facing economic problems will generally have the
negative cash flow from operations.
• Cash flow from operations are used to maintain the operating capability of the entity, pay
dividends and make new investments without recourse to external sources of financing.
Therefore, it is necessary to assess how much cash is generated by the business from
operations? Are they sufficient to take care of their future investment plans? Can loans
be repaid in time without default from such cash flows? Is there sufficient amount for
payment of preference dividend? Is anything left for equity shareholders after making
all these payments? Answers to all these questions well depend on whether the entity
has generated enough cash or not.
CERTAIN SPECIFIC ISSUES
1. Profit / Loss on Sale of Assets: Some transactions, such as the sale of an item of
plant, may give rise to a gain or loss that is included in recognised or loss. The cash
flows relating to such transactions are cash flows investing activities.
2. Properties built for let out: Cash payment to manufacture or acquire assets held for
rental to other and subsequently held for sale are flows from operating activities. The
cash receipts from rents and subsequent sales of such assets are also cash flows from
operating activities.
3. Operations of Financial companies and Banks: An entity may hold securities and loans
for dealing or trading purposes, in which case they are similar to acquired specifically
for resale. Therefore, cash flows arising from the purchase and sale of dealing or
trading securities are classified as operating activities. Similarly, cash advances and
loans made by financial institutions are usually classified as operating activities since
they relate to the main revenue- producing activity of that entity.
INVESTING ACTIVITY
Investment means sacrifice of current resource in a view to get more returns in future. All
entities need some amount of investment for their future survival.
Ind AS 7 states that investing activities represent the extent to which expenditures
have been made for resources intended to generate future income and cash flows. Only
expenditures that result in a recognised asset in the balance sheet are eligible for
classification as investing activities.
Examples of cash flows arising from investing activities Are:
Cash Inflow from Investing Activities Cash Outflow form Investing Activities
Cash receipts from of property, plant and Cash payments to acquire property, plant
equipment, intangibles and other long- equipment, intangibles and other long-term
term assets assets. These payments include those relating
to capitalised development costs and self-
constructed property, Plant and equipment
52 ACCOUNTS
Cash receipts from sales of equity or debt Cash payments to acquire equity or debt
instrument of other entities and interests instruments of other entities and interests
in joint ventures (other than receipts for in joint ventures (other than payments for
those instruments considered to be cash those instruments considered to be cash
equivalents and those held for dealing or equivalents or those held for dealing or
trading purposes) trading purposes);
Cash receipts from the repayment of Cash advances and loans made to other
advances and loans made to other parties parties (other than advances and loans made
(other than advances and loans of a by a financial institution)
financial institution)
Cash receipts from futures contracts, Cash payments for futures contracts,
forward contracts, option contracts forward contracts, option contracts and
and swap contracts except when the swap contracts except when the contracts
contracts are held for dealing or trading except when the contracts are held for
purpose, or the receipts are classified dealing or trading purposes, or the payments
activities are classified as financing activities
When a contract is accounted for as hedge of an identifiable position the cash flows ot the
contract are classified in the same manner as the cash flows of the position vein hedged.
QUESTION 3
From the following transactions taken from a private sector bank operating in India, identify
which transaction will be classified as operating and which would be classified as Investing
activity.
S. No. Nature of transaction paid

1 Interest received on loans
2 Interest paid on Deposits
3 Deposits accepted
4 Loans given to customers
5 Loans repaid by the customers
6 Deposits repaid
7 Commission received
8 Lease rentals paid for various branches
9 Service tax paid
10 Furniture purchased for new branches

11 Implementation of upgraded banking software
12 Purchase of shares in 100% subsidiary for opening a branch in Abu Dhabi
13 New cars purchased from Honda dealer, in exchange of old cars
14 Provident fund paid for the employees
15 Issued employee stock options
SOLUTION:
Sr. No. Nature of transaction paired Operating /Investing / Not to be

considered
1 Interest received on loans Operating –Main revenue generating
activity
2 Interest paid on Deposits Operating –Main expenses of operations
3 Deposits accepted Operating- financial nature of business
4 Loans given to customers Operating –in case of financial institutes
5 Loans repaid by the customers Operating – in case of financial institutes
6 Deposits repaid Operating- financial nature of business
7 Commission received Operating –Main revenue generating
activity
8 Lease rentals paid for various Operating –Main expenses of operations
branches
9 Service tax paid Operating –Main expenses of operations
10 Furniture for new branches Investing - Assets purchased
11 Implementation of upgraded Investing – Purchased for long term
banking software purpose
12 Purchase of shares in 100% Investing – Strategic investment
subsidiary for opening a branch in
Abu Dhabi
13 New cars purchased from Honda Investing
dealer, in exchange of old cars
14 Provident fund paid for the Operating
employees
15 Issued employee stock options Not to be considered. No cash flow
54 ACCOUNTS
Financing Activity
Drying the life time of the entity, it needs money for long term investment as well as
for working capital purpose. Company can raise the capital by any of equity or loans, Thus
the cash flows related to raising of funds and redemption of funds will be covered under
Cash flows from financing activities. The cost of capital is also generally covered under the
Financing Activity.
Ind AS 7 states that the cash flows from Financing activity are useful in predicting claims
on future cash flows by providers or capital to the entity
Cash Inflows from financing Activity Cash outflows from Financing Activity
Cash proceeds from issuing shares or other Cash payments to owners to acquire or
equity instrument; redeem the entity’s shares;
Cash proceeds from issuing debentures, Cash repayments of amount borrowed; and
Loans, note, bonds, mortgages and other
Short - term or loan-term borrowings; Cash payment by a lessee for the reduction
of the outstanding liability relating to
A finance lease.
QUESTION 4
From the following transactions taken from a parent company having multiple businesses
and multiple segments, identify which transaction will be classified as operating investing
and financing:
S. No. Nature of Transaction

1 Issued preference shares
2 Purchased the shares of 100% subsidiary company
3 Dividend received from shares of subsidiaries
4 Dividend received from shares other companies
5 Bonus shares issued
6 Purchased license for manufacturing of special drugs
7 Royalty received from the goods patented by the company
8 Rent received from the let out building (letting out is not main business)
9 Interest received from the advance given
10 Dividend paid
11 Interest paid on security deposits
12 Purchased goodwill
13 Acquired the assets of a company by issue of equity shares (not parting any
cash )
14 Interim dividends paid
15 Dissolved the 100% subsidiary and received the amount in final settlement
SOLUTION:
Sr.No. Nature of transaction Operating /investing / Financing

/ Not to be considered
1 Issued preference shares Financing
2 Purchased the shares of 100% subsidiary Investing
company
3 Dividend received from other of subsidiary Investing
4 Dividend received from other companies Investing /operating
5 Bonus shares issued No cash flow
6 Purchased license for manufacturing of Investing
special drugs
7 Royalty received from the goods patented Operating
by the company
8 Rent received from the let out building Investing
(letting out is not main business)
9 Interest received from the advances given Operating
10 Dividend paid Financing
11 Interest paid on security deposits Financing
12 Purchased goodwill Investing
13 Acquired the assets of a company by issued Not to be considered
of equity shares( not parting any cash)
14 Interim dividends paid Financing
15 Dissolved the 100% subsidiary and received Investing
the amount in final settlement
56 ACCOUNTS
REPORTING CASH FLOWS FROM OPERATING ACTIVITIES
Major classes of gross cash receipts and

Direct Method
gross cash payments are disclosed
Cash Flows
from Operating
Profit or loss is adjusted for the effects
Activities
of transactions of a non-cash nature, any
deferrals or accruals of past or future
Indirect Method
operating cash receipts or payment’s, and
items of income or expense associated with
investing or financing cash flows
• An entity shall report cash flows from operating activities using either:
(a) the direct method; whereby major classes or gross cash receipts and gross cash
payments and disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the effect of
transaction of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
• Entities are encouraged to report cash flows from operating activities using the direct
method. The direct method provides information which may be useful in estimating
future cash flows and which is not available under the indirect method. Under the
direct method, information about major classes of gross cash receipts and gross cash
payment may be obtained either
(a) from the accounting records of the entity; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense
and similar charge for a financial institution) and other items in the statement of
profit and loss. For:
(i) c
hanges during the period in inventories and operating receivable and
payables;
(ii) other non-cash items; and
(iii) other items for which the cash effect are investing or financing cash flows.
Analysis
Direct method starts with cash revenue/income/receipts of the company. All the cash
expenses will deducted from such cash revenue. The cash profit will be adjusted for the
cash flows arising from investing and financing activities. Non-cash expenses/losses/gains
will not be considered. The payments to suppliers and receipts from customers are also
taken into consideration. The resultant figure would cash flows from operating activity.
The exercise would be similar to converting the income and expenditure account (accrual
system) into receipt and payment (cash system), with the difference effect on investment
and liabilities will not be considered. Thus if we consider the vertical operating statement,
direct method will (TOP down) approach of presentation.
• Under the indirect method, the net cash flow from operating activities is determined
by adjusting profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes, unrealised
foreing currency gains and losses, and undistributed profits of associates; and
(c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flows operating activities may be presented under the indirect
method by showing the revenues and expenses disclosed in the statement of profit and loss
and the changes during the period in inventories and operating receivables and payables.
Analysis
Indirect method is reverse of direct method. It starts with the accounting profit after
tax as given in profit and loss account. Thereafter, the profit will be adjusted for non-
cash items, losses and gains on investing and financing activities, interest and dividends,
collection and payments to debtors/creditors etc. Accordingly, the cash from, operating
activity will derived, Thus indirect method will have (Bottom up) approach.
Note: Under both the methods the amount of cash flow from Operating activities need
to be necessarily same. It’s only the approach for presentation which differs.
QUESTION 5
Find out the cash from operations by direct method and indirect method from the following
information:
58 ACCOUNTS
Operating statement of ABC Co for the year ended 31.3.2017
Particulars `
Sales 500,000.00
Less: Cost of goods sold 350,000.00
Administration & Selling Overheads 55,000.00
Depreciation 7,000.00
Interest Paid 3,000.00
Loss on sale of asset 2,000.00
Profit before tax 83,000.00
Tax (30,000.00)
Profit After Tax 53,000.00
Balance Sheet as on 31st March
2017 2016
Shareholders’ Funds 60,000.00 50,000.00
Non-current Liabilities 25,000.00 30,000.00
Current Liabilities
Creditors 12,000.00 8,000.00
Creditors for Expenses 10,000.00 7,000.00
Provisions 8,000.00 5,000.00
Total 115,000.00 100,000.00
Assets
Fixed Assets 75,000.00 65,000.00
Investment 12,000.00 10,000.00
Current Assets
Inventories 12,000.00 13,000.00
Debtors 10,000.00 7,000.00
Cash 6,000.00 5,000.00
Total 115,000.00 100,000.00
REPORITNG CASH FLOWS FROM INVESTING

AND FINANCING ACTIVITIES
An entity is required to report separately major classes of gross cash receipts and gross
cash payments arising from investing and financing activities, except to the extent that
cash flows are permitted to be reported on a net basis.
REPORTING CASH FLOWS ON A NET BASIS

If nothing is specifically mentioned, then as per Ind AS 7, the cash flows will be presented
on Gross Basis. Gross basis means the receipts would be shown separately and the payments
will be shown separately.
Example:
If in the year 20X1 – 20X2, some land is purchased for ` 2.5 crores and another land is
sold for ` 3.5 crores then while presenting the information, entity shall show separately
outflow of `3.5 crores and inflow of ` inflow of ` 3.5 crores.
The above base has following exceptions
1. Cash flows arising from the following operating, investing or financing activities may
be reported on a net basis:
(a) Cash receipts and payments on behalf of customers when the cash flows reflect
the activities of the customer rather than those of the entity;
Examples of cash receipts and payments referred to in paragraph 22 (a) are:
• The acceptance and repayment of demand deposit of a bank;
• Funds held for customers by an investment entity; and
• Rents collected on behalf of, and paid over to, the owners of properties.
(b) Cash receipts and payments for items in which the turnover is quick, the amounts
are large, and the maturities are short.
Examples of cash receipts and payments referred to in paragraph 22(b) are
advances made for, and the repayment of:
• Principal amounts relating to credit card customers;
• The purchase and sale of investments; and
• o
ther short-term borrowing, for example, those which have a maturity period
of three months or less.
60 ACCOUNTS
2. Cash flow arising from each of the following activities of a financial institution may be
reported on a net basis:
(a) cash receipts and payment for the acceptance and repayment of deposits with a
fixed maturity date;
(b) the placement of deposits with and withdrawal of deposits from other financial
institutions; and
(c) cash advances and loans made to customers and the repayment of those advances
and loans.
FOREIGN CURRENCY CASH FLOWS
• Cash flows arising from transactions in a foreign currency shall be recoded in an entity’s
functional currency by applying to the foreign currency amount the exchange rate
between the functional currency and the foreign currency the date of the cash flow.
• The cash flows of a foreign subsidiary shall be translated at the exchange rates between
the functional currency and the foreign currency at the dates of the cash flows.
Example:
Suppose the money is received on account of exports on 15th January 2017 in US $.
The company prepares the accounts in ` In such case the exchange rate between USD
and Rupee as on 15th January 2017 need to be applied of conversion.
• Unrealised gains and losses arising from changes in foreign currency exchange rates
are not cash flows. However, the effect of exchange rate changes on cash and cash
equivalents held or due in a foreign currency is reported in the statement of cash flows
in order to reconcile cash and cash equivalents at the beginning and the end of the
period. This amount is presented separately from cash flows from operating, investing
and financing activities and includes the differences, if any, had those cash flows been
reported at end of period exchange rate.
INTEREST AND DIVIDENDS

Cash flows from interest and dividends received and paid shall each be disclosed separately.
Financing company Other company

Interest paid Cash flows arising from Cash flows from financing
operating activities activities
Interest and dividends Cash flows arising from Cash flows from investing
received operating activities activities
Dividends paid Cash flows from financing Cash flows from financing
activities activities
QUESTION NO 6
A firm invests in a five year bond of another company with a face a value of ` 10,00,000
by paying ` 5,00,000. The effective rate is 15% the firm recognises proportionate interest
income its income statement throughout the period of bond.
Based on the above information answer the following question:
a) How the interest income will be treated in cash flow statement during the period of
bond ?
b) On maturity, the receipt of ` 10,00,000 should be split between interest income and
receipts from investment activity.
SOLUTION:
Interest Income will treated as income over the period of bond in the income statement.
However, there will be no cash flow in these years because no cash has received, On maturity,
receipt of ` 10,00,000 will be classified as investment activity with a bifurcation of interest
income & money received on redemption of bond.
TAXES ON INCOME
Cash flows arising from taxes on income shall be separately disclosesd and shall be classified
as cash flows from operating activities unless they can be specifically identified with
financing and investing activities.
Taxes on income arise on transactions that give rise to cash flows that are classified as
operating, investing or financing activities in a statement of cash flows. While tax expense
may be readily identifiable with investing or financing activities, the related tax cash flows
are often impracticable to identify and may arise in a different period from the cash flows
of the underlying transaction. Therefore, taxes paid are usually classified as cash flows
from operating activities. However, when it is practicable to identify the tax cash flow
with an individual transaction that gives rise to cash flows that are classified as investing
or financing activities the cash flow is classified as an investing or fencing activity as
appropriate.
62 ACCOUNTS
QUESTION 7
X Limited has paid an advance tax amounting to ` 5,30,000/- during the current year. Out
of the above paid tax. ` 30,000 is paid for tax on long term capital gains.
Under which activity the above said tax be classified in the cash flow statement of X
Limited?
SOLUTION:
Cash flows arising from taxes on income should be classified as cash flows from operating
activities unless then can be specifically identified with financing and investing activities.
In the cash of X Limited, the tax amount of ` 30,000 is specifically related with investing
activities.
` 5,00,000 to be shown under operating activities. ` 30,000 to be shown under investing
activities.
QUESTION 8
INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND JONINT VENTURES

When accounting for an investment in an associate, a joint venture or a subsidiary accounted
for by use of the equity or cost method, an investor restricts its reporting in the statement
of cash flows to the cash flows between itself and the investee, for example, to dividends,
to dividends and advances.
An entity that reports its interest in an associate or a joint venture using the equity method
includes in its statement of cash flows the cash flows in respect of its investment sin the
associate or joint venture, and distributions and other payments or receipts between it and
the associate or joint venture.
QUESTION 9
X Limited acquires fixed asset of ` 10,00,000 from Y Limited by accepting the liabilities
of ` 8,00,000 of Y Limited and balance amount it paid in cash. How X Limited will treat all
those items in its cash flow statements?
SOLUTION:
Investing and financing transactions that do not require the use of cash and cash equivalents
shall be excluded from a statement of cash flows. X Limited should classify cash payment
of ` 2,00,000 under investing activities. The non-cash transactions –liabilities and asset
should be disclosed in the notes to the financial statements.
QUESTION 9
An entity has bank balance in foreign currency aggregating to USD 100 (equivalent to `
4,500) at the beginning of the year. Presuming no other transaction taking place, the entity
reported a profit before tax of ` 100 on account of exchange gain on the bank balance in
foreign currency at the end of the year. What would be the closing cash and cash equivalents
as per the balance sheet?
SOLUTION:
For the purpose of statement of cash flows, the entity shall present the following:
Amount `
Profit before tax 100
Less: Unrealised exchange gain (100)
Cash flow from operating activities Nil
Cash flow from investing activities Nil
Cash flow from financing activities Nil
Net increase in cash and cash equivalents during the year Nil
Add: Opening balance of cash and cash equivalents 4,500
Cash and cash equivalents as at the year end 4,500
Reconciliation of cash and cash equivalents
Cash and cash equivalents as per statement of cash flows 4,500
Add: Unrealised gain on cash and cash equivalents 100
Cash and cash equivalents as per the balance sheet 4,600
• If any changes in the policies take place , that will be dealt with as per the provisions of
IND AS 8
64 ACCOUNTS
TEST YOUR KNOWLEDGE
Practical Questions
1. Use the following data of ABC Ltd. to construct a statement of cash flows using the
direct and indirect methods:
(Amount in `)
20X2 20X1
Cash 4,000 14,000
Accounts Receivable 25,000 32,500
Prepaid Insurance 5,000 7,000
Inventory 37,000 34,000
Fixed Assets 3,16,000 2,70,000
Accumulated Depreciation (45,000) (30,000)
Total Assets 3,42,000 3,27,500
Accounts Payable 18,000 16,000
Wages Payable 4,000 7,000
Debentures 1,73,000 1,60,000
Equity Shares 88,000 84,000
Retained Earnings 59,000 60,500
Total Liabilities & Equity 3,42,000 3,27,500
20X2
Sales 2,00,000
Cost of Goods sols (1,23,000)
Depreciation (15,000)
Insurance Expense (11,000)
Wages (50,000)
Net Profit 1,000
During the financial year 20X2 company ABC Ltd. declared and paid dividends of ` 2,500.
During 20X2, ABC Ltd. paid ` 46,000 in cash to acquire new fixed assets. The accounts
payable was used only of inventory. No debt was retired during 20X2.
2. From the following summary cash account of XYZ Ltd, Prepare cash flow statement
for the year ended March 31, 20X1 in accordance with Ind AS 7 using direct method.
Summary of Bank Account for the year ended March 31, 20X1
` ‘000 `’000
Balance on 1.4.20X0 50 Payment to creditors 2,000
Issue of Equity Shares 300 Purchase of fixed Assets 200
Receipts from customers 2,800 Overhead Expenses 200
Sale of Fixed Assets 100 Payroll 100

Tax payment 250
Dividend 50
Repayment of Bank loan 300
___ Balance on 31.3. 20X1 150

3,250 3,250
66 ACCOUNTS
EXTRA QUESTIONS ON IND -7
QUESTION 1
Following is the balance sheet of Kuber Limited for the year ended March 31,20X2
(` In lacs)
20X2 20X1
ASSETS
Non-current Assets
Property, plant and equipment 13,000 12,500
Intangible assets 50 30
Other financial assets 145 170
Deferred Tax Asset (net) 855 750
Other non-current assets 800 770
Total Non-current assets 14,850 14,220
Current Assets
Financial assets
Investments 2,300 2,500
Cash and cash equivalents 220 460
Other current assets 195 85
Total Current assets 2,715 3,045
Total Assets 17,565 17,265
EQUITY AND LIABILITES

Equity
Equity share capital 300 300
Other equity 12,000 8,000
Total equity 12,300 8,300
Liabilities
Long-term borrowings 2,000 5,000
Other non-current liabilities 2,740 3,615
Total current liabilities 4,740 8,615
Current liabilities
Financial liabilities
Bank Overdraft 75 60
Other current liabilities 300 200
Total current liabilities 525 350
Total liabilities 5,265 8,965
Total Equity and Liabilities 17,565 17,265
(1) Profit after tax for the year ended March 31,20X2 – ` 4,450 lacs
(2) Interim Dividend paid during the year- ` 450 lacs
(3) Depreciation and amortisation charged in the statement of profit and loss during the
current year are as under
(a) Property, Plant and Equipment- ` 500 lacs
(b) Intangible Assets – ` 20 lacs
(4) During the year ended March 31,20X2 two machineries were sold for ` 70 lacs. The
carrying amount of these machineries as on March 31, 20X2 is ` 60 lacs.
(5) Income taxes paid during the year ` 105 lacs
(6) Other non-current/current assets and liabilities are related to operation of Kuber
Ltd. and do non contain any element of financing and investing activities.
Using the above information of Kuber Limited, construct a statement of cash flows under
indirect method.
68 ACCOUNTS
QUESTION 2
Z Ltd. has no foreign currency cash flow for the year 2017, It holds some deposit in a
bank in the USA. The balances as on 31.12.2017 and 31.12 2018 were US $ 100,000 and
US $ 102,000 respectively. The exchange rate. On December 31,2017 was US $ 1 = `45.
The same on 31.12.2018 was US $ 1 = ` 50. The increase in the balance was on account of
interest credited on 31.12.2018 Thus, the deposit was reported at ` 45, 00,000 in the
balance sheet as on December 31,2017. It was reported at ` 51,00,000 in the balance sheet
as on 31.12.2018 How these transactions should be presented in cash flow for the year
ended 31.12.2018 as per Ind AS 7?
SOLUTION:
The profit and loss account was credited by ` 1,00,000 (US$ 2000 x ` 50) towards interest
income. It was credited by the exchange difference of US$ 100,000 x (` 50- ` 45) that is `
500,000 in preparing the cash low statements, ` 500,000 the exchange difference, should
be deducted from the net profit before taxes, and extraordinary item. However, in order
to reconcile the opening balance of the cash and cash equivalents with its closing balance,
the exchange difference ` 500, 000 should be added to the opening balance in note to cash
flow statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z ltd. s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow.
Ind AS –7: CASH FLOW STATEMENTS

QUESTION 1
The relevant extracts of consolidated financial statements of A Ltd. are provided below:
Consolidated Statement of Cash Flows
For the year ended (` in Lac)

31st March 20X2 31st March 20X1
Assets
Non-Current Assets
Property, Plant and Equipment 4,750 4,650
Investment in Associate 800 —
Financial Assets 2,150 1,800
Current Assets
Inventories 1,550 1,900
Trade Receivables 1,250 1,800
Cash and Cash Equivalents 4,650 3,550
Liabilities
Current Liabilities
Trade Payables 1,550 3,610
Extracts from Consolidated Statement of Profit and Loss

for the year ended 31st March 20X2
Revenue 12,380
Cost of Goods Sold (9,860)
Gross Profit 2,520
Other Income 300
Operating Expenses (450)
Other expenses (540)
Interest expenses (110)
Share of Profit of Associate 120
Profit before Tax 1,840
70 ACCOUNTS
The below information is relevant for A Ltd. Group.
1. A Ltd. had spent ` 30 Lac on renovation of a building. A Ltd. charged the entire
renovation cost to profit and loss account.
2. On 1st April 20X1, A Ltd. acquired 100% shares in S Ltd, for cash of ` 300 Lac.
Fair value of the assets acquired and liabilities assumed under the acquisition are as
under:
Property, Plant and Equipment 140 Lac

Inventories 60 Lac
Trade Receivables 30 Lac
Cash and Cash Equivalents 20 Lac
Total Assets 250 Lac
Less : Trade Payables (50 Lac)
Net Assets on acquisition 200 Lac
A Ltd.’s property, plant and equipment comprise the following:
Carrying amount on 1st April 20X1 4,650 Lac
Addition (at cost) including assets in S Ltd. 800 Lac
Revaluation Surplus 80 Lac
Disposal (Sale) of Assets (490 Lac)
Depreciation for the year (290 Lac)
Carrying Amount on 31st March 20X2 4,750 Lac
A Ltd. constructed a machine that is a qualifying asset and incurred construction costs
of ` 40 Lac that has been charged to other expenses. Of the interest cost of ` 110
Lac charged to profit or loss statement, ` 10 Lac includes interest cost on specific
borrowings that need to be capitalized.
Property, plant and equipment was sold at 630 Lac. Gain on disposal is adjusted against
operating expenses.
3. A Ltd. purchased 30% interest in an Associate (G Ltd.) for cash on 1st April 20X1. The
associate reported profit after tax of ` 400 Lac and paid a dividend of ` 100 Lac for
the year.
4. Impairment test was conducted on 31st March 20X2. The following were impaired as
under :
Goodwill impairment loss : ` 265 Lac
Intangible Assets impairment loss ` 900 Lac
The goodwill impairment relates to 100% subsidiaries.

Assume that interest cost is all paid in cash.
You are required to determine cash generated from operations for group reporting
purposes for the year ended 31st March 20X2.
QUESTION 2
Company A acquires 70% of the equity stake in Company B on July 20, 20X1. The consideration
paid for this transaction is as below:
(a) Cash consideration of ` 15,00,000

(b) 200,000 equity shares having face of ` 10 and fair value of ` 15 per share.
On the date of acquisition, Company B has cash and cash equivalent balance of ` 2,50,000
in its books of account.
On October 10, 20X2, Company A further acquires 10% stake in Company B for cash
consideration of ` 8,00,000.
Advise how the above transactions will be disclosed / presented in the statement of cash
flows as per Ind AS 7.
QUESTION 3 (RTP MAY 2020 Q.2…………….DISCUSSED IN RTP)
(SAME QUESTION ASKED IN NOV 2020 EXAMS)

Entity A acquired a subsidiary, Entity B, during the year. Summaries information from the
Consolidated Statement of Profit and Loss and Balance Sheet is provided, together with
some supplementary information.
Consolidated Statement of Profit and Loss
Amount (`)
Revenue 3,80,000
Cost of sales (2,20,000)
Gross profit 1,60,000
72 ACCOUNTS
Other operating expenses (56,000)
Interest cost (4,000)
Taxation (15,000)
Consolidated balance sheet
20X2 20X1
Assets Amount (`) Amount (`)
Cash and cash equivalents 8,000 5,000
Trade receivables 54,000 50,000
Property, plant and equipment 1,60,000 80,000
Goodwill 18,000 —
Total assets 2,70,000 1,70,000
Liabilities
Trade payables 68,000 60,000
Income tax payable 12,000 11,000
Long term debt 1,00,000 64,000
Total Liabilities 1,80,000 1,35,000
Shareholders’ equity 90,000 35,000
Total liabilities and shareholders’ 2,70,000 1,70,000
Other information
All of the shares of entity B were acquired for ` 74,000 in cash. The fair values of assets
acquired and liabilities assumed were:
Amount (`)
Inventories 4,000
Cash 2,000
Property, plant and equipment 1,10,000
Trade payables (32,000)
Long term debt (36,000)
Goodwill 18,000
Cash consideration paid 74,000
Prepare the Consolidated Statement of Cash Flows for the year 20X2, as per Ind AS 7.
QUESTION 4 (RTP NOV 20……ALREADY DISCUSSED IN RTP VIDEO)
During the financial year 2019-2020, Akola Limited have paid various taxes & reproduced
the below mentioned records for your perusal:
- Capital gain tax of ` 20 crore on sale of office premises at a sale consideration of `

100 crore.
- Income Tax of ` 3 crore on Business profits amounting ` 30 crore (assume entire
business profit as cash profit).
- Dividend Distribution Tax of ` 2 crore on payment of dividend amounting ` 20 crore
to its shareholders.
- Income tax Refund of ` 1.5 crore (Refund on taxes paid in earlier periods for business
profits).
You need to determine the net cash flow from operating activities, investing activities
and financing activities of Akola Limited as per relevant Ind AS.
ANSWER:
Para 36 of Ind AS 7 inter alia states that when it is practicable to identify the tax
cash flow with an individual transaction that gives rise to cash flows that are classified
as investing or financing activities the tax cash flow is classified as an investing or
financing activity as appropriate. When tax cash flows are allocated over more than one
class of activity, the total amount of taxes paid is disclosed.
Accordingly, the transactions are analysed as follows:
Particulars Amount (in crore) Activity

Sale Consideration 100 Investing Activity
Capital Gain Tax (20) Investing Activity
74 ACCOUNTS
Business profits 30 Operating Activity

Tax on Business profits (3) Operating Activity
Dividend Payment (20) Financing Activity
Dividend Distribution Tax (2) Financing Activity
Income Tax Refund 1.5 Operating Activity
Total Cash flow 86.5
Activity wise Amount (in crore)

Operating Activity 28.5
Investing Activity 80
Financing Activity (22)
Total 86.5
QUESTION 5 (RTP NOV 21…..ALREADY DISCUSSED IN RTP VIDEO)
From the following data of Galaxy Ltd., prepare statement of cash flows showing cash
generated from Operating Activities using direct method as per Ind AS 7:
31.3.20X2 31.3.20X1
(`) (`)
Current Assets:
Inventory 1,20,000 1,65,000
Trade receivables 2,05,000 1,88,000
Cash & cash equivalents 35,000 20,500
Current Liabilities:
Trade payable 1,95,000 2,15,000
Provision for tax 48,000 65,000
Summary of Statement of Profit and Loss `
Sales 85,50,000
Less: Cost of sales (56,00,000) 29,50,000
Other Income
Interest income 20,000
Fire insurance claim received 1,10,000 1,30,000
30,80,000
Administrative and selling expenses (15,40,000)
Interest expenses (36,000)
Foreign exchange loss (18,000) (16,18,000)
Net Profit before tax and extraordinary 14,62,000
income
Income Tax (95,000)
Net Profit 13,67,000
(i) Trade receivables and Trade payables include amounts relating to credit sale and
credit purchase only.
(ii) Foreign exchange loss represents increment in liability of a long-term borrowing
due to exchange rate fluctuation between acquisition date and balance sheet date.
ANSWER
Statement Cash Flows from operating activities
of Galaxy Ltd. for the year ended 31 March 20X2 (Direct Method)
Particulars ` `
Operating Activities:
Cash received from Trade receivables (W.N. 3) 85,33,000
Less: Cash paid to Suppliers (W.N.2) 55,75,000
Payment for Administration and Selling expenses 15,40,000
Payment for Income Tax (W.N.4) 1,12,000 (72,27,000)
13,06,000
Adjustment for exceptional items (fire insurance 1,10,000
claim)
Net cash generated from operating activities 14,16,000
76 ACCOUNTS
Working Notes:
1. Calculation of total purchases

Cost of Sales = Opening stock + Purchases – Closing Stock
` 56,00,000 = ` 1,65,000 + Purchases – ` 1,20,000
Purchases = ` 55,55,000
2. Calculation of cash paid to Suppliers
Trade Payables
` `
Bank A/c (balancing figure) 55,75,000 By Balance b/d 2,15,000
Balance c/d 1,95,000 By Purchases (W.N. 1) 55,55,000
57,70,000 57,70,000
3. Calculation of cash received from Customers
Trade Receivables
` `
To Balance b/d 1,88,000 By Bank A/c (balancing 85,33,000
figure)
To Sales 85,50,000 By Balance c/d 2,05,000

87,38,000 87,38,000
Calculation of tax paid during the year in cash
Provision for tax
` `
To Bank A/c (balancing figure) 1,12,000 By Balance b/d 65,000
To Balance c/d 48,000 By Profit and Loss A/c 95,000
1,60,000 1,60,000
IND AS 10: EVENTS AFTER THE REPORTING PERIOD 77
IND AS 10:
EVENTS AFTER THE REPORTING PERIOD
The objectives of the standard are divided mainly in three points.
1. Guidelines for taking a decision regarding adjusting or not adjusting the financial
statements for the events after the reporting period.
2. Guidelines regarding the disclosures that an entity should give about the date when
the financial statements were approved for issue and about events after the reporting
period.
3. Ensuring that the going concern is not hampered during the reporting period: the
standard requires an entity should not prepare its financial statements on a going
concern if events after the reporting period indicate that the going concern assumption
is not appropriate.
CONCEPT 2: SCOPE
The standard is mainly applicable in respect of the following two things:
1. Accounting for events after reporting period

2. Disclosure of events after the reporting period.
CONCEPT 3: DEFINTIONS AND EXPLANATIONS

We have seen above that the main focus of the standard is events after the reporting
period. Therefore, it is necessary to understand the meaning of it.
Events after Reporting period

Event after the reporting period is the period between the end of the reporting period and
the date when the financial statements are approved.
EXAMPLE
The financial year of an entity ends on 31st March 20X2. If the boards of directors approve
the accounts on 15th May 20X2, the events after the reporting period will a period from 1st
April, 20X2 to 15th 20X2.
78 IND AS 10: EVENTS AFTER THE REPORTING PERIOD
Approval of financial Statements

The definition says that the last date of the concerned period is the date of approval of
accounts. Now the question comes what is meant by approval of accounts? When can one
say the accounts are approved? Which body needs to be considered as approving authority?
If there is a hierarchy of approvals, at what level, one can assume that the accounts are
approved?
As per the standard,
(i) In case of company: The accounts will be said as approved when board of
directors approve the statements.
(ii) Any other entity: The accounts will be said as approved when corresponding
approving authority approves the statements. The standard does not mention
specifically what will constitute the approving authority in case of other entity.
But form the word “corresponding” one can construe that it is the body which is
Authorised to manage the entity on behalf of all members.
(iii) If shareholders’ approval is must, then should the approval date be considered
as the date on which the shareholders approve it?
Even though shareholders’ approval is needed, yet for the purpose of deciding the
event after the reporting period, the date of approval will be considered as the
date of approval by the board of directors only.
Example
The Board of Directors of ABC Limited its meeting on May 5, 20X1, reviews and
approves the accounts for the year ended 31st March, 20X1 and issues then to the
shareholders. The accounts are adopted by the shareholders in the annual general
meeting on June 23, 20X1. The date of approval of financial statements for the
purpose of this standard is May 5, 20X1.
(iv) What date should be considered, if in some cased, the management of an entity is
requited to issue its financial statements to a supervisory board (made up solely
of non-executives) for approval?
In such cases, the financial statements are approved for issue when the management
approves them for issue to the supervisory board.
Example
On 18 March 20X2, the management of an entity approves financial statements
for issue to its supervisory board. The supervisory board is made up solely of
non-executives and may include representatives of employees and other outside
interests. The supervisory board approves the financial statements on 26 March
20X2. The financial statements are made available to shareholders and others
on 1 April 20X2.
The shareholders approve the financial statements at their annual meeting on

15 May 20X2 and the financial statements are then filed with a regulatory body
on 17 May 20X2. The financial statements are approved for issue on 18 March
20X2 (date of management approval for issue to the supervisory board).
Should the company report only unfavorable events?

The standard clearly states that events can be favorable as well as unfavorable.
CONCEPT 4: TYPES OF EVENTS

The ‘events after the reporting period’ are classified into two categories
(i) Adjusting Events: those that provide evidence of conditions that existed at the end
the reporting period (adjusting events after the reporting period);and
(ii) No Adjusting Events: those that are indicative of conditions that arose after the
reporting period (non-adjusting events after the reporting period).
CONCEPT 5: RECOGNITION AND MEASUREMENT

AND DISCLOSURE OF ADJUSTING EVENTS
An entity shall adjust the amounts recognised in its financial statements to reflect adjusting
events after the reporting period.
Examples of adjusting events after the reporting period
The following are examples of adjusting events after the reporting period that requite an
entity to adjust the amounts recognised in its financial statements, or to recognise items
that were not previously recognised:
(a) The settlement after the reporting period of a court case that confirms that the
entity had a present obligation at the end of the reporting period. The entity adjusts
any previously recognised provision related to this court case in accordance with Ind
As 37, provisions, Contingent Liabilities and contingent Assets of recognise a new
provision.
The entity does not merely disclose a contingent liability because the settlement
provides additional evidence that would be considered in accordance with paragraph
16 of Ind AS 37.
QUESTION 1
A case is going on between ABC & Co and Tax department on claiming the exemption for
certain goods, for the year 20X1-20x2. The court has issued the order on 15th April rejected
the claim of the company. Accordingly, company is liable to pay the additional tax. Shall
company account for such tax in the year 20X1-20X2 or shall it account for in the year’s
20X2-20X3?
SOLUTION
To decide whether, the event is adjusting or not adjusting two conditions need to be
satisfied,
(a) There has to be evidence

(b) The event must have been related to period ending on reporting date. Here both
the conditions are satisfied. Court order is conclusive evidence and the liability is
related to earlier year. Therefore. The event will be considered as adjusting event and
accordingly the amounts will be adjusted in accounts.
(b) The receipt of information after the reporting period indicating that an asset was
impaired at the end of the reporting period, or that the amount of a previously
recognised impairment loss for that asset needs to be adjusted. For example:
(i) The bankruptcy of a customer that occurs after the reporting period usually
confirms that the customer was credit-impaired at the of the reporting period:
Example
An allowance for bad debt of 50% of the amount due from a customer was made
at the year end. Subsequent liquidation order on the customer proceeds indicated
that nothing could be received from the customer. This confirms that a loss
existed at the end of the reporting period on the trade receivable and that the
need to adjust the carrying amount of the trade receivable.
(ii)
The sale of inventories after the reporting period may give evidence about their
net realisable value at the end the reporting period.
While making the valuation of closing inventory, Ind AS 2, states the general
principal that the closing stock need to be valued at cost or net realizable value,
whichever is less. In such cases, net realizable value will be after reporting period
only. However that would be the most realistic value to be applied to the closing
stock. Therefore, in such cases, the value which is available after reporting period
will be used to for valuation of closing inventory of earlier years.
Example
Entity A values its inventory at cost or NRV, whichever is less. Entity A has
10 pieces of item a in its Stock at the year end. Each item costs ` 500. All
these items are sold subsequently at ` 450 per piece. The sale of inventories the
reporting period provides evidence about their net realisable value at the end of
the reporting period.
QUESTION 2
Company has 100 finished cars on 31st March, 20X2, which is having a cost of ` 4, 00,000
each, on 30th of April, new guidelines of pollution control are implemented (which was already
expected to come) and as per as per the new government rules, the cars which do not satisfy
the conditions of using new engines which emit less carbon-dioxide are totally banned for
the sale. Therefore, the demand for such cars drops drastically and selling price came down
to ` 3, 00,000.The accounts of the company for the year 20X1-20X2 are not yet approved.
Shall company value its stock at ` 4, 00,000 each or shall value at ` 3, 00,000 each?
SOLUTION
Since the changed conditions provide the evidence about the net realizable of the cars
therefore the amount of ` 3, 00,000 should be considered for the valuation of stock.
(c) The determination after the reporting period of the cost of assets purchased. of the
proceeds from assets sold, before the end of the reporting period,
Same principle can be applied for sale of asset as well.
Example
The actual sale of asset took place in March 20X2. However, the sales proceed of the
transaction was collected after 31st March 20X2, i .e .on 10th May 20X2 (which was the
date of approval of accounts). In such a situation, sale value recognized in the books
as on 31st March, 20X2 shall be adjusted.
QUESTION 3
ABC Ltd. has purchased the new machinery during the year 20X1-20X2. The asset was
finally installed and made ready for use on 15th March 20X2. However, the company involved
in installation and training, has not yet submitted the final bills for the same.
The suppler company sent the bills on 10th April 20X2, when the accounts were not yet
approved. Shall the company include the amount of capitalization in the year 20X1-20X2 or
in the year 20X2-20X3?
SOLUTION
As per the above provisions, the cost of Installation and training of new machine was an
integral part of the cost of asset purchased. Therefore, even in the details are available
after reporting period, they provide proof the circumstances that existed at the end of
reporting period, Therefore, the will be considered for the year 20X1-20X2
(d) The determination after the reporting period of the amount of profit-sharing or bonus
payment, if the entity had a present legal or constructive obligation at the end of the
reporting period to make such payments as a result of events that date (see Ind AS
19, Employee Benefits).
The careful reading of the above provision brings forth following two points
(i) There is a legal or constructive obligation at the end of reporting period
(ii)
The obligation is based on profit sharing or bonus payments.
Here one would understand that unless the year is closed, one cannot determine the
amount of profit. Unless one determines the final amount of profit, one cannot finalise
the amount of profit sharing as both the things are interconnected. Therefore, such
events must be considered for the adjustments in accounts, provided, the contract
already exists on the last day of reporting period.
(e) The discovery of fraud or errors that show that the financial statements are incorrect.
Ind AS 8, deals with errors and frauds separately along with the errors that occurred
in the previous period. However, Ind 10 focuses on the errors or the errors or frauds
those are revealed after reporting period. In any case, the entity is not supposed to
present any misstatement, to the stakeholders, in spite of knowing that is not true.
Therefore, if error or any fraud is detected after the reporting period, which is
related to the reporting period, then company must adjust the accounts and rectify
the error.
CONCEPT 6: ACCOUNTING TREATMENT AND DISCLOSURE

OF NON-ADJUSTING EVENTS AFTER THE REPORTING PERIOD
An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period.
An example of a non-adjusting event after the reporting period is a decline in fair value
of investments between the end of the reporting period and the date when the financial
statements are approved for issue. The decline in fair value does not normally relate to the
condition of the investments at the end of the reporting period, but reflects circumstances
that have arisen subsequently Therefore, an entity does not adjust the amounts recognised
in its financial statements for the investments. Similarly, the entity does not update the
amounts disclosed for the investments as at the end of the reporting period, although it
may need to give additional disclosure.
The major difference between the adjusting event and non-adjusting events are as
follows
Sr.no Particular Adjusting Non-Adjusting
1 Timing of the Event During or on the end After the report financial
Reporting financial year year
2 Legality There is an evidence It may be just indicative
3 Accounting treatment Adjust the amounts Do not adjust the amounts

of reporting financial of reporting financial
statements statements
4 Disclosure Yes Yes
CONCEPT 7:SPECIAL CASES
DIVIDENDS DECLARED
• If an entity declares dividends to holders of equity instruments (as defined in Ind AS

32, financial instruments: presentation) after the reporting period, the entity shall
not recognise those dividends as a liability at end of the reporting period.
• If dividends are declared after the reporting period but financial statements are
approved for issue, the dividends are not recognised as a liability at the end of the
reporting period because no obligation exists at that time. ? Such dividends are disclosed
in the notes in accordance with Ind AS 1, presentation of financial Statements.
• The crux of adjusting and on- adjusting event lies in the fact whether the event
existed at the end of reporting period or not.
QUESTION 4
ABC co declares the dividend on 15th 20x2 as the results of year 20X1-20X2 as well as
Q 1 ending 30th June 20X2 are better than expected. The accounts of the company are
approved on 20th July 20X2 for the financial year ending 31st March 20X2. State, whether
the dividend will be accounted in F. Y. 20X2-20X3 or will it be considered as proposed
dividend and accounted in the year 20X2?
SOLUTION
AS per the interpretation of the provision of Ind As 10, the dividend is declared in the year
20X2-20X3. Therefore, the event did not exist on the end date of reporting period i.e. on
31st March 20X2. Therefore, it will be accounted in the year 20X2-20X3 and not in 20X1-
20X2, even if accounts of 20X1-20X2? Were approved after the declaration of dividend.
Going concern
• An entity shall not prepare its financial statements on a going concern basis if
management determines after the reporting period either that it intends to liquidate
the entity or to cease trading, or that it has it has no realistic alternative but to do
so.
• Deterioration in operating results and financial position after the reporting period may
indicate a need to consider whether the going concern assumption is still appropriate.
If the going concern assumption is no longer appropriate, the effect is so pervasive
that this Standard requires a fundamental change in the basis of accounting, rather
than an adjustment to the amounts recognised within the original basis of accounting.
DISCLOSURE OF NON-ADJUSTING EVENTS AFTER

THE REPORTING PERIOD
If non-adjusting events after the reporting period are material, non-disclosure could
influence the economic disclosure that could influence the economic decisions that users
make ion the basis of the financial statements. Accrodingly an entity shall disclose the
following for each material of non-adjusting event after the reporting period:
(a) The nature of the event; and

(b) An estimate of its financial effect or a statement that such an estimate cannot be
made.
Examples of non-adjusting events after the reporting period resulting in disclosure
(a) A major business combination after the reporting period Ind 103, business Combinations,
requires specific disclosures in such cases)or disposing of a major subsidiary;
(b) Announcing a plan to discontinue an operation;
(c) Major purchases of assets, classification of assets as held for sale in accordance with
Ind AS 105, Non- current Assets Held for Sale and discontinued Operations, other
disposals of assets, or expropriation of major assets by government;
(d) The destruction of a major production plant by a fire the reporting period;
(e) Announcing, or commencing the implementation of, a major restructuring (see Ind AS
37):
(f) Major ordinary share transactions and potential ordinary share transactions after
the reporting period (Ind AS 33, Earnings per share, requires an entity to disclose
a description of such transactions, other than when such transactions involve
capitalisation or bonus issues , share splits or reverse share splits all of which are
required to be adjusted under Ind AS 33);
(g) Abnormally large changes after the reporting period in asset prices or foreign exchange
rates;
(h) Changes in tax rates or tax laws enacted or announced after the reporting period that
have a significant effect on current and deferred tax and liabilities (see Ind AS 12,
Income Taxes);
(i) Entering into significant commitments or contingent liabilities, for example, by issuing
significant guarantees; and
(j) Commencing major litigation arising solely out of events that occurred after the
reporting period.
CONCEPT 8: DISTRIBUTION OF NON-CASH ASSETS OT OWNERS

Sometimes an entity distributes non-cash assets as dividends to its equity holders. An
entity may also give equity holders a choice of receiving either non-cash assets or a cash
alternative.
Ind AS 1 requires an entity to present details of dividends recognised as distributions
to owners either in the statement of changes in equity or in the notes to the financial
statements but does not prescribe how to measure it.
Applicability
• it applies to the following types of non-reciprocal distributions of assets by entity to

tis owners acting in their capacity as owners;
(a)
distributions of non-cash assets (e g items of property, plant and equipment,
businesses as defined in Ind AS 103, ownership interests in another entity or
disposal groups as defined in Ind AS 105); and
(b)
Distributions that give owners a choice of receiving either non-cash or a cash
alternative.
• It applies only to distributions in which all owners of the same class of equity instruments
are treated equally.
Non-applicability
• This Appendix does not apply to a distribution of a non-cash asset that is ultimately
controlled by the same party or parties before and after the distribution.
• This exclusion applies to the separate, individual and consolidated financial statements
of an entity that makes the distribution.
• For a distribution to be outside the scope on the basis that the same parties control
the asset both before and after the distribution, a group of individual shareholders
receiving the distribution must have, as a result of contractual arrangements, such

ultimate collective power over the entity making the distribution.
• It does not apply when an entity distributes some of its ownership interests in a
subsidiary but retains control of the subsidiary. The entity making a distribution that
results in the entity recognising a non-controlling interest in its subsidiary accounts
for the distribution in accordance with Ind as 110.
• This Appendix addresses only the accounting by an entity that a non –cash asset
distribution. It does not address the accounting by shareholders who receive such a
distribution.
Accounting principles
When an entity declares a distribution and has an obligation to distribute the assets
concerned to its owners, it must recognise a liability for the dividend payable.
When to recognise a dividend payable
The liability to pay a dividend shall be recognised when the dividend is appropriately
Authorised and is no longer at the discretion of the entity, which is the date:
(a) When declaration of the dividend, e.g. by management or the board of directors, is
approved by the relevant authority, e.g. the shareholders, if the jurisdiction requires
such approval, or
(b) When the dividend is declared, e.g. by management or the board of directors, it the
jurisdiction does not require further approval.
Measurement of a dividend payable
• An entity shall measure a liability to distribute non-cash assets as dividend to its

owners at the fair value of the assets to be distributed.
• If an entity gives its owners a choice of receiving either a non-cash asset or a cash
alternative, the entity shall estimate the dividend payable by considering both the
fair value or each alternative and the associated probability of owners selecting each
alternative.
• At the end of each reporting period and at the date of settlement, the entity shall
review and adjust the carrying amount of the dividend payable, with changes, in the
carrying amount of the dividend payable recognised in equity in as adjustments to the
amount of the distribution.
Accounting for any difference between the carrying amount of the assents distributed
and the carting amount of the dividend payable when an entity settles the dividend
payable.
• When an entity settles the dividend payable. It shall recognise the difference, if any
between the carting amounts of the assets distributed and the carrying amount of the
dividend payable in profit or loss.
Presentation and disclosures

An entity shall present the difference described in paragraph 14 as a separate line item in
profit or loss.
An entity shall disclose the following information, if applicable:
(a) the carrying amount of the dividend payable at the beginning and end of the period;
and
(b) the increase of decrease in the carrying amount recognised in the period as result of
a change in the fair value of the assets to be distributed.
If after the end of a reporting period but before the financial statements are approved for
issue, an entity declares a dividend to distribute a non-cash asset, it shall disclose:
(a) The nature of the asset to be distributed;

(b) The carrying amount of the asset to be distributed as the end of the reporting period;
and
(c) The fair value of the asset to be distributed as of end of the reporting period, if it is
different from its carrying amount, and the information amount the method(s) used
to measure that fair value.
TEST YOUR KNOWLEDGE
1. ABC Ltd. has announced its Interim results for Quarter 1, ending 30th June 20X2 on
5th July 20X2. However, till that time AGM for the year 20X1-20X2 was not held. The
accounts for 20X1-20X2 were approved by the board of directors on 15th July 20X2.
What will be the period after the reporting date as per the definition of Ind AS 10?
2. ABC Ltd. is in the legal suit with the excise department. Company gets a court order
in its favors, on 15th April, 20X2 which resulted into reducing the excise liability as on
31st March 20X2. The management has not considered the effect of the transaction
as the event is favorable to the company. Company’s view is favorable events after the
reporting date should not be considered as it would hamper the realization Concept of
accounting. Comment In the light of Ind AS 10?
3. ABC Ltd. is trading company in Laptops. On 31st March 20X2 company has 50 laptops
which were purchased at ` 45,000 each. Company has considered the same price for
calculation of closing inventory. On 15th April 20X2, advanced version of same series
of laptops is introduced in the market. Therefore, the price of the current laptops
crashes to ` 35,000 each. Company does not want to value the stock as ` 35,000 as
the event of reduction took place after the 31st march 20X2 and the reduced prices
wire not applicable as on 31st March 20X2. Comment.
4. JCB manufactures and sales earth moving machines. The machines are dispatched
on 25th March 20X2 for exports. The machines reached the customer on 15th April
20X2. The details of the price of sale, foreign exchange rates etc. are available on
4th April 20X2. The accounts were approved by the management on 15th May 20X2.
Shall company consider it as the sale of 20X1-20X2 and adjust the accounts for the
information received on 4th April or not?
ANSWERS
1. As per Ind AS 10, even if partial information is published, still the reporting period
will be considered as the period end date of reporting period and approval of accounts.
In the above case the accounts are approved on 15th July. Therefore, the period after
the reporting date would be 31st March to 15th July.
2. AS per Ind AS 10, even favourable event needs to be considered. What is important is
whether the conditions exist as on the end of the reporting and there is a conclusive
evidence for the same.
3. As per Ind AS 10, the decrease in the net realizable value of the stock after reporting
period should be considered as adjusting event.
4. AS per Ind As 10, any information received after the reporting period for determining
purchase of cost or sale of asset, related, to earlier financial year, should be considered
as adjusting event.

QUESTION 1
What is the date of approval for issue of the financial statements prepared for the reporting
period from April 1, 20X1 to March 31, 20X2, in a situation where following dates are
available? Completion of preparation of financial statements May 28, 20X2 Board reviews
and approves it for issue 19,20X2
Available to shareholders July 01, 20X2

Annual General Meeting September 15,20X2
Filed with regulatory authority October 16, 20X2
Will your answer differ if the entity is a partnership firm?
SOLUTION
As per Ind AS 10 the date of approval for issue of financial statements is the date on
which the financial statements share approved by the Board of Directors in case of a
company, and by corresponding approving authority in case of any other entity, Accordingly,
in the instant case, the date of approval is the date on which the financial statements are
approved by the Board of Directors of the company, i.e., June 19, 20X2
In the case of an entity is a partnership frim, the date of approval will be the date when
relevant approving authority of such entity approves the financial statements for issue i.e.
the date when the partner (s) of the frim approve (s) the financial statements.
QUESTION 2
ABC Ltd. Prepared interim financial report for the quarter ending June 30, 20X1. The
interim financial report was approved for issue by the Board of Directors on July 15, 20X1.
Whether events occurring between end of the interim financial report and date of approval
by Board of Directors, i.e., events between July 1, 20X1 and July 15, 20X1 that provide
evidence of conditions that existed at the end of the interim reporting period shall be
adjusted in the interim financial report ending June 30, 20X1?
SOLUTION
Paragraph 3 of Ind AS 10, inter alia, defines Events after the reporting Period as those
events favourable and unfavourable, that occur between the end of the reporting period
and the date when the financial statements are approved by the Board of Directors in case
of a company, and by the corresponding approving authority in case of any other entity for
issue.
What is reporting period has been dealt with in Ind AS 10, Absence of any specific guidance
regarding period implies that any terms for which reporting is done by preparing financial
statements is the reporting period of the purpose of Ind AS 10. Accordingly, financial
reporting done for interim period by preparing either complete set of financial statements
or by preparing condensed financial statements will be treated ad reporting period for
purpose of Ind AS 10.
Paragraph 2 of Ind AS 34, inter alia, provides that each financial report, annual or interim, is
evaluate on its own for conformity with Ind AS Further, paragraph 19 Ind AS 34, provides
that an interim financial report shall not be described as complying with Ind As unless it
complies with all of the requirements of Ind AS.
In accordance with the above, an entity describing that its interim financial report is in
compliance with Ind AS, has to comply withal the Ind AS including Ind AS 10.
In order to comply with the requirements of Ind AS 10, each interim financial report should
be adjusted for the adjusted events occurring between end of the interim financial report
and the date of approval by Board of Directors. Therefore, in the instant case, events
occurring between July, 1, 20X1 and July 15, 20X1 that provide evidence of conditions
that existed at the end of the interim reporting period should be adjusted in the interim
financial report ending June 30, 20X1
QUESTION 3
The Board of Directors of ABC Ltd. approved the financial statements for the reporting
period 20X1 -2 for issue on June 15, 20X2. The management of ABC Ltd. discovered a
major fraud and decided to reopen the books of account, The financial statements were
subsequently approved by the Board of Directors on June 30, 20X2. What is the date of
approval for issue as per Ind AS 10 in the given case?
SOLUTION
Date of approval is the date on which the financial statements are approved by the Baard
of Directors in case of a company, and by the corresponding approving authority in case of
any other entity for issue. In the given case, there are two dates of approval by Board of
Directors. The financial statements were reopened for further adjustments subsequent
to initial approval. The date of approval should be taken as the date on which financial
statements are finally approved by the Board of Directors. Therefore, in the given case,
the date of approval for issue as per Ind AS 10 should be considered as June 30,20X2.
QUESTION 4
A case is going on between ABC Ltd. and GST department on claiming some exemption for
the year 20X1-20X2. The court has issued the order on 15th April, 20X2 and rejected the
claim of the company. Accordingly, the company is liable to pay the additional tax. The
financial statements of the company for the year 20X1 – 20X2 have been approved on 15th
May, 20X2 should the company account for such tax in the year 20X1 -20X2 or should it
account for the same in the year 20X2-20X3?
SOLUTION
An event after the reporting period is an adjusting event, if it provides evidence of a
condition existing at the end of the reporting period. Here this condition is satisfied. Court
order received after the reporting period provides the evidence of the liability existing at
the end of the reporting period. Therefore, the event will be considered as an adjusting
event and, accordingly, the amounts will be adjusted in financial statements for 20X1-
20X2.
QUESTION 5
While preparing its financial statements for the year ended 31st March, 20X1 XYZ Ltd.
Made a general provision for bad debts @ 5% of its debtors. In the last week of February,
20X1 a debtor for ` 2 Lakhs had suffered heavy loss due to an earthquake; the loss was
not covered by any insurance policy Considering the events of earthquake, XYZ Ltd. Made
a provision @ 50% of the amount receivable from that debtor apart from the general
provision of 5% on remaining debtors. In April, 20X1 the debtor become bankrupt, Can
XYZ Ltd. Provide for the full loss arising out of in solvency of the debtor in the financial
statements for the year ended 31st March, 20X1?
Would the answer be different if earthquake had taken place after 31st March, 20X1 and
therefore, XYZ Ltd. Did not make any specific provision in context that debtor and made
only general provision for bad debts @ 5% on total debtors?
SOLUTION
As per the definition of Events after the Reporting Period and paragraph 8 of Ind AS 10,
Events after the Reporting Period, Financial statements should be adjusted for events
occurring after the reporting period that provide evidence of conditions that existed at
the end of the reporting period. In the instant case, the earthquake took place before
the end of the reporting period, i.e., in February 20X1. Therefore, the condition exists at
the end of the reporting date though the debtor is declared insolvent after the reporting
period. Accordingly, full provision for bad debt amounting to ` 2 lakhs should be made to
cover the loss arising due to the bankruptcy of the debtor in the financial statements for
the year ended March 31, 20X1. Since provision for bad debts on account of amount due
from that particular debtor was made @ 50 % XYZ Ltd should provide for the remaining
amount as a consequence of declaration of this debtor as bankrupt.
In case, the earthquake had taken place after the end of the reporting period, i.e., after
31st March, 20X1 and XYZ Ltd. Had not made any specific provision for the debtor who was
declared bankrupt later on, since the earthquake occurred after the end of the reporting
period no condition existed at the end of the reporting period. The company had made only
general provision for bad debts in the ordinary business course and not to recognise the
catastrophic situation of an earthquake Accordingly, bankruptcy of the debtor in this case
in a non-adjusting event.
As per para 21 of Ind AS 10, if non adjusting events after the reporting period are material,
non-disclosure could influence the economic decisions that users make on the basis of the
financial statements Accordingly, an entity shall disclose the following for each material
category of non-adjusting events after the reporting period.
(a) the nature of the event; and
(b) an estimate of its financial effect, or a statement that such an estimate cannot be
made.”
If the amount of bad debt is considered to be material, the nature of this no-adjusting
event, i.e., event of bankruptcy of the debtor should be disclosed along with the estimated
financial effect of the same in the financial statements.
QUESTION 6
Company XYZ Ltd. was formed to secure the tenders floated by a telecom company for
publication of telephone directories. It bagged the tender for publishing directories for
Pune circle for 5 years. It has made a profit in 20X1- 20X2, 20X2-20X3 20X3-20X4 and
20X4-20X5. It bid in tenders for publication of directories for other circles Nagpur, Nashik
Mumbai, Hyderabad but as per the results declared on 23rd April, 20X5, the company failed
to bag, any of these Its only activity till date is publication of Pune directory. The contract
for publication of directories for Pune will expire on 31st December 20X5 the financial
statements for the F.Y 20X4-X5 have been approved by the Board of Directors on July
10, 20X5 whether it is appropriate to prepare financial statements on going concern basis?
SOLUTION
With regard to going concern basis to be followed for preparation of financial statements,
paras 14 & 15 of Ind AS 10 states that-
An entity shall not prepare its financial statements on a going concern basis if managements
determines after the reporting period either that it intends to liquidate that entity or to
cease trading. Or that it has no realistic alternative but to do so.
Deterioration in operating results and financial portion after the reporting period may
indicate a need to consider whether the going concern assumption is still appropriate. If
the going concern assumption is no longer appropriate, the effect is so pervasive that
this Standard requires a fundamental change in the basis of accounting rather than an
adjustment to the amount recognised within the original basis of accounting
In accordance with the above an entity needs to change the basis of accounting if the
effect of deterioration in operating results and financial position is so pervasive that
management determines after the reporting period either that is intends to liquidate the
entity or to cease trading, or that it has no realistic alternative but to do so.
In the instant case, since contract is expiring on 31st December 20X5 and it is conferment
on 23rd April, 20X5 i.e., after the end of the reporting period and before the approval of the
financial statements, that no further contract is secured implies that the entity s operations
are expected to come to an end,; Accordingly, if entity s operation are expected to come to
an end, the entity needs to make a judgement as to whether it has any realistic possibility
to continue or not, in case, the entity determines that it has no realistic alternative of
continuing the business, preparation of financial statements for 20X4-X5 and thereafter
on going concern basis may not be appropriate.
QUESTION 7
In the plant of PQR Ltd. There was a fire on 10.05.20X1 in which the entire plant was
damaged and the loss of ` 40,00,000 is estimated, The claim with the insurance company
has been filed and a recovery of ` 27,00,000 is expected .
The financial statements for the year ending 31.03.20X1 were approved by Board of
Directors on 12th June 20X1. Show how should it be disclosed?
SOLUTION
In the instant case, since fire took place after the end of the reporting period, it is a non-
adjusting However, in accordance with paragraph 21 of Ind AS 10, disclosures regarding
non-adjusting event should be made in the financial statements, i.e., the nature of the event
and the expected financial effect of the same.
With regard to going concern basis followed for preparation of financial statements, the
company needs to determine whether it is appropriate to prepare the financial statements
on going concern basis, since there is only one plant which has been damaged due to fire, if
the effect of deterioration in operating.
Results and financial position is so pervasive that management determines after the
reporting period either that it intends to liquidate the entity or to cease trading, or that
it has no realistic alternative but to do so, preparation of financial statements for the F.Y
20X0-X1 on going concern assumption may not be appropriate. In that case, the financial
statements may have to be prepared on a basis other than going concern.
However, if the going concern assumption is considered to be appropriate even after the
fire, no adjustment is required in the financial statements for the year ending 31.03.20X1.
QUESTION 8
What would be the treatment for dividends declared to redeemable preference shareholders
after the reporting period but before the financial statements are approved for issue
for the year 20X1-X2 Whether Ind AS 10 prescribes any accounting treatment for such
dividends?
SOLUTION
Paragraph 12 of Ind AS 10 prescribes accounting treatment for dividends declared to
holders to equity instruments, if entity declares dividends to holders of equity instruments
(as defined in Ind AS 32, Financial Instruments: Presentations) after the reporting period,
the entity shall not recognise those dividend as liability at the end of the reporting period.
However, Ind AS 10 dies no prescribe accounting treatment for dividends declared to
Redeemable preference shareholders. As per the principles of Ind 32, Financial Instruments:
Presentation, a preference share that provides for mandatory redemption by the issuer
for a fixed or determinable amount at a fixed or determinable future date, or gives the
holder the right to require the issuer to redeem the instrument at or after a particular
date for a fixed or determinable amount, is a financial liability Thus dividend payments to
such preference shares are recognised as expanse in the same way as interest on a bond.
Since interest will be charge on time basis, the requirements of Ind AS 10 regarding date
of declaration of dividend not relevant for its recognition
QUESTION 9
XY Ltd had taken a large-sized civil construction contract, for a public sector undertaking,
valued at ` 200 Crores. Execution of the project started during 20X1-X2 and continued
in the next financial year also. During the course the course of execution of the work on
May 29, 20X2, the company found while raising the foundation work that it had met a
rocky surface and cost of contract would go up by an extra ` 50 Crores. which would not be
recoverable from the Contractee as per the terms of the contract. The Company s financial
year ended on 31st March, 20X2 and the financial statements were considered and approved
by the Board of Directors on 15th June 20X2 How will you treat the above in the financial
statements for the year ended 31st March , 20X2?
SOLUTION
In the instant case, the execution of work started during the F.Y. 20X1-X2 and the rocky
surface was there at the end of the reporting period though the existence of rocky surface
is confirmed after the end of the reporting period as a result of which it become evident
that the cost may escalate by ` 50. Crores. In accordance with the definition of Events
after the Reporting Period,’ therefore, it is an adjusting event. The cost of the project and
profit should be accounted for accordingly.
QUESTION 10
A Ltd. Was required to pay penalty for a breach in the performance of a contract. A Ltd.
believed that the penalty was payable at a lower amount than the amount demanded by the
other party. A Ltd. Created provision for the penalty but also approached the arbitrator
with a submission that the case may be dismissed with costs. A Ltd. prepared the financial
statements for the year 20X1-X2 which were approved in July 20X2. The arbitrator, in
June 20X2 awarded the case in favour of A Ltd As a result of the award of the arbitrator,
the provision earlier made by A Ltd. Was required to be reduced. The arbitrator also
decided that cost of the case should be borne by the other party. Now, whether A Ltd is
required to remeasure its provision and what would be the accounting treatment of the
cost that will be recovered by a Ltd., which has already been charged to the Statements of
profit and Loss as an expense for the year 20X1-X2?
SOLUTION
In the instance case, A Ltd. approached the arbitrator before the end of the reporting
period, who decided the award after the end of the reporting period but before approval
of the financial statements for issue. Accordingly, the conditions were existing at the end
of the reporting date because A Ltd. had approached the arbitrator before the end of
the reporting period whose outcome has been confirmed by the award of the arbitrator.
Therefore it is an adjusting event.
Accordingly, the measurement of the provision is required to be adjusted for the event
occurring after the reporting period. As far as the recovery of the cost by A Ltd. from the
other party is concerned this right to recover was a contingent asset as at the end of the
reporting period.
As per para 35 of Ind AS 37 contingent assets are assessed continually to ensure that
developments are appropriately reflected in the financial statements. If it was become
virtually certain that an inflow of economic benefits will arise, the asset and the related
income are recognised in the financial statements of the period in which the change occurs.
If an inflow of economic benefits has become probable an entity discloses the contingent
asset.
On the basis of the above, a contingent asset should be recognised in the financial statements
of the period in which the realisation of asset and the related income becomes virtually
certain. In the instant case, the recovery of cost become certain when the arbitrator
decided the award during F.Y 20X2-X3.
Accordingly, the recovery of cost should be recognised in the financial year 20X2-X3.
QUESTION 11
A company manufacturing and supplying process control equipment is entitled to duty

drawback if it exceeds its turnover above a specified limit. To claim duty drawback, the
company needs to file application within 15 days of meeting the specified turnover. If
application is not filed within stipulated time, the Department has discretionary power
of giving duty draw back credit, For the year 20X1-X2, the company has exceeded the
specified limit of turnover by the end of the reporting period but the application for duty
drawback is filed on April 20, 20X2 which is after the stipulated time of 15 days of meeting
the turnover condition.
Duty drawback has been credited by the Department on June 28, 20X2 and financial
statements have been approved by the Board of Directors of the company on July 26,
20X2. Whether duty drawback credit should be treated as an adjusting event?
SOLUTION
In the instant case, the condition of exceeding the specified turnover was met at the
end of the reporting period and the company was entitled for the duty draw back but the
application for the same has been filed after the stipulated time. Therefore, credit of duty
drawback is discretionary in the hands of the Department. Accordingly, the duty drawback
credit is a contingent asset as at the end of the reporting period, which may be realised if
the Department credits the some.
As per para 35 of Ind AS 37, contingent assets are assessed continually to ensure that
developments are appropriately reflected in the financial statements. If it has become
virtually certain that an inflow of economic benefit will arise, the asset and the related
income are recognised in the financial statements of the period in which the change occurs.
If an inflow of economic benefits has become probable, an discloses the contingent asset.
In accordance with the above the duty draw back credit which was contingent asset for the
F.Y 20X1-X2 should be recognised as asset and related income should be recognised in the
reporting period in which the change occurs. i.e., in the period in which realisation becomes
certain virtually i.e., F.Y. 20X2-X3.
QUESTION 12
XYZ Ltd. Sells goods to its customer with a promise to give discount of 5% on list price of
the goods provided that the payments are received from customer within 15 days. XYZ Ltd.
Sold goods of ` 5 lakhs to ABC Ltd. Between 17th March, 20X2 and 31st March, 20x2. ABC
Ltd. Paid the dues by 15th April. 20X2 with respect to sales made between 17th March, 20X2
and 31st March 20X2 Financial statements were approved for issue by Board of Directors
on 31st May, 20X2
State whether discount will be adjusted from the sales at the end of the reporting period
SOLUTION
As per Ind AS 115, if the consideration promised in a contract included a variable amount,
an entity shall estimate the amount of consideration to which the entity will be entitled in
exchange for transferring the promised goods or services to a customer
In the instant case, the condition that sales have been made exists at the end of the
reporting period and the receipt of payments with 15 days’ time after the end of the
reporting period and before the approval of the financial statements confirms that the
discount is to be provide on those sale. Therefore, it is an adjusting event. Accordingly,
XYZ Ltd. should adjust the sales made to ABC Ltd. with respect to discount of 5% on the
list price of the goods.
QUESTION 13
Whether the fraud related to 20X1-X2 discovered after the end of the reporting period
but before the date of approval of financial statements for 20X3-X4 is an adjusting event?
SOLUTION
In the instant case, the fraud is discovered after the end of the reporting period of 20X3-
X4 which related to F.Y 20X1-X2 since the fraud has taken place before the end of the
reporting period, the condition was existing which has been confirmed by the detection
of the same after the end of the reporting period but before the approval of financial
Therefore, it is an adjusting event.
Moreover, Ind AS 10 in paragraph 9 specifically provides that the discovery fraud or error
after the end of the reporting period, that shows that financial statements are incorrect,
is an adjusting event. Such a discovery of fraud should be accounted for in accordance with
Ind AS 8, if it meets the definition of prior period error.
QUESTION 14
X Ltd. was having investment in from of equity shares in another company as at the end
of the reporting period i.e. 31st March, 20X2 After the end of the reporting period but
before the approval of the financial statement it has been found that value of investment
was fraudulently inflated by committing a computation error. Whether such event should be
adjusted in the financial statements for the year 20X1-X2?
SOLUTION
Since it has been detected that a fraud has been made by committing an intentional error
and as a result of the same financial statements present an incorrect picture, which has
been detected after the end of the reporting period but before the approval of the financial
statements The same is an adjusting event. Accordingly, the value of investments in the
financial statements should be adjusted for the fraudulent error in computation of value
of investments.
IND AS 115: REVENUE FORM CONTRACTS WITH CUSTOMERS 99
IND AS 115
REVENUE FORM CONTRACTS WITH CUSTOMERS
The objective of the standard is to establish principles regarding revenue recognition – it
includes
• Nature, amount, timing and uncertainty of revenue recognitions; and

• Cash flows arising from a contract with a customer.
This Standard specifies the accounting for an individual contract with a customer.
An entity can apply this for a portfolio of contracts when
• Contracts have similar characteristics; and
CONCEPT 2: SCOPE
This Standard applies to ALL CONTRACTS with customers, except the following.
(a) Revenue from lease contracts (discussed in Ind AS 17- Leases);

(b) Revenue from Insurance contracts which are covered by Ind AS 104 – Insurance
Contracts;
(c) Financial instruments and other contractual rights or obligations within the scope of
Ind AS 109, Financial Instruments, Ind AS 110, consolidated Financial Statements,
Ind AS 111, Joint Arrangements, Ind AS 27, Separate Financial Statement and Ind AS
28, Investments in Associated and Joint Ventures; and
(d) Non- monetary exchanges between entities in the same line of business to facilitate
sale to customers or potential customers.
For example, this Standard would not apply to a contract between two oil companies that
agree to an exchange of oil (Exchanging same items is not called as barter) to fulfill
demand from their customers in different specified locations on a timely basis. As the
items exchanged are same, there is no commercial substance – hence it will not treated
as transaction.
100 ACCOUNTS
Example
A Ltd. and B Ltd. both are engaged in manufacturing of homogeneous bottles. A Ltd.
operates, in northern, eastern and central parts of India. B Ltd. operators in western and
southern parts of India. Company A Ltd. fulfills the demands of its customers based on
western and southern India by using the bottles manufactured by B Ltd. Similarly, B Ltd.
Fulfills the demands of customer based on northern, eastern and central parts of India
by delivering bottles manufactured by A Ltd. How A Ltd. and B Ltd. should recognize the
revenue?
In industries with homogeneous products, it is common for entities in the same line of
business to exchange products in order to sell them to customers of potential customers
other than parties to exchange.
It is to be noted that all contracts (including contract for non-monetary exchanges)
should have commercial substance before an entity can apply the other requirements in
the revenue recognition model prescribed in Ind AS 115.
In this case, the exchange of bottles qualifies as non-monetary exchange between
customers in the same line of business. Accordingly, A Ltd. and B Ltd. should not recognise
any revenue on account of exchange of goods as Ind AS 115 will not apply to the contract.
CONCEPT 3: DEFINITIONS
This standard is applicable ONLY to the contracts with customers. It means if it is a
contract with other then customer- this standard is NOT applicable and the entity needs
to refer other relevant standard for those transactions.
Let us understand what meanings of contracts & customers are.
What is a contract?
Contract is an agreement between two or more parties that creates ENFORMCEALBE

rights and obligations. The contract can be written, oral or as per other customary
business practices.
Enforceability of the rights and obligations in a contract is matter of law.
Who is a customer?
A Party that has contracted (entered into an agreement) with an entity to obtain goods
or services for consideration These goods or services are an output of the entity’s
ordinary activities.
Management needs to identify whether the counterparty to the contract is customer,

since contract that are not with customer are outside the scope of the revenue standard.
Based on this, Dividends- counterparty is not customer (it is shareholder) (Dealt by Ind
AS 109), Contributions/ Donations and increase in far value of biological assets ( Ind AS
41), investment property (Ind AS 40), etc. are scoped OUT of this standard.
What is Income?
Income is increaser in inflows or enhancements of assets or decreases of liabilities that
result in an increase in equity, other than those relating to contributions from equity
participants. (Refer chapter – Framework for detailed discussion)
This definition is broad – It includes all kinds of income I.e. Profit on sale of Property, Plant
and equipment (PPE), Profit on sale on investments, revaluation gain, extinguishment of
debt, revenue from sale of goods or services etc., it includes profit and gains. It includes
realized and unrealized.
What is Revenue?
Revenue is an income arising in the course of an entity’s ordinary activities:
It is subset of income. It arises from sale of goods or rendering of services as part of
an entity’s ongoing major on central activities i.e. ordinary activities. Transactions that
do not arise in the course of an entity’s ordinary activities do not result in revenue. For
example, from the disposal of the entity’s PPE are not included in revenue.
EXAMPLE
A car dealer makes one of the cars as test drive car (demonstration cars’) These cars
are used for more than one year and then sold as used cars The dealership sells new and
used cars. Whether the sale of test drive car is considered as revenue or gain from sale
of PPE?
Suggested answer
The car dealership is in the business of selling new and used cars. The sale of demonstration
cars is therefore revenue, since selling used cars is part of the dealership’s ordinary
activities.
102 ACCOUNTS
When a car is classified as test drive car - it should be classified as PPE as its cost. It
should be depreciated as usual as per Ind AS 16. When the management intends to sell it
in the ordinary course of business, the same car should be reclassified as inventory i.e. it
should be reclassified as its carrying amount. The sale of such car should be recongised
as Revenue i.e. sale of goods –as the Car dealer’s primary business is selling new and used
cars.
Say if the entity decides to sell its used “Laptop – PPE – It cannot be treated as revenue
as sale of laptops is not its ordinary activity.
CONCEPT 4: RECOGNITION & MEASUREMENT

The entire recognition process can be divided into five steps.
Step 1: Identifying the contracts with the customer;
Step 2: Identify the separate performance obligations;
Step 3: Determine the transaction Price;
Step 4: Allocate the transaction price to the performance obligation;
Step 5: Recognise revenue when performance obligation is satisfied.
Learning each step is very important. Read slowly and revise it a t least once before going
to the next step
Step 1: Identifying the contracts with the customer;

This Standard is applicable only when a contract meets ALL the following condition:
1. The contract has been approved by the parties to the contract and are committed to
perform the obligations:
2. The entity can identify each party’s rights regarding the goods or services to be
transferred;
3. The entity can identify the payment terms;
4. The contract has commercial substance (i.e. the risk, timing or amount of the entity
s future cash flows is expected to change as a result of the contract); and
5. It is probable that entity will collect the consideration due. For determining
collectability, consider the ability and intention of the customer when it becomes due.
QUESTION 1 (COLLECTION OF CONSIDERATION)
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 is may be able to
collect the full amount from the customer,
Determine how New way will recognize this transaction?
SOLUTION:
Assuming the contract meets the other criteria covered within the scope of the model in
Ind AS 115, New way need to assesses whether collectability is probable.
In the given case, it is probable that New Way limited expects the full amount
collections from customer. So, Revenue can be recognized under IND AS 115
QUESTION 2 (ENFORCEABLE RIGHTS)
A company provides free trial services for two months to encourage the customers for
non-cancellable paid services for a year. Does it need to recognize revenue during the free
period?
SOLUTION:
No, During the free trial period the parties are not committed, hence the entity should not
recognize the revenue during this period if the customer signs a non-cancellable agreement
for 12 months.
104 ACCOUNTS
QUESTION 3 (ENFORCEABLE RIGHTS)
Continuation to the above concept capsule

If customer sings the agreement one month before expiring free trial. Can the entity
recognize revenue for 13 months?
SUGGESTED ANSWER:
No, Revenue will be recognized still for 12 months.
COMBINATION OF CONTRACT
An entity shall combine two or more contracts entered into at or near the same time with
the same customer (or related parties of the customer) and account for the contracts as
a single contract if the following conditions are satisfied:
(a) The contracts are negotiated as a package with a single commercial objective &
(b) The amount of consideration to paid in one contract depends on the price or
performance of the other contract &
(c) The goods or services promises in the contracts (or some goods or services promises
in each of the contracts) are a single performance obligation discusses below.
QUESTION 4 (COMBINATION OF CONTRACT)
Government of Andhra Pradesh invited tenders for construction of roads in five routes.
All five routes are to be awarded to one contractor as a package price. Tender should be
submitted with estimations of all routes. Rama Constructions Ltd got the contract. Can we
combine these contracts as a single contract and account for?
SOLUTION:
Based on the given information, it can be understood that it is negotiated as a single package
and contractor doesn’t have an option to select the routes. So the company should select
the entire contract based on overall profit margin. Hence it is appropriate to treat all five
routes as single construction contract for accounting purposes. Submission of estimations
for each route does not change the single commercial objective.
QUESTION 5 (COMBINATION OF CONTRACTS)
Mr. Bhargav is a construction contractor undertakes constructions of Villas. He undertook

a contract to construct 25 villas from a real estate company, Each villa is different in its
specifications, hence has separate proposal of each unit to be constructed and subject to
separate negotiations. He was able to identify the costs and revenue attributable to each
unit. Should he each unit as a separate contract or consider all villas as a single contract
for accounting revenue under Ind AS 115?
SOLUTION:
As per Ind AS 115, contracts shall be combined if the contracts satisfy the conditions as
discussed above.
In the given case,-
(a) The contracts are not negotiated as a package;
(b) Consideration of one contract is no dependent on performance or price of another;
(c) Each one has a separate performance obligations.
As the above conditions are not satisfied —

the entity cannot combine the contracts because all villas are different.
QUESTION 6 (COMBINATION OF CONTRACTS)
Manufacture 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 manufacture enters
into a separate contract to supply parts for existing planes at other bases.
Would these contracts be combined?
SOLUTION:
Contracts were negotiated at the same time, but they appear to have separate commercial
objectives. Manufacturing and supply contracts are not dependent on one another, and the
planes and the parts are not a single performance obligation. Therefore, contracts for
supply of fighter planes and supply of parts shall not be combined and instead, they shall
be accounted separately.
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DURATION OF CONTRACT
QUESTION 7 (TERMINATION OF CONTRACT)
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.
SOLUTION:
The enforceable rights and obligation of this contract are for three months, and therefore
the contract term is three months.
QUESTION 8 (TERMINATION OF CONTRACTS)
A party has unilateral right to terminate the entire wholly unperformed contract. Will it be
considered as contract as per Ind AS 115.
SOLUTION:
The standard considers that there is NO contract when the parties have the right to
terminate the unperformed contract. A contract is wholly unperformed if both of the
following criteria are met:
(a) the entity has not yet transferred any promised goods or services to the customer;
and
(b) the entity has yet received, and is not yet entitled to receive, any consideration in
exchange for promised goods or services.
A maintenance service provider enters into a contract with a customer to provide monthly
services for a three- year period. Customer can terminate the contract at the end of any
month for any reason without compensating other party (that is, there is no penalty for
terminating the contract early.) What is the contract term in this case?
SOLUTION:
The contract should be treated as a month-to-month contract in the three-year
stated term. It means contract period is one month. The parties do not have enforceable
rights and obligations beyond the month.

If the contract can be terminated only by paying penalty ? What would be contract period?
SOLUTION
The answer depends on the substantive i.e. materiality of the penalty amount. If it is
a substantive amount, it automatically creates enforceable rights and obligation for the
three years of the contract. Then contract period is 3 years. If the penalty amount
is nominal – it will be treated as month on month contract as discusses in the above concept
capsule.
MODIFICATIONS
A contract modification is Change in the scope or price (or both) of a contract that is
(approved) by the parties to the contract.
A modification should be approved by the parties in writing, by oral agreement or implied
by customary business practices. If the modification is not approved, the entity should
account only the existing contract as per this Ind AS.
Such modification may be accounted as a separate contract or modification to the existing
contract. This depends on the facts and circumstances of each case.
An entity shall account for a contract modification as a separate contract, if both the
conditions are satisfied
a) Modification leads to addition of goods or services which distinct from existing
contract; and
b) It is priced at their stand alone selling prices;
What is “Stand alone selling price”?

It is a price at which an entity would sell a promised good or service separately to a customer.
For example, an entity might provide a discount to a recurring customer that is would not
provide to new customers. The objective is to determine whether the pricing reflects the
amount that the entity would have negotiated independent of other existing contracts.
If the goods or services are prices at a discount to the stand-alone selling price, management
will need to evaluate the reason for the discount, because this might be an indicator the
new contract is modification of the existing contract.
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QUESTION 11 (MODIFICATION OF CONTRACTS)
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 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?
SOLUTION:
When the contract is modified, the price of the contract modification for the additional
30 products is an additional ` 28,500 or ` 950 per product. The pricing for the additional
products reflects the stand-alone selling price or the products at the time of the contract
modification and the additional products are distinct from the original products.
Accordingly, the contract modification for the additional 30 products is, in
effect, a new and separate contract for future products that does not
affect the accounting for the existing contract and ` 950 per product for the
30 products in the new contract.
QUESTION 12 (MODIFICATION OF CONTRACTS)
On 1 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 1 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?
SOLUTION:
In the given question, modification will be accounted as per cumulative catch up adjustment
because there is no addition of distinct goods or services. There is only price revision in the
services. The original period of services was 12 months which is same in modification as well.
So, we should apply cumulative catch up adjustment in this case….
Total revenue which is expected in 12 months:

55,000x6months 3,30,000
45,000x6months 2,70,000
6,00,000
Average monthly revenue as CCM=6,00,000/12MONTHS 50,000 P.M.
REVENUE ALREADY BOOKED IN BOOKS IN FIRST 6MONTHS 3,30,000
@55000
REVENUE SHOULD HAVE BEEN BOOKED AS PER CCM @50,000 3,00,000

REVENUE SHOUD BE REVERSED (RETROSPECTIVE ADJUSTMENT) 30,000
Note: Solution given in icai material is wrong bcz icai is considerining the given modification
as distinct service which is compeletly wrong.
QUESTION 13(MODIFICATION OF CONTRACTS)
Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing
deal.
Based on its experience, Growth Ltd determines that customizing 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?
SOLUTION:
Considering that the remaining goods or services are not distinct, the modification will be
accounted for on a cumulative catch up basis, as given below:
Particulars Hours Rate (`) Amount(`)

Initial contract amount 200 150 30,000
Modification in contract 50 100 5,000
Contract amount after modification 250 140* 35,000
Revenue to be recognized 100 140 14,000

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Revenue already booked 100 150 15,000

Adjustment in revenue (1,000)
*35,000/250=140
Hint: In the given question, we have applied cumulative catch up adjustment even if
50 hours have been added because 50 hours can not be considered as distinct goods
or service as original contract was for 200 hours which were estimated. If 200 hours
contract would have been fixed then we would have consider the 50 hours as distinct
services.
For better understanding, please watch

doubts video in last lecture for clarifications.
QUESTION 14 (MODIFICATIONS)
Anju Ltd. Provides accounting services. It enters into a 3-year service with customer for
` 6,00,000 (Rs.2,00,000 per year) is the SSP for the service at inception, At the end of
the second year the parties agree to modify the contract as follows: (1) the fees for the
third year is reduced by ` 90,000 and (2) the contract is extended for another 3 year of `
7,50,000 per year(` 2,50,000 per year). The SSP of the services at the of modification is
` 2,30,000. How should this modification be accounted for?
SOLUTION:
The modification is accounted for prospectively; as if the existing arrangement is terminated
and a new contract is entered into Anju Ltd. should reallocated the remaining services to
be provided. Anju Ltd. will recognise a total of ` 8,60,000 (`,7,50,000+ `,1,10,000)over
the remaining 4 years’ service period (One year remaining under the original contract plus
three additional years), or ` 2,15,000 per year.
QUESTION 15
Anju Ltd. provides accounting services. It enters into a 2-year service contract with
customer for ` 6,00,000 (` 3,00,000 per year) is the SSP for the service at inception AT
the end first year, both the parties agree that the fees should be ` 3,50,000 per year for
the years because the volumes were much larger than larger than expected. How should
this modification be accounted for?
SOLUTION:
In the given case, services are not distinct and only transaction price is increasing – Hence
the entity should recognize ` 50,000 as cumulative catch up adjustment i.e. recorded
immediately, as soon as the modification is approved by the customer.
Step 2: Identifying the Performing Obligation
Question: What is performance obligation?

Answer: Performance obligation is promise in a contract to transfer to the customer
either:
(a) A goods or service (or a bundle of goods or services) that is distinct; or

(b) A series of distinct goods or services that are substantially the same and that have
the same pattern of transfer to the customer.
Once the contract has been identified, an entity needs to evaluate the terms and
customary business practices to identify the promised goods or services which need to
be accounted as performance obligation.
Question: When should performance obligation be identified?

Answer: At contract inception itself- an entity should identify what are the goods or
services to be delivered as per the contract.
Question: When can we say goods or services are distinct?

Answer: Goods or services that are promised to a customer are distinct if both conditions
are met:
(a) the customer can benefit from the good or service either on its own or together with
other resources that are readily available to the customer; and
(b) the entity’s promise to transfer the good or service to the customer is separately
identifiable other promises in the contract.
Example: In case of IT Hardware Company sells printers and laptops that compatible
with each other and compatible with other laptops and printers available in the market.
The company would consider the printer and laptop as separate performance obligation
under the contract, as it can sell the laptop and the printer independently.
QUESTION 16
A software developer enters into a contract with a customer to transfer a software license,
perform installation and provide software updated and technical support for five years. He
sells the license, installation, updates and technical support separately to other customers.
How many performance obligations exist in this contract?
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SUGGESTED ANSWER:
As understood, a contract may have one or more performance obligations. Performance
obligation is a promise to transfer a distinct goods services to the customer.
Goods or services are distinct if they are separately identifiable and customer can get
benefit from the goods or service with on its own or together with other resources that
the customer has.
In the given case, goods are separately identifiable because the developer is selling
separately to other customers. Delivery of software is different from installation, updates
and support and it works without updates and technical support. So we can say that the
customer gets the benefit from each goods or services on its own.
On this basis, we can conclude this contract has the four following performance obligations:
• Software license;
• Installation service;
• Software updates;
• Technical support.
Hint: All the services are distinct because customer can avail all services separately &
can be benefited from each service separately. It means that each service is not inter
related.
QUESTION 17

What would be your answer if installation services are critical to produce customized
software required by the customer?
SUGGESTED ANSWER:
In that situation, there are only performance obligations i.e. software and installation
services will be treated as one performance obligation as the installation services significantly
modify and customize the software.
Hint: Now, software licence & installation service are to be considered one performance
obligation because both the services are inter related.
QUESTION 18
A customer approaches a contractor to design and build a house for him. For this purpose,
the contractor will have to provide different services such as designing, site preparation,
electrical, plumbing, civil work and carpentry. The contractor also provides these services
individually to other customers also. So what are the performance obligations in the
contract?
SUGGESTED ANSWER:
In the given context, all the components will be treated as one single performance obligation
because the contractor provides a significant service of integrating the various goods and
services into a home. The customer has contracted to purchase the home rather than the
individual services that make up the home. Another way of looking at this is, when goods
or services are highly dependent or interrelated with each other, they would constitute a
single performance obligation.
Hint: In the given case, all services are required to be intigrated to build a house. It
can be said that all services are inter related. The customer has entered into a contract
for a home, but not for each service separately. So, it has been considered as single
performance obligation.
QUESTION 19
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 single or multiple performance obligations under the
contract?
SOLUTION:
In order to determine how many performance obligations are present in the contract, the
company applies the guidance above. While the customer may be able to benefit from each
promised good or service on its own (or together with other readily available resources),
they do not appear to be separately identifiable within the context of the contract. That
is, the promised goods and services are subject to significant integration, and as result will
be treated as a single performance obligation.
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This is consistent with a view that the customer is primarily interested in acquiring a
single asset (a water purification plant) rather than a collection or related components and
services.
Hint: In the given case, customer has entered into a contract for construction of a
water purification plant. All services like project management, design, site preparation
or construction are to be considered as inter related. So there is a single performance
obligation.
QUESTION 20
An entity provides broadband services to its customers along with voice call service.
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 services or both.
Are the performance obligations under the contract distinct?
SOLUTION:
Entity promises to customer to provide
 Broadband Service
 Voice Call services
 Modem
Entity’s promise to provide goods and services is distinct if

 Customer can benefit from the good or service either on its own or together with
other resources that are readily available to the customer, and
 entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract
For broadband and voice call services-

 Broadband and voice services are separately identifiable from other promises as
company has various plans to provide the two services separately. These two services
are not dependent or interrelated. Also the customer can benefit on its own from the
services received.
For sale of modem-

 Customer can either buy product from entity or third party. No significant Customisation
or modification is required for selling product.
Based on the evaluation we can say that there are three separate performance obligation:-
 Broadband Service
 Voice Call services
 Modem
Hint: All services have been considered as different performance obligation because
all services are not inter related & inter dependant. The customer can avail all services
separately.
QUESTION 21
Could the series requirement apply to hotel management services where day to day activities
vary, involve employee management, procurement, accounting, etc?
SOLUTION:
The series guidance requires each distinct good or service to be “substantially the same”
Management should evaluate this requirement based on the nature of its promise to customer
For example, a promise to provide hotel management services for a specified contract term
may meet the series criteria. This is because the entity is providing the same service of
“hotel management” each period, even though some on underlying activities may vary each
day. The underlying activities for e.g. reservation services, property maintenance services
are activities to fulfill the hotel management service rather than separate promises. The
distinct service within the series is each time increment of performing the service.
Hint: Hotel management includes all activities from zero to hundered (i.E., Day to
activities, employee management, property management, accounting etc.). So all activites
should be considered as single obligation because all activities are inter related as a part
of hotel management.
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QUESTION 22
Entity A, a specialty construction firm, enters into a contract with Entity B to design and
construct a multi-level shopping center with a customer car parking facility located in sub-
levels underneath the shopping center. 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 obligation 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?
SOLUTION:
Entity A analyses that is will be required to continually alter the design of the shopping
center and parking facility during construction as well as continually assess the propriety
of the materials initially selected for the project. Therefore, the design and construction
phases are highly dependent on one another (i.e., the two phases are highly interrelated).
Entity A also determines that significant Customisation and modification of the design and
construction services is required in order to fulfill the performance obligation under the
contract. As such, Entity A concludes that design and construction services will be bundled
and accounted for as one performance obligation.
Hint: We have considered it as single performance obligation because continous alteration

is expected in this contract due to which services of design & construction are to be
assumed as inter related & interdependant.
Step 3: Identifying the Transaction Price

“The Transaction price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties (for example, GST etc.)”
The transaction price may be effected by the following reasons:
1. Variable consideration
2. Significant finance component
3. Non cash consideration
4. Consideration payable to customer
The standard says estimate the variable consideration should be estimated.

How to estimate? Is there any method suggested?
Yes. There are two method suggested by the standard:
Estimation methods
The Expected Value The Most likely amount
It is a sum of probability – weighted average It is the single most likely amount in a range
amounts in rage of possible consideration of possible consideration amount (i.e. the
amounts. single most likely outcome of the contract)
When con this be used? When the contract has only two possible
Only if an entity has a large number of outcomes (e.g. entity either achieve a
contracts with similar characteristics; performance bonus or does not)
There is no free choice to the entity is using either method; the method selected should
be used consistently. A single contract may have more than one variable consideration – In
this case, entity can use expected value method for one variable consideration and most
likely amount method for other variable consideration.
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In estimating the variable consideration, the entity should use all available information i.e.
historical, current and forecast. The information should be similar to the information which
is used at the time of bid and proposal process for establishing the prices.
Constraining estimates of variable consideration

Variable consideration is included in the transaction price ONLY IF it is highly probable that
the amount will not result in a significant revenue reversal of cumulative recognised when
the uncertainty associated with the variable e consideration is subsequently resolved (i.e.
it is highly probable that is will not be reversed). For this purpose, entity should consider
both the likelihood and magnitude of the revenue reversal.
In some contracts, penalties are specified. In such cased, penalties shall be accounted for
as per the substance of the contract. Where the penalty is inherent in determination of
transaction price, it shall form part of variable consideration For example, where an entity
agrees to transfer control of a good or service in a contract with customer at the end of 30
days for ` 1,00,000 and if it exceeds 30 days, the entity is entitled to receive only ` 95,000
the reduction on ` 5,000 shall be regarded as variable consideration. In other cases, the
transaction price shall be considered as fixed.
Reassessment of variable consideration

At the end of each reporting period, an entity shall update the estimate transaction price
(including updating constraints) to represent faithfully the circumstance present at the
end of the reporting period and the changes in circumstances during the reporting period.
Let us discuss few variable consideration estimation basis in the following table:
Variable Estimation basis

consideration
Volume These are incentives to encourage additional purchases and customer
discounts loyalty. This is generally given to a customer to purchase a specified
amount of goods or services, after which the price is either reduced
prospectively for additional goods or services purchased in the future
OR retrospectively reduced for all purchases during the specific period.
Retrospective value discounts included the variable consideration as
the transaction price for the current purchases are not known till the
uncertainty of discount is resolved Management should use experience
and other information to make a reasonable

consideration
Estimate. Sometimes, it may be difficult to estimate. Based of the
estimation, at least a Minimum price per unit should be included in the
estimated transaction price at the inception of the contract.
Price Price concessions are adjustment to the initial contract and provided for
concessions a variety of reasons.
For Example, a vendor might accept a lover payment than the amount
contractually due form a customer, to encourage the customer pay for
previous purchase and continue making future purchases. Price concessions
are also sometime provided where a customer has experienced some level
of dissatisfaction with that good or service (other than items covered
by warranty) Management should assets the likelihood of offering
price concession. An entity that expects to provide a price concession or
practice of doing so, should reduce the transaction price to reflect the
consideration to which is expects to be entitled after the concession is
provided.
Prompt Customer purchases frequently include a discount of early payment For

payment example, an entity might offer a 2% discount if an invoice is paid within
discounts 10 days of receipt. A portion of the Consideration is variable in this
(Cash situation, because there is uncertainty as to whether the customer will
discounts) pay the invoice within the discount period.
Management need to make an estimate of the consideration that is
expect to be entitled to as a result of offering this incentive. Experience
with similar customers and similar transactions should be considered in
determining the number of customers that are expected to receive the
discount.
Rebate- Customers typically pay full for goods or services at contract inception
Cash receipt and then receive a cash rebate in the future. This cash rebate is often
in the tied to an aggregate level of purchases.
future when
achieved Management needs to consider the volume of expected sales and expected
the target rebated in such cases to determine the revenue to be recognises n each,
purchases sale. The consideration is variable in these situations, because it is based
on the value of eligible transactions. Is should only include amounts in the
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consideration
transaction price for arrangements with rebates if it is highly probable
that a significant reversal in the amount if cumulative revenue reasonably
will not occur if estimates of rebates change. Where management cannot
reasonable estimate the amount of rebates that customers are expected
to earn, it still need to consider whether there is a minimum amount of
variable consideration that should not be constrained.
Price based A contract could include variable consideration if pricing is based on a

on a formula or a contractual rate per unit of outputs and there is an undefined
Formula quantity of outputs The Transaction price is variable because is based
on an unknown number of outputs. For example, a hotel is management
entity enters into an arrangement to manage properties on behalf of
a customer for a 5 - year period Contract consideration is based on a
defined percentage of daily receipts the consideration is variable for
this contract as it will be calculated based on daily receipts. The promise
to the customer is to provide management services for the terms of the
contract; therefore, the contract contains a variable fee as opposed to
an option to make future purchases.
Price Price protection clauses allow a customer to obtain a refund if the seller
protection reduces the product’ price to any other customers during a specified
and price period.
matching Say one customer bought at ` 100 per unit and subsequently due any
reason the product price is reduced to ` 90 during the year. In this case,
if the customer has price protection he gets back ` 10.
Price matching provisions require an entity to refund a portion of the
transaction price if a competitor lowers its price on a similar product.
In this case, if the market price of the item. i.e. even competitor reduces
the price to ` 90, the entity should pay ` 10 to the customer.
In Addition some arrangements allow for price protection only on
the goods that remain in a customer’s inventory. It means this rule is
applicable to the unsold stock of the customer.
Both of these provisions create a possibility of subsequent adjustments

to the stated transaction price.

consideration
Management needs to estimate the number of units to which the price
protection guarantee applies in such cases, to determine the transaction
price, as the reimbursement does not apply to unit already sold by the
customer.
Non-cash • Non-cash consideration should be measured at FAIR VALUE

consideration • If the entity cannot reasonably measure – Stand alone selling price
of goods or services is the value of non-cash consideration;
• If non- cash consideration varies for reasons other than only the form
of it apply the constraining requirements;
• If customer gives goods or services like materials’ equipment of labour-
Assess whether entity obtains controls over it -If Yes, recognise
revenue.
Time value of money/significant financing component/deferred credit period

Normally credit period in many industries is 1 to 6 months (max.) If an entity is providing
a credit period for a longer period (Say more than one year ) i.e. called as deferred period
It is apparent that invoice amount includes inters element (that means there is a financing
arrangement between the parties). That interest should be separated (deducted) from the
transactions price and recognised in the statement of P&L as expense.
• If there is a significant financing component in the contact, it should be considered
whether it is explicitly mentioned in the agreement or it is implicit;
• In determining the interest element the entity should consider the following:
— Difference between promised consideration and Cash selling price; and
— Combined effect of the deferred period & interest rates prevailing in the market.
What rate should be used for discounting?

Ans: The entity should use the rate that reflects the credit characteristics of the party
and any collateral or security provided by the customer or the entity, including assets
transferred in the contract. The rate can be determined by identifying the rate that
discounts the nominal amount of the promised consideration to Cash selling price i.e. IRR
between the promised consideration and cash price (effective rate of return).
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After contract inception, an entity shall not update the discount rate for changes in
interest rates on other circumstances (such as a change in the assessment of the customer’s
credit risk).
As a practical expedient, an entity NEED NOT apply this concept if the deferred is less
than or equal to a year.
Consideration payable to a customer/customer loyalty programs

Consideration payable to a customer includes
• Cash amount e.g. cash back offers;
• A credit or other items e.g. a coupon or voucher;
Consideration payable to a should be reduced from the transaction price unless

The entity received a distinct goods or services from the customer.
If the consideration payable to a customer include a variable amount, an entity shall estimate
the transaction price (including considering the constraints);
Payments made by an entity to its customer’s customer are assessed and accounted for the
same as those paid directly to the entity’s customer.
If the consideration paid to a customer for supplying a distinct goods of services to

the entity?
If it is paid for a distinct good or service from the customer account for the purchase in
the same way that is accounts for other purchases from suppliers.
If the amount of consideration payable to the customer exceeds the fair value of the
distinct good or service received from the customer, then such an excess amount should be
reduced from the transaction price.
When (timing) to recognise the reduction in transaction price?

Ans: Recognise the reduction of revenue at the later of the following events occur (whoever
is later)
(a) The entity recognises revenue for the transfer of the related goods or services to
the customer; and
(b) The entity pays or promises to pay the consideration (even if the conditional on future
event). That promise might be implied by the entity’s customary business practices.
QUESTION 23 – 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` Crores, but that amount will be reduced or increased
depending on the timing of completion of the asset. Specifically, for each day after 31
March 20X1 that the asset is incomplete, the promised consideration is reduced by ` 1 lakh.
For each day before 31 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 entitled to an incentive bonus of ` 15 lakhs.
SOLUTION:
In determining the transaction price, the entity prepares a separate estimate for each
element of variable consideration to which the entity will be entitled using the estimation
methods described in paragraph 53 of Ind AS 115.
(a) The entity decides to use the expected value method to estimate the variable
consideration associated with daily penalty or incentive (i.e. ` 2.5 cores, plus or minus
` Lakh per day). This is because it is the method that entity expects to better predict
the amount of consideration to which it will entitled.
(b) The entity decides to use the most likely amount to estimate the variable consideration
associated with the incentive bonus. This is because there are only two possible
outcomes (` 15 lakhs or ` Nil) and it is the method that the entity expects to better
predict the amount of consideration to which it will be entitled.
QUESTION 24- ESTIMATING VARIABLE CONSIDERATION
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 36th month for an agreed-upon
price of ` 25 cores.
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)

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In addition to the potential performance bonus for early completion, AST Limited is entitled
to a quality bonus ` 2 crores if 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 is will receive the quality bonus.
Determine the transaction price.
SOLUTION:
In determining the transaction price, AST Limited separately estimates variable
consideration for each element of variability i.e. the early completion bonus and the quality
bonus.
AST Limited decides to use the expected value method to estimate the variable consideration
associated with the early completion bonus because there is a range of possible outcomes
and the entity has experience with a large number of similar contract that provide a
reasonable basis to predict future outcomes. Therefore, the entity expects this method
to best predict the amount of variable consideration associated with the early completion
bonus. AST’s best estimate of the early completion bonus is ` 2.13 crores, calculated as
shown in the following table:
Bonus% Amount of bonus Probability Probability-weighted

(` in crores) Amount(` in crores)
15% 3.75 25% 0.9375
10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% -___
2.125
AST Limited decides to use the most likely amount to estimate the variable consideration
associated with the potential quality bonus because there are only two possible outcomes (`2
crores or ` Nil) and this method would best predict the amount of consideration associated
with the equality bonus. AST Limited believes the most likely amount of the equality bonus
is ` 2 crores.
QUESTION 25- VOLUME DISCOUNT INCENTIVE
HT Limited enters into a contract with a customer on 1 April 20X1 to sell product X for
` 1,000 per unit. If customer purchases more than 100 units of product A in financial year,
the contract specifies that price per unit is retrospectively reduced to ` 900 per unit.
Consequently, the consideration in the contract is variable.
For the first quarter ended 30 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 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 purchase is known).
Further, in May 20X1, the customer acquires another company and in the second quarter
ended 30 September 20X1 the entity sell s 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 30
June 20X1 and 30 September 20X1.
SOLUTION:
The entity recognises revenue of ` 10,000 (10 units x` 1,000 per unit) for the quarter
ended 30 June 20X1.
HT Limited recognises revenue of ` 44,000 for the quarter ended 30 September 20X1.
That amount is calculated from ` 45,000 for the sale of 500 units (50 units x ` 900 per
unit) lees the change in transaction price of ` 1,000 (10 units x ` 100 price reduction) for
the reduction of revenue relating to unit sold for the quarter ended 30 June 20X1.
QUESTION 26- 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 ` 950,000. The entity will
transfer control of the product over five years, and the entity uses the cost-to cost input
method to measure progress on the contract. An incentive award is available if the product
meets the following weight criteria:
Weight (kg) Award % of fixed fee Incentive fee

951 or greater 0% -
701-950 10% ` 100,000
700 or less 25% ` 250,000
The entity has extensive experience creating products that meet the specific performance
criteria. Based on its experience, the entity has identified five engineering alternative that
126 ACCOUNTS
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 confident 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 include 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 recognised 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 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 I the year four because, at this point, is probable that a significant reversal in
the amount of cumulative revenue recognised will not occur including the entire variable
consideration in the transaction price.
Evaluate the impact of changes invariable 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
SOLUTION:
[Note: For simplification purposes, the table calculates revenue for the year independently
based on costs incurred during the year divided by total expected cost, with the assumption
that expected costs do not change.
Fixed A 1,000,000
consideration
Estimated costs B 950,000
to complete*
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated C 100,000 1,00,000 100,000 250,000 250,000
variable
Consideration
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable E= C x H/B 5,263 18,421 42,105 72,368 13,158
revenue
Cumulative F (See below) - - - 99,370 -
revenue
adjustment
Total revenue G = D + E+ F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin J = I/G 14% 14% 14% 14% 24%

(rounded off)
For simplicity, it is assumed three is no change to the estimated costs to complete throughout
the contract period.
• In practice, under the cost-to cost measure of progress, total revenue for each period
is determined by multiplying the total transaction price (fixed and variable) by the ratio
of cumulative cost incurred total estimated costs to complete, less revenue recognised
to date.
Calculation of cumulative catch-up adjustment:
Updated variable consideration L 250,000

Percent complete in Year 4: (rounded off) M=N/O 95%
Cumulative costs through year 4 N 900,000
Estimated costs to complete 0 950,000
Cumulative variable revenue through Year 4: P 138,130
Cumulative catch up adjustment F=LxM–P 99,370
QUESTION 27 – RIGHT OF RETURN
An entity enters into 1,000 contracts with customers. Each contract includes the sale of
one product for `50 (1,000 total products x ` 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. The
entity’s cost of each product is `30.
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The entity applies the requirement 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 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.
SOLUTION:
The entity also considers the requirements in paragraphs 56-58 of Ind AS 115 on constraining
estimates of variable consideration to determine whether the estimates amount of variable
consideration of ` 48,500 (` 50 x 970 products not expected to be returned) can be included
in the transaction price. The entity considers the factors in paragraph 57 of Ind AS 115 and
determines that although the returns are outside the entity’s influence, it has significant
experience in estimating returns for this product and customer class. In addition, the
uncertainty will be resolved within a short time frame (i.e. the 30- day return period). Thus,
the entity concludes that it is highly probable that a significant reversal in the cumulative
amount of revenue recognised (i.e. ` 48,500) will not occur as the uncertainty is resolved
(i.e. over the return period).
The entity estimates that the costs of recovering the products will be immaterial and
expects that the returned products can be resold at profit.
Upon transfer of control of the 1,000 products, the entity not recognise revenue for the
30 products that it expects to be returned. Consequently, in accordance with paragraphs
55 and B21 of Ind AS 115, the entity recognises the following:
(a) Revenue of ` 48,500 (` 50 x 970 products not expected to be returned);
(b) a refund liability of ` 1,500 (` 50 refund x 30 products expected to be retuned); and
(c) an assets of ` 900 (` 30 x 30 products for its right to recover products from
customers on setting the refund liability).
QUESTION 28
Financing component: significant or insignificant?

A commercial airplane component supplier enters into a contract with a customer for promised
consideration of ` 7,000,000. Based on an evaluation of the facts and circumstances, the
supplier concluded that ` 140,000 represented a 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 ` 1,400,000 represented the financing component based on an analysis
of the facts and circumstances.
SOLUTION:
The entity may conclude that ` 140,000, or 2 percent of the contract price, is not significant,
and the entity may not need to adjust the consideration in determining the transaction
price.
However, when the advance payment was larger and received further in advance such that
the entity may conclude that ` 1,400,000 represents the financing component based on
an analysis of the fact and circumstances. In such a case, the entity may conclude that `
1,400,000, or 20 percent of the contract price, is significant, and the entity should adjust
the consideration promised in determining the transaction price.
Note: In this illustration, the entity’s conclusion that 2 percent of the transaction price
was not significant and 20 percent was significant is a judgment based on the entity’s facts
and circumstances. An entity may a different conclusion on its facts and circumstances.
QUESTION 29
Accounting for significant financing component

NKT Limited sells a product to a customer for ` 121,000 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 ` 100,000 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.
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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 ` 121,000 to the cash selling price
of ` 100,000). Analyse the above transaction with respect to its financing component.
SOLUTION:
The contract includes a significant component. This is evident from the difference between
the amount of promised consideration of ` 121,000 and the cash selling price of ` 100,000
at the date that the goods are transferred to the customer.
The contract includes an implicit rate of 10 per cent (i.e. the interest rate that over 24
months discounts the promised consideration of ` 121,000 to the cash selling price of
` 100,000). The entity evaluates the rate concludes that is commensurate with the rate
that would be reflected in a separate financing transaction between the entity and its
customer at contract inception.
Until the entity receives the cash payment from the customer, interest revenue would be
recognised in accordance with Ind AS 109. In determining the effective interest rate in
accordance with Ind AS 109, the entity would consider the remaining contractual term.
QUESTION 30 – 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 the transaction price when
Case A- Contractual discount rate reflects the rate in separate financing transaction
Case B – Contractual discount rate does not reflect the rate in a separate financing
transaction i.e. 14%
SOLUTION:
Case A – Contractual discount rate reflects the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component,
VT Limited observes that the 10% contractual rate of interest reflects the that would be
used in a separate financing transaction between the entity and its customer at contract
inception (i.e. the contractual rate of interest of 10% reflects the credit characteristics
of the customer).
The market terms of the financing mean that the cash selling price of the equipment is
` 1 crore. This amount is recognised as revenue and as a loan recevable when control of the
equipment transfers to the customer. The entity account for the receivable in accordance
with Ind AS 109.
Case B- Contractual discount rate does reflect the rate in a separate

financing transaction
In evaluating the discount rate in the contract that contains a significant financing
component, the entity observes that the 10% contractual rate of interest is significantly
lower than the 14% interest rate would be used in a separate financing transaction between
the entity and its customer at contract inception (i.e. the contractual rate of interest of
10% does not reflect the credit characteristics of the customer). This suggests that the
cash selling price is less than ` 1
VT Limited determines the transaction price by adjusting the promised amount of
consideration to reflect the contractual payments using the 14% interest rate reflects
the credit characteristics of the customer. Consequently, the entity determines that
transaction price is ` 9,131,346 (60 monthly payments of ` 212,470 discounted at 14%).
The entity recognises revenue and a loan receivable for that amount. The entity accounts
for the loan receivable in accordance with Ind AS 109.
QUESTION 31
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 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.
132 ACCOUNTS
SOLUTION
Journal Entries showing accounting for the significant financing component:
(a) Recognise a contract liability for the ` 4,000 payment received at contract inception:
Cash Dr. ` 4,000
To Contract liability ` 4,000
During the two years from contract inception until the transfer of the asset, the entity
adjusts the promises amount of consideration and accretes the contract liability by
recognising interest on ` 4,000 at 6% for two years:
(b) Interest expense Dr. ` 494*

To Contract liability ` 494
` 494 = ` 4,000 contract liability x (6% interest per year for two years).
(c) Recognise revenue for the transfer of the asset.

Contract liability Dr. ` 4,494
To Revenue ` 4,494
QUESTION 32- 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 the
entity the building is complete.
Analyse whether the contract contains any financing component.
SOLUTION:
ABC Limited concludes that the contract does not include a significant financing component
since the milestone payments coincide with its performance and the contract requires
amounts to be retained for reasons other than the provision of finance. The withholding of
a specified percentage of each milestone payment is intended to protect the customer from
the contractor failing to adequately complete its obligations under contract.
QUESTION 33 – 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.
Analyse whether there is any significant financing component in the contract or not.
SOLUTION:
Due to this customer’s rating, the customer pays in advance for the three-year term. Because
there is no difference between the amount of promised consideration and the cash selling
price (that is, the customer does not receive a discount for paying in advance), the vendor
requires payment in advance only to protect against customer non-payment, and no other
factors exist to suggest the arrangement contains a financing, the vendor concludes this
contract does not provide the customer or the entity with a significant benefit of financing.
QUESTION 34 - SALES BASED ROYALTY
A software vendor enters into a contract with a customer to provide a license solely in
exchange for a sales- based royalty.
SOLUTION:
Although the payment will be made in arrears, because the total consideration varies based
on the occurrence or non-occurrence of a future event that is not within the control of
the customer or the entity, the software vendor concludes the contract does provide the
customer or the entity with a significant benefit or financing.
QUESTION 35 – PAYMENT IN ARREARS
An EPC contractor enters into a two-year contract to develop customised machine for a
customer. The contractor concludes that goods and services in this contract constitute a
single performance obligation.
Based on the terms of the contract, the contactor determines that is transfers control
over, time, and recognised revenue based on an input method best reflecting the transfer
of control to the customer. The customer agree 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.
134 ACCOUNTS
SOLUTION:
There is no difference between the amount of promised consideration and the cash selling
price (that is, the customer did not pay a premium a portion of the consideration in arrears).
The payment terms included a holdback payment only to ensure successful completion of the
project, and no other factors exist to suggest the arrangement contains a financing. Hence,
the contractor this does not provide the customer or the contractor with a significant
benefit of financing.
QUESTION 36 – PAYMENT IN ARREARS
Company Z is a developer and manufacture of defence systems that is primarily a Tier-II

suppler 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, specialised missiles for use in one 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 crores. The consideration will be paid by the customer related to
costs incurred near the time Company Z incurs such cost. However, the ` 100 crores award
fee is awarded upon successful completion of the development and test fire of a missile to
occur in 16 months from the contract is executed.
The contract specifies Company Z will earn up to ` 100 crores 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 under Ind AS 115 and determined the award fee
represents variable consideration Based of their assessment, Company Z has estimated a
total of ` 80 crores in the transaction price related to the variable consideration pursuant
to guidance within Ind AS 115. Further, the entity has concluded it should recognised
revenue over time for a single performance obligation using a cost-to cost input method.
SOLUTION:
The intention of the parties in negotiating the award fee upon completion of the test fire,
and based on the results of that test fire, was to provide incentive to Company Z to producer
high functioning missiles that achieved successful scoring from Company X. Therefore,
it was determined the contract does not contain a significant financing component, and
Company Z should not adjust the transaction price.
As per Ind AS 115. 63, as practical expedient, an entity need not adjust the promised
amount of consideration for the effects of significant financing component if the entity
expects, at contract inception, that the period between;
(a) When the entity transfers a promised good or service to a customer and
(b) When the customer pays for the good or service Will be one year or less.
QUESTION 37- APPLYING PRACTICAL EXPEDIENT
Company H enters into a two-year contract to develop customised software for Company
C. Company H concludes that goods and services in this contract constitute a single
Based on the terms of the contract, Company H determines that is transfers control over
time,. And recognised 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.
SOLUTION:
Company H concludes it will not need to further whether a significant financing component
is present and does adjust the promised consideration in determining the transaction price,
as they applying the practical expedient under In AS 115.
As per Ind AS 115.65 an entity shall present the effects of financing (interest revenue or
interest expenses) separately from revenue from contracts with customers in the statement
of profit and loss. Interest revenue or interest expense is recognises only to the extent
that a contract asset (or receivable) or a contract liability is recognised in accounting for
a contract with a customer.
QUESTION 38 – 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 signal 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
136 ACCOUNTS
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 par week of
service a (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.
SOLUTION:
The entity measures its progress towards complete satisfaction of the performance
obligation as each week of service is complete. To determine the transaction price (and the
amount of revenue to be recognised), the entity has to measure the fair value of 100 shares
that are received upon completion of each weekly service. The entity shall not reflect any
not reflect any subsequent changes in the fair value of the shares received (or receivable)
in revenue.
QUESTION 39
Fair 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 crores for the project.
RT Limited will receive a bonus of 10 lakhs equity shares of AT Limited if is completes
construction of the office building within one year. Assume a fair value of ` 100 per share
at contract inception.
SOLUTION:
The ultimate value of nay shares the might receive could change for two reasons:
1) The entity earns or does not earn the shares and
2) The fair value per share may change during the contract term.
When determining the transaction price, the entity would reflect changes in the number
of shares to be earned. However, the entity would not reflect changes in the fair value
per share. Said another way, the share price of ` 100 is used to value the potential bonus
throughout the life of the contract.
As a result, if the entity earns the bonus, its revenue would be ` 350 crores plus 10 lakhs
equity shares at ` 100 per share for total consideration of ` 360 crores.
QUESTION 40 – CUSTOMER PROVIDED GOODS OR SERVICES
MS Limited is a manufacture of It has 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.
The tooling has a fair value of ` 2 crores 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?
SOLUTION:
AS a result, at contract inception, SK Limited includes the fair value of the tooling in the
transaction price at contract inception, which it determines to be ` 27 crores (` 25 crores
for the steering systems and ` 2 cores for the tooling).
QUESTION 41 – 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 crores of products during the year. The contract also requires the entity to make
a non-refundable payment of ` 1.5 crores to the customer at the inception of the contract.
The ` 1.5 crores 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 of any rights
to the customer’s shelves.
SOLUTION:
The entity considers the requirements in paragraphs 70 -72 of Ind AS 115 and concludes
that the payment to the customer is not in exchange for a distinct good or service that
transfers to the entity. This is because the entity does not obtain control of any rights
to the customer’s shelves. Consequently, the entity determines that, in accordance with
paragraph 70 of Ind AS 115, the ` 1.5 crores payment is a reduction of the transaction
price.
The entity apples the requirement 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 foreach good by
138 ACCOUNTS
10 per cent [(` 1.5 crores ÷ ` 15crores)] Therefore in the first month in which the entity
transfers goods to the customer, the entity recognises revenue of ` 1.125 cores (` 1.25
Crores invoiced amount less ` 0.125 crore of consideration payable to the customer).
QUESTION 42 (DISCOUNT)
A seller offers a cash discount for immediate or prompt payment (i.e. earlier than required
under the normal credit terms). A sale is made for ` 100 with the balance due within 90
days. If the customer pays within 30 days, the customer will receive a 10% discount on the
total invoice. The seller sells a large volume of similar items on these credit terms (i.e. this
transaction is part of a portfolio of similar items). How should the seller account for this
early payment incentive- if discount is taken by 40% of transactions.
SOLUTION:
In the circumstances described, revenue is ` 100 if the discount is not taken and ` 90 if the
discount is taken, As a result, the amount of consideration to which the entity will entitled
is variable.
Under Ind AS 115, if the consideration promised in a contract includes a variable amount,
an entity should estimate the amount of variable consideration to which it will be entitled
by (1) using either the expected value or the most likely amount method (whichever method
the entity expects would better predict the amount of consideration to which it will be
entitled), and then (2) considering the effect of the constraint.
Therefore, the seller should recognises revenue net of the amount of cash discount
expected to be taken, measured as described in the precious paragraph.
Expected value will be calculate as follows (` 100x 60%) + (` 90 X 40) = ` 96
QUESTION 43 (CONTINUATION WITH Q.42)

What if the proportion of transactions for which the discount is taken varies significantly
which will result in the recognition of less revenue. Based on historical, although the term
average is 40% there is grate variability from month to month and that the proportion of
transactions for which the discount is taken is frequently as high as 70% (but never higher
than). How to account revenue under these circumstances?
SOLUTION:
In Such a scenario, the seller might conclude that only 30% of the variable consideration
should be included, because inclusion of a higher amount might result in significant revenue
reversal. In that case, the amount of revenue recognised would be restricted to the following
(conservative)
(`100 x30) + (` 90 x70%) = ` 93
QUESTION 44 (CONSIDERATION PAID TO CUSTOMER)
Lubes Ltd. Sells lubes in containers to its customer, which in this case is the distributor,
These containers carry a cash coupon, which is placed inside the container. The cash coupons
are received by the ultimate customer, which for example, is either the grange or mechanic
that actually opens the lube container. The ultimate customer is reimbursed by Lubes Ltd.
A batch of containers was sold to distributors at ` 5,20,000. These containers carried cash
of coupons of ` 20,000 what is the transaction price in this case?
SOLUTION:
Transaction price will be ` 5,20,000 – 20,000 = ` 5,00,000. As per the standard, it does not
matter whether incentive is provided to the customer (distributor) of customer’s (mechanic
or garage).Both will have impact of reducing the transaction price.
QUESTION 45 (NON CASH CONSIDERATION)
A Ltd., A telecommunication company, entered into an agreement with B Ltd. Which is

engaged in generation supply of power, the agreement provide that A Ltd. Will provide
1,00,000 minutes talk time free to employees of B Ltd. In exchange for getting free power
equivalent to 20,000 units. A of Ltd. normally charges ` 0.50 per minute and B Ltd. charges
` 3 per unit. How to measure revenue of A Ltd. And B Ltd.?
SOLUTION:
As per Ind AS 115, when non-cash consideration is received Revenue should be measured at
Fair value of goods/services received/ adjusted by any cash equivalents transferred;
In the given case, as power per unit rate is clearly available, sales should be recorded at `
60,000 (i.e. 20,000 units x ` 3 per unit) in the books of A Ltd. Revenue in the books of B
Ltd. Would be ` 50,000 (i.e. 1,00,000 units x ` 0.5.per minute);
140 ACCOUNTS
QUESTION 46 (NON CASH CONSIDERATION)
X Ltd. A dealer of garments, got the renovation of one shop carried out by Y Ltd. In turn,
it gave 100 T – Shirts and ` 3,000 to Y Ltd. As full payment of the renovation work. Y Ltd.
would normally charge ` 15,000 for the work done. X Ltd. Usually sells T – Shirts at ` 120
each. How both X Ltd. Y Ltd. Will account for the above transactions?
SOLUTION:
X Ltd. Books;
It received service (non-cash consideration ) in exchange of goods, In this case, the revenue
is measured at the fair value of the goods or services received, adjust by the amount of any
cash or cash equivalents transferred.
The fair value of service received is ` 15,000 (i.e. the amount that Y Ltd. normally charge
for the same work) and also X Ltd. Has transferred cash of ` 3,000 to Y Led. So X Ltd. Will
recognise revenue from sale of goods (T-shirts) as 12,000 (` 15,000 – ` 3,000).
If assume renovation work is capitalised-
PPE a/c Dr 15,000
To Sales a/c 12,000
To Cash a/c 3,000
Y Ltd. Books:
It will recognise revenue (from renovation activities) as ` 15,000 (` 120 x 100) + 3,000]
QUESTION 47 (FINANCING COMPONENT)
X Ltd. Is engaged in manufacturing and selling of designer furniture. It sells goods extended
credit On 1st April, 2018, it sold furniture for ` 48,40,000 to a customer, the payment
against which was receivable after 24 months. He sells the same furniture at ` 40,00,000
to other customer who pays cash on the date of sale. How will X Ltd. Recognise revenue for
the above transaction?
SOLUTION:
In the give case, the credit period is a deferred credit period. There is significant financing
component involved and not mentioned explicitly in the contract. The entity should account
for the time value of money as interest income.
Interest element = Promised consideration – cash selling price = ` 48,40,000 – ` 40,00,000=

` 8,40,000.
Internal rate of rerun between ` 48,40,000 & ` 40,00,000 is 10% The interest revenue
should be accounted for using the same rate.
The following journal entry should be recoded
Date Journal entry Debit Credit

1st April 2018 Customer A/c……………Dr 40,00,000
To Sales (Revenue) A/c 40,00,000
(Being revenue is recognised at fair value)
31st Mar 2019 Customer A/c………….Dr. 4,00,000

To Interest Income A/c 4,00,000
(Being finance income is recognised at
effective
Rate i.e. ` 40,00,000 x 10%)
31st Mar 2020 Customer A/c………..Dr. 4,40,000

To Interest Income A/c 4,40,000
(Being finance income is recognised at
effective
Rate i.e. ` 44,00,00 x 10%)
Receivable amount as at 31st March 2020

= ` 40,00,000 ` 4,00,000 + 4,40,000 `
48,40,000
31st Mar 2020 Cash A/c………Dr. ` 48,40,000
To Customer ` 48,40,000
(Being receipt of consideration is
accounted)
Note: If customer paid advance consideration and the timing of the transfer of those
goods or services is at the discretion of the customer –the entity should not consider any
interest revenue in this case.
142 ACCOUNTS
Step 4: ALLOCATION OF TRANSACTION PRICE
QUESTION 48 – ALLOCATION METHODOLOGY
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
of Products B and are not directly observable.
Because the stand-and 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
Determine the transaction price allocated to each product.
SOLUTION:
The customer receives a discount for purchasing the bundle of goods because the sum of
the stand – alone selling prices (` 15,000) exceeds the promised consideration (` 10,000)
the entity considers that there is no observable evidence about the performance obligation
to which the entire discount belongs. The discount is allocated proportionately across
products A, B and C. The discount, and therefore the transaction price, is allocated as
follows:
Product Allocated transaction price (to nearest ` 100)

`
Product A 3,300 (` 5,000 ÷ ` 15,000 ` 10,000)
Product B 1,700 (` 2,500 ÷ `15,000 x ` 10,000)
Product C 5,000 (` 7,500 ÷ ` 15,000 x ` 10,000)
Total 10,000
QUESTION 49 (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 Products 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.
SOLUTION:
Case A- Allocating a discount to one or more performance obligations
The contract includes a discount of ` 20,000 on the overall transaction, which would
be allocated proportionately to all three performance obligations when allocating the
transaction price using the relative stand-alone selling price method.
However, because the entity regularly sells Products Y and Z together for ` 50,000 and
Product X for ` 50,000, it has evidence that the entire discount should be allocated to the
promises to transfer Products Y and Z in accordance with paragraph 82 of Ind AS 115.
If the contract requires the entity to transfer control of Products Y and Z together,
then the allocated amount of ` 50,000 is individually allocated to the promises to transfer
Product Y (stand-alone selling price of ` 25,000) and Product Z (stand-alone selling price of
` 45,000) as follows:
144 ACCOUNTS
Product Allocated transaction price

`
Product Y 17,857 (` 25,000 ÷ ` 70,000 total stand-alone selling price * ` 50,000)
Product Z 32,143 (` 45,000 ÷ ` 70,000 total stand-alone selling price × ` 50,000)
Total 50,000
Case B – Residual approach is appropriate

Before estimating the stand-alone selling price of Product Alpha using the residual approach,
the entity determines whether any discount should be allocated to the other performance
obligations in the contract.
As in Case A, because the entity regularly sells Products Y and Z together for ` 50,000
and Product X for ` 50,000, it has observable evidence that ` 100,000 should be allocated
to those three product and a ` 20,000 discount should be allocated to the promises to
transfer Products Y and Z in Accordance with paragraph 82 of Ind As 115.
Using the residual approach, the entity estimated the stand-alone selling price of Product
Alpha to be ` 30,000 as follows:
Product Stand-alone selling price Method

`
Product X 50,000 Directly observable
Product Y and Z 50,000 Directly observable with discount
Product Alpha 30,000 Residual approach
Total 130,000
The entity observes that the resulting ` 30,000 allocated to Product Alpha is within the
range of its observable selling price (` 15,000- ` 45,000).
QUESTION 50– ALLOCATING OF VARIABLE CONSIDERATION
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 obligation
each satisfied at a point in time. The stand-alone selling prices of Licences A and B are
` 1,600,000 and ` 2,000,000, respectively. The entity transfers Licence B at inception of
the contract and transfers Licence A one month later.
The price stated in the contract for Licence A is a fixed amount of ` 1,600,000 and for
Licence B the consideration is three per cent of the customer’s future sales of products
that use Licence B. For purposes of allocation, the entity estimates its sales-bases royalties
(i.e. the variable consideration) to be ` 2,000,000. Allocate the transaction price.
SOLUTION:
To allocate the transaction price, the entity considers the criteria in paragraph 85 and
concludes that the variable consideration (i.e. the sales-based royalties) should be allocated
entirely to Licence B. The entity concludes that the criteria are met for the following
reasons:
(a) The variable payment related specifically to an outcome from the performance
obligation to transfer Licence B (i.e. the customer’s subsequent sales of products that
use License B).
(b) Allocating the expected royalty amounts of ` 2,000,000 entirely to Licence B
is consistent with the allocation objective in paragraph 73 of Ind AS 115. This is
because the entity’s estimate of the amount of sales-based royalties (` 2,000,000)
approximates the stand-alone selling price of Licence B and the fixed amount of
` 1,600,000 approximates the stand-alone selling price of Licence A. The entity
allocated ` 1,600,000 to Licence A. This is because, based on an assessment of the
facts and circumstances relating to both licences, allocating to Licence B some of the
fixed consideration in addition to all of the variable consideration would not meet the
allocation objective in paragraph 73 of Ind As 115.
QUESTION 51 – ALLOCATING A CHANGE IN TRANSACTION PRICE
On 1 April 20X0, a consultant enters into a n arrangement to provide due diligence, valuation,
and software implementation services to a customer for ` 2 crores. The consultant can earn
` 20 lakhs bonus if it completes the software implementation by 30 September 20X0 or `
10 lakhs bonus if it completes the software implementation by 31 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 lakhs

• Valuation - ` 20 lakhs
• Software implementation - ` 1 crore
146 ACCOUNTS
At contract inception, the consultant believes it will complete the software implementation
by 30 January 20X1. After considering the factors in Ins 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 bonus in its estimated transaction price at contract inception.
On 1 July 20X0, the consultant notes that the project has progressed better than expected
and believes that implementation will be completed by 30 September 20X0 based on a
revised forecast. As a result, the consultant updates its estimated transaction price to
reflect a bonus of ` 20 lakhs.
After reviewing its progress as of 1 July 20X0, the consultant determines that it is 100 per
cent complete in satisfying its performance obligations for due diligence and valuation and
60 per cent complete in satisfying its performance obligation for software implementation.
SOLUTION:
On 1 July 20X0, the consultant allocates the bonus of ` 20 lakhs to the software
implementation performance obligation, for total consideration of ` 1.2 crores allocated to
that performance obligation, and adjusts the cumulative revenue to date for the software
implementation services to ` 72 lakhs (60 per cent of ` 1.2 crores).
Step 5: SATISFYING THE PERFORMANCE OBLIGATION
QUESTION 52
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 revenue?
SOLUTION:
Payroll processing is a single performance obligation. On a monthly basis, as Microtek Ltd
carries out the payroll processing-
• The customer, i.e. ABC Limited simultaneously receives and consumes the benefits of the
entity’s performance in processing each payroll transaction
• Further, once the services have been performed for a particular month, in case of
termination of the agreement before maturity and contract is transferred to another
entity, then such new entity will not need to re-perform the services for expired months.
Therefore, it satisfied the first criterion, i.e. services completed on a monthly basis are
consumed by the entity at the same time and hence, revenue shall be recognised over the
period of time.
QUESTION 53
T&L Limited (‘T&L’) is a logistics company that provides inland and sea transportation
services. A customer – Horizon Limited (‘Horzon’) enters into a contract with T&L for
transportation of its goods from India to Srilanka through sea. The voyage is expected to
take 20 days Mumbai to Colombo. T&L is responsible for shipping the goods from Mumbai
port to Combo port.
Whether T&L’s performance obligation is met over period of time?
SOLUTION:
T&L has a single performance to ship the goods form one port to another. The following
factors are critical for assessing how services performed by T&L are consumed by the
customer-
• As the voyage is performed, the service undertaken by T&L is progressing such that
no other entity will need to re-perform the service till so far as the voyage has been
performed, if T&L was to deliver only part-way.
• The customer is directly benefiting from the performance of the voyage as & when it
progresses.
Therefore, such performance obligation is said to be met over a period of time.
148 ACCOUNTS
QUESTION 54
AFS Ltd. Is a risk advisory firm and enters into a contract with a company WBC Ltd provide
audit service that results in AFS issuing an audit opinion of 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?
SOLUTION:
AFS has a single performance to provide an opinion on the professional audit services
proposed to be provided under the contract with the customer. Evaluating the criterion for
recognising revenue over a period of time or at a point in time, Ind AS 115 requires one of
the following criterion to be met-
• Criterion (a) – whether the customer simultaneously receives and consumes the benefits
from services provided by AFS: Company shall benefit only when the audit opinion is
provided upon completion. And in case the contract was to be terminated, and other
frim engaged to perform similar services will have to substantially re-perform.
Hence, this criterion is not met.

• Criterion (b) – An asset created that customer controls: This is service contract and no
asset created, over which customer acquires control.
• Criterion (C)- no alternate use to entity and right to seek payment:
 The services provided by AFS are specific to the company WBC and do not have any
alternate use to AFS
 Further, AFS has a right to enforce payment if contract was early terminated, for
reasons other than AFS’s failure to perform. And the profit margin approximates
what entity otherwise earns.
Therefore, criterion (c) is met such performance obligation is said to be met over a period
of time.
QUESTION 55
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.
SOLUTION:
While evaluating the pattern of transfer of control to the customer, the Company shall
evaluate condition laid in para 35 of Ind AS 115 as follows:
• Criterion (a) whether the customer simultaneously and consumes the benefits Customer
can benefit only when the satellite is fully constructed and no benefits are consumed as
its constructed. Hence, this criterion in not met.
• Criterion (b) – An asset created that customer controls: per provided facts, the
customer does not acquire control
• Criterion (c) – no alternate use to entity and right to seek payment:
 T
he asset is being specifically created for the customer. The asset is customised
to customer’s requirements such that any diversion for a different customer will
require significant work. Therefore, the asset has practical limitation in being to
alternate use
 F
urther, Space Ltd. Has a right to enforce payment if contract was early
terminated, for reasons other than Space Ltd. s failure to perform.
Therefore, criterion (c) is met and such performance obligation is said to be met over a
period of time.
QUESTION 56: UNINSTALLED MATERIALS
On 01 January 20X1, an entity contracts to renovate a building including the installation of

new elevators. The entity estimates the following with respect to the contract:
Particulars Amount (`)

Transaction price 5,000,000
Expected costs:
(a) Elevators 1,500,000
(b) Other costs 2,500,000
Total 4,000,000
150 ACCOUNTS
The entity purchases the elevators and they are delivered to the six months before they
will be installed. The entity uses an input method based on cost to measure progress towards
completion. The entity has incurred actual other costs of 500,000 by March 31, 20X1.
How will the Company recognise revenue, if performance obligation is met over a period of
time?
SOLUTION:
Costs to be incurred comprise two major components – elevators and cost of construction
service.
(a) The elevators are part of the overall construction project and are not a distinct
performance obligation
(b) The cost of elevators is substantial to the overall project and are incurred well in
advance.
(c) Upon delivery at site, customer acquires control of such elevators.
(d) And there is no modification done to the elevators, which the company only procures
and delivers at site. Nevertheless, as part of materials used in overall construction
project, the company is principal in the transaction with the customer for such
elevators also.
Therefore, applying the guidance on lnput method-
The measure of progress should be made based on percentage of cots incurred relative to
the budgeted costs.
-
The cost of elevators should be excluded when measuring such progress and revenue
for such elevators should be recognised to the extent of costs incurred.
The revenue to be recognised is measured as follows:

Transaction Price 5,000,000
Costs incurred:
(a) Cost of elevators 1,500,000
(b) Other costs 5,00,000
Measure of progress: 5,00,000/2,500,000 = 20%
Revenue to be recognised:
(a) For costs incurred (other than elevators) Total attributable revenue =
3,500,000 of work completed = 20%
Revenue to be recognised = 700,000
(b) Revenue for elevators 1,500,000 (equal to costs incurred)

Total revenue to be recognised 1,500,000 + 7,00,000 = 2,200,000
Therefore, for the year ended 31 March 20X1, the Company shall recognise revenue of `
2,200,000 on the project.
CONCEPT 5: VARIOUS SITUATIONS
QUESTION 57 (REPURCHASE AGREEMENT)
An entity enters into a contact with a customer for the sale of a tangible asset on 1 January
20X1 for ` 1 million. The contract includes a call option that gives the entity the right to
repurchase the asset for ` 1.1 million on or before December 31,20X1.
How would the entity account for this transaction?
SOLUTION:
In the above, where the entity has a right to call back the goods upto a certain date-
• The customer cannot be said to have acquired control, owing to the repurchase right
with the seller entity
• Since the original selling price (` 1 million) is lower than the repurchase price (` 1.1
million,) this is construed to be a financing arrangements and accounted as follows:
(a)
Amount received shall be recognised as ‘liability’
(b)
Difference between sale price and repurchase price to be recognised as finance
cost and recognised over the repurchase term.
QUESTION 58 (REPURCHASE AGREEMENT)
An entity enters into a contract with a customer for the sale of a tangible asset on 1
January 20X1 for ` 1,000,000. The contract includes a put option that gives the customer
the right to sell the asset for ` 9,00,000 on or before December 31, 20X1. The market
price for such goods is expected to be ` 750,000
How would the entity account for this transaction?
SOLUTION:
In the above case, where the entity has an obligation to buy back the goods up to certain
date-
152 ACCOUNTS
• The entity shall evaluate if the customer has a significant economic incentive to
return the goods, Since the repurchase price is significantly higher than market price,
therefore, customer has a significant economic incentive to return the goods, There are
no other factors which entity may affect this assessment.
• Therefore, company determines that control of goods is not transferred to the customer
till 31 December 20X1, i.e. Till the put option expires
• Against payment of ` 1,000,000 the customer only has a right to use the asset and put it
back to the entity for 900,000. Therefore, this will be accounted as a lease transaction
in which difference between original selling price (i.e. ` 1,000,000) and repurchase price
(i.e. ` 900,000) shall be recognised as lease income over the period of lease.
QUESTION 59 (BILL & HOLD)
An entity enters into a contract with a customer on 1 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 31 March 20X3, the customer pays for the machine
and spare parts, but only takes physical possession of the machine. Although the customer
inspects and accept the spare part, the customer requires that the spare parts be stored
at the entity’s warehouse because of its close proximity to the customer’s factory. The
customer has legal title to the spare parts and the parts can be identified as belonging to
the customer. Furthermore, the entity stores the spare parts in a separate section of its
warehouse and the parts are ready for immediate shipment at the customer’s request. The
entity expects to hold the spare parts for two to four years and the entity does not have
the ability to use the spare parts or direct them to another customer.
How will the Company recognise revenue for sale of machine and spare parts? Is there any
other performance obligation attached to this sale of goods?
SOLUTION:
In the fats provided above, the entity has made sale of two goods- machine and space parts,
whose control is transferred at a point in time. Additionally, company agrees to the spare
parts for the customer for a period or 2-4 years, which is a separate performance obligation
therefore, total transaction price shall be divided amongst 3 performance obligations-
(i) Sale of machinery
(ii) Sale of spare parts

(iii) Custodial services for storing spare parts.
Recognition of revenue for each of the three performance obligations shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and physical possession as
well as legal – title passed to the customer on 31 March 20X3. Accordingly, revenue for
sale of machinery shall be recognised on 31 March 20X3.
- Sale of spare parts: the customer has made payment for the spare parts and legal
title has been passed to specifically identified goods, but such spares continue to be
physically held by the entity In this regard, the company shall evaluate if revenue can
be recognised on bill-n hold basis if all below criteria are met:
(a) The reason for the bill and – hold The customer has specifically requested
arrangement must be substantive for entity to store goods in their
(for example, the customer has warehouse, owing to close proximity to
requested the arrangement); customer’s factory
(b) The product must be identified The spare parts have been specifically
separately as belonging to the identified and inspected by the customer
customer;
(c) The entity cannot have the ability Spares have been segregated and cannot
to use the product or to direct it to be redirected to any other customer.
another customer
Therefore, all conditions of bill-and-hold are met hence, company can recognise revenue
for sale of spare parts on 31 march 20X3.
- Custodial services; Such services shall be given for a period of 2 to 4 years form 31
March 20X3. Where services are given uniformly and customer receives & consumes
benefits simultaneously, revenue for such service shall be recognised on a straight line
basis over a period of time.
QUESTION 60 (CONTRACT COST)
Customer outsources its information technology data center

Term= 5 years plus two 1yr renewal options
Average customer relationship is 7 years
Entity spends ` 4,00,000. designing and building the technology platform needed to
accommodate outsourcing contract:
154 ACCOUNTS
Design services ` 50,000

Hardware ` 140,000
Software ` 100,000
Migration and testing of data centre ` 110,000
Total ` 400,000
How should such costs be treated?
SOLUTION:
Design services ` 50,000 Assess under Ind AS 115. Resulting

Asset would be amortised over 7 years
(i.e. include renewals)
Hardware ` 140,000 Account for asset under Ind AS 16
Software ` 100,000 Account for asset under Ind AS 38
Migration and testing ` 110,000 Assess under Ind AS 115. Any resulting asset would
of date centre be amortised over 7 years (i.e. include renewals)
TOTAL ` 400,000
QUESTION 61 (AMORTISATION)
An entity enters into a service contract with a customer and incurs incremental cost to
obtain the contact 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 buy it can
be renewed for subsequent one- year periods up to a maximum of 10 years. The average
contract term of similar contracts entered into entity is seven years.
Determine appropriate method of amortisation?
SOLUTION:
The most appropriate amortisation period is likely to be seven years (i.e. the initial term of
five years plus two anticipated one year renewals) because that is the period over which the
entity expects to provide serviced under the contract to which the capitalised costs relate.
QUESTION 62 (SERVICE CONCESSION ARRANGEMENTS)
A Ltd. is in the business of the infrastructure and has two divisions under the same; (I)
Toll Roads and (II) Wind Power. The brief details of these business and underlying project
details are as follows:
I. Bhilwara- Jabalpur Toll Project – the Company has commenced the construction of the
project in the current year and has incurred total expenses aggregating to ` 50 crores
as on 31st December, 20X1. Under IGAAP, The Company has recorded such expenses as
Intangible Assets in the book account. The brief details of the Concession Agreement
are as follows:
• Total Expenses estimated to be incurred on the project ` 100 crores;
• Fair Value of the construction services is ` 110 crores;
• Total Cash Flow guaranteed by the Government under the concession agreement is
` 200 crores;
• Finance revenue over the period of operation phases is ` 15 crores:
• Other income relates to the services provide 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 ` 100 crores. The fair value of such construction cost in
approximately ` 200 crores. The said concession agreement is Toll based project and
the Company needs to collect the toll from the users of the expressway. Under IGGAP,
UK Ltd. has recorded the expenses incurred on the said project as an Intangible
Assets.
Required:
(i) What would be the classification of Bhilwara – Jabalpur Toll Project as per applicable
Ind AS:? Give brief reasoning for your choice.
(ii) What would be the classification of Kolhapur- Nagpur Expressway Toll Project as per
applicable Ind AS? Give brief reasoning for your choice
(iii) Also, suggest suitable accounting treatment for preparation of financial statements
as per Ind AS for the above 2 projects.
QUESTION 63 (CONSIGNMENT AGREEMENT)
Manufacture M enters into a 60-day consignment contract to ship 1,000 dresses to Retailer
A’s Stores. Retailer A is obligated to pay Manufacture M ` 20 per dress when the dress is
sold to an end customer.
156 ACCOUNTS
During the consignment period, Manufacture M has contractual right to require Retailer A
to either return the dresses or transfer them to another retailer. Manufacture M is also
required to accept the return of the inventory. State when the control is transferred.
SOLUTION:
Manufacture M determines the control has been transferred to Retailer A on delivery, for
the following reasons:
(a) Retailer A does not have an unconditional obligation to pay for the dresses until they
have been sold to an end customer;
(b) Manufacturer M is able to require that the dresses be transferred to another retailer
at any time before Retailer A sells them to an end customer; and
(c) Manufacturer M is able to require the return of the dresses or transfer them to
another retailer.
Manufacturer M determines that control of the dresses transfers when they are sold to
an end customer i.e. when retailer A has an unconditional obligation to pay Manufacturer M
and can no longer return or otherwise transfer the dresses.
Manufacturer M recognizes revenue as the dressers are sold to the end customer.
QUESTION 64 (UPFRONT FEES)
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?
SOLUTION:
By selling a new connection, the entity promises to supply data services to customer.
Customer will not be able to benefit from just buying a data card and data services form
third party. The activity of registering and activating connection is not a service to customer
and therefore does not represent satisfaction of performance obligation.
Entity’s obligation is to provide data service and hence activation is not separate performance
obligation.
EXTRA QUESTIONS FOR SELF READING ON IND AS 115
QUESTION 65 (ALLOCATION OF TRANSACTION PRICE)
An entity sells boats for ` 30,000 each. The entity also provides mooring facilities for `
5,000 per annum. The entity sells these goods and services separately. If a purchaser of a
boat contracts to buy mooring facilities for a year there is a discount on the whole package.
Thus the ‘package’ costs ` 32,500. How should revenue be recognized?
SUGGESTED ANSWER:
AS per the standard, transaction price should be allocated between the performance
obligations in the ratio of SSPs.
In the given contract, there are two performance obligations i.e. sale of boats and mooring
facility.
SSP is very clearly observable in the given question. Hence the transaction price of `
32,500 should be allocated in the ratio of `30,000 :` 5,000
Sale value of boats = ` 27,857 (` 32,500 × 35,000/`35,000); and
Sale value of mooring facility = ` 4,643 (` 32,500 × ` 5,000/`35,000).
The revenue recognized on the sale (`28,857) of the boat should, therefore, be recognized
on delivery of the boat. The revenue recognized for the mooring facilities is ` 4,643, which
will be recognized evenly over the year for which the mooring facility is provided.
QUESTION 66
Continuation to the above question

Assume an entity X generally sells the boats in range between ` 29,000 and ` 32,500.
The entity enters into a contract to sell a boat and one year of mooring services to a
customer. The stated contract prices for the boat and the mooring services are ` 31,000
and ` 1,500 respectively?
How should entity X allocate the total transaction price of ` 32,500 to each performance
obligation?
SUGGESTED ANSWER:
The contract price for the boat (` 31,000) falls within the range entity X established for
stand-alone selling price: therefore, entity X could use the stated contract price for the
boat as the stand-alone selling price in the allocation.
Boat : ` 27,986 (` 32,500 × (` 31,000/` 36,000))
Mooring services :` 4,514 (` 32,500 × (` 5,000/` 36,000))
158 ACCOUNTS
QUESTION 67
Continuation to the above question

What is the contract price of the boat did not fall within the range like ` 28,000?
SUGGESTED ANSWER:
Entity X would need to determine a price within the range to use as the stand-alone price of
the boat in the allocation, such as the midpoint. Entity X should apply a consistent method
for determining the price within the range to use the stand-alone selling price.
QUESTION 68
A seller enters into a contract with a customer to sell products A.B and C for a total
transaction price of ` 1,00,000. The seller regularly sells product A for ` 25,000 and product
B for ` 45,000 on a stand-alone basis. Product C is a new product that has not been sold
previously, has no established price and is not sold by competitors in the market. Products
A and B are not regularly sold together at a discounted price. Product C is delivered on 1st
March, and products A and B are delivered on 1st April.
How should the seller determine the stand-alone selling price of product C?
SUGGESTED ANSWER:
The seller can use the residual approach to estimate to stand-alone selling price of product
C, because the seller has not previously sold or established a price for product C.
Prior to using the residual approach, the seller should assess whether any other observable
data exists to estimate the stand-alone selling price.
For example, although product C is a new product, the seller might be able to estimate a
stand-alone selling price through other methods, such as using expected cost plus a margin.
The seller has observable evidence that products A and B sell for ` 25,000 and ` 45,000
respectively, for a total of ` 70,000. The residual approach results in an estimates stand-
alone selling price of ` 30,000 for Product C (` 100,000 total transaction price less
` 70,000).
QUESTION 69 (RIGHT TO RETURN)
ABC Ltd. Sole 10,000 @ ` 1,000 limited on customary terms of right to return within a
month without any penalty. On the basis of past experience, ABC Ltd. assesses that 10%
refund is expected but it will be able to sale the returned goods at a profit. Cost of goods
is ` 700 per unit. Suppose 1,000 units are returned within the specified time and customer
gets replacement. Show necessary accounting entries.
SUGGESTED ANSWER:
As discussed above. The entity should recognise revenue to the extent it expects to be
entitled, a refund liability and an asset & corresponding adjustment to cost of sales – this
is because the entity has right to recover the product.
Date Particulars Dr. ` Cr. `

At the time of Bank a/c……….Dr 1,00,00,000
sale To Sales a/c 90,00,000
To Refund liability 10,00,000
(90% of the revenue recognized on the
basis of expected value method of the
amount of variable consideration and 10%
is recognised as refund liability)
At the time of Stock on sale or return a/c……..Dr 7,00,000

sale To Stock of finished goods 7,00,000
(Inventories with the customer are
recognised and respect of goods expected
to be refunded at cost i.e. 1,000 units x
700)
After the Refund liability a/c…………….. Dr. 10,00,000

goods are To Sale of goods a/c 10,00,000
replaced by
(Revenue recognised after the replacement
entity
of the returned goods- 1000 units and
refund liability is extinguished)
After the Stock of finished goods a/c…….Dr 7,00,000

goods are To Stock on sale or return a/c 7,00,000
replaced by
(Entries in respect of stock goods with the
entity
customer reversed after return of goods
by customer)
160 ACCOUNTS
QUESTION 70 (FINANCING COMPONENT IN ADVANCE PAYMENT)
On 1stjan, ABC Ltd enters into a non- cancellable contract with TVC Ltd for the sale of
an excavator for ` 3.50,000. The excavator will be delivered to TVC Ltd on 1st April. The
contract required TVC Ltd to pay ` 3,50,000 in advance on 1st Feb and TVC Ltd makes the
payment on 1st March. Prepare the journal entries that would be used by ABC Ltd to account
for this contract.
SUGGESTED ANSWER:
Date Particulars Debit Credit

1st Feb Receivable Dr 3,50,000
To contracts liability 3,50,000
(Being ABC Ltd recognises receivable
because it has an unconditional rights
to the consideration (i.e. the contract is
non-cancellable)
1st March Cash DR 3,50,000

To receivable 3,50,000
(Being TVC makes the payment ABC
recognise the cash collection)
1st April Contract liability DR 3,50,000

To revenue 3,50,000
(Being ABC recognises revenue when
excavator is delivered to TVC)
EXTRA QUESTIONS ON CONSTRUCTION CONTRACTS
QUESTION 1
Wisdom Ltd. a limited liability company that designs and builds race courses, commenced a
four–year contract early in 2015. The price was initially agreed at ` 1,20,00,000.
Revenue is recognized over the term of the contract as the performance obligation is
satisfied over time. Wisdom recognises revenue based on the percentage of costs incurred
to date compared to total expected costs. Relevant figures are as follows:
(Amt. in `’ 000)
2015 2016 2017 2018

Costs incurred in year 2,750 3,000 4,200 1,150
Anticipated future costs 7,750 7,750 1,550 -
Cash received to date 3,000 5,000 11,000 12,000
Required: Show how the above would be discloses in the financial statements of Wisdom
for each of the four years.
QUESTION 2
BGC Ltd. commenced work on three long-term contracts during the financial year to 31st
March 2018. The first contract with NP commenced on 1st July 2017 and had a total sales
value of ` 36 lakhs. It was envisaged that the contract would run for two years and that
the total expected costs would be ` 30 lakhs. On 31st March 2018 BGC revised its estimate
of the total expected cost to ` 31 Lakhs on the basis of the additional rectification costs
of ` 100,000 incurred on the contract during the current financial year. An independent
surveyor has estimated at 31st March 2018 that the contract is 40% complete. BGC has
incurred costs upto 31st march 2018 of ` 15 lakhs and has received payments on accounts
of ` 12lakhs.
The second contract with HP commenced on 1st Oct 2017 and was for a two year period This
contract was relatively small and has a total sales value of ` 60,000 The expected costs
were ` 48,000. A valuation has been carried out by on independent surveyor. The directors
of the company estimated at 31st March 2018 that the contract was 30% complete the costs
incurred to date were ` 19,000 and payments on account received were ` 21,000 A non-
current asset which had cost ` 8,000 and had been purchased specifically for the project
was considered to be obsolete as at 31st March 2018. The cost of Asset was included in the
amount of the costs incurred.
162 ACCOUNTS
The third contact with KP commenced on 1st Nov 2017 and was for 1.5 years. The total
sales value of contract was ` 24 lakhs and the total expects costs ` 20. Lakhs, payments on
account already received were ` 10 lakhs and total costs incurred to date were ` 700,000.
BGC had insisted on a large deposit from KP because the companies had not traded together
prior to the contract .The independent surveyor estimated that at 31st March 2018 the
contract was 25% complete.
The three contracts meet the requirements of Ind AS- 115 Revenue from Contracts with
Customer’ to recognize revenue over time as the performance obligations are satisfied over
time.
Required:
Draft financial statements extract for BGC in respect for the three construction contract
for the year ending 31st March 2018.
QUESTION 3
Comfort Ltd. enters into an agreement to construct a commercial building for a customer
on customer owned land for a consideration as follows:
Transaction Price ` 80 Lakhs

Bonus ` 5 Lakhs
` 85 Lakhs
The bonus is for on time completion of the construction. The construction is agreed to be
completed by 18 – months. At the inception, the company estimates cost of ` 60 lakhs to
complete the contract
The entity accounts for the promised bundle of goods and services as a single performance
obligation satisfied over time on accordance with Ind AS -115 because the customer controls
the building during the construction. The entity determines that the input measure, on the
basis of costs incurred provided an appropriate measure of progress towards complete
satisfaction of the performance obligation. It does not include the bonus at the inception
since it concludes that it is highly probable that there will be significant reversal as the
construction may not be complete within the specified Time.
At the end of the first year, the company incurred cost of ` 45 lakhs (i.e., 75% of the
total cost) and therefore recognized 75% of the transaction price (` 60 lakhs) as revenue.
Comfort Ltd. assessed that the constraint of recognising variable consideration still exists.
The agreement was modified at the beginning of the year 2. The work specification has
been changed and the transaction price is increased by ` 15 lakhs. Comfort Ltd. has revised
the cost estimate by additional ` 10 lakhs. The completion time been extended by another
6 months, Comfort Ltd. has assesses that will be able to complete the contract within the
specified time. How should Comfort Ltd. recognise the effect of contact modification.
QUESTION 4
Sun Led. Enters into construction contract with Moon Ltd. contract price is ` 100 lakh. Sun
Ltd has estimated costs to complete the work amounting to ` 80 lakhs. It has concluded
that cost incurred is appropriate measure of recognise progress of the work AS on 31
March, the reporting date it has incurred cost of ` 10 lakhs, But Moon Ltd. terminated
the contract because it wished to get out the contract, demolish, the construction and
pursue alternative design. As per terms and conditions, Sun Ltd. is entitled to het cost plus
reasonable profit. Can Sun Ltd recognise revenue?
QUESTION 5
On 1st July 2018 Zed Ltd. enters into a contract to construct a building as per the following
details:
` in lakhs
Year 0 Year 1 Year 2 Total

1.4.2018 18-19 19-20
Tendering costs 3 3
Negotiation expenses 8 8
Costs of obtaining the contract 11 11
Estimated costs to fulfil the contract
obligation:
Material 4,000 5,000 9,000
Labour 1,000 1,300 2,300
Insurance 2 3
Design 25 25
Technical assistance and approval 25 15 40
Depreciation on tangible assets used 10 10 20
in the construction
Other expenses 100 100 200
164 ACCOUNTS
Allocated expenses:
General Administrative expenses 100 100 200
Borrowing costs 50 55 105
22 53,12 6,581 11,915
Borrowing costs 15,000
It has been agreed that the designing, technical service and assistance shall be provided at
a stand-alone price of ` 81.25 which merged in the transaction price but payment shall be
mode in two instalment at the end of year 1 ` 50 lakhs and the balance on complete of the
contract.
The customer has agreed for the following payments terms for supply of material and other
contract services linked to progress in the construction.
31.03.2018 ` 4000 lakhs, 15.4.2018 ` 100 lakhs; 30.09.18 ` 1000 lakhs, 31.12.2018 ` 1000
lakhs, 30.06.2020 ` 1200 lakhs, 30.09.2020 ` 1400 lakhs, 31.12.2020 ` 4000 lakhs, balance
` 2218.75 lakhs on completion.
Assuming that budgeted and actual expenses are the same, Prepare a worksheet showing
year-wise and performance obligation – wise allocation of revenue profit and contract asset
QUESTION 6
Sky Ltd. is building a multi – units residential complex. Last year Sky Ltd entered into a
contract with a customer for a specific unit that is under construction. This 3- year contract
is expected to be completed next year. Company has determined the contract to single
performance obligation satisfied over time. Company gathered the following information
during the current year (i.e., second year of the contract).
Year end 31st

December (` In lakhs)
Cost to date 1,500
Future expected costs 1,000
Work certified to date 1,800
Expected sales value 3,200
Revenue recognized in earlier year 1,200
Cost recognized in earlier year 950
Calculate the figures to be recognized in the statement of profit of loss in respect of

revenue and cost for the year ended 31st December on both:
(i) A sale basis (an output method); and

(ii) A cost basis (an input method)
QUESTION 7
Bob Ltd. a construction company, enters into a contract on 15th April, 2017 to construct
a commercial Building for lee Ltd. on the land owned by lee Ltd. for a consideration of `
20,00,000. The expected cost of construction is ` 14,00,000 As per the agreed terms, if
the building is complete within 24 months, i.e., 14th April, 2019, then the Bob Ltd. is entitled
for a performance bonus of ` 4,00,000
As at year ended March 2018, Bob Ltd. has satisfied 60 per cent of its performance
obligation on the basis of costs incurred to date. In June 2018, Bob Ltd. and Lee Ltd.
agreed to modify the contract by changing the floor plan to the building . As a result, the
fixed consideration and expected costs increase by 3,00,000 and ` 2,40,000 respectively.
In addition the allowable time for achieving the performance bonus of 4,00,000 is extended
by 6 months (i.e., form 24 months to 30 months viz. 14th October 2019 from the original
contract inception date.
How should Bob Ltd. account for this contract modification?
166 ACCOUNTS
IND AS 115: REVENUES FROM CUSTOMER
QUESTION 1
Contractor P enters into 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.
SOLUTION:
P determines that because there is no substantive compensation amount payable by Q on
termination of the contract – i.e. no termination penalty in the contract – it is akin to a
contract to produce 10 CCTV Cameras that gives Customer Q an option to purchase an
additional 90 CCTV Cameras. Hence, contract is for 10 units.
QUESTION 2
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 ?
SOLUTION
M concludes that the said two contracts should be combined because, among other things,
P is a related party of Q, the contracts were entered into at nearly the same time and the
contracts were negotiated as a single commercial package, which is clearly evident from
the fact that discount is being offered if both the parties purchases the security system,
thereby also making the consideration in one contract dependent on the other contract.
QUESTION 3
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 performances obligations does the entity T Ltd. Have?
SOLUTION:
T Ltd. Concludes that the modem and router are each distinct and that the arrangement
includes three performance obligations (the modem, the router and the internet services)
based on the following evaluation :
Criterion 1 : Capable of being distinct

• C can benefit from the modem and router on their own because they can be resold for
more than scrap value.
• C can benefit from the internet services in conjunction with readily available resources
– i.e. either the modem and router are already delivered at the time of contract set-up,
they could be bought from alternative retail vendors or the internet service could be
used with different equipment.
Criterion 2 : Distinct within the context of the contract

• T Ltd. Does not provide a significant integration service.
• The modem, router and internet services do not modify or customise one another.
• C could benefit from the internet services using routers and modems that are not sold
by T Ltd. Therefore, the modem, router and internet services are not highly dependent
on or highly inter-related with each other.
QUESTION 4
V Ltd. Grants Customer C a three-year licence for anti-virus software. Under the contract,
V Ltd. Promises to provide C with when-and-if-available updates to that software during
the licence period. The updates are critical to the continued use of the anti-virus software.
Determine how many performance obligations does the entity have?
SOLUTION:
V Ltd. Concludes that the licence and the updates are capable of being distinct because the
anti-virus software can still deliver its original functionally during the licence period without
the updates. C can also benefit from the updates together with the licence transferred
when the contract is signed.
However, V Ltd. Concludes that the licence and the updates are not separately identifiable
because the software and the service are inputs into a combined item in the contract – i.e.
the nature of V Ltd.’s promise is to provide continuous anti-virus protection for the term
of the contract. Therefore, V Ltd. Accounts for the licence and the updates as a single
168 ACCOUNTS
QUESTION 5
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.
SOLUTION:
P evaluates whether the promises to provide printed copies and online access are separate
performance obligations. P determines that the arrangement includes two performance
obligations for the following reasons :
• The printed copies and online access are both capable of being distinct because the
customer could use them on their own.
• The printed copies and online access are distinct within the context of the contract
because they are different formats so they do not significantly customise or modify
each other, nor is there any transformative relationship into a single output.
QUESTION 6: 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 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 ?
SOLUTION:
In evaluating whether the telephone support is a separate performance obligation, K
Ltd. notes that the promise to provide telephone support free of charge to end users is
considered a service that meets the definition of a performance obligation when control of
the software product transfers to D. As a result, K Ltd. accounts for the telephone support
as a separate performance obligation in the transaction with D.
QUESTION 7 – 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.
SOLUTION:
The maintenance is treated as a separate performance obligation in the sale of the vehicle
to the dealer. Revenue from the sale of the vehicle is recognised when control of the
vehicle is transferred to the dealer. Revenue from the maintenance services is recognised
separately as and when the maintenance services are provided to the retail customer.
QUESTION 8
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.
SOLUTION:
Allocated price per unit (year) is calculated as follows :
Total estimated memberships is 175 members (Year 1 = 100; Year 2 = 50; Year 3 = 25) = 175
Total consideration is ` 12,00,000 {(100 × 7,500) + (50 × 6,000) + (25 × 6,000)}
Allocated price per membership is ` 6,857 approx. (12,00,000 / 175)
Basis on above, it is to be noted that although entity has collected ` 7,500 but revenue can
be recognised at ` 6,857 approx. per membership and remaining ` 643 should be recorded
as contract liability against option given to customer for renewing their membership at
discount.
QUESTION 9
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.
170 ACCOUNTS
− 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 ?
SOLUTION:
D Ltd. is primarily responsible for fulfilling the promise to provide advertising services.
Although F Ltd. delivers the placement service, D Ltd. directly works with customers to
ensure that the services are performed to their requirements. Even though D Ltd. does
not bear inventory risk and does not have discretion in setting the price, it controls the
advertising services before they are provided to the customer. Therefore, D Ltd. is a
principal in this case.
QUESTION 10: 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 within the 90-day coverage period for the assurance-type warranty.
Pass required journal entries.
SOLUTION:
The entity will record the following journal entries:
` `
Cash / Trade receivables Dr. 36,000
Warranty expense Dr. 2,000
To Accrued warranty costs (assurance-type warranty) 2,000
To Contract liability (service-type warranty) 4,000
To Revenue 32,000
(To record revenue and contract liabilities related to

warranties)
Cost of goods sold Dr. 14,400
To Inventory 14,400
(To derecognise inventory and recognise cost of goods sold)
The entity derecognises the accrued warranty liability associated with the assurance-type
warranty as actual warranty costs are incurred during the first 90 days after the customer
receives the computer. The entity recognises the contract liability associated with the
service-type warranty as revenue during the contract warranty period and recognises
the costs associated with providing the service-type warranty as they are incurred. The
entity had to determine whether the repair costs incurred are applied against the warranty
reserve already established for claims that occur during the first 90 days or recognised as
an expense as incurred.
QUESTION 11: 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 ` 1 per battery.
Pass required journal entries.
SOLUTION:
The entity will record the following journal entries :
Upon delivery of the batteries, the entity records the following entry :
` `
Cash / Receivables Dr. 2,00,000
To Revenue 1,70,000
To Contract liability (service warranty) 30,000
Warranty expense Dr. 10,000
To Accrued warranty costs (assurance warranty) 10,000
172 ACCOUNTS
The contract liability is recognised as revenue over the service warranty period (years 2-5).
The costs of providing the service warranty are recognised as incurred. The assurance
warranty obligation is used / derecognised as defective units are replaced / repaired during
the initial year of the warranty. Upon expiration of the assurance warranty period, any
remaining assurance warranty obligation is reversed.
QUESTION 12: 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.
SOLUTION:
Y determines that the transaction price is ` 1,600, comprising of ` 1,000 fixed amount plus
the fair value of the advertising slots i.e. ` 600.
If the fair value of the advertising slots could not be reasonably estimated, then the
transaction price would be ` 1,500 i.e. Y would use the stand-alone selling price of the goods
or services promised for the non-cash consideration.
QUESTION 13: CREDITS TO A NEW CUSTOMER
Customer C is in the middle of a two-year contract with Talco 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 D Ltd. for ` 800 per month, then D Ltd. promises at contract inception
to give C a non-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.
SOLUTION:
D Ltd. determines that it should account for the port-in credit as consideration payable
to a customer. This is because the credit will be applied against amounts owing to D Ltd.
Since, D Ltd. does not receive any distinct goods or services in exchange for this credit, it
will account for it as a reduction in the transaction price ` 17,200 [(` 800 × 24 months) -
` 2,000]. D Ltd. will recognise the reduction in the transaction price as the promised goods
or services are transferred.
QUESTION 14: DISCRETIONARY CREDIT
Telco G Ltd. grants a non-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?
SOLUTION:
G Ltd. concludes that this is a change in the transaction price and not a variable consideration.
Since, the credit does not relate to a satisfied performance obligation, the change in
transaction price resulting from the credit is accounted for a contract modification and
recognised over the remaining term of the contract. If, in this example, rather than
providing a one-time credit, G ltd. granted a discount of ` 5 per month for the remaining
contract term, then also G Ltd. would conclude that it was a change in the transaction
price. It would apply the contract modification guidance and recognise the credit over the
remaining term of the contract.
QUESTION 15
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?
SOLUTION:
The entity assesses the goods or services promised to the customer to determine which
goods and services are distinct in accordance with paragraph 27 of Ind AS 115. The entity
concludes that its only performance obligation is to grant the licence. The entity does
not have any contractual or implied obligations to change the licensed recording. The
licensed recording has significant stand-alone functionality (i.e. the ability to be played)
and, therefore, the ability of the customer to obtain the benefits of the recording is not
substantially derived from the entity’s ongoing activities. The entity therefore determines
that the contract does not require, and the customer does not reasonably expect, the entity
to undertake activities that significantly affect the licensed recording. Consequently, the
entity concludes that the nature of its promise is transferring the licence is to provide
174 ACCOUNTS
the customer with a right to use the entity’s intellectual property as it exists at the point
in time that it is granted. Therefore, the promise to grant the licence is a performance
obligation satisfied at a point in time. The entity recognises all of the revenue at the point in
time when the customer can direct the use of, and obtain substantially all of the remaining
benefits from, the licensed intellectual property.
QUESTION 16:
Assessing the nature of 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
functionally of the software.
Determine the nature of license.
SOLUTION:
Basis on the facts given in question it can be concluded that, although the updates and
upgrades will change the functionality of the software, they are not activities considered
in determining the nature of the entity’s promise in granting the licence. The activities of
X to provide updates or upgrades are not considered because they transfer a promised
good or service to Y – i.e. updates or upgrades are distinct from the license. Therefore, the
software licence provides a right to use the IP that is satisfied at a point in time.
QUESTION 17:
Assessing the nature of a film licence and the effect of marketing activites
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.
SOLUTION:
C would probably conclude that the licence provides a right to use its IP and, therefore,
is transferred at a point in time. There is no expectation that C will undertake activities
to change the form or functionality of the film. Because the IP has significant stand-alone
functionality. C’s marketing activities do not significantly affect D’s ability to obtain benefit
from the film, nor do they affect the IP available to D.
QUESTION 18:
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 ?
SOLUTION:
(i) The nature of D’s promise in this contract is to provide M with the right to access the
sports team’s IP and, accordingly, revenue from the licence will be recognised over
time. In reaching this conclusion, D considers all of the following facts :
- M reasonably expects D to continue to undertake activities that support and
maintain the value of the team name and logo by continuing to play games and field
a competitive team throughout the licence period. These activities significantly
affect the IP’s ability to provide benefit to M because the value of the team name
and logo is substantially derived from, or dependent on, those ongoing activities.
- The activities directly expose M to positive or negative effects (i.e. whether
D plays games and fields a competitive team will have a direct effect on how
successful M is in selling its products featuring the team’s name and logo).
- D’s ongoing activities do not result in the transfer of a good or a service to M as
they occur (i.e. the team playing games does not transfer a good or service to M).
(ii) Based on B’s customer business practices, Apparel Maker M probably does not
reasonably expect B to undertake any activities to change the form of the IP or to
support or maintain the IP. Therefore, B would probably conclude that the nature of
its promise is to provide M with a right to use its IP as it exists at the point in time at
which the licence is granted.
176 ACCOUNTS
QUESTION 19
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 machinery but cannot seek further compensation from P Ltd., even if the full
value of the amount owned 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 ?
SOLUTION:
In the given case, it is not probable that G Ltd. will collect the consideration to which it
is entitled in exchange for the transfer of the machinery. P Ltd.’s ability to pay may be
uncertain due to the following reasons:
(a) P Ltd. intends to pay the remaining consideration (which has a significant balance)
primarily from income derived from its food processing unit (which is a business
involving significant risk because of high competition in the said industry and P Ltd.’s
little experience);
(b) P Ltd. lacks sources of other income or assets that could be used to repay the balance
consideration; and
(c) P Ltd.’s liability is limited because the financing arrangement is provided on a non-
recourse basis.
In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.
In the given case G Ltd. should account for the non-refundable deposit of ` 1,00,000 payment
as a deposit liability as none of the events described in paragraph 15 have occurred—that is,
neither the entity has received substantially all of the consideration nor it has terminated
the contract. Consequently, in accordance with paragraph 16, G Ltd. will continue to account
for the initial deposit as well as any future payments of principal and interest as a deposit
liability until the criteria in paragraph 9 are met (i.e. the entity is able to conclude that it
is probable that the entity will collect the consideration) or one of the events in paragraph
15 has occurred. Further, G Ltd. will continue to assess the contract in accordance with
paragraph 14 to determine whether the criteria in paragraph 9 are subsequently met or

whether the events in paragraph 15 of Ind AS 115 have occurred.
QUESTION 20
Entity I sells 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 atleast ` 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 has granted similar price concessions
in comparable contracts.
Entity I concludes 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 ?
SOLUTION:
Entity I is likely to provide a price concession and accept an amount less than ` 2 million in
exchange for the machinery. The consideration is therefore variable. The transaction price
in this arrangement is ` 1.75 million, as this is the amount which entity I expects to receive
after providing the concession and it is not constrained under the variable consideration
guidance. Entity I can also conclude that the collectability threshold is met for ` 1.75
million and therefor contract exists.
QUESTION 21
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.
178 ACCOUNTS
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 ?
SOLUTION:
The transaction price is ` 90 per container based on entity J’s estimate of total sales
volume for the year, since the estimated cumulative sales volume of 2.8 million containers
would result in a price per container of ` 90. Entity J concludes that based on a transaction
price of ` 90 per container, it is highly probable that a significant reversal in amount of
cumulative revenue recognised will not occur when the uncertainty is resolved. Revenue
is therefore recognised at a selling price of ` 90 per container as each container is sold.
Entity J will recognise a liability for cash received in excess of the transaction price for
the first 1 million containers sold at ` 100 per container (that is, ` 10 per container) until the
cumulative sales volume is reached for the next pricing tier and the price is retroactively
reduced.
For the quarter ended 31st march, 20X8, entity J recognizes revenue of ` 63 million (700,000
containers × ` 90) and a liability of ` 7 million [700,000 containers × (` 100 - ` 90)].
Entity J will update its estimate of the total sales volume at each reporting date until the
uncertainty is resolved.
QUESTION 22
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 it estimates of the rebates
change.
How should entity K determine the transaction price ?
SOLUTION:
Entity K records sales to the retailer at a transaction price of ` 47.50 (` 50 less 25%
of ` 10). The difference between the per unit cash selling price to the retailers and the
transaction price is recorded as a liability for cash consideration expected to be paid to the
end customer. Entity K will update its estimate of the rebate and the transaction price at
each reporting date if estimates of redemption rates change.
QUESTION 23
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 ?
SOLUTION:
The transaction price is ` 950, because the expected reimbursement is ` 50. The expected
payment to the retailer is reflected in the transaction price at contract inception, as that
is the amount of consideration to which the manufacturer expects to be entitled after the
price protection. The manufacturer will recognise a liability for the difference between the
invoice price and the transaction price, as this represents the cash that it expects to refund
to the retailer. The manufacturer will update its estimate of expected reimbursement at
each reporting date until the uncertainty is resolved.
QUESTION 24
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 if offers for that television during
the following six months. Based on M’s extensive experience with similar arrangements, it
estimates the following outcomes.
Price reduction in next six months (`) Probability

0 70%
` 500 20%
` 1,000 10%

180 ACCOUNTS
SOLUTION:
After considering all relevant facts and circumstances, M determines that the expected
value method provides the best prediction of the amount of consideration to which it will
be entitled. As a result, it estimates the transaction price to be ` 4,800 per television – i.e.
(` 5,000 × 70%) + (` 4,500 × 20%) + (` 4,000 × 10%).
QUESTION 25
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%
SOLUTION:
Because there are only two possible outcomes under the contract. C determines that using
the most likely amount provides the best prediction of the amount of consideration to
which it will be entitled. C estimates the transaction price to be ` 1,30,000, which is the
single most likely amount.
QUESTION 26
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.
SOLUTION:
The licence provides F access to the IP as it exists it exists at any point in time in the
licence period. That is because :
- Y Ltd. is required to maintain the brand, which will significantly affect the IP by
affecting F’s ability to obtain benefit from the brand;
- any action by Y Ltd. may have a direct positive or negative effect on F; and
- these activities do not transfer good or service to F.
Therefore Y Ltd. recognises the up-front fee over the 10-year franchise period.

PROVISIONS, CONTINGENT LIABILITIES
AND CONTINGENT ASSETS
Example: Penalties or clean-up costs for unlawful environmental damage, both of which
would lead to an outflow of resources embodying economic benefits in settlement regardless
of the future actions of the entity.
Similarly, an entity should recognize a provision for the decommissioning costs of an oil
installation or a nuclear power station to the extent that the entity is obliged to rectify
damage already caused.
 n contrast, because of commercial pressure or legal requirements, an entity may
I
intend or need to carry out expenditure to operate in a particular way in the future.
 he entity can avoid the future expenditure by its future actions (for example by
T
changing its method of operation). In such a case, it has no present obligation for
that future expenditure and no provision is recognized.
Example: Fitting smoke filters in a certain type of factory.

Since, the entity can avoid the future expenditure by its future actions, for example by
changing its method of operation, it has no present obligation for that future expenditure
and no provision is recognized.
Example: Staff retraining as a result of changes in the income tax system
The government introduces a number of changes to the income tax system. As a result of
these changes, an entity in the financial services sector will need to retrain a large proportion
of its administrative and sales workforce in order to ensure continued compliance with
financial services regulation. At the end of the4 reporting period, no retraining of staff has
taken place. It is assumed that a reliable estimate can be made of any outflows expected.
Present obligation as a result of a past obligating event – There is no obligation because
no obligating event ( retraining) has taken place.
Conclusion – No provision is recognized.
Example: Legal requirement to fit smoke filters

Under new legislation, an entity is required to fit smoke filters to its factories by September
30,2011. The entity has not fitted the smoke filters. It is assumed that a reliable estimate
can be made of any outflows expected.
182 ACCOUNTS
(a) At March 31,2011, the end of the reporting period

Present obligation as a result of a past obligating event – There is no obligation
because there is no obligating even either for the cost of fitting smoke filters or for
fines under the legislation.
Conclusion – No provision is recognized for the cost of fitting the smoke filters.
(b) At March 31, 2012, the end of the reporting period
Present obligation as a result of a past obligating event- There is still no obligation
for the cost of fitting smoke filters because no obligating even has occurred (the
fitting of the filters). However, an obligation might arise to pay fines or penalties
under the legislation because the obligating even has occurred (the non-compliant
operation of the factory).
An outflow of resources embodying economic benefits in settlement – Assessment
of probability of incurring fines and penalties by non-compliant operation depends on
the details of the legislation and the stringency of the enforcement regime.
Conclusion – No provision is recognized for the costs of fitting smoke filters. However,
a provision is recognized for the best estimate of any fines and penalties that are
more likely than not to be imposed.
Example: Repairs and maintenance

Some assets require, in addition to routine maintenance, substantial expenditure every few
years for major refits or refurbishment and the replacement of major components. Ind AS
16, Property, Plant and Equipment gives guidance on allocating expenditure on an asset to its
component parts where these components have different useful lives or provide benefits in
a different pattern.
Example: Refurbishment costs – non legislative requirement
A furnace has a lining that needs to be replaced every five years for technical reasons. At
the end of the reporting period, the lining has been in use for three years. It is assumed
that a reliable estimate can be made of any outflows expected.
Present obligation as a result of a past obligating event – There is no present obligation.
The cost of replacing the lignin is not recognized because, at the end of the reporting period,
no obligation to replace the lining exists independently of the company’s future actions –
even the intention to incur the expenditure depends on the company deciding to continue
operating the furnace or to replace the lining. Instead of a provision being recognized, the
depreciation of the lining takes account of its consumption, i.e. it is depreciated over five
years. The re-lining costs then incurred are capitalized with the consumption of each new
lignin shown by depreciation over the subsequent five years.
Example: Refurbishment costs – legislative requirement.

An airline is required by law to overhaul its aircraft once every three years. It is assumed
that a reliable estimate can be made of any outflows expected.
Present obligation as a result of a past obligating event – There is no present obligation.
The costs of overhauling aircraft are not recognized as a provision for the same reasons
as the cost of replacing the lining is not recognized as a provision in Example 14. Even a
legal requirement to overhaul does not make the costs of overhaul a liability, because no
obligation exists to overhaul the aircraft independently of the entity’s future actions – the
entity could avoid the future expenditure by its future actions, for example by selling the
aircraft. Instead of a provision being recognized, the depreciation of the aircraft takes
account of the future incidence of maintenance costs, i.e., an amount equivalent to the
expected maintenance cots is depreciated over three years.
Example
An entity may not be obliged to remedy the consequences due to causing of environmental
damage by it. However, the causing of the damage will become an obligating event when a
new law requires the existing damage to be rectified or when the entity publicly accepts
responsibility for rectification in a way that creates a constructive obligation.
 Where details of a proposed new law have yet to be finalized, an obligation would
arise only when the legislation is virtually certain to be enacted as drafted. For the
purpose of Ind AS 37 , such an obligation is treated as a legal obligation. Differences
in circumstances surrounding enactment make it impossible to specify a single event
that would make the enactment of a law virtually certain. In many cases if will be
impossible to be virtually certain of the enactment of a law until it is enacted.
Example: Contaminated land – legislation virtually certain to be enacted

An entity in the oil industry ( having 31 March year-end) causes contamination but cleans up
only when required to do so under the laws of the particular country in which it operates.
One country in which it operates has had no legislation requiring cleaning up, and the entity
has been contaminating land in that country for several years. At March 31, 2011, it is
virtually certain that a draft law requiring a clean-up of land already contaminated will be
enacted shortly after the year-end. It is assumed that a reliable estimate can be made of
any outflows expected.
Present obligation as a result of a past obligating event – The obligating event is the
contamination of the land because of the virtual certainty of legislation requiring cleaning
up.
184 ACCOUNTS
An outflow of resources embodying economic benefits in settlement – Probable.

Conclusion – A provision is recognized for the best estimate of the costs of the clean-up.
Example: Contaminated land and constructive obligation

An entity in the oil industry (having 31 March year-end) causes contamination and operates
in a country where there is no environmental legislation. However, the entity has a widely
published environmental policy in which it undertakes to clean up all contamination that
it causes. The entity has a record of honoring this published policy. It is assumed that a
reliable estimate can be made of any outflows expected.
contamination of the land, which gives rise to a constructive obligation because the conduct
of the entity has created a valid expectation on the part of those affected by it that the
entity will clean up contamination.
Conclusion –A provision is recognized for the best estimate of the costs of clean-up.
Example: Offshore oilfield

An entity operates an offshore oilfield where its licensing agreement requires it to remove
the oil rig at the end of production and restore the seabed. 90% of the eventual costs
relate to the removal of the oil rig and restoration of damage caused by building it, and 10%
arise through the extraction of oil. At the end of the reporting period, the rig has been
constructed but no oil has been extracted. It is assumed that a reliable estimate can be
made of any outflows expected.
Present obligation as a result of a past obligating event - The construction of the oil rig
creates a legal obligation under the terms of the license to remove the rig and restore the
seabed and is thus an obligating event. At the end of the reporting period, however, there
is no obligation to rectify the damage that will be caused by extraction of the oil.
An outflow of resources embodying economic benefits in settlement – Probable
Conclusion - A provisions is recognized for the best estimate of ninety per cent of the
eventual costs that relate to the removal of the oil rig and restoration of damage caused by
building it. These costs are included as part of the cost of the oil rig. The 10% of costs that
arise through the extraction of oil are recognized as a liability when the oil is extracted.
Example: A Court Case

After a wedding in 2011-2012, tend people died, possibly as a result of food poisoning from
products sold by the entity. Legal proceedings are started seeking damages from the entity
but it disputes liability. Up to the date of approval of the financial statements for the year
to 31 March 2012 for issue, the entity’s lawyers advise that it is probable that the entity
will not be found liable. However, when the entity prepares the financial statements for
the year to 31 March 2013, its lawyers advise that, owing to developments in the case, it is
probable that the entity will be found liable. It is assumed that a reliable estimate can be
made of any outflows expected.
(a) At 31 March 2012

Present obligation as a result of a past obligating event- On the basis of the
evidence available when the financial statements were approved, there is no obligation
as a result of past events.
Conclusion - No provision is recognized. The matter is disclosed as a contingent liability
unless the probability of any outflow is regarded as remote.
(b) At 31 March 2013
Present obligation as a result of a past obligating event – On the basis of the
evidence available, there is a present obligation.
Conclusion – A provision is recognized for the best estimate of the amount to settle
the obligation.
Example: A single guarantee

On March 31, 2011, Entity A gives a guarantee of certain borrowings of Entity B, whose
financial condition at that time is sound. During 2011-2012, the financial condition of Entity
B deteriorates and at June 30, 2011 entity B files for protection from its creditors.
This contract meets the definition of an insurance contract in Ind AS 104, Insurance
Contracts, but is within the scope of Ind AS 109, financial Instruments, because it also
meets the definition of a financial guarantee contract in Ind AS 109. If an issuer has
previously asserted explicitly that it regards such contracts as insurance contracts and has
used accounting applicable to insurance contracts, the issuer may elect to apply either Ind
AS 109 or Ind AS 104 to such financial guarantee contracts. Ind AS 104 permits the issuer
to continue its existing accounting policies for insurance contracts if specified minimum
requirements are satisfied. Ind AS 104 also permits changes in accounting policies that
meet specified criteria. The following is an example of an accounting policy that Ind AS 104
permits and that also complies with the requirements in Ind AS 109 for financial guarantee
contracts within the scope of Ind AS 109.
186 ACCOUNTS
It is assumed that a reliable estimate can be made of any outflows expected.
(a) At March 31, 2011

Present obligation as a result of a past obligating event - The obligating event is
the giving of the guarantee, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement – No outflow
of benefits is probable at March 31, 2011.
Conclusion – The guarantee is recognized at fair value.
(b) At March 31, 2012
Present obligation as a result of a past obligating event – The obligating event is
the giving of the guarantee, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement – At March 31,
2012, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation.
Conclusion - The guarantee is subsequently measured at the higher of (a) the
best estimate of the obligation, and (b) the amount initially recognized less, when
appropriate, cumulative amortization in accordance with Ind AS 18, Revenue.
 Where there are a number of similar obligations (e.g. Products warranties or similar
contracts) the probability that an outflow will be required in settlement is determined
by considering the class of obligations as a whole. Although the likelihood of outflow
for any one item may be small, it may well be probable that some outflow of resources
will be needed to settle the class of obligations as a whole. If that is the case, a
provision should be recognized (if the other recognition criteria are met).
Example: Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under
the terms of the contract for sale the manufacturer undertakes to make good, by repair
or replacement, manufacturing defects that become apparent within three years from the
date of sale. On past experience, it is probable (i.e. more likely than not) that there will be
some claims under the warranties. It is assumed that a reliable estimate can be made of
any outflows expected.
Present Obligation as a result of a past obligating event – The obligating event is the
sale of the product with a warranty, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in Settlement – Probable for the
warranties as a whole.
Conclusion – A provision is recognized for the best estimate of the cost of making good
under the warranty products sold before the end of the reporting period.
Example: Refunds policy

A retail store has a policy of refunding purchases by dissatisfied customers, even through
it is under no legal obligation to do so. Its policy of making refunds is generally known. It is
assumed that a reliable estimate can be made of any outflows expected.
sale of the product, which gives rise to a constructive obligation because the conduct of
the store has created a valid expectation on the part of its customers that the store will
refund purchases.
An outflow of resources embodying economic benefits in settlement – Probable, a
proportion of goods are returned for refund.
Conclusion – A provision is recognized for the best estimate of he cost of refunds.
Example
If an entity has an environmental obligation to clean up the drinking water that got
contaminated, there might be a number of different ways to carry out this work. Each
of these methods would have different probabilities of success and would cost different
amounts. In such case, the entity might choose the method which has the most likely
possibility of success.
Example
If an entity has to rectify a serious fault in a major plant that it has constructed for a
customer, the individual most likely outcome may be for the repair to succeed at the first
attempted at a cost of ` 1,000.but a provision for a larger amount is made if there is a is a
significant change that further attempts will be necessary.
QUESTION 1
X Shipping Ltd. is required by law to overhaul its shipping fleet once n every 3 years. The
company’s finance team was of the view that recognizing the cost only when paid would
prevent matching of revenue earned all the time with certain costs of large amounts which
are incurred occasional. Thereby, it has formulated an accounting policy of providing in its
books of account for the future costs of maintenance ( overhauls, annual inspection etc.)
by calculating a rate per hours sailed on sea and accumulating a provision over time. The
provision is adjusted when the expenditure is actually incurred. Is the accounting policy of
X Shipping Ltd. correct?
SOLUTION:
A provision is made for a present obligation arising out of a past event. Overhauling does
not arise out of past event. Even a legal requirement to overhaul does not make the cost of
overhaul a liability, because no obligation exists to overhaul the ships independently of the
188 ACCOUNTS
company’s future actions – the company could avoid the future expenditure by its future
actions for example by selling the ships. So there is no present obligation.
As per the standard, financial statements deal with the financial position of an entity at
the end of its reporting period and not its possible position in the future. Therefore, no
provision is recognized for costs that need to be incurred to operate in the future. The
only liabilities recognized in an entity’s balance sheet are those that exist at the end of the
reporting period.
Therefore, the accounting policy of X Shipping Ltd. is not correct. The company should
adopt the component approach in Ind AS 16 , Property, Plant and Equipment, for accounting
for the refurbishment costs.
 An obligation always involves another party to whom the obligation is owed. It is not
necessary, however, to know the identity of the party to whom the obligation is owed.
 A management or board decision does not give rise to a constructive obligation at the
end of the reporting period unless the decision has been communicated before the end
of the reporting period to those affected by it in a sufficiently specific manner to
raise a valid expectation in them that the entity will discharge its responsibilities.
 An event that does not give rise to an obligation immediately may do so at a later date,
because of changes in the law or because an act ( for example, a sufficiently specific
public statement) by the entity gives rise to a constructive obligation.
QUESTION 2
X Chemical Ltd. is operating in the vicinity of a river since 20 years. A community living near
X Chemical Ltd. claims that its operation has caused contamination of drinking water. X
Chemical Ltd. has received notice from the governmental environmental agency that official
investigations will be made into claims of pollution caused by the entity. If it is found that
X Chemical Ltd. has caused contamination, then penalties and fine would be levied on it.
X Chemical Ltd. believes that it has implemented all environmental safety measures to an
extent that it is unlikely to cause pollution. Management is not sure whether it has all the
information about the entire 20 years. Therefore, neither management not external experts
are able to assess X Chemical Ltd’s responsibility until the investigation has completed.
In such situation, how should management of X Chemical Ltd. account for a liability?
SOLUTION:
As per the standard in the present case, the available evidence does not support a conclusion
that a present obligation exists. However, there is a possible obligation which exists and will
be confirmed upon completion of investigations. Therefore, management should disclose the
contingent liability for potential penalties and fines that may be imposed if contamination
is proved.
QUESTION 3
X Ltd. has entered into an agreement with its selling agent Y, in accordance with which X
Ltd. has to pay a base percentage of commission on export sales and an additional commission
is to be paid if the export incentives are received. As per the accounting policy of X Ltd.,
it recognizes export incentives when actually realized, on account of the uncertainty in
realizing such incentives. Export incentive shave not been received for the year 2011-2012,
however X Ltd. is hopeful of receiving the export incentives in the year 2012-2013. In the
financial statements for 2011-2012, should X Ltd. provide for both base commission and
additional commission?
SOLUTION:
So far as the base percentage of sales commission is concerned, it is a present obligation
arising out of past events. The obligating event takes place when the sales are made and
also since commission is based on percentage of sale, reliable estimation can also be made.
Therefore, the base percentage of sales commission should be provided.
However, in respect of additional commission, it is to be paid when the export incentives
are recognized and export incentives are recognized only when it is received. Therefore ,
the obligating event will arise only when export incentives are received. Hence, no provision
for additional commission is to be made in financial year 2011-2012. The expectation of X
Ltd. to received the export incentives in next year would not make any difference as on 31
March 2012.
QUESTION NO 4
X Sugars Ltd. has entered into a sale contract of ` 3,00,00,000 with Y Choclates Ltd. for
the supply of sugar during 2011-2012. As per the contract the delivery is to be made within
2 months from the date of contract. In case of failure to delivery within the schedule, X
Sugars Ltd has to pay compensation of ` 30,00,000 to Y Chocolates Ltd.
During the transit, the vehicle carrying the sugar met accident and X Sugar Ltd. lost the
entire consignment. It is, however covered by an insurance policy. According to the report
of the surveyor, the amount is collectible, subject to the deductible clause [i.e. 15% of the
claim] in the insurance policy. The cost of goods lost was ` 2,50,00,000.
Before the financial year end, X Sugar Ltd. received informal information from the insurance
company that their claim had been processed and the payment had been dispatched for
85% of the claim amount. Meanwhile Y Chocolates Ltd. has made demand of ` 30,00,000
since the goods were not delivered on time.
What provision or disclosure would X Ltd. need to make at year end?
190 ACCOUNTS
SOLUTION:
As per the standard, where an inflow of economic benefits is probable, an entity should
disclose a brief description of the nature of the contingent assets at the end of the
reporting period, and, where practicable, an estimate of their financial effect, measured
using the principles set out in Ind AS 37.
So X Sugars Ltd. would need to disclose the contingent asset of ` 2,12,50,000 (` 2,50,00,000)
x 85%) at the end of the financial year 2011-2012.
It would also need to make provision of ` 30,00,000 towards the clam of Y Chocolates Ltd.
QUESTION NO 5
An entity sells goods with a warranty under which customers are covered for the cost of
repairs of any manufacturing defects that become apparent within the first six months
after purchase. If minor defects were detected in all products sold, repair cost of ` 1
million would result. If major defects were detected in all products sold, repair cost of
` 4 million would result. The entity’s past experience and future expectations indicate that,
for the coming year, 75% of the goods sold will have no defects, 20% of the goods sold will
have minor defects and 5% of the goods sold will have major defects. In accordance with
the standard, an entity assesses the probability of an outflow for the warranty obligations
as a whole.
SOLUTION:
The expected value of the cost of repairs is:
(75% of nil) + (20% of 1 m) + (5% of 4 m) = ` 4,00,000
 Where a single obligation is being measured, the individual most likely outcome may be
the best estimate of the liability. However, even in such a case, the entity considered
other possible outcomes.
 Where other possible outcomes are either mostly higher or mostly lower than the
most likely outcome, the best estimate will be a higher or lower amount.
QUESTION 6
X Solar Power Ltd, a power company, has a present obligation to dismantle its plant after
35 years of useful life. X Solar Power ltd. Cannot cancel this obligation or transfer to third
party. X Solar Power Ltd. Has estimated the total cost of dismantling at ` 50,00,000,
the present value of which is ` 30,00,000. Based on the facts and circumstances. X Solar
Power Ltd. Considers the risk factor of 5% i.e. the risk that the actual outflows would be
more from the expected present value. How should X Solar Power Ltd. Account for the
obligation?
SOLUTION
The obligation should be measured at the present value of outflows i.e., ` 30,00,000. Further
a risk adjustment of 5% i.e. ` 1,50,000 (` 30,00,000 x 5%) would be made.
So, the liability will be recognised at = ` 30,00,000 + ` 1,50,000 = ` 31,50,000.
QUESTION NO 7
X Chemicals Ltd. Engaged in the chemical industry causes environmental damage by dumping
waste in the river near its factory. It does not clean up because there is no environmental
legislation requiring cleaning up and X Chemicals Ltd. Is causing damage for last 40 years.
As at March 31, 2012 the state Legislature has passed a path breaking legislation requiring
all polluting factories to clean-up the river water already contaminated. The formal Gazette
notification of the law is pending. How should X Chemicals Ltd. Deal with this situation?
SOLUTION:
The obligating event is the contamination of water and because of the virtually certainty of
legislation requiring cleaning up, an outflow of resources is certain. It is possible to arrive
at best estimated cost for the cleanup activity. So, a provision should be recognized in the
books of X Chemicals Ltd. For 2011-2012.
QUESTION NO 8
X Beauty Solutions Ltd. Is selling cosmetic products under its brand name ‘B’, but it is
getting its product manufactured from Y Ltd. It has an understanding with Y ltd. That if the
company becomes liable for any damage claims, due to any injury 9or harm to the customer
f the cosmetic products 30% will be reimbursed to it by Y Ltd. During the financial year
2011-1012, a claim of ` 30,00,000 becomes payable to customers by X Beauty Solutions ltd.
account for the claim that becomes payable?
SOLUTION:
X Beauty Solutions Ltd. will get reimbursement of ` 9,00,000 (` 30,00,000 x 30%) from
Y Ltd. So, X Beauty Solutions Ltd. should make a provision of ` 21,00,000 (` 30,00,00 -
` 9,00,000) in financial year 2011-2012 and disclose a contingent liability of ` 9,00,000. The
contingent liability is recognized keeping in view the fact that in case Y Ltd. does not pay,
then X Beauty Solutions Ltd. will be liable for the whole claim.
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QUESTION 9
X Telecom Ltd. has income tax litigation pending before appellate authorities. Legal advisor’s
opinion is that X Telecom Ltd. will lose the case and estimate that liability of ` 1,00,000
may arise in two years. The liability is recognized on a discounted basis. The discount rate
at which the liability has been discounted is 10% and it is assumed that discount rate does
not change over the period of 2 years. How should X Telecom Ltd. calculate the amount of
borrowing cost?
SOLUTION:
The discount factor of 10% for 2 years is 0.827. X Telecom Ltd. will initially recognized
provision for ` 82,70,000 (` 1,00,00,000 x 0.827)
The discount factor of 10% at the end of year 1 is 0.909. At the end of year 1, provision
amount would be ` 90,90,000 (` 1,00,00,000 x 0.909)
As per the standard, the difference between the two present values i.e. ` 8,20,000 is
recognized as a borrowing cost in year 1.
At the end of the Year 2, the liability would be ` 1,00,00,000.
The difference between the two present values i.e. ` 9,10,000 (` 1,00,00,000 - ` 90,90,000)
is recognized as borrowing cost in year 2.
QUESTION 10
X Packaging Ltd. has two segments, packing division and paper division. In March 2011, the
board of directors approved and announced a formal plan to sell the paper division in June
2011. Operating losses of the paper division are estimated to be approximately ` 50,00,000
during the period from April 1, 2011 to the expected date of disposal. Management of X
Packaging Ltd. wants to include the future operating loss of ` 50,00,000 in a provision
for restructuring in the financial statements for the period ended March 31, 2011. Can X
Packaging Ltd. include these operating losses in a provision for restructuring?
SOLUTION:
Standard states that provision should not be made for future operating losses. Since Ind
AS 37 prohibits the recognition of future operating losses, so X Packaging Ltd. should not
include these future operating losses in a provision for restructuring even though these
losses relate to the disposal group.
QUESTION 11
X Metals Ltd. had entered into a non-cancellable contract with Y Ltd. to purchase 10,000
units of raw material at ` 50 per unit at a contract price of ` 5,00,000. As per the terms
of contract, X Metals Ltd. would have to pay ` 60,000 to exit the said contract. X Metals
Ltd. has discontinued manufacturing the product that would use the said raw material. For
that X Metals Ltd. has identified a third party to whom it can sell the said raw material at
` 45 per unit.
How should X Metals Ltd. account for this transaction in its books of account in respect of
the above contract?
SOLUTION:
These circumstances do indicate an onerous contract. The only benefit to be derived from
the purchase contract costing ` 5,00,000 are the proceeds from the sale contract, which
are ` 4,50,000. Therefore a provision should be made for the onerous element of ` 50,000,
being the lower of cost of fulfilling the contract and the penal cost of cancellation of `
60,000.
QUESTION 12
X Cements Ltd. has three manufacturing units situated in three different states of India.
The board of directors of X Cements Ltd., in their meeting held on January 10, 2011,
decided to close down its operations in one particular state on account of environmental
reasons. A detailed formal plan for shutting down the above unit was also formalized and
agreed by the board of directors in that meeting, which specific the approximate number
of employees who will be compensated and expenditure expected to be incurred. Date of
implementation of plan has also been mentioned. Meetings were also held with customers,
suppliers, and workers to communicate the features of the formal plan to close down the
operations in the said state, and representatives of all interested parties were present in
those meetings. Do the actions of the board of directors create constructive obligation
that needs a provision for restructuring?.
SOLUTION:
As per Ind AS 37, the conditions prescribed are:
(a) There should be detailed formal plan of restructuring;
(b) Which should have raised valid expectations in the minds of those affected that the
entity would carry out the restructuring by announcing the main features of its plans
to restructure.
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The board of directors did discuss and formalize a formal plan of winding up the operation
in the above said state. This plan was communicated to the parties affected and created a
valid expectation in their minds that X Cements Ltd. would go ahead with its plans to close
down operations in that state. Thus, there is a constructive obligation that needs to be
provided at year – end.
TEST YOUR KNOWLEDGE
QUESTION 1
In 2017, an entity involved in nuclear activities recognizes a provision for decommissioning

costs of ` million. The provision is estimated using the assumption that decommissioning will
take place in 60-70 years time. However, there is a possibility that it will not take place
until 100-110 years’ time, in which case the present value of the costs will significantly
reduced. Draft the note assuming discount rate 2%.
SOLUTION:
A provision of ` 300 million has been recognized for decommissioning costs. These costs
are expected to be incurred between 2077 and 2087; however, there is a possibility that
decommissioning will not take place until 2117-2127. If the cost were measured based upon
the expectation that they would not be incurred until 2117-2127 the provision would be
reduced to ` 136 million. The provision has been estimated using existing technology, at
current prices, and discounted using a real discount rate of 2%.
QUESTION 2
An entity is involved in dispute with a competitor, who is alleging that the entity has
infringed patents and is seeking damages of ` 100 million. The entity recognizes a provision
for its best estimate of the obligation, but discloses none of the information required by
the standard. Draft the note.
SOLUTION:
Litigation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed patents and is seeking damages of ` 100 million.
If entity has created reasonable provision on the basis of best estimates then it indicates
that enterprise has estimation of probable outflows. So directors should disclose the
reasons for such provisions.
QUESTION 3
X Ltd. is operating in the tlecom industry. During the Financial Year 2011-2012, the Income
Tax Authorities sent a scrutiny assessment notice under Section 143 (2) of the Income-tax
Act 1961, in respect to return filed under Section 139 of this Act for Previous year 2010-
2011 (Assessment Year 2011-2012) and initiated assessment proceedings on account of a
deduction claimed by the company which in the view of the authorities was inadmissible.
During the Financial year 2011-2012 itself, the assessment proceedings were complete and
the assessing officer did not allow the deduction and raised a demand of ` 1,00,00,000
against the company. The company contested such levy and filed an appeal with the Appellate
authority. At the end of the financial year 20112-2012, the appeal had not been heard. The
company is not confident whether that the company would win the appeal. However, the
company was advised by its legal counsel that on a similar matter, two appellate authorities
of different jurisdictions had given conflicting judgments, one in favour of the assesse and
one against the assesse. The legal counsel further stated it had more than50% chance of
winning the appeal. Please advise how the company should account for these transactions in
the financial year 2011-2012.
SOLUTION:
Ind As 37 provides that in rare cases if not clear whether there is a present obligation,
for example, in a lawsuit, it may be disputed either whether certain events have
occurred or whether those events result in a present obligation. In such a case, an
entity should determine whether a present obligation exists at the end of the reporting
period by taking account of all available evidence, For example, the opinion of experts.
In the present case, the company is not confident that whether it would win the appeal. By
taking into account the opinion of he legal counsel, it is not sure that whether the company
would win the appeal. On the basis of such evidence, it is more likely than not that a present
obligation exists at the end of the reporting period. Therefore the entity should recognize
a provision. The company should provide for a liability of ` 1,00,00,000.
QUESTION 4
An entity is a telecom operator. Laying of cables across the world is a requirement to enable
the entity to run its business. Cables are also laid under the sea and contracts are entered
into for the same. By virtue of laws of the countries through which the cable passes, the
entity is required to restore the sea bed at the end of the contract period. What is the
nature of obligation that the entity has in such a case?
196 ACCOUNTS
SOLUTION:
Paragraph 14 of Ind AS 37 states “A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions
are not met, no provision shall be recognised.”
Further, with regard to past event paragraph 17 of Ind AS 37 states “A past event that
leads to a present obligation is called an obligating event. For an event to be an obligating
event, it is necessary that the entity has no realistic alternative to setting the obligation
created by the event. This is the case only:
(a) Where the settlement of the obligation can be enforced by law; or
(b) In the case of a constructive obligation, where the event (which may be an action of
the entity) creates valid expectations in other parties that entity will discharge the
obligation.”
On the basis of the above, provision should be recognised as soon as the obligating event
takes place because the entity is under legal obligation to restore the sea bed, provided
the other recognition criteria stated in paragraph 14 reproduced above are met. Moreover,
the amount of the provision would depend on the extent of the obligation arising from the
obligating event. In the instant case, an obligating event is the laying of cables under the
sea. To the extent the cables have been laid down under the sea, a legal obligation has
arisen and to that extent provision for restoration of sea bed should be recognised.
QUESTION 5
Entity A is a dealer in washing machines. Entity A offers to its customers a scheme whereby
it states that after a period of 3 years, the entity offers to buy back the washing machine
at a fixed price which is expected to be less than the fair value of the machine at the end of
three years, The credit emanating therefrom will be required to be used by the customer
for buying a new washing machine, i.e., new washing machine will be sold at a discounted
price.
SOLUTION:
Paragraph 14 of Ind AS 37 states “A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past event;
(b) It is probable that an outflow of resources embodying economic benefits will be

required to settle the obligation; and
(c) a reliable estimated can be made of the amount of the obligation. If these conditions
are not met, no provision shall be recognised.”
In the instant case, assuming that the entity recognises the entire revenue on the sale of
first washing machine, a provision for expected cost of meeting the obligation of selling
the second machine at discounted price should be recognised because sale of first washing
machine is the past event.
Moreover, past experience indicates that customers generally opt of this scheme, therefore,
probability of outflow of resources in more likely than not. Since it is a normal practice
which the entity follows, reliable estimate of the amount of meeting the obligation can
also be made.
198 ACCOUNTS
QUESTION 1
ABC Limited is an automobile component manufacturer. The automobile manufacturer has

specified a delivery schedule, non-adherence to which will entail a penalty. As on 31s’ March,
20X1, the reporting date, the manufacturer has a delivery scheduled for June 20X2.
However, the manufacturer is aware that he will not be able to meet the delivery schedule
in June 20X2.
Determine whether the entity has a present obligation as at 31s1 March, 20X1, requiring
recognition of provision.
QUESTION 2
ABC Ltd. has an obligation to restore the seabed for the damage it has caused in the past.
It has to pay ` 10,00,000 cash on 31st March 20X3 relating to this liability. ABC Ltd.’s
management considers that 5% is an appropriate discount rate. The time value of money is
considered to be material.
Calculate the amount to be provided for at 31st March 20X1 for the costs of restoring the
seabed.
QUESTION 3
U Ltd. is a large conglomerate with a number of subsidiaries. It is preparing consolidated

financial statements as on 31s1 March 20X2 as per the notified Ind AS. The financial
statements are due to be approved for issue on 15th May 20X2. Following are a few
transactions that have taken place in some of its subsidiaries during the year:
G Ltd. is a wholly owned subsidiary of U Ltd. engaged in management consultancy services.
On 31st January 20X2, the board of directors of U Ltd. decided to discontinue the business
of G Ltd. from 30th April 20X2. They made a public announcement of their decision on 15th
February 20X2.
G Ltd. does not have many assets or liabilities and it is estimated that the outstanding
trade receivables and payables would be settled by 31st May 20X2. U Ltd. would collect
any amounts still owed by G Ltd.’s customers after 31st May 20X2. They have offered
the employees of G Ltd. termination payments or alternative employment opportunities.
Following are some of the details relating to G Ltd.:
- On the date of public announcement, it is estimated by G Ltd. that it would have to pay
` 540 lakhs as termination payments to employees and the costs for relocation of employees
who would remain with the Group would be ` 60 lakhs. The actual termination payments
totalling to ` 520 lakhs were made in full on 15th May 20X2. As per latest estimates made
on 15th May 20X2, the total relocation cost is ` 63 lakhs.
G Ltd. had taken a property on operating lease, which was expiring on 31st March 20X6.
The present value of the future lease rentals (using an appropriate discount rate) is ` 430
lakhs. 0n 15th May 20X2, G Ltd. made a payment to the lessor of ` 410 lakhs in return for
early termination of the lease.
The loss after tax of G Ltd. for the year ended 31st March 20X2 was ` 400 lakhs. G Ltd.
made further operating losses totaling ` 60 lakhs till 30th April 20X2.
What are the provisions that the Company is required to make as per Ind AS 37?
QUESTION 4
A company manufacturing and supplying process control equipment is entitled to duty draw
back if it exceeds its turnover above a specified limit. To claim duty drawback, the company
needs to file application within 15 days of meeting the specified turnover. If application
is not filed within stipulated time, the Department has discretionary power of giving duty
draw back credit. For the year 20X1-20X2 the company has exceeded the specified limit
of turnover by the end of the reporting period. However, duty drawback can be claimed on
filing of application within the stipulated time or on discretion of the Department if filing
of application is late. The application for duty drawback is filed on April 20, 20X2, which
is after the stipulated time of 15 days of meeting the turnover condition. Duty drawback
has been credited by the Department on June 28, 20X2 and financial statements have been
approved by the Board of Directors of the company on July 26, 20X2. What would be the
treatment of duty drawback credit as per the given information?
QUESTION 5
Entity XYZ entered into a contract to supply 1000 television sets for ` 2 million. An increase
in the cost of inputs has resulted into an increase in the cost of sales to ` 2.5 million.
The penalty for non- performance of the contract is expected to be ` 0.25 million, is the
contract onerous and how much provision in this regard is required?
QUESTION 6
Marico has an obligation to restore environmental damage in the area surrounding its
factory. Expert advice indicates that the restoration will be carried out in two distinct
phases; the first phase requiring expenditure of ` 2 million to remove the contaminated
200 ACCOUNTS
soil from the area and the second phase, commencing three years later from the end of
first phase, to replant the area with suitable trees and vegetation. The estimated cost of
replanting is ` 3.5 million. Marico uses a cost of capital (before taxation) of 10% and the
expenditure, when incurred, will attract tax relief at the company’s marginal tax rate of
30%. Marico has not recognised any provision for such costs in the past and today’s date is
31 March 20X2. The first phase of the clean up will commence in a few months time and will
be completed on 31 March 20X3 when the first payment of ` 2 million will be made. Phase 2
costs will be paid three years later from the end of first phase. Calculate the amount to be
provided at 31 March 20X2 for the restoration costs.
IND AS 102: SHARE BASED PAYMENT 201
IND AS 102: SHARE BASED PAYMENT

QUESTION NO 1
(Equity settled shared Based payment-service conditions)

ABC Limited granted to its employees, share options with a fair value of INR 5,00,000
on April 20X0, if they remain in the organization upro 31st March 20X3. On 31St March
20X1, ABC limited expects only 91% of the employees to remain in the employment. On
31%st march 20X2 company expects only 89% of the employees ramain in the employment.
However, only 82% of the emploeyee remained in the organisation at the end of March,
20X3 and all of them exercised their oprions. Pass the Journal entries?
QUESTION NO 2
(Cash settled shared Based payment-Service conditions)

XYZ issued 10,000 share appreciation rights (SARs) that vest immendiately to its employees
on 1 April. 20X0. The SARs will be settled in cash. At that date it is emstimated, ussing
an optioh pricing model, that the fair value of a SAR is INR 95. SAR can be exercised any
time upto 31 march 20X3. At the end of peiod on 31 march 20X1 it is expected that 95%
of total employees will exrecise the option. 92% of total emplyees will exercise the option
at the end of next year and finally 89% will be vested only at the end of the 3rd year. Fair
values at the end of each period have been given below:
Fair value of SAR INR

31-Mar-20X1 112
31-Mar-20X2 109
31-Mar-20X3 114
Pass the journal entries?
QUESTION NO 3
(Share- based payment with cash alternative)

On 1 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.
202 ACCOUNTS
Fair values of the shares are as follows: INR

Share alternative fair value (with restrictions) 102
Grant date fair value on 1 Jan 20X1 113
Fair value on 31 Dec 20X1 120
Fair value on 31 Dec 20X2 132
The employees exercise their cash option at the end of 20X2.
Pass the Journal entries.
QUESTION NO 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 of Indian Inc. on 20X1 and shares were issued. Fair value of the office
building was INR 2, 00,000 and face value of each share of Indian Inc was INR 100.
Pass the journal entries?
QUESTION NO 5
(Share-based payment –services)

Reliance limited hired a maintenance company of r 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 1 April
20X1 and fair value of the service was estimated using market value of similar contracts
for INR 1, 00,000. Nominal value per share is INR 10.
Record the transactions?
QUESTION NO 6
(Share- based payment- Cash & equity alterantives)

Tata industries issued Share-based option to one of its key management personal which can
bd exercises either in cash or equity and it has following featrues:
Option 1 Period INR

No of cash settled shares 74,000
Service conditon 3 years
Option 11
No of equity settled shares 90,000
Conditions:
Service 3 years
Restriction to sell 2 years
Fair Values
Equity price with a restriction of sale for 2 years 115
Fair value grant date 135
Fair value 20X0 138
20X1 140
20X2 147
Pass the Journal entries?
QUESTION NO 7
(Equate settle – Non market conditions)

Ankita Holding Inc. grants 100 to each of its 500 employees on 1st January 20X1. The
employees should remain in service during the vesting period, the shares will 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 INR 122. In 20X1, earnings increased by 10%,
and 29 employees left the organization. The company expects that earnings will continue at
a similar rate in 20X2 and expects that the shares will vest at the end of the year 20X2.
The company also expects that additional 31 employees will leave the organization in the
year 20X2 and 440 employees will receive their shares at the end of the year 20X2. At the
end 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 increases to desired level and the
performance target has been met.
204 ACCOUNTS
Required:
Determine the expense for each year and pass appropriate journal entries?
QUESTION NO 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 was INR 95
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?
QUESTION NO 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 INR 120.
How should we recognize the transaction?
QUESTION NO 10
Modifications – Equity – settled based payment

Marathon Inc. issued 150 share options to each of its 1,000 employees subject to the
service conditions of 3 years. Fair value of the option given was calculated at INR 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 INR 50.
After the re-pricing they are worth INR 80, hence expense is expected to increase by INR
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?
QUESTION NO 11
Cancellation-Equity Settled Share based payment

Anara Fertilisers’ Limited issued 2000 share options to its 10 directors for an exercise
price of INR 100. The directors are required to stay with the company for company for
next 3 years.
Fair value of the option estimated INR 130
Expected no of Directors to vest the option 8
During the year 2, there was a crisis in the company and management decided to cancel the
such scheme immediately. It was estimated further as below-
Fair value of option at the time of cancellation was
Market price of the share at the cancellation date was
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 INR 95 per option to each of 9 directors.
How the cancellation would be recorded?
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QUESTION NO 12 (CONDITIONAL SERVICE PERIOD)
The following particulars in respect of stock options granted by a company are available:
Grant date April 1,2006

Number of employees covered 525
Number options granted per employee 100
Vesting condition: Continuous employment for 3 years
Nominal value per share (Rs.) 100
Exercise price per share (Rs.) 125
Fair value per share on grant date (Rs.) 149
Vesting date March 31,2009
Exercise March 31,2010
Position on 31/03/07
(a) Estimated annual rate of departure 2%
(b) Number of employees left = 15
(a) Estimated annual rate of departure 3%
(b) Number of employee left = 10
(a) Number of employees left = 8
(b) Number of employees entitled to exercise option = 492
(a) Number of employees exercising the option = 480
(b) Number of employees not exercising the option = 12
Compute expenses to recognize in each year and show important accounts in books of the
company.
QUESTION NO 13 (VESTING BASED ON TARGET OF PROFITS)
The following particulars in respect of stock options granted by a company are available.
Grant date Apriil, 2006

Number options granted per employee 100
Fair value of option per share on grant date (Rs.) 25
The vesting period shall be determined as below:
(a) If the company earns Rs. 120 crore or above after taxes in 2006-07, the options will
vest on 31/03/07.
(b) If condition (a) is not satisfied but the company earns Rs. 250 crores or above after
taxes in aggregate in 2006-07 and 2007-08, the option will vest on 31/03/08.
(c) If conditions (a) and (b)are not satisfied but the company earns Rs. 400 crores or
above after taxes in Aggregate in 2006-07, 2007-08 and 2007-09, the options will
vest on 31/03/09
(a) The company earned Rs. 115 crore after taxes in 2006-07
(b) The company expects to earn Rs. 140 crores in 2007-08 after taxes
(c) Expected vesting date: March 31,2008
(d) Number of employees expected to be entitled to option =474
(b) The company expects to earn Rs. 160 crores in 2008-09 after taxes
(c) Expected vesting date: March 31,2009
(d) Number of employees expected to be entitled to option = 465
(b) Number of employees on whom the option actually vested = 450
Compute expenses to recognize in each year.
208 ACCOUNTS
QUESTION NO 14
(Vesting Based On Target Of Market Price)

The following particular in respect of stock option granted by a company are available:
Grant date April 1, 2006

Number options granted per employee 1,000
Fair value of option per share on grant date (Rs) 9
The option will vest to employees serving continuously for 3 years from vesting date,
provided the share price is Rs. 70 or above at the end of 2008-09
The estimates of number employees satisfying the condition the condition of continuous
employment were 48 on 31/03/07, 47 on 31/03/08. The number of employees actually
satisfying the condition of continuous employment was 45.
The share price at the end of 2008-09 was Rs.68
Compute expenses to recognize in each year and show important accounts in books of the
company.
QUESTION 15 (EMPLOYEES’ STOCK PURCHASE PLAN)
On April 1,2015, a Company offered 100 Shares to each of its 500 Employees at Rs.40 per
Share. The Employees are given a month to decide whether or not to accept the offer. The
Shares issued under the plan shall be subject to lock-in on transfer for 3 years from Grant
Date. The market price of Shares of the Company on the Grant Date is Rs.50 per share.
Due to pot-vesting restrictions on transfer, this Fair Value of Shares issued under the plan
is estimated at Rs.48 per share.
On April 30, 2015, 400 Employees accepted the offer and paid Rs. 40 per share purchased.
Nominal Value of each Share is Rs.10. Record the issue of Shares in books of the Company
under the aforesaid plan.
TEST YOUR KNOWLEDGE
1. 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 INR 195 each. There is an
expectation 97% of the total 1,000 employees will remain in service at end of 1st year.
However, at the end of 2nd year the expected employees to remain is service would be
91% out to the total 1,000 employees. Calculate expense for the year 1 & 2?
2. An entity issued 50 shares each to its 170 employees subject to service Conditions of
next 2 Years. The settlement is to be made in cash. Grant date fair value of the share
is INR 85 each, however, the fair value as at end of Year, 2nd year were INR 80 & 90
respectively. Calculate expense for years 1 and 2?
3. 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-
No. of employees of company B 100

Grant date fair value of share INR 87
No. of shares to each employee granted 25
Vesting conditions Immediately
Pass the journal entry in the books of company p & company B?

4. Plastic manufacturing company “X” enters into an agreement with company “Y” to
purchase 100kg of fiber which will be settled in cash at an amount equal to 10 Shares
of X. However, X can settle the contract at any time by paying an amount of amount
of current share price less market of fiber .there is no intention of taking delivery of
such fiber .How the transaction would be evaluated under Ind As 102?
5. Entity X acquired entity Y in a business combination as per Ind AS 103. There is an
existing share-based plan in Y with a vesting condition for 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_
Acquisition date fair value of share-based payment plan INR 300

No. of years to vest to vest after acquisition 1 year
Fair Value of award which replaces existing plan INR 400
Calculate the share-based payment values as per Ind As 102?

210 ACCOUNTS
6. An entity p issues share- based payment plan to its employees based on the below
details
No. of employees 100

Fair value at grant date INR 25
Market condition Share price to reach at INR 30
Service condition To remain in service until market
condition is fulfilled
Expected completion of market 4 years
condition
Define expenses related to such-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.
7. 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 INR 100
Million.
- It is expected that PAT should reach opt INR 100 million by end of 3 years.
- Fair value at grant date is INR 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?
8. At 1 January 20X1, Ambani limited grants its CEO an option to take either cash amount
equivalent to 990 shares or 800 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 INR

Share alternative fair value (with restrictions) 212
Grant date fair value on 1 January, 20X0 213
Fair value on 31 December,20X0 220
Fair value on 31 Decemver,20X1 232
The key management exercises his cash at the end of 20X2. Pass journal entries.
9. MINDA issued 11,000 share appreciation rights (SARs) that vest immediately to its
employees on 1 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 INR 100. SAR can
be exercised any time until 31 March 20X3. It is expected that out of the total
employees, 94% at the end of period on 31 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 INR

31-Mar-20X1 132
31-Mar-20X2 139
31-Mar-20X3 141
212 ACCOUNTS
IND AS – 102: SHARE BASED PAYMENTS

QUESTION 1
P Ltd. granted 400 stock appreciation rights (SAR) each to 75 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 ` 220
31st March 20X4 ` 215
31st March 20X5 ` 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 2
(ALREADY DISCUSSED IN RTP NOV 2019…..QUESTION 3…REFER RTP VIDEO)

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, 30X1, 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 31st 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 re-pricing 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.
QUESTION 3
A parent, Company P, grants 30 shares to 100 employees each of its subsidiary, Company S,
on condition that the employees remain employed by Company S for three years. Assume
that at the outset, and at the end of Years 1 and 2, it is expected that all the employees
will remain employed for all the three years. At the end of Year 3, none of the employees
has left. The fair value of the shares on grant date is ` 5 per share.
Company S agrees to reimburse Company P over the term of the arrangement for 75 percent
of the final expense recognised by Company S. What would be the accounting treatment in
the books of Company P and Company S ?
QUESTION 4
(ALREADY DISCUSSED IN RTP MAY 2020…..QUESTION 19…REFER RTP VIDEOS)

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 1st 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

31st December 20X5 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 each year? Pass Journal
entries.
214 ACCOUNTS
NOTES

PRESENTATION OF FINANCIAL STATEMENTS
QUESTION NO 1
An entity prepares its financial statements that contain an explicit and unreserved statement
of compliance with Ind AS. However, the auditor’s report on those financial statements
contains a qualification because of disagreement on application of one Accounting Standard.
In such case, is it acceptable for the entity to make an explicit and unreserved statement
of compliance with Ind AS?
SOLUTION
Yes, it is possible for an entity to make an unreserved and explicit statement of compliance
with Ind AS, even though the auditor’s report contain a qualification because of disagreement
on application of Accounting Standard(s), as the preparation of financial statements is the
prerogative of the management. In case the management has a bonafide reason to believe
that it has complied with the all Ind AS, it can make an explicit and unreserved statement
of compliance with the Ind AS.
QUESTION NO 2
Entity XYZ is a large manufacturer of plastic for the local market. On 1 april 2016 the newly
elected government unexpectedly abolished all import tariffs, including the 40 percent
tariff on all imported plastic products. Many other economic reforms implemented by the
new government contributed to the value of the country’s currency (CU(2)) appreciating
significantly against most another currencies. The currency appreciating severely reduced
the competitiveness of the entity’s products.
Before 2016 entity XYZ was profitable. However, because it was unable to compete with low
priced imports, entity XYZ reported a loss of CU 4,000 for the year ended 31 march 2017.
At 31 March 2017, entity XYZ’s equity was CU 1,000. Management restructured entity B’s
operations in the second quarter of 2017. That restructuring helped reduce losses for the
third and fourth quarters to CU 400 and CU 380, respectively
In January 2017 the local plastic industry and labor union lobbied government to reinstate
tariffs on plastic. On 15 March 2017, the government announced that it would reintroduce
limited plastic import tariffs in 2018. However, it emphasized that those tariffs would not
be as protective as the tariffs enacted by the previous government. In its latest economic
forecast, the predicts a stable currency exchange rate in the short term with a gradual
weakening of the jurisdiction’s currency in the longer term. Management of entity XYZ
undertook a going concern assessment at 31 March 2017. Management projects/forecasts
216 ACCOUNTS
that imposition of a 10 percent tariff on the import of plastic product would, at current
exchange rates, result in entity XYZ returning to profitability. How should the management
of entity XYZ disclose the information about the going concern assessment in entity XYZ’s
31 March 2017 annual financial statements?
SOLUTION
Going concern is a general feature of Presentation of Financial Statements. As per Ind AS
1, when preparing financial statements, management shall make an assessment of an entity’s
ability to continue as a going concern. An entity shall prepare financial statements on a
going concern basis unless management either intends to liquidate the entity or to cease
trading, or has no realistic alternative but to do so. When management is aware, in making
its assessment, of material uncertainties related to events or conditions that may cast
significant doubt upon the entity’s ability to continue as a going concern, the entity shall
disclose those uncertainties. An entity is required to disclose the facts, if the financial
statements are not prepared on a going concern basis. Along with the reason, as to why the
financial statements are not prepared on a going concern basis.
While assessing the going concern assumption, an entity is required to take into consideration
all factors covering at least but not limited to 12 months from the end of reporting period.
On the basis of Ind AS 1 and the facts and circumstances of this case, the following
disclosure is appropriate:
QUESTION NO 3
Is offsetting of revenue against expenses, permissible in case of a company acting as an

agent and having sub-agents, where commission is paid to sub-agents from the commission
received as an agent?
SOLUTION
On the basis of the above, net presentation in the given case would not be appropriate, as it
would not reflect substance of the transaction and would detract from the ability of users
to transaction. The commission received by the company as an agent is the gross revenue of
the company. The amount of commission paid by it to the sub-agent should be considered as
an expense and should not be offset against commission earned by it.
QUESTION NO 4
Inventory or trade receivables of X Ltd. are normally realized in 15 months. How should X
Ltd. classify such inventory/trade receivables: current or non-current or non-current if
these are expected to be realized within 15 months?
SOLUTION
These should be classified as current.
QUESTION NO 5
B Ltd. produces aircrafts. The length of time between first purchasing raw materials to
make the aircrafts and the date the company completes the production and delivery is 9
months. The company receives payment for the aircrafts 7 months after the delivery.
(a) What is the length of operating cycle?

(b) How should it treat its inventory and debtors?
SOLUTION
(a) The length of the operating cycle will be 16 months.

(b) Assuming the inventory and debtors will be realized within normal operating cycle, i.e.,
16 months, both the inventory as well as debtors should be classified as current.
QUESTION NO 6

Work-in-progress holding period : 1 months
Debtors collection period : 5 months
You are requested to compute the operating cycle of X Ltd.
SOLUTION
The operating cycle of X Ltd. will be computed as under:
Raw material stock holding period ÷ Work-in progress holding period ÷ Finished goods holding
period ÷ Debtors Collection period = 3 ÷ 1 ÷ 5 ÷ 5 = 14 months.
QUESTION NO 7
Entity A has two different businesses, real estate and manufacture of passenger vehicles.
With respect to the real estate business, the entity constructs residential apartments
for customers and the normal operating cycle is three to four years. With respect to the
business of manufacture of passenger vehicles, normal operating cycle is three to four
years. With respect to the businesses, how classification into current and non-current be
made?
218 ACCOUNTS
SOLUTION
As per paragraph 66(a) of Ind AS 1, an asset should be classified as current id an entity
expects to realize the same, or intends to sell or consume it in its normal operating cycle.
Similarly, as per paragraph 69(a) of Ind AS 1, a liability should be classified as current if an
entity expects to settle the liability in its normal operating cycle. In this situation, where
business have different operating cycles, classification of asset/liability as current/non-
current would be in relation to the normal operating cycle that is relevant to that particular
asset/liability. It is advisable to disclose the normal operating cycles relevant to different
types of businesses for better understanding.
QUESTION NO 8
An entity has placed certain deposits with various parties. How the following deposits should
be classified, i.e., current or non-current?
(a) Electricity Deposit

(b) Tender Deposit/Earnest Money Deposit[EMD]
(c) GST Deposit paid under dispute or GST payment under dispute.
SOLUTION
(a) At all points of time, the deposit is recoverable on demand, when the connection is
not required. However, practically, such electric connection is required as long as the
entity exists. Hence, from a commercial reality perspective, an entity does not expect
to realize the asset within twelve months from the end of the reporting period. Hence,
electricity deposit should be classified as a non-current asset.
(b) Generally, tender deposit/EMD are paid for participation in various bids. They normally
become recoverable if the entity does not win the bid. Bid dates are known at the time
of tendering the deposit. But until the date of the actual bid, one is not in a position to
know if the entity is winning the bid or otherwise. Accordingly, depending on the terms
of the deposit if entity expects to realize the deposit if entity expects to realize the
deposit within a period of twelve months, it should be classified as current otherwise
non-current.
(c) Classification of GST deposits paid to the government authorities in the event of any
legal dispute, which is under protest would depend on the facts of the case and the
expectation of the entity to realize the same within a period of twelve months. In the
case the entity expects these to be realized within 12 months, it should classify such
amounts paid as current else these should be classified as non-current.
QUESTION NO 9
Paragraph 69(a) of Ind AS 1 states ”An entity shall classify a liability as current when it
expects to settle the liability in its normal operating cycle”. An entity develops tools for
customers and this normally takes a period of around 2 years for completion. The material
is supplied by the customer and hence the entity only renders a service. For this, the
entity receives payments upfront and credits the amount so received to “income Received
in Advance”. How should this “income Received in Advance” be classified, i.e., current or
non-current?
SOLUTION
Ind AS 1 provides “Some current liabilities, such as trade payables and some accruals for
employee and other operating costs, are part of the working capital used in the entity’s
normal operating cycle. An entity classifies such operating items as current liabilities even
if they are due to be settled more than twelve months after the reporting period. ”
QUESTION NO 10
An entity has taken a loan facility from a bank that is to be paid within a period of 9 months
from the end of the reporting period, the entity and the bank enter into an arrangement,
whereby the existing outstanding loan will, unconditionally, roll into the new facility which
expires after a period of 5 years.
(a) How should such loan be classified in the balance sheet of the entity?
(b) Will the answer be different if the new facility is agreed upon after the end of the
reporting period?
(c) Will the answer to (a) be different if the existing facility is from one bank and the
new facility is from another bank?
(d) Will the answer to (a) be different if the new facility is not yet tied up with the
existing bank, but the entity has the potential to refinance the obligation?
SOLUTION
(a) The loan is not due for payment at the end of the reporting period. The entity and the
bank have agreed for the said roll over prior to the end of the reporting period for a
period of 5 years. Since the entity has an unconditional right to defer the settlement
of the liabilities for at least twelve months after the reporting period, the loan should
be classified as non-current.
(b) Yes, the answer will be different if the arrangement for roll over agreed upon the
end of the reporting period, since assessment is required to be made based on terms
of the existing loan facility. As at the end of the reporting period, the entity does
220 ACCOUNTS
not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period. Hence the loan is to be classified as current.
(c) Yes, loan facility arranged with new bank cannot be treated as refinancing, as the loan
with the earlier bank would have to be settled which may coincide with loan facility
arranged with a new bank. In this case, loan has to be repaid within a period of 9
months from the end of the reporting period, therefore, it will be classified as current
liability.
(d) Yes, the answer will be different and the loan should be classified as current. This
is because, as per paragraph 73 of Ind AS1, when refinancing or rolling over the
obligation is not at the discretion of the entity(for example, there is no arrangement
for refinancing), the entity does not consider the potential to refinance the obligation
and classifies the obligation as current.
QUESTION NO 11
In December 2001 an entity entered into a loan agreement with a bank . The loan is repayable
in three equal installments starting from December 2005. One of the loan covenants is that
an amount equivalent to the loan amount should be contributed by promoters by March
24 2002, failing which the loan becomes payable on demand. As on March 24, 2002, the
entity has not been able to get the promoter’s contribution. On March 25, 2002, the entity
approached the bank and obtained a grace period up to June 30, 2002 to get the promoter’s
contribution.
The bank cannot demand immediate repayment during the grace period. The annual reporting
period of the entity ends of March 31 2002
(a) As on March 31,2002, how should the entity classify the loan?
(b) Assume that in anticipation that it may not be able to get the promoter’s contribution
by due date, in February 2002, the entity approached the bank and got the compliance
date extended up to June 30, 2002 for getting promoter’s contribution. In this case
will the loan classification as on March 31, 2002 be different from (a) above ?
SOLUTIONS
(a) Paragraph 75 of Ind AS 1, inter alia, provides, “An entity classifies the liability as non-
current if the lender agreed by the end of the reporting period to provide a period
of grace ending at least twelve month after the reporting period, within which the
entity can rectify the breach and during which the lender cannot demand immediate
repayment.” In the present case, following the default, grace period within which an
entity can rectify the breach is less than twelve months after the reporting period.
Hence as on March 31, 2002, the laon will be classified as current.
(b) Ind AS 1 deals with classification of liability as current or non-current in case of breach
of a loan covenant and does not deal with the classification in case of expectation of
breach. In this case, whether actual breach has taken place or not is to be assessed
on June 30, 2002, i.e. after the reporting date. Consequently, in the absence of actual
breach of the loan covenant as on March 31, 2002, the loan will retain its classification
as non-current.
QUESTION NO 12
A Limited has prepared the following draft balance sheet as on 31st March 2011:
(` in crores)
Particulars March 31, March 31,

2011 2010
ASSETS
Cash 250 170
Cash equivalents 70 30
Non-Controlling interest’s share of profit for the year 160 150
Dividend declare by A Limited 90 70
Accounts receivable 2,300 1,800
Inventory at cost 1,500 1,650
Inventory at fair value less cost to complete and sell 180 130
Investment property. 3,100 3,100
Property, plant and equipment (PPE) at cost 5,200 4,700
Total 12,850 11,800
CLAIMS AGAINST ASSETS
Long term debt (` 500 crores due on 1st January each year) 3,300 3,885
Interest accrued on long term debt (due in less than 12 months) 260 290
Share Capital 1,130 1,050
Retained earnings at the beginning of the year 1,875 1,740
Profit for the year 1,200 830
Non-controlling interest 830 540
Accumulated depreciation on PPE 1,610 1,240
Provision for doubtful receivables 200 65
222 ACCOUNTS

Accrued expenses 15 30
Warranty provision (for 12 months from the date of sale) 600 445
Environmental restoration provision (restoration expected in
2016 765 640
Provision for accrued leave ( due within 12 months) 35 25
Dividend payable 150 230
Total 12,850 11,800
Prepare a balance sheet using current and non – current classification in accordance with
Ind AS 1. Assume operating cycle is 12 months.
SOLUTION
A Limited
Balance Sheet as at 31st March 2011
(` in crores)
Particulars March 31, March 31,

2011 2010
ASSETS
Non-current assets
(a) Property, plan and equipment (Refer Note 5) 3,590 3,460
(b) Investment property 3,100 3,100
Total non-current assets 6,690 6,560
Current assets
(a) Inventory (Refer Note 6) 1,680 1,780
(b) Financial assets Trade and other receivables (Refer
Note 7) 2,100 1,735
(c) Cash and cash equivalents (Refer Note 8) 320 200
Total current assets 4,100 3,715

Equity & Liabilities

Equity attributable to owners of the parent
Share capital 1,130 1,050
Other Equity (Refer Note 1) 2,825 2,350
Non-controlling interests 830 540
Total equity 4,785 3,940
Liabilities
i. Borrowings – Long – term debt (Refer Note 2) 2,800 3,385
(b) Provisions Long –term provisions (environmental
restoration) 765 760
Total non current liabilities 3,565 4,025
Current Liabilities
i. Trade and other payables (Refer Note 3) 895 820
ii. Current portion of long-term debt (Refer Note 4) 500 500
iii. Interest accrued on long-term debt 260 290
(b) Provision
i. Warranty provision 600 445
ii. Other short-term provision 35 25
(c) Other current liability
Dividends payable 150 230
Total current liabilities 2,440 2,310
Total liabilities 6,005 6,335
Total equity and liabilities 10,790 10,275
224 ACCOUNTS
Working Notes:
Notes Particulars Basis Calculation Amount

(` crores) (` Crores)
1 Other Equity Retained earnings at the 1,875 + 2,825
beginning of the year add 1,200—
Profit for the year less 160 — 90
Non- controlling interest’s
share of profit for the year (1,740 + 830 (2,350)
less — 150 — 70)
Dividend declared by A
Limited
2 Long-term Long-term debt less Due on 3,300 — 2,800

debt 1st January each year 500
(3,385)
(3,885 —
500)
3 Trade & other Trade payables add Accrued 880 + 15 895

payables expenses
(790 + 30) (820)
4 Current Due on 1st January each year - 500
portion of
long- term - (500)
debt
5 Property, Property, plant and 5,200 —1,610 3,590
plant and equipment (PPE) at cost less (3,460)
equipment (4,700 —
1,240)
Accumulated (depreciation
on PPE
6 Inventory Inventory at cost 1,500 + 180 1,680
add (1,650 + 130) (1,780)
Inventory at fair value
less
cost to complete and sell
7 Trade Accounts receivable 2,300 — 200 2,100
and other less (1,800 — 65) (1,735)
receivables Provision for doubtful
receivables
8 Cash and cash Cash and Cash equivalents 250 + 70 320
equivalents
(170 + 30) (200)
TEST YOUR KNOWLEDGE
QUESTIONS
(1) An entity manufactures passenger vehicles. The time between purchasing of underlying
raw materials to manufacture the passenger vehicles and the date the entity completes
the production and delivers to its customers is 11 months. Customers settle the dues
after a period of 8 months from the date of sale.
(a) Will the inventory and the trade receivables be current in nature?
(b) Assuming that the production time was say 15 months and the time lag between
the date of sale and collection from customers is 13 months, will the answer be
different?
(2) In December 2XX1 an entity entered into a loan agreement with a bank. The loan is
repayable in three equal annual instalments starting from December 2XX5. One of the
loan covenants is that an amount equivalent to the loan amount should be contributed
by promoters byMarch 24 2XX2, failing which the loan becomes payable on demand. As
on March 24, 2XX2, the entity has not been able to get the promoter’s contribution.
On March 25, 2XX2, the entity approached the bank and obtained a grace period upto
June 30, 2XX2 to get the promoter’s contribution.
The bank cannot demand immediate repayment during the grace period. The annual
reporting period of the entity ends on March 31, 2XX2.
(a) As on March 31, 2XX2, how should the entity classify the loan?
(b) Assume that in anticipation that it may not be able to get the promoter’s
contribution by due date, in February 2XX2, the entity approached the bank and
got the compliance date extended upto June 30, 2XX2 for getting promoter’s
contribution. In this case will the loan classification as on March 31, 2XX2 be
different from (a) above?
ANSWERS
1. Inventory and debtors need to be classified in accordance with the requirement of Ind
AS 1, which provides that an asset shall be classified as current if an entity expects
to realise the same, or intends to sell or consume it in its normal operating cycle.
(a) In this case, time lag between the purchase of inventory and its realisation into
cash is 19 months [11 months + 8 months]. Both inventory and the debtors would
be classified as current if the entity expects to realise these assets in its normal
operating cycle.
(b) No, the answer will be the same as the classification of debtors and inventory
depends on the expectation of the entity to realise the same in the normal
226 ACCOUNTS
operating cycle. In this case, time lag between the purchase of inventory and
its realisation into cash is 28 months [15 months + 13 months]. Both inventory
and debtors would be classified as current if the entity expects to realise these
assets in the normal operating cycle.
2. (a) Ind AS 1, inter alia, provides, “An entity classifies the liability as non-current if
the lender agreed by the end of the reporting period to provide a period of grace
ending at least twelve months after the reporting period, within which the entity
can rectify the breach and during which the lender cannot demand immediate
repayment.” In the present case, following the default, grace period within which
an entity can rectify the breach is less than twelve months after the reporting
period. Hence as on March 31, 2XX2, the loan will be classified as current.
(b) Ind AS 1 deals with classification of liability as current or non-current in case
of breach of a loan covenant and does not deal with the classification in case of
expectation of breach. In this case, whether actual breach has taken place or not
is to be assessed on June 30, 2XX2, i.e., after the reporting date. Consequently,
in the absence of actual breach of the loan covenant as on March 31, 2XX2, the
loan will retain its classification as non-current.

QUESTION 1
A retail chain acquired a competitor in March, 20X1 and accounted for the business
combination under Ind AS 103 on a provisional basis in its 31st March, 20X1 annual financial
statements. The business combination accounting was finalised in 20X1 – 20X2 and the
provisional fair values were updated. As a result, the 20X0-20X1 comparatives were
adjusted in the 20X1-X2 annual financial statements. Does the restatement require an
opening statement of financial position (that is, an additional statement of financial position)
as of 1st April, 20X0?
SOLUTION
An additional statement of financial position is no required because the acquisition had no
impact on the entity s financial position at 1st April,20X0.
QUESTION 2
On 1st April, 20X3 Charming Ltd issued 100,000 ` 10 bonds for ` 1,000,000. On 1st April,
each year interest at the fixed rate of 8 per cent per year is payable on outstanding capital
amount of the bonds (i.e., the first payment will be made on 1st April, 20X4). On 1st April
each year (i.e., from 1st April, 20X4), Charming Ltd has a contractual obligation to redeem
10,000 of the bonds at ` 10 per bond. In its statement of financial Position at 31st March,
20X4 How should this be presented in financial statements?
SOLUTION
Charming Ltd must present ` 80,000 accrued interest and ` 1,00,000 current portion of the
non-current bond (i.e. the portion repayable on 1st April, 20X4) as current liabilities. The `
9,00,000 due late than 12 months after the end of the reporting period is presented as a
non-current liability.
QUESTION 3

Work-in progress holding period : 1 month
Debtors collection period : months
The trade payables of the Company are paid in 12.5 months. Should these be classified as
current or non-current?
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SOLUTION
In this case, the operating cycle of X Ltd. is 14 months, Since the trade payables are
expected to be settled within the operating cycle i.e. 12.5 months, they should be classified
as a current.
QUESTION 4
OMN Ltd has a subsidiary MN Ltd. OMN Ltd Provides a loan to MN Ltd at 8% interest to
be paid annually. The loan is required to be paid whenever demanded back by OMN Ltd.
How should the loan be classified in the financial statements of OMN Ltd? Will it be any
different for MN Ltd?
SOLUTION
The demand feature might be primarily a form of protection or a tax-driven feature of
the loan. Both parties might expect and intend that the loan will remain outstanding for
the foreseeable future. If so, the instrument is, in substance, long-term in nature, and
accordingly, OMN Ltd would classify the loan as a non-current asset.
However, OMN Ltd would classify the loan as a current asset if both the parties intend
that it will be repaid within 12 months of the reporting period
MN Ltd would classify the loan as current because it does not have the right to defer
repayments of more than 12 months, regardless of the intentions of both the parties.
The classification of the instrument could affect initial recognition and subsequent
measurement. This might require the entity’s management to exercise judgement, which
could require disclosure under judgements and estimates.
QUESTIONS 5
Company A has taken a long term loan from Company B in the month of December 20X1
there has been a breach of material provision of the arrangement. As a consequence of which
the loan becomes payable on demand on March 31, 20X2. In the month of May 20X2, the
Company started negotiation with the Company B for no to demand payment as a consequence
of the breach. The financial statements were approved for the issue in the month of June
20X2. In the month of July 20X2, both the companies agreed that the payment will not be
demanded immediately as a consequence of breach of material provision.
Advise on the classification of the liability as current / non-current.
SOLUTION
As per para 74 of Ind AS 1 Presentation of Financial Statements where there is a breach of
a material provision of a long term loan arrangements on or before the end of the reporting
period with the effect the a the liability becomes payable on demand, it classifies the
liability as current, even if the lender agreed after the reporting Period and before the
authorization of the financial statements for issue, not to demand payment as a consequence
of the breach.
However, an entity classifies the liability as non-current if the lender agreed by the end
of the reporting period to provide a period of grace ending at least twelve months after
the reporting period, within which the entity can rectify the breach and during which the
lender cannot demand immediate repayment.
In the given case, Company B (the lender) agreed for not to demand payment but only after
the reporting date and the financial statements were approved for issuance. The financial
statements were approved for issuance in the months of June 20X2 and both companies
agreed for not to demand payment in the month of July 20X2 although negotiation started
in the month of May 20X2 but could not agree before June 20X2 when financial statements
were approved for issuance.
Hence, the liability should be classified as current in the financial statements as at March
31, 20X2.
QUESTION 6
Entity a Has undertaken various transitions in the financial year ended March 31, 20X1,
Identify and present the transactions in the financial statement as per Ind AS 1.
Remeasurement of defined benefit plans 2,57,000

Current service cost 1,75,000
Changes in revaluation surplus 1,25,000
Gains and losses arising from translating the monetary assets in foreign 75,000
currency
Gains and losses arising from translating the financial statements of a 65,000
foreign operation
Gains and losses from investments in equity instruments designated at 1,00,000
fair value through other comprehensive income
Income tax expense 35,000
Share based payment cost 3,35,000
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SOLUTION
Items impacting the Statement of Profit Loss for the year ended 31st March, 20X1
(`)
Current service cost 1,75,000

Gains and losses arising from translating the monetary assets in
foreign currency 75,000
Income tax expense 35,000
Share based payments cost 3,35,000
Items impacting the other comprehensive income for the year ended 31st March, 20X1 (`)
Remeasurement of defined benefit plans 2,57,000

Changes in revaluation surplus 1,25,000
Gains and losses arising from translating the financial statements of a
foreign operation 65,000
Gains and losses from investments in equity instruments designate at fair
value through other comprehensive income 1,00,000
Ind AS – 01: PRESENTATION

OF FINANCIAL STATEMENTS
QUESTION 1
XYZ Limited (the ‘Company’) is into the manufacturing of tractor parts and mainly supplying
components to the Original Equipment Manufacturers (OEMs). The Company does not have
any subsidiary, joint venture or associate company. During the preparation of financial
statements for the year ended March 31, 20X1, the accounts department is not sure
about the treatment / presentation of below mentioned matters. Accounts department
approached you to advice on the following matters.
S.No. Matters
(i) There are qualifications in the audit report of the Company with reference to
two Ind AS.
(ii) Is it mandatory to add the word “standalone” before each of the components of
(iii) The Company is Indian Company and preparing and presenting its financial
statements in `. Is it necessary to write in the financial statements that the
financial statements has been presented in `.
(iv) The Company is having turnover of ` 180 crores. The Company wants to present
the absolute figures in the financial statements. Because for tax audit purpose,
tax related fillings and other internal purposes, Company always need figures in
absolute amounts.
(v) The Company had sales transactions with 10 related party parties during previous
year. However, during current year, there are no transactions with 4 related
parties out of aforesaid 10 related parties. Hence, Company is of the view that
it need not disclose sales transactions with these 4 parties in related party
disclosures because with these parties there are no transactions during current
year.
Evaluate the above matters with respect to preparation and presentation of general purpose
financial statement.
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QUESTION 2
A Company presents financial results for three years (i.e. one for current year and two
comparative years) internally for the purpose of management information every year in
addition to the general purpose financial statements. The aforesaid financial results are
presented without furnishing the related notes because these are not required by the
management for internal purpose. During current year, management thought why not they
should present third year statement of profit and loss also in the general purpose financial
statements. It will save time and will be available easily whenever management needs this
in future.
With reference to above background, answer the following :
(i) Can management present the third statement of profit and loss as additional
comparative in the general purpose financial statements ?
(ii) If management present third statement of profit and loss in the general purpose
financial statement as comparative, is it necessary that this statement should be
compliant of Ind AS ?
(iii) Can management present third statement of profit and loss only as additional
comparative in the general purpose financial statements without furnishing other
components (like balance sheet, statement of cash flows, statement of change in
equity) of financial statements ?
QUESTION 3
A Company while preparing the financial statements for Financial Year (FY) 20X1-20X2,
erroneously booked excess revenue of ` 10 Crore. The total revenue reported in FY 20X1-
20X2 was ` 80 Crore. However, while preparing the financial statements for 20X2-20X3, it
discovered that excess revenue was booked in FY 20X1-20X2 which it now wants to correct
in the financial statements. However, management of the Company is not sure whether it
need to present the third balance sheet as additional comparative.
With regard to the above background, answer the following :
(i) Is it necessary to provide the third balance sheet at the beginning of the preceding
period in this case?
(ii) The Company wants to correct the error during FY 20X2-20X3 by giving impact in the
figures of current year only. Is the contention of management correct ?
QUESTION 4
XYZ Limited (the ‘Company’) is into construction of turnkey projects and has assessed its
operating cycle to be 18 months. This Company has certain trade receivables and payables
which are receivable and payable within a period of twelve months from the reporting date,
i.e. March 31, 20X2.
In addition to above there are following items / transactions which book place during
financial year 20X1-20X2.
S.No. Items / transactions

(i) The Company has some trade receivables which are due after 15 months from
the date of balance sheet. So the Company expects that the payment will be
received within the period of operating cycle.
(ii) The Company has some trade payables which are due for payment after 14
months from the date of balance sheet. These payables fall due within the
period of operating cycle. Though the Company does not expect that it will
be able to pay these payable within the operating cycle because the nature
of business is such that generally projects gets delayed and payments from
customers also gets delayed.
(iii) The Company was awarded a contract of ` 100 Crore on March 31, 20X2. As
per the terms of the contract, the Company made a security deposit of 5% of
the contract value with the customer, of ` 5 crore on March 31, 20X2. The
contact is expected to be completed in 18 months’ time. The aforesaid deposit
will be refunded back after 6 months from the date of the completion of the
contract.
(iv) The Company has also given certain contracts to third parties and have
received security deposits from them of ` 2 Crore on March 31, 20X2 which
are repayable on completion of the contract but if contract is cancelled
before the contract term of 18 months, then it becomes payable immediately.
However, the Company does not expect the cancellation of the contract.
Considering the above items / transactions answer the following :
(i) The Company wants to present the trade receivable as current despite the fact that
these are receivables in 15 months’ time. Does the decision of presenting the same as
current is correct ?
(ii) The Company wants to present the trade payables as non-current despite the fact
that these are due within the operating cycle of the Company. Does the decision of
presenting the same as non-current is correct ?
234 ACCOUNTS
(iii) Can the security deposit of` 5 Crore made by the Company with the customers be
presented as current ?
(iv) Can the security deposit of ` 2Crore taken by the Company from contractors be
presented as non-current ?
QUESTION 5 (RTP NOV 2021..ALREADY DISCUSSED IN RTP VIDEO)
Is offsetting permitted under the following circumstances?

(a) Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed
by the subsidiary - whether in the separate books of the holding company, the
expenditure and related reimbursement of expenses can be offset?
(b) Whether profit on sale of an asset against loss on sale of another asset can be
offset?
(c) When services are rendered in a transaction with an entity and services are received
from the same entity in two different arrangements, can the receivable and payable
be offset?
ANSWER
1. (a) As per paragraph 33 of Ind AS 1, offsetting is permitted only when the offsetting
reflects the substance of the transaction.
In this case, the agreement/arrangement, if any, between the holding and subsidiary
company needs to be considered. If the arrangement is to reimburse the cost
incurred by the holding company on behalf of the subsidiary company, the same may
be presented net. It should be ensured that the substance of the arrangement is
that the payments are actually in the nature of reimbursement.
(b) Paragraph 35 of Ind AS 1 requires an entity to present on a net basis gains and losses
arising from a group of similar transactions. Accordingly, gains or losses arising on
disposal of various items of property, plant and equipment shall be presented on
net basis. However, gains or losses should be presented separately if they are
material.
(c) Ind AS 1 prescribes that assets and liabilities, and income and expenses should be
reported separately, unless offsetting reflects the substance of the transaction.
In addition to this, as per paragraph 42 of Ind AS 32, a financial asset and a financial
liability should be offset if the entity has legally enforceable right to set off and
the entity intends either to settle on net basis or to realise the asset and settle
the liability simultaneously.
In accordance with the above, the receivable and payable should be offset against
each other and net amount is presented in the balance sheet if the entity has a legal
right to set off and the entity intends to do so. Otherwise, the receivable and payable
should be reported separately

THE EFFECTS OF CHANGES IN
FORGEIGN EXHANGES RATES
The objective of the standard is to address the accounting for foreign activities which
include:
• Transactions in foreign currencies; or

• Foreign operations.
Considering that an entity may present its financial statements in a foreign currency,
the standard also seeks to prescribe how to translate financial statements into a
presentation currency.
In this contest, the Standard defines foreign currency as a currency other than the
functional currency of the entity.
1. Functional currency is the currency of the primary economic environment in which the
entity operates.
In this regard, the primary economic environment will normally be the one in which it
primarily generates and expends cash i.e. it operates.
2. Foreign operation has been defined as an entity that is a subsidiary, associate, joint
venture or branch of a reporting entity, the activities of which are based or conduced
in a country or currency other than those of the reporting entity.
3. Presentation currency is the currency in which the financial statements are presented;
the presentation currency may be different form the entity’s functional currency.
Types of Currency
Foreign currency Functional currency Presentation currency
The currency of the The currency in

A currency other than
primary economic which the financial
the function currency
environment in which statements are
of the entity
the entity operates presented
236 ACCOUNTS
CONCEPT 2: SCOPE
• Ind AS Applies to :
(a)
In accounting for transactions and balances in foreign currencies, except for
derivative transactions and balances covered by Ind AS 109.
Foreign currency derivatives not covered by Ind AS 109 (e.g., some foreign
currency derivatives that are embedded in other contracts) the scope of this
Standard.
The standard also applies for translation of amounts relating to derivatives form
functional currency to presentation currency.
(b)
In translating the results and financial position of foreign operations;
(c)
In translating an entity’s results and financial position into a presentation currency.
• Ind AS 21 does not apply to:
(a)
Hedge accounting for foreign items, including the hedging of a net investment in
a foreign operation; Ind AS 109 should be applied for hedge accounting.
(b)
Presentation of cash flows from transactions in a foreign currency or to translation
of cash flows of a foreign operation in the statement of cash flows (refer to Ind
AS 7).
• This standard also does not apply to long term foreign currency items for which an
entity has opted for the exemption as per Ind AS 101.
• Such an entity may continue to apply the accounting policy as opted for such long term
foreign currency monetary items.
CONCEPT 3: FUNCTIONAL CURRENCY
• An entity measures its assets, equity, income and expenses in its functional currency.
• All transactions in currencies other than the functional currency are foreign currency
transactions.
Ind AS 21 requires each entity to determine its functional currency.
• In determining its functional currency, an entity emphasizes the currency that determines
the pricing of the transactions that it undertakes, rather than focusing on the currency
in which those transactions are denominated.
• The following are the factors that may be considered in determining an appropriate
functional currency:
(a) The currency that mainly influences sales prices for goods and services; this
often will be the currency in which sales prices are denominated and settled;
(b) The currency of the country whose competitive and regulations mainly determine the
sales prices of its goods and services; and
(c) The currency that mainly influences labour, material and other costs of providing
goods and services; often this will the currency in which these costs are denominated
and settled.
(d) Other factors that may provide supporting evidence to determine an entity’s
functional currency are:
(e) The currency in which receipts from operating activities are usually retained. If an
entity is a foreign operation, additional factors are set out in the standard which
should be considered to determine whether its functional currency is the same as that
of the reporting entity of which it is a subsidiary, branch associate or joint venture:
(a) Whether the activities of foreign operations are carried out as an extension of
that reporting entity, rather than being carried out with a significant degree of
autonomy.
If the foreign operation only sells goods imported from the reporting entity and
remits the proceeds to it, this will be an example of the former. An example of the
latter is when the foreign operations accumulates cash and other monetary items,
incurs expenses, generates income and arranges borrowings, all substantially in
its local currency;
(b) Transactions with the reporting entity as a proportion of the foreign operation’s
activates;
(c)
Impact of cash flows from the activates of the foreign operations on the cash
flows of the reporting entity and whether such cash flows are readily available
for remittance;
(d) Whether cash flows from the activities of the foreign operation are sufficient of
service existing and normally expected debt obligation without funds being made
available by the reporting entity.
In practice, the functional currency of a foreign operation that is integral to the group
will usually be the same as that of the parent.
• Management will be required to use its judgment to use judgment to determine the
functional currency for which they have to give priority to the primary indicators
before considering the other indicators which are designed to provide additional
supporting evidence to determine an entity’s functional currency.
QUESTION 1
Future Ltd. sells a revitalizing energy drink that is sold throughout the world. Sales of
the energy Drink comprise over 90% of the revenue of future Ltd. For convenience and
consistency in pricing, Sales of the energy drink are drink are denominated in USD. All
238 ACCOUNTS
financing activities of future Ltd. are in its local currency ($), future Ltd. are denominated
in $ what is the functional currency of future Ltd.?
SOLUTION
The functional currency of future ltd. is the $ looking at the primary indicators, the facts
presented indicate that the currency that mainly influences the cost of producing the
energy drink is the $. As stated in the fact pattern, pricing of the product in USD is done
for convenience and consistency purposes; there is no indication that the sales price is
influences by the USD.
QUESTION 2
Small India private Limited a subsidiary of Big Inc., takes orders from Indian customers
for Bing’s merchandise and then bills and collects for the sale of merchandise. Small also
has a local ware house in India to facilitate timely delivery and ensures that it remits to its
parent all cash flows that it generates as the operations of Small are primarily financed by
Big Inc. What is small’s functional currency?
SOLUTION
Small, although based in India with its cash inflows generated within India, is essentially
a “pass through company” established by its parent. Small is totally reliant on big for
financing and goods to be sold, despite the fact that goods are sold within India Rupees.
Therefore, Small in not a self-contained entity within India, but rather an entity that relies
on its parent. This reliance translates into a reliance on parent’s functional currency, the
US Dollar. Therefore, the primary economic environment is US and thus the functional
currency is the US Dollar. Therefore, Small India private Limited would have the US Dollar
as it functional currency and hence any receivables or payables of the branch or subsidiary
denominated in currencies other than US Dollar would be remeasured into the US Dollar at
the current rate, and changes in the exchange rate would result in an exchange gain or loss
to be included in net income.
BRIEF APPROACH UNDER THE STANDARD

The following is a summary of the approach under Ind AS 21to foreign currency translation:
• Determine the functional currency of the entity- each entity, whether a stand-
alone entity with foreign operations (such as a parent) or a foreign operation (such as
a subsidiary or branch should determine its functional its functional foreign currency
transactional (i.e., transactions not in entity’s functional currency) are translated into
the entity’s functional currency at the transaction date.
• Translation of assets and liabilities denominated in foreign currency at the reporting
date- At the reporting date assets and liabilities denominated in foreign currency are
_ Monetary items: at the exchange rate at the reporting date i.e., closing date.
_ Non –monetary items measured at historical cost: not retranslated/restated.
_ N
on-Monetary items measured at value: at the exchange rate on the date of fair
value determination.
• A reporting entity may comprise branches, subsidiaries, associates or joint ventures.
The functional currency of each entity should be determined separately. This may or
may not be the same as the reporting entity
• The Standard permits an entity to present its financial statements in any currency (or
currencies). Accordingly, the financial statements of the parent, branches, subsidiaries,
associates and joint ventures to be translated into group presentation currency by any
of the following two methods:
Step by step method: Financial operations translated into functional currency of any
Intermediate parent which is then translated into functional currency of any intermediate
parent which is then translated into functional currency (or presentation currency, if
different) of the ultimate parent.
Direct method: Financial operations translated into functional currency (or presentation
currency, if different) of the ultimate parent.
• Overall result is the presentation of the financial statements of the entity (or its
consolidated financial statements) being presented in functional currency (or presentation
currency, if different) of the parent entity.
CONCEPT 4: ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS
Initial Recognition at the Transaction date
• A foreign currency transaction is a transaction that is denominated or requires settlement

in a foreign currency (i.e., a currency other than the functional currency of the entity),
Including transactions arising when an entity:
(a)
Buys or sells goods or services whose price is denominated in a foreign currency:
(b)
Borrows or lends funds with amounts denominated in a foreign currency; or
(c)
Otherwise acquires or disposes of assets, or incurs or settles liabilities,
denominated in a foreign currency.
• A foreign currency transaction is initially recorded by translation in the entity’s functional
currency at the exchange rate on the transaction date (or at rate that approximates
the actual exchange rate.)
240 ACCOUNTS
• An average exchange rate for a specific period may be used as an approximate rate if
the exchange rate does not fluctuate significantly.
Subsequent Recognition at the end of each reporting period
• At the reporting date, assets and liabilities denominated in a foreign currency are
translated as follows:
(a)
Monetary items are translated at the exchange rate at the at the reporting date
I.e., closing rate;
(b) Non-monetary items measured at historical cost are not retranslated and instead
remain at the exchange rate at the date of the transaction: and
(c) Non-monetary items measured at fair value in a foreign currency are translated
at the exchange rate on the fair value was determined.
• The carrying amount of the item to be translated is determined applying the relevant
Accounting Standard.
For example, property, plant and equipment may be measured at fair value or
historical cost as per Ind AS 16, property, plant and Equipment.
• The carrying amount so determined, be it on the basis of historical cost or fair value,
if in foreign currency, is translated into the functional currency in accordance with this
Standard.
• In some cases, the carrying amount of items is determined by comparing two or more
amounts e.g.:
♦ Inventories-measured at lower of cost and net realisable value.
♦ Asset subject to impairment loss-lower of an assent’s carrying amount and its
recoverable amount.
• If such an assent is non-monetary and measured in a foreign currency, then for the
comparison:
(a)
The cost or carrying amount. As appropriate, is translated at the exchange rate
at the date when that amount was determined : and
(b)
The net realisable value or recoverable amount. As appropriate, is translated at
the exchange rate at date when that value was determined.
• The above may result in an impairment loss being recognised in the functional currency
but not in the foreign currency. Or versa.
• Where a country has multiple exchange rates, the rate used is that is that at which the
future cash flows represented by the transaction or balance could have been settled if
those cash flow had occurred at the measurement date. If exchangeability between two
currencies is temporarily lacking, the rate used is the first subsequent rate at which
exchanges could be made.
Foreign currency
Transactions
Initial recognition Subsequent Measurement
Spot rate on the

date of transaction Non-Monetary
Spot rate on Non-Monetary items
Items at Fair Value
the date of at Historical Cost-
–when fair value is
transaction no Translation
measured
Recognition of Foreign exchange Gains and Losses
• When an entity directly enters into foreign currency transactions, it is exposed to the
cash flow effects of changes in value of the foreign currency. An entity is required to
convert foreign currency items into its functional currency for recording those items
in its books of account as per the requirements of this standard, This produces the
same amounts in the functional currency as would have occurred had the items been
recorded initially in the functional currency. Once recorded, exchange differences will
arise where change in exchange rates affect the recorded balances.
• Exchange difference is the difference resulting from translating a given number of
units of one currency into another currency at different exchange rates.
• When the transaction occurs and settles within the some accounting period, all the
exchange entity’s net investment in that operation because an associate is not a group
entity.
• Exchange differences arising on monetary item that forms part of a reporting entity’s
net investment in a foreign operation have to be recognised in profit or loss in the
separate financial statements of the reporting entity and /or the individual financial
statements of the foreign operation, as appropriate:
- If such an item is denominated in the functional currency of the reporting entity.
An exchange difference arises in the foreign operation’s individual financial
statements.
- If such an item is denominated in the functional currency of the foreign operation.
Am exchange difference arises in the reporting entity’s separate financial
statements.
- If such an item is denominated in a currency other than the functional currency
242 ACCOUNTS
of either the reporting entity or the foreign operation, an exchange difference

arises in the reporting entity’s separate financial statements and in the foreign
operation’s individual financial statements.
• In the financial statements that include the foreign operation and the reporting entity
(e.g., consolidated financial statements when the foreign operation is a subsidiary,
associate or joint venture), such exchange differences are recognised initially in other
comprehensive income and then reclassified from equity to profit or loss on disposal of
the net investment.
QUESTION NO 3
Functional currency of parent p is EURO while the functional currency of its subsidiary S
is USD. P sells inventory to S for EURO 300. AT the reporting date, though the amount is
yet to be received from s, the payment is expected to be made in the foreseeable future.
In addition to the trading balances between P has lent an amount of EURO 500 to that is
not expected to be repaid in the foreseeable future. Should the exchange difference be
recognised in the profit and loss account?
SOLUTION
The exchange gain or loss incurred by p on the trading balance should be recognised in
profit or loss. Even if repayment was no due for three years (for example) of even longer,
but if repayment is still planned, then the gain of loss should be recognised in profit or loss.
The amount lent by P should be regarded as part of its permanent funding to S. Thus, the
exchange gain or loss incurred by P on the EURO 500 loan should be recognised in profit or
loss in P’s separate financial statement, but recognised in other comprehensive income and
presented within equity in the consolidated financial statements.
QUESTION NO 4
Modifying the above illustration, suppose that for tax reasons, the ‘permanent’ funding
extended to S is made via another entity in the group, T, rather than from P directly
i.e., on the directions of P.T gives the loan to S. Where should the exchange differences
recognised?
SOLUTION
Parent p
100%
100%
Subsidiary T Subsidiary S
Loan
Any exchange difference in respect of the loan is recognised in other comprehensive

income in the consolidated financial statements because from the group’s point of view the
funding relates to an investment in f foreign operation. This in the case irrespective of the
currency in which the loan is denominated . So if the loan is denominated in T’s functional
currency, and this is different from that of S, then exchange differences still should be
recognised in other compressive income in the consolidated financial statements.
CONCEPT 5: TRANSLATION OF FORENGN OPERATIONS

The guidance provide on determining an entity’s functional currency equally applies to
determine the functional currency of a foreign operation of the entity.
Effectively, translation procedures those for translating foreign operations are the same
as those followed when an entity presents its financial statements in presentation currency
that is different from its functional currency;
(a) assets and liabilities are translated at the exchange rate at the reporting date;
(b) items of income and expense are translated at exchange rates at the dates of the
relevant transactions, although appropriate average rates may be used;
(c) The resulting exchange differences are recognised in other comprehensive income and
are presented in a separate component of equity (generally referred to as the foreign
currency translation reserve or currency translation adjustment) until disposal of the
foreign operation; and
(d) Cash flows are translated at exchange rates at the dates of the relevant transactions,
although an appropriate average rate may be used.
• In addition to the exchange difference as stated above. The foreign currency
translation reserve may include exchange differences arising from loans that
form part of the parent’s net investment in the foreign operation and gains and
losses related to hedges of net investment in a foreign operation.
DIFFERENCE IN THE REPORTING DATES

When there is difference in the year end of foreign operation and that of the reporting
entity, the foreign operation often prepares additional statements as of the same date
as the reporting entity’s financial statements. When such financial statements are not
prepared, Ind AS 27 allows the use of a different date provided that the difference is no
greater than three months and adjustments are made for the effects of any significant
transactions or other events that occur between the different dates. In such a case,
the assets and liabilities of the foreign operation are translated at the exchange rate
at the end of the reporting period of the foreign operation. A similar approach is used in
applying the equity method to associates and joint ventures and in applying proportionate
consolidation to joint ventures in accordance with Ind AS 28, Investment in Associates and
Joint Venture.
244 ACCOUNTS
CONCEPT 6: INTRA – GROUP TRANSACTIONS
• Although in intra- group balances are eliminated on consolidation, any foreign exchange
gains or losses will not be eliminated, this is because the group has a real exposure to a
foreign currency since one of the entities will need to obtain or sell foreign currency in
order to settle the obligation or realise the proceeds received.
• Accordingly, in the consolidated financial statements of the reporting entity, the
exchange difference arising on such intra group transactions in recognised in the
statement of profit or loss account unless it arises form on a monetary item that form
part of a reporting entity’s net investment in a foreign operation in which case it is taken
to other comprehensive income and accumulated in a separate component of equity and
reclassified to profit or loss only on disposal of the foreign operation.
QUESTION NO 5
The functional and presentation currency of parent p is USD while the functional currency
of its subsidiary S is EURO. P sold goods having a value of USD 100 to S when the exchange
rate was USD 1 = EURO 2.At year- end, the amount is still due and the exchange rate is UAD
1= EURO 2.2 How should the exchange differences be accounted for in the consolidated
SOLUTION
At year-end, S should revalue its accounts payable to EURO 220 recognising a loss of 20 in
its standalone profit or loss. Thus, in the books of S, the balance payable to P will appear at
EURO 220 while in the books of P books the balance receivable from S will USD 100.
For consolidation purposes, the assets and liabilities of S will be translated to USD at the
closing rate i.e., USD 100 which will get eliminated against the receivable in the books of P
but the EURO 20 exchange loss recorded In the subsidiary’s statement of profit and loss
has no equivalent gain in the parent’s financial statements. Therefore, the EURO 20 loss will
remain in the consolidated statement of profit and loss.
The reason for this is that intra- group balance represents a commitment to translate Euro
into USD and this is similar to holding a foreign currency asset in the parent company. The
subsidiary must go out and buy USD to settle the obligation to the parent, so the Group as
a whole has an exposure to foreign currency risk.
Example
Parent p has a functional currency of USD, and Subsidiary S has a functional currency of
EURO. P whose reporting date is March 31, lends USD 100 to S on September 30, 2016.
S converted the cash received into EURO on Receipt.
USD EURO
Exchange rate at September 30, 2016 1 = 1.5
Exchange rate at March 31, 2017 1 = 2,0
Entries in the books of account of S Debit Credit
(EURO) (EURO)
Date particulars
September 30, cash A/c Dr. 150
2016 To Intra-group payable 150
(To recognise Intra-group loan)
March 31, 2017 Exchange loss A/c Dr. 50
50
(To recognise exchange loss on intra-group loan)
In S’ s second entry, the liability is remeasured at March 31, 2017 and a translation loss
is recorded.
The following entry is recorded by P/
Debit (USD) Credit (USD)
Intra-group receivable Dr. 100
To Cash 100
(To recognise intra-group loan on issue)
On consolidation at March 31, 2017 the EURO 200 Will convert to USD 100 And the
receivable and payable will be eliminated. However ,an exchange loss equivalent to EURO
50 For the year ending March 31 , 2017 will remain on consolidation, This is appropriate
because S will need to obtain USD in order to repay the liability, therefore, the group as a
whole has a foreign currency exposure. It is not appropriate to transfer the exchange loss
to equity on consolidation unless the loan form part of P’s net investment in S.
CONCEPT 7: GOODWILL AND FAIR VALUE ADJUSTEMENTS

ARISING FROM A BUSUNESS COMBINATION
• Goodwill and fair value acquisition accounting adjustments arising from a business
combination are treated as assets and liabilities of the foreign operation.
• Hence they are expressed in the functional currency of the foreign operation and should
be translated at the closing exchange rate as is the case for other assets and liabilities.
246 ACCOUNTS
CONCEPT 8:DISPOSAL OR PARTIAL

DISPOSAL OF FOREGN OPERATIONS
Full Disposal
• A disposal may arise, for example, through sale, liquidation or repayment of share capital.
On disposal of the foreign operation, the cumulative exchange difference relating to that
foreign operation recognised in other comprehensive income and accumulated separately
in equity are reclassified to profit or loss (reclassification adjustment) when the gain or
loss on disposal is recognised.
• On disposal of a subsidiary that includes a foreign operation, the cumulative amount of
the exchange differences related to that foreign operation that have been attributed
to the non-controlling interests forms part of the non-controlling interests that is
derecognised and is included in the calculation of the gain or loss on disposal, but it is
not reclassified to profit or loss.
• In addition to the disposal on an entity’s interest in a foreign operation, the following
Are accounted for as disposals even if the entity retains an interest in the former
subsidiary, associate or jointly controlled entity:
♦ The loss of control of a subsidiary that includes a foreign operation;
♦ The loos of significant influence over an associate that includes a foreign
operation; and
♦ The loss of joint arrangement over a jointly controlled entity that includes a
foreign operation.
Example:-
Parent P owns 100 percent of subsidiary S. P sells 70 Percent of its investment
and loses control of S. The entire balance in the foreign currency translation
reserve in respect of S is reclassified to profit or loss.
Partial disposal
A partial disposal of an entity’s interest in a foreign operation is any an entity’s ownership
interest in a foreign operation, except for those reductions that are accounted for as
disposals.
In the case of the partial disposal of a subsidiary that includes a foreign operation, the
entity reattributes the proportionate share of the cumulative amount of the exchange
differences recognised in other income to the NCI in that foreign operation.
In any other partial disposal of foreign operation, the entity reclassifies to profit or loss only
the proportionate share of the cumulative amount of the exchange differences recognised
in other comprehensive income.
Example:-
Parent P owns 100 percent of subsidiary S. P sells 10 percent of its investment
and retains control over S. Therefore, 10 percent of the balance in the foreign
currency translation reserve is reclassified to NCI.
Example:-
Parent P owns 35 percent of Associate B. P sells a 5 percent stake and retains significant
influence over B. Therefore, One- Seventh (5/35 )of the balance in the foreign currency
translation reserve is reclassified profit or loss.
A write-down of the carrying amount of a foreign operation, either because of its own
losses or because of an impairment recognised by the investor, does not constitute a partial
disposal.
Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive
income is reclassified to profit or loss at the time of a write- down.
TAX EFFECT OF ALL EXCHANGE DIFFERENCES

Ind AS 12 applies to tax effects of gains and losses on foreign currency transactions and
exchange differences arising on translating the results and financial position of an entity
(including a foreign operation) into a different currency.
Ind AS 21 requires the following disclosures:
(a) Amount of exchange differences recognised in profit or loss except for those arising
on financial instruments measured at fair value through profit or loss in accordance
with Ind AS 109;
(b) Net exchange differences recognised in other comprehensive income and accumulated
in a separate component of equity, along with the reconciliation of the amount at the
beginning and end of the period;
(c) If the presentation currency is different from the functional currency- that fact
shall be stated, together with disclosure of the functional currency and the reason for
using a different presentation currency;
(d) In case of change in functional currency of either the reporting entity of a significant
foreign operation:
(i) Fact of such change
(ii)
Reason for the change and :
(iii)
Date of change in functional currency:
248 ACCOUNTS
(e) If presentation currency is different from functional currency. The financial

statements can be described as complying with Ind only if all Ind AS including the
translation method of this Standard is complied with.
However, If an entity presents its financial statements or supplementary financial
information in a currency other than its functional or presentation currency:
(i) The information should be clearly identified as supplementary information to
distinguish it from the information that complies with Ind As;
(ii)
The currency in which the supplementary information is displayed should be
disclose; and
(iii)
The entity’s functional currency and the method of translation used to determine
the supplementary information should be disclosed,
TEST YOUR KNOWLEDGE
1. Parent P acquired 90 percent of subsidiary s some years ago. P now sells its entire
investment in S for ``1,500 lakh. The net assets of s are 1,000 and the NCI in is ` 100
lakhs. The cumulative exchange differences that have arisen during P,s ownership are
gains of ` 200 lakhs, resulting in P.s foreign currency translation reserve in respect
of S having a credit balance of ` 180 lakhs, while the cumulative amount of exchange
differences that have been attributed to the NCI is `20 lakhs
Calculate P’s gain on disposal.
2. InfoTech Global Ltd. has a functional currency of USD and needs translate its financial
statements into the functional and presentation currency of InfoTech Inc. (L$)
The following is the statement of financial position of InfoTech Global Ltd. prior to
translation:
USD L$
Property, plant and equipment 50,000
Receivables 9,35,000
Total assets 9,85,000
Issued capital 50,000 30,055
Opening retained earnings 28,000 15,274
Accounts payable 8,40,000
Accrued liabilities 47,000
Total equity and liabilities 9,85,000
Requited:
Translate the statement of financial position of InfoTech Global Ltd. into L$ ready
for consolidation by InfoTech Inc.(Share capital and opening retained earnings have
been pre-populated.)
Prepare a working of the cumulative balance of the foreign currency translation
reserve.
Relevant exchange rates are:
Rate at beginning of the year L$ 1 = USD.22
Average rate for the year L$ 1 = USD 1. 175
Rate at end of the year L$ = USD 1.13
Answers to practical questions
1. P’ s gain on disposal would be calculated in the following manner
(` in lakhs)
Sale proceeds 1500
Net assets of S (1000)
NCI derecognised 100
Foreign currency translation 180
Gain on disposal 780
2. Translation of the financial Statements

USD Rate L$
Property, Plant and equipment 50,000 1.13 44,248
Receivables 9,35,000 1.13 8,27,434
Total assets 9,85,000 8,71,682
Issued Capital 50,000 _ 30,055
Opening retained corning’s 28,000 _ 15,274
Profit for the year 20,000 1.175 17,021
Accounts payable 8, 40,000 1.13 7,43,363
Accrued liabilities 47,000 1.13 41,593
Total equity and liabilities USD 9,85,000 8,47,306
Foreign Currency 24,376
Translation reserve (proof below)
Total equity and liabilities L$ 8, 71, 682
250 ACCOUNTS
Working of the cumulative balance of the FCTR

Particulars Actual Amount Difference
Translated translate
Amount at closing
In L$ rate of 1.13
Issued 30, 055 44,274 14,192
Opening retained earnings 15,274 24,779 9,505
Profit for the year 17,021 17,699 678
[Difference of 1 is rounding] 62,350 86,725 24,375

QUESTION 1
A is an Oman based company having a foreign operation. B in India the foreign operation
was primarily set up to execute a construction project in India the functional currency of
A is OMR.
78% of entity B ’s finances have been raised in USD by way of contribution from A . B’s bank
accounts are maintained in USD as well as INR. Cash flows generated by B are transferred
to A on a monthly basis in USD in respect of repayment of finance received from A.
Revenues of B are in USD. Its competitors globally based. Tendering for the construction
project happened in USD.
B incurs 70% of the cost in INR and remaining 30% costs in USD.
Since B is located in India can its cap presume its function currency to be INR?
SOLUTION
No, B cannot presume INR to be its function currency on the basis of its location. It needs
to consider various factors listed in Ind AS for determination of function currency.
Primary indicators:
1. The currency that mainly influences

Sales prices for its goods and services. This will often be the currency in which
(a)
sales prices are denominated and settled; and of the country whose competitive
forces and regulations mainly determine the sales prices of its goods and services.
labour. Material and other cost of providing goods and services. This will often be
(b)
the currency in which these cost are determinate and settled.
Other factors that may provide supporting evidence to determine an entity’s functional
2.
currency are (Secondary indicators):
the currency in which funds from financing activities (i.e. issuing debt and equity
(a)
instruments) are generate; and
the currency in which receipts from operating activities are usually retained.
(b)
If an entity is a foreign operation, additional factors asset set out in Ind AS 21
3.
should be considered to determine whether its function currency is the same as that of
the reporting entity of which it is a subsidiary, branch, associate or joint venture:
Whether the activities of foreign operations are carried out as an extension of
(a)
the reporting entity rather than being carried out with a significant degree of
autonomy;
252 ACCOUNTS
Whether the transaction with the reporting entity are a high or a low proportion of
(b)
the foreign operation’s activities;
Whether cash flows from the activities of the foreign operation directly affect the
(c)
cash flows of the reporting entity and are readily available for remittance to it
Whether cash flows from the activities of the foreign operation are sufficient to
(d)
service existing and normally expected debt obligation without funds being made
available by the reporting entity .
On the basis of additional factors mentioned in point 3 above, b cannot be said to have
functional currency same as that of A Ltd.
Hence primary and secondary indicators should be used for the determination of functional
currency of B giving priority to primary indicators. The analysis is given below:
• Its significant revenues and competitive forces are in USD.
• Its significant portion of cost is incurred in INR. Only 30% costs are in USD.
• 78% of its finances have been raised in USD.
• It retains its operating cash flows partially in USD and partially in NAR.
Keeping these factors in view, USD should be considered as the function currency of B.
QUESTION 2
S Ltd is a company based out of India which got listed on Bombay Stock Exchange in the
financial year ended 31st March, 20X1 Since then the company’s operations have increased
considerably. The company was engaged in the business of trading of motor cycles. The
company only deals in imported Motor cycles. These motor cycles are imported from US.
After importing the motor cycles, these are sold across India through its various
distribution channels The company had only private customers earlier but company also
started corporate tie-up and increased its customer base to corporates also The purchase
of the motor cycles are in USD because the vendor (s) from whom these mother cycles are
purchased those are all located in US.
All other operation expense of the company are incurred in India only because of its location
and they generally happen to be in INR
Currently, its customers are both corporate and private in the ratio of 70:30 approximately.
The USD Denominated prices of motor cycles in India cycles in India are difference from
those in other countries.
The company is also expecting that in the coming years, its customers based will increase
significantly in India and the current proportion may also change.
Currently, the invoices are raised to the corporate customers in USD for the purpose of
hedging. However, private customers don’t accept the same arrangement and hence invoices
are raised to them in INR.
What would be the functional currency of this company?
SOLUTION
The functional currency of S Ltd. is INR.
Following factors need to be considered for determination of functional currency:
Primary indicators
1. the currency that mainly influences
Sales prices for its goods and services. This will often be the currency in which
(a)
sales prices are denominated and settled; and of the country whose competitive
forces and regulation mainly determine the sales prices of its goods and services.
labour, material and other costs of providing goods and services. This will often be
(b)
the currency in which these costs are denominated and settled.
Other factors that may provide supporting evidence to determine an entity s functional
2.
currency are (Secondary indicators):
The currency in which funds from financing activities (i.e. issuing debt and equity
(a)
instruments) are generate; and
The currency in which receipts from operating activities are usually retained.
(b)
Primary and secondary indicators should be used for the determination of functional
currency of S Ltd. giving priority to primary indicators.
The analysis is given below:
Ind AS 21 gives greater emphases to the currency of the economy that determines the
pricing of transactions, as opposed to the currency in which transactions are denominated.
Sales prices for motor cycles are mainly influenced by the competitive forces and regulation
in India The market for motor cycles depends on the economic situation in India and the
company is in competition with importers of other motor cycle brands.
Even though 70% of the revenue of the company id denominated in USD, India economic
conditions are the main factors affecting the Prices. This is evidenced by the fact that
USD denominated sales prices in India are different from USD denominated sale prices for
the same motor cycles in other countries.
Management is able to determine the functional currency because the revenue is clearly
influenced by the India economic environment and expenses are mixed.
On the basis of above analysis, INR should be considered as the functional currency of the
company
254 ACCOUNTS
QUESTION 3
M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies

and non-pharmaceutical companies. It has a wholly owned subsidiary, G Ltd, which is engaged
in the business of pharmaceuticals. G Ltd purchases the pharmaceutical bottles from its
parent company. The demand of G Ltd is very high and the operations of M Ltd are very
large and hence to cater to its shortfall, G Ltd also purchases the bottles from other
companies. Purchases are made at the competitive prices.
M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on 1st February, 20X1 The cost
of these bottles was ` 830 lacs in the books of M Ltd at the time of sale. At the year- end
i.e. 31st March, 20X1 all these bottles were laying as closing stock with G Ltd. What should
be the accounting treatment for the above?
Following additional information is available:
Exchange rate on 1st February, 20X1 1 Euro = ` 83
Exchange rate on 31st March, 20X1 Euro = ` 85
SOLUTION
Accounting treatment in the books of M Ltd
M Ltd will recognise sales of ` 996 lacs (12 lacs Euro X 83)
Profit on sale of inventory = 996 lacs – 830 lacs – ` 116 lacs.
Accounting treatment in the books of G Ltd

G Ltd will recognise inventory on 1st February, 20X1 of Euro 12 lacs which will also be its
closing stock at year end.
Accounting treatment in the consolidated financial statements

Receivable and payable in respect of above mentioned sale/ purchase between M Ltd and G
Ltd will get eliminated.
The closing stock of G Ltd will be translated at year end resulting in amount of closing stock
of ` 1,020 lacs (12 lacs Euro X 85).
The restated amount of closing stock includes three components
Restante amount of cost of inventory for ` 850 lacs
Profit element of ` 166 lacs; and
Translated amount of profit element of ` 4 lacs.
At the time of consolidation, the two elements amounting to ` 170 lacs will be eliminated
from the closing stock.
QUESTION 4
Entity A, whose functional currency is ` Has a foreign operation, Entity B , with a Euro
functional currency Entity B issues to A perpetual debt (i.e. it has no maturity) denominated
in euros with an annual interest rate of 6 per cent. The perpetual debt has no issuer call
option on holder put option thus contractually it is just an infinite stream of interest
payments in Euros.
In A’s consolidated financial statements, can the perpetual debt be considered, in accordance
with Ind AS 21 a monetary item “for which settlement is neither planned nor likely to occur
in the foreseeable future’ (i.e. part of A’s net investment in B) with the exchange gains and
losses on the perpetual debt therefore being recorded in equity?
SOLUTION
Yes, as per Ind AS 21 net investment in a foreign operation is the amount of the reporting
entity s interest in the net assets of that operation.
As per para 15 of Ind AS 21 an entity may have a monetary item that is receivable from or
payable to a foreign operation. An item for which settlement is planned not likely to occur in
the foreseeable future is, in substance, a part of the entity’s net investment in that foreign
operation. Such monetary items may include long-term receivables or loans. They do not
include trade receivables or trade payables.
Analysis on the basis of above mentioned guidance

Through the origination of the perpetual debt, A Has made a permanent investment in B.
the interest payments are treated as interest receivable by A and interest payable by B,
no as repayment of the principal debt. Hence, the fact that the interest payments are
perpetual does not mean that settlement is planned or likely to occur. The perpetual debt
can be considered part of A’s net investment in B.
In accordance with para 15 of Ind AS 21 the foreign exchange gains and losses should be
recorded in equity at the consolidated level because sentiment of that perpetual debt is
neither planned nor likely to occur.
256 ACCOUNTS
IND AS 21: FOREIGN CURRENCY TRANSACTIONS

QUESTION 1
On 30th January, 20X1, A Ltd. purchased a machinery for $ 5,000 from USA supplier
on credit basis. A Ltd.’s functional currency is Rupees. The exchange rate on the date of
transaction is 1 $ = ` 60. The fair value of the machinery determined on 31st March, 20X1
is $ 5,500. The exchange rate on 31st March, 20X1 is 1$ = ` 65. The payment to overseas
supplier done on 31st March 20X2 and the exchange rate on 31st March 20X2 is 1$ = `
67. The fair value of the machinery remain unchanged for the year ended on 31st March
20X2. Prepare the Journal entries for the year ended on 31st March 20X1 and year 20X2
according to Ind AS 21. Tax rate is 30%
QUESTION 2
On 1st January, 2018, P Ltd. purchased a machine for $ 2 lakhs. The functional currency of
P Ltd. is Rupees. At that date the exchange rate was $1= ` 68. P Ltd. is not required to pay
for this purchase until 30th June, 2018. Rupees strengthened against the $ in the three
months following purchase and by 31st March, 2018 the exchange rate was $1 = ` 65. CFO
of P Ltd. feels that these exchange fluctuations wouldn’t affect the financial statements
because P Ltd. has an asset and a liability denominated in rupees, which was initially the
same amount. He also feels that P Ltd. depreciates this machine over four years so the
future year-end amounts won’t be the same.
Examine the impact of this transaction on the financial statements of P Ltd. for the year
ended 31st March, 2018 as per Ind AS.
QUESTION 3
Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to
deliver goods in exchange for total consideration of USD 50 million and receives an upfront
payment of USD 20 million on this date. The functional currency of the supplier is INR.
The goods are delivered and revenue is recognised on 31st March, 2018. USD 30 million is
received on 1st April, 2018 in full and final settlement of the purchase consideration.
State the date of transaction for advance consideration and recognition of revenue. Also
state the amount of revenue in INR to be recognized on the date of recognition of revenue.
The exchange rates on 1st January, 2018 and 31st March, 2018 are ` 72 per USD and ` 75
per USD respectively.
QUESTION 4 (RTP MAY 2021….ALREADY DISCUSSED IN RTP VIDEOS)
Global Limited, an Indian company acquired on 30th September, 20X1. 70% of the share
capital of Mark Limited, an entity registered as company in Germany. The functional currency
of Global Limited is Rupees and its financial year end is 31st March, 20X2.
(i) The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30th September, 20X1.
The exchange rates as at 30th September, 20X1 was ` 82 / EURO and at 31st March,
20X2 was ` 84 / EURO.
What is the value at which the goodwill has to be recognised in the financial statements
of Global Limited as on 31st March, 20X2?
(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million
EURO during the year ended 31st March, 20X2. The exchange rate on the date of
purchase by Global Limited was ` 83 / EURO and on 31st March, 20X2 was ` 84 / EURO.
The entire goods purchased from Mark Limited are unsold as on 31st March, 20X2.
Determine the unrealised profit to be eliminated in the preparation of consolidated
ANSWER
(i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be translated
at the closing rate in accordance with paragraphs 39 and 42. In this case the amount
of goodwill will be as follows:
Net identifiable asset Dr. 23 million
million Goodwill(bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x ` 84 = ` 117.6 million
(ii)
Particulars EURO in million

Sale price of Inventory 4.20
Unrealised Profit [a] 1.80
Exchange rate as on date of purchase of Inventory [b]` 83 / Euro Unrealized profit

to be eliminated [a x b]` 149.40 million
258 ACCOUNTS
As per para 39 of Ind AS 21 “income and expenses for each statement of profit and
loss presented (ie including comparatives) shall be translated at exchange rates at
the dates of the transactions”.
In the given case, purchase of inventory is an expense item shown in the statement
profit and loss account. Hence, the exchange rate on the date of purchase of
inventory is taken for calculation of unrealized profit which is to be eliminated on
the event of consolidation.
QUESTION 5 (RTP MAY 2020……ALREADY DISCUSSED IN RTP VIDEOS)
On 1st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The
investors subscribed for 6 million Foreign Currency (FCY) loan notes at par. It incurred
incremental issue costs of FCY 2,00,000. Interest of FCY 6,00,000 is payable annually on
31st March, starting from 31st March, 20X2. The loan is repayable in FCY on 31st March,
20X7 at a premium and the effective annual interest rate implicit in the loan is 12%. The
appropriate measurement basis for this loan is amortised cost. Relevant exchange rates
are as follows:
- 1st April, 20X1 - FCY 1 = ` 2.50.
- 31st March, 20X2 – FCY 1 = ` 2.75.
- Average rate for the year ended 31st Match, 20X2 – FCY 1 = ` 2.42. The functional
currency of the group is Indian Rupee.
What would be the appropriate accounting treatment for the foreign currency loan in the
books of Makers Ltd. for the FY 20X1-20X2? Calculate the initial measurement amount
for the loan, finance cost for the year, closing balance and exchange gain / loss.
ANSWER
Initial carrying amount of loan in books
Loan amount received = 60,00,000 FCY
Less: Incremental issue costs = 2,00,000 FCY
58,00,000 FCY
Ind AS 21, “The Effect of Changes in Foreign Exchange Rates” states that foreign currency
transactions are initially recorded at the rate of exchange in force when the transaction
was first recognized.
Loan to be converted in INR = 58,00,000 FCY x ` 2.50/FCY
=
` 1,45,00,000
Therefore, the loan would initially be recorded at ` 1,45,00,000.

Calculation of amortized cost of loan (in FCY) at the year end:
Period Opening Financial Interest @ Cash Flow Closing Financial

Liability (FCY) 12% (FCY) (FCY) Liability (FCY)
A B C A+B-C
20X1-20X2 58,00,000 6,96,000 6,00,000 58,96,000
The finance cost in FCY is 6,96,000

The finance cost would be recorded at an average rate for the period since it accrues over
a period of time.
Hence, the finance cost for FY 20X1-20X2 in INR is ` 16,84,320 (6,96,000 FCY x
` 2.42 / FCY)
The actual payment of interest would be recorded at 6,00,000 x 2.75 = INR 16,50,000
The loan balance is a monetary item so it is translated at the rate of exchange at the
reporting date.
So the closing loan balance in INR is 58,96,000 FCY x INR 2.75 / FCY = ` 1,62,14,000
The exchange differences that are created by this treatment are recognized in profit
and loss. In this case, the exchange difference is
` [1,62,14,000 - (1,45,00,000 + 16,84,320 – 16,50,000)] = ` 16,79,680.
This exchange difference is taken to profit and loss.
260 ACCOUNTS
NOTES
IND AS 103: BUSINESS COMBINATION 261
IND AS 103: BUSINESS COMBINATION
UNIT 1:
BUSINESS VS ASSETS ACQUISITION VS
BUSINESS COMBINATION
BUSINESS COMBINATION
Under Ind AS 103, Business combination occurs when an entity obtains control of a business
by acquiring net assets or acquiring its significant equity interest. An entity can obtain
control of a business by contract only in which case the acquirer would neither have acquired
net assets nor equity interest. In such a case, while preparing balance sheet, controlling
interest would be zero and non-controlling interest will be 100%.
• As such, two elements are required for a transaction to be a business combination

under Ind AS 103:
 the acquirer obtains control of an acquiree (“control” as defined in Ind AS 110);
and
 the acquiree is a business
• A business combination may be structured in a variety of ways for legal, taxation or
other reasons, which include but are not limited to:
 one or more businesses become subsidiaries of an acquirer or the net assets of
one or more businesses are legally merged into the acquirer;
 one combining entity transfers its net assets, or its owners transfer their equity
interests, to another combining entity or its owners;
 all of the combining entities transfer their net assets, or the owners of those
entities transfer their equity interests, to a newly formed entity (sometimes
referred to as a roll- up or put-together transaction); or
 a group of former owners of one of the combining entities obtains control of the
combined entity.
ELEMENTS OF BUSINESS
Definition of Business
As per paragraph B7 of the application guidance of Ind AS 103, a business consists of
inputs and processes applied to those inputs that have the ability to contribute to the
creation of outputs. Although businesses usually have outputs, outputs are not required for
an integrated set of activities and assets to qualify as a business.
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Analysis: Ind AS 103 defines business as an integrated set of activities and assets that
is capable of being conducted and managed for the purpose of providing goods or services
to customers, generating investment income (such as dividends or interest) or generating
other income from ordinary activities.
Elements of Business
The three elements of a business are defined as follows:
(a) Input: Any economic resource that creates outputs, or has the ability to contribute to
the creation of outputs, when one or more processes are applied to it.
Example:
Non-current assets (including intangible assets or rights to use non-current assets),
intellectual property, the ability to obtain access to necessary materials or rights and
employees.
(b) Process: Any system, standard, protocol, convention or rule that when applied to an
input or inputs, creates output or has the ability to contribute to the creations of
outputs
Example:
Strategic management processes, operational processes and resource management
processes.
These processes typically are documented, but the intellectual capacity of an organised
workforce having the necessary skills and experience following rules and conventions
may provide the necessary processes that are capable of being applied to inputs to
create outputs. (Accounting, billing, payroll and other administrative systems typically
are not processes used to create outputs.)
(c) Output: The result of inputs and processes applied to those inputs that provide goods
or services to customers, generate investment income (such as dividends or interest)
or generate other income from ordinary activities.
FURTHER ASSESSMENT
To be capable of being conducted and managed for the purpose identified in the definition
of a business, an integrated set of activities and assets requires two essential elements—
inputs and processes applied to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an input
and a substantive process that together significantly contribute to the ability to create
output.
Substantive Process:
To determine whether acquired process is substantive, following has to be considered:
(1) If a set of activities and assets does not have output at the acquisition date, an
acquired process (or group of processes) shall be considered substantive only if-
(a) It is critical to the ability to develop or convert an acquired input or inputs into
outputs; and
(b) The inputs acquired include both an organised workforce that has the necessary
skills, knowledge, or experience to perform that process (or group of processes)
and other inputs that the organised workforce could develop or convert into
outputs.
Those other inputs could include-
(i) Intellectual property that could be used to develop a good or service;
(ii) Other economic resources that could be developed to create outputs; or
(2) If a set of activities and assets has outputs at the acquisition date, an acquired process
(or group of processes) shall be considered substantive if, when applied to an acquired
input or inputs, it-
(a) is critical to the ability to continue producing outputs, and the inputs acquired
include an organised workforce with the necessary skills, knowledge, or experience
to perform that process (or group of processes); or
(b) Significantly contributes to the ability to continue producing outputs and-
(i) Is considered unique or scarce; or
(ii) Cannot be replaced without significant cost
QUESTION 1
Company X is a liquor manufacturer and has traded for a number of years. The company
produces a wide variety of liquor and employs a workforce of machine operators, testers,
and other operational, marketing and administrative staff. It owns and operates a factory,
warehouse and machinery and holds raw material inventory and finished products.
On 1st January 2011, Company Y pays USD 80 million to acquire 100% of the ordinary voting
shares of Company X. No other type of shares has been issued by Company X. On the same
day, the four main executive directors of Company X take on the same roles in Company Y.
Comment on given transaction whether it is a business acquisition or asset acquisition?
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SOLUTION:
In this case, it is clear that Company X is a business. It operates a trade with a variety of
assets that are used by its employees in a number of related activities. These assets and
activities are necessarily integrated in order to create and sell the company’s products. As
per definition the above acquisition includes an input (including four executive directors of
company X) and thus it can be concluded as the significant process acquired along with the
other inputs.
So, it can be said that Y limited as acquired a business.
QUESTION NO 2 (INVESTMENT IN A DEVELOPMENT STAGE ENTITY)
Company D is a development stage entity that has not started revenue-generating operations.
The workforce consists mainly of research engineers who are developing a new technology
that has a pending patent application. Negotiations to license this technology to a
number of customers are at an advanced stage. Company D requires additional funding
to complete development work and commence planned commercial production.
The value of the identifiable net assets in Company D is INR 750 million. Company A pays
INR 600 million in exchange for 60% of the equity of Company D (a controlling interest).
SOLUTION:
Although Company D is not yet earning revenues (an example of ` outputs’) there are a
number of indicators that it has a sufficiently integrated set of activities and assets that
are capable of being managed to produce a return for investors. In particular, Company D:
• Employs specialist engineers developing the know-how and design specifications of the
technology.
• Is pursuing a viable plan to complete the development work and commence
production.
• Has identified and will be able to access customers willing to buy the outputs
So, company D should be presumed as business.
QUESTION NO 3
(Acquisition of an entity holding investment properties)

Company A acquires 100% of the equity and voting rights of Company P, a subsidiary of a
property investment group. Company P owns three investment properties. The properties
are single-tenant industrial warehouses subject to long-term leases. The leases oblige
Company P to provide basic maintenance and security services, which have been outsourced
to third party contractors. The administration of Company P’s leases was carried out by an
employee of its former parent company on a part-time basis but this individual does not
transfer to the new owner.
SOLUTION:
In most cases, an asset or group of assets and liabilities that are capable of generating
revenues, combined with all or many of the activities necessary to earn those revenues,
would constitute a business. However, Investment property is a specific case in which
earning a return for investors is a defining characteristic of the asset. Accordingly,
revenue generation and activities that are specific and ancillary to an investment
property and its tenancy agreements should therefore be given a lower ` weighting’ in
assessing whether the acquiree is a business.
Further process (i.e. Basic maintenance, security services and administration) is not critical
to the ability to continue producing outputs. Also process (i.e. Basic maintenance, security
services and administration) is not unique and it can be replaced easily without significant
cost.
In our view the purchase of investment property with tenants and services that are
purely ancillary to the property and its tenancy agreements should generally be accounted
for as an asset purchase.
QUESTION NO 4
(Acquisition of an entity holding investment properties)

Company A acquires 100% of the equity and voting rights of Company Q, which owns three
investment properties. The properties are multi-tenant residential condominiums subject
to short term rental agreements that oblige company Q to provide substantial maintenance
and security services, which are outsourced with specialist providers. Company Q has five
employees who deal directly with the tenants and with the outsourced contractors to resolve
any non-routine security or maintenance requirements. These employees are involved in
a variety of lease managements tasks (eg identification and selection of tenenats; lease
negotiation and rent reviews)_ and marketing activities to maximize the quality of tenants
and the rental income.
SOLUTIONS:
In this case, Company Q consists of a group of revenue – generating assets, together with
employees and activities that clearly go beyond activities ancillary to the properties and
their tenancy agreements.
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Further process (i.e. identification and selection of tenants: lease negotiation and rent
reviews) is critical to the ability to continue producing outputs (i.e. in terms to maximize
quality of tenants and the rental income)
These assets and activities are clearly integrated so Company Q is considered a
business.
QUESTION NO 5
(Seller retains some activities and assets)

Company S is a manufacturer of a wide range of products. The company’s payroll and
accounting system is managed as a separate cost centre, supporting all the operating
segments and the head office functions.
Company A agrees to acquire the trade, assets, liabilities and workforce of the operating
segments of Company S but does not acquire the payroll and accounting costs center or any
head office functions. Company A is a competitor of Company S.
SOLUTION:
In this case, the activities and assets within the operating segments are capable of being
managed as a business and so Company A accounts for the acquisition as a business combination.
The payroll and accounting cost centre and administrative head office functions are typically
not used to create outputs and so are generally not considered an essential element in the
assessment of whether an integrated set of activities and assets is a business or not.
QUESTION NO 6
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.
Required:
Does Company A constitute a business in accordance with Ind AS 103?
SOLUTION:
The definition of business requires existence of inputs and processes. In this case, the
skilled workforce, manufacturing plant and IPR, along with strategic and operational
processes constitutes the inputs and processes in line with the requirements of Ind AS 103.
When the said inputs and processes are applied as an integrated set, the Company
A will be capable of producing outputs; the fact that the Company A currently does
not have revenue is not relevant to the analysis of the definition of business under
Ind AS 103. Basis this and presuming that Company A would have been able to obtain
access to customers that will purchase the outputs, the present case can be said to
constitute a business as per Ind AS 103.
QUESTION NO 7
Modify 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?
SOLUTION:
Though the sales force has not been taken over, however, if the missing inputs (i.e. sales
force) can be easily replicated or obtained by the market participant to generate output, if
may be concluded that Company A has acquired business. Further, if Company B is also into
similar line of business, then the existing sales force of Company B may also be relevant to
mitigate the missing input. As such, the definition of business is met in accordance with Ind
AS 103.
ASSETS ACQUISITION
As per the provisions of Ind AS 103, the following points to be considered while making
accounting adjustment for assets acquisition:
1. There will be no goodwill or capital reserve at the time acquisition for the difference
between price paid and fair value of assets.
2. The Purchase Price of assets will be allocated over the acquired assets in the ratio
of fair value of assets.
QUESTION NO 8
X Limited purchased from Y limited a group of assets comprising of plant and machinery,
furniture, equipment and software at a combined price of 400 lacs. Assets do not constitute
business as per ind as 103. How would X limited measure these assets for the purpose of
initial recognition?
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The fair value of these assets determined applying IND AS 113 fair value measurement are:
Plant & Machinery 200 lakhs
Furniture 30 lakhs
Equipment 50 lakhs
License 70 lakhs
Total 350 lakhs
QUESTION 9 (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. The fair values
of the equipment and patent are estimated to be ` 500 crore and ` 1,000 respectively. The
equipment and patent to a product that has just recently been commercialised. The market
for this product is still developing.
Assumed the entity incurred no transaction costs. For ease of convenience, the tax
consequences on the gain have been ignored. How should the transaction be accounted for ?
SOLUTION:
As per paragraph 2 (b) of Ind AS 103, the standard does not apply to the acquisition of an
asset or a group of assets that does not constitute a business. Such a transaction of event
does not give rise to goodwill in the given case, the acquisition of equipment and patent does
not represent acquisition of a business.
Thus, the fair value of the consideration given, i.e., ` 1,400 crore is allocated to the individual
assets acquired based on their relative estimated fair values. The entity should record a
gain of ` 300 corore for the difference between the fair value and carrying value of the
land.
The equipment is recorded at its relative fair value (` 500 / ` 1,500) x 1,400 = ` 467 crore).
The patent is recorded at its relative fair value (` 1,000 / ` 1,500) x ` 1,400, = ` 933 Crore).
OPTIONAL CONCENTRATION TEST

(NEW CONCEPT ADDED IN AMENDMENT)
As per paragraph B7A of the application guidance of Ind AS 103, an optional test (the
concentration test) has been introduced to permit a simplified assessment of whether an
acquired set of activities and assets is not a business.
On the basis of the above test, following will be the consequences:
Test is met Test is not met
Not a business Further assessment to be made
No further assessment is needed
Following conditions should be present to meet concentration test:

As per paragraph B7A of the application guidance of Ind AS 103, the concentration test is
met if substantially all of the fair value of the gross assets acquired is concentrated in a
single identifiable asset or group of similar identifiable assets. For the concentration test:
(a) gross assets acquired shall exclude cash and cash equivalents, deferred tax assets,
and goodwill resulting from the effects of deferred tax liabilities;
(b) the fair value of the gross assets acquired shall include any consideration transferred
(plus the fair value of any non-controlling interest and the fair value of any previously
held interest) in excess of the fair value of net identifiable assets acquired.
(c) a single identifiable asset shall include any asset or group of assets that would be
recognized and measured as a single identifiable asset in a business combination;
(d) if a tangible asset is attached to, and cannot be physically removed and used separately
from, another tangible asset (or from an underlying asset subject to a lease, as defined
in Ind AS 116, Leases), without incurring significant cost, or significant diminution in
utility or fair value to either asset (for example, land and buildings), those assets shall
be considered a single identifiable asset;
(e) when assessing whether assets are similar, an entity shall consider the nature of each
single identifiable asset and the risks associated with managing and creating outputs
from the assets (that is, the risk characteristics);
(f) the following shall not be considered similar assets:
(i) a tangible asset and an intangible asset;
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(ii) tangible assets in different classes unless they are considered a single identifiable
asset in accordance with the criterion in subparagraph (d);
(iii) identifiable intangible assets in different classes
(iv) a financial asset and a non-financial asset;
(v) financial assets in different classes; and
(vi) identifiable assets that are within the same class of asset but have significantly
different risk characteristics.
Notes:
1) Concentration test is optional test and the decision to apply is made on a transaction
to transaction basis.
2) Does not prohibit an entity from performing a detailed test assessment using definition
of business given in this standard.
3) 3 Step process for concentration test:
a) Measure the Fair Value of Gross Assets acquired.
b) Identify the single identifiable assets or group of similar identifiable asset.
c) Determine if substantially all of the value determined in point (a) is concentrated
in the value determined in point (b) then it is an asset acquisition otherwise needs
to assess business definition as per Ind AS 103.
Fair value of gross assets shall be determined as follows ( i+ ii – iii):
i) Fair value of consideration transferred (including fair value of non-controlling
interest and fair value of previously interest held)
ii) Fair value of liabilities assumed.
iii) Cash and cash equivalent and deferred tax assets and goodwill resulting from
DTL’s.
(REFER LAST VIDEO ON THIS CONCEPT….NO NEED TO READ IT FROM BOOK….

JINDAL SIR HAS EXPLAINED IT IN VERY SIMPLE LANGUAGE….)
QUESTION 10 (CONCENTRATION TEST)
Entity A holds 20% interest in Entity B. Subsequently, Entity A further acquirers 50%
shares in Entity B by paying 300 crores.
The fair value of assets acquired and liabilities assumed are as follows:
Building: 1000 crores
Cash: 200 crores
Financial liabilities: 800 crores
DTL: 150 crores
Fair value of Entity B 400 crores and fair value of NCI is 120 crores (400x30%)
Fair value of Entity A previous holding is 80 crores (400x20%)
Identify the given transaction is asset acquisition or business acquisition as per concentration
test.
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UNIT 2: ACQUISITION METHOD

(IF BUSINESS COMBINATION IS IN THE FORM
OF ACQUISITION OF NET ASSETS)
The following key steps are involved in the acquisition accounting for business combinations:
Step 1: Identifying the acquirer.
Step 2: Determining the acquisition date.
Step 3: Purchase Consideration
Step 4: Recognising and measuring the identifiable assets acquired, the liabilities assumed
Step 5: Recognising and measuring goodwill or a gain from a bargain purchase
Step 6: Recognition of other assets & liabilities
STEP 1: IDENTIFICATION OF ACQUIRER

As per the provisions of IND AS 103, identification of Acquirer is very important because
application of IND AS 103 is required to be made only on Acquirer. It means that IND
AS 103 is not applicable on Acquiree. It can also be said that this statement lays down
principles only for the controlling enterprise. The following cases can be considered for the
identification of an acquirer:
CASE 1: Acquisitions through payment of cash or incurring of liability

In a business combination effected primarily by transferring cash or other assets or by
incurring liabilities, the acquirer is usually the entity that transfers the cash or other
assets or incurs the liabilities.
CASE 2: Acquisitions through issue of equity instrument

In a business combination effected primarily by exchanging equity interests, the acquirer
is usually the entity that issue its equity interests. However, in some business combinations,
commonly called ‘reserve acquisitions’, the issuing entity is the acquiree. Reverse acquisition
has been dealt in a separate section of this chapter.
Other pertinent facts and circumstances shall also be considered in identifying the acquirer
in a business combination effected by exchanging equity interests, including:
a. The relative voting rights in the combined entity after the business combination:
The acquirer is usually the combining entity whose owners as a group retain or receive
the largest portion of the voting rights in the combined entity. In determining which
group of owners retains or receives the largest portion of the voting rights, an entity
shall consider the existence of any unusual or special voting arrangements and options,
warrants or convertible securities.
b. The existence of a large minority voting interest in the combined entity if no other
owner or organised group of owners has a significant voting interest—The acquirer
is usually the combining entity whose single owner or organised group of owners holds
the largest minority voting interest in the combined entity.
c. The composition of the governing body of the combined entity—The acquirer is usually
the combining entity whose owners have the ability to elect or appoint or to remove a
majority of the members of the governing body of the combined entity.
d. The composition of the senior management of the combined entity—The acquirer is
usually the combining entity whose (former) management dominates the management
of the combined entity.
e. The acquirer is usually the combining entity whose relative size (measured in,
for example, assets, revenues or profit) is significantly greater than that of the
other combining entity or entities. In a business combination involving more than
two entities, determining the acquirer shall include a consideration of, among
other things, which of the combining entities initiated the combination, as well as
the relative size of the combining entities.
QUESTION NO 11
Company A and Company B operate in power industry and both entities are operating entities.
Company A has much larger scale of operations than Company B. Company B merges with
Company A such that the shareholders of Company B would receive 1 equity share of company
A for every 10 shares held in Company B such issue of shares would comprise 20%of the
issued share capital of the combined entity. After discharge of purchase consideration, the
pre-merger shareholders of company A hold 80% of the capital in Company A.
SOLUTION:
In this transaction. Company A is the acquirer for the purposes of accounting for business.
Combination as per Ind AS 103. This is because, by merging the entire shareholding of
company B, Company A has acquired control over Company B. Further, the shareholders of
erstwhile Company B do not obtain control over Company A on account of shares received as
part of purchase consideration, as they hold only 20% of the paid-up capital of Company A.
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QUESTION NO 12
Company A and Company B operate in power industry and both entities are operating entities.
Company A has much smaller scale of operations than Company B. Company B merges Company
A such that the shareholders of Company B would receive 10 equity share of Company A
for every 1 Share held in Company B. Such issue of share would comprise 70% of the issued
share capital of the combined entity. After discharge of purchase consideration, the pre-
merger shareholders of Company A hold 30% of capital of Company A. Post – acquisition,
the management of Company B would manage the operations of the combined entity.
SOLUTION:
In this transaction, Company B is the acquirer for the purposes of accounting for business
combination as per Ind AS 103. This is because, after merger, the shareholders of erstwhile
Company B would have a controlling interest and management of the combined entity. As
such, in substance, Company B has acquired control over Company A.
It is important to note that the Company B would be considered as an acquirer for
accounting purposes only (i.e., accounting acquirer), For legal purposes as well
as for reporting purposes, it is the Company A that would be considered as an
acquirer (i.e., legal acquirer).
Appropriate identification of an acquirer is relevant, as the net assets of the accounting
acquire (rather than that of the accounting acquirer) are recognized at fair value.
QUESTION 13
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, Supper Ltd.
acquired a loan from XYZ Bank at commercial interest rates. The loan funds are used by
Super Ltd. to acquire entire voting share of Focus Ltd. at fair value in orderly transaction.
Post the acquisition, Super Ltd. has the ability to elect or appoint or to remove a majority
of the members of the governing body of the Focus Ltd and also Super Ltd.’ 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?
SOLUTION:
The key drivers of the accounting are identifying the party on whose behalf the new entity
has been formed and identifying the business acquired. In this scenario as Super Ltd. the
ability to elect or appoint or to remove a majority of the members of the governing
body of the Focus Ltd. and has the ability to dominate the management of the Focus
Ltd. Accordingly, Super Ltd. will be identified as the acquirer.
QUESTION 14
Company A decided to spin off two of its existing businesses (currently housed in two separate
entities, Company B and Company C). To facilitate the spin off, company A incorporate a new
entity (company D) with nominal entity and appoints independent directors to the board of
company D. Company D signs an agreement to purchase companies B & C in cash, conditional
on obtaining sufficient funding. To fund these acquisitions, company D issues a prospectus
offering to issue shares for cash.
At the conclusion of the transaction, company D has owned 99% by the new investors with
Company A retaining only a 1% non-controlling interest.
In this situation, a set of new investors paid cash to obtain control of company D in an arm’s
length transaction. Company D is then used to effect the acquisition of 100% ownership of
companies B & C by paying cash. Company A relinquishes its control of companies B & C to
the new owners of company D.
SOLUTION:
Although company D is a newly formed company, it is identified as the acquirer not only
because it paid cash that also because the new owners of company D have obtained control
of companies B and C from company A.
STEP II: DETERMINING THE ACUQISITION DATE

The acquirer shall identify the acquisition date, which is the date on which it obtains control
of the acquiree.
The date on which the acquirer obtains control of the acquiree is generally the date on
which the acquirer legally transfers the consideration, acquires the assets and assumes the
liabilities of the acquiree—the closing date. However, the acquirer might obtain control on a
date that is either earlier or later than the closing date. For example, the acquisition date
precedes the closing date if a written agreement provides that the acquirer obtains control
of the acquiree on a date before the closing date. An acquirer shall consider all pertinent
facts and circumstances in identifying the acquisition date.
The acquisition date is a very important step in the business combination accounting because
it determines when the acquirer recognises and measures the consideration, the assets
acquired and liabilities assumed. The acquiree’s results are consolidated from this date.
The acquisition date materially impacts the overall acquisition accounting, including post-
combination earnings.
The acquisition date is often readily apparent from the structure of the business
combinations and the terms of the sale and purchase agreement (if applicable) but this is
not always the case.
Acquisition date will be the date on which the acquirer obtains control.
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QUESTION NO 15
On 9.4.20x2, Shyam limited a listed company started to negotiate with Ram Limited which is
an unlisted company about the possibility of merger. On 10.5.20x2, the board of directors of
Shyam authorized their management to pursue the merger with Ram limited. On 15.5.20x2,
management of Shyam limited offered management of Ram limited 12,000 shares of Shyam
limited against their total share outstanding. On 31.5.20x2, the board of directors of Ram
limited accepted the offer subject to shareholder vote. On 2.6.20x2 both the companies
jointly made a press release about the proposed merger.
On 10.6.20x2, the shareholders of Ram limited approved the terms of merger. On 15.6.20x2,
the shares were allotted to the shareholders of Ram limited.
The market price of the shares of shyam limited as was follows:
DATE PRICE
9.4.20X2 70
10.5.20X2 75
15.5.20X2 60
31.5.20X2 70
2.6.20X2 80
10.6.20X2 85
15.6.20X2 90
What is the acquisition date and what is purchase consideration in the above scenario?
SOLUTION:
As per paragraph 8 of this statement, the acquirer shall identify the acquisition date,
which is the date on which it obtains control of the acquiree. In the above scenario, the
acquisition date will the date on which the shares were allotted to the shareholders of Ram
limited. Although the shareholders’ approval was obtained on 10th june but the shares were
issued only on 15th june and accordingly the 90 will be considered as the market price.
QUESTION 16
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?
SOLUTION:
No as per the requirement of the standard a non-binding Letter of Intent (LOI) does
not effectively transfer control and hence this cannot be considered as the basis for
determining the acquisition date.
QUESTION 17
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 are
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?
SOLUTION:
The acquisition date in the above case is 1st April.This is because in the above scenario, even
if the shareholders don’t approve the shares, consideration will be settled through payment
of cash.
QUESTION 18
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 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?
SOLUTION:
Ind AS 103 provides that acquisition date is the date on which the acquirer obtains control
of the acquiree.
Further, Ind AS 103 clarifies that the date of which the acquirer obtains control of the
acquire is generally the date on which the acquirer legally transfers the consideration
acquires the assets and assumes the liabilities of the acquire the closing date. However, the
acquirer might obtain control on a date that is either earlier or later than the closing date.
Therefore, in this case, notwithstanding that the price is based on the net assets at 1st
January. 20X1 and it is only on 1st March, 20X1 and not 1st January 20X1 that ABC Ltd. has
the power to direct the relevant activates of XYZ Ltd. so as to affect its returns from its
involvement with XYZ Ltd. Accordingly, the of acquisition is 1st March, 20X1.
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QUESTION 19 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 scrutinized 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)?
SOLUTION:
Ind AS 103 provides that acquisition date is the date on which the acquirer obtains control
of the acquirer.
Further, Ind AS 103 clarifies that the date on which the acquirer obtains control of the
acquirer is generally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree – the closing date. However
the acquirer might obtain control on a date that is either or later than the closing date.
Since CCI approval is substantive approval for ABC Ltd. To acquirer of XYZ Ltd.’s
operations. The date of acquisition cannot be earlier than the date on which approval is
obtained from CCI. This is pertinent given that the approval from CCI is considered to be
a substantive process and accordingly, the acquisition is considered to be complete only
or receipt of such approval.
QUESTION 20
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’
SOLUTION:
The relative voting rights in the combined entity after the business combination - The
acquirer is usually the combining entity whose owners as a group retain or receive the
largest portion of the voting rights in the combined entity.
Based on above mentioned para, acquirer shall be the either of the combining entities (i.e.
Veera Limited or Zeera Limited) whose owners as a Group retain or receive the largest
portion of the voting rights in the combined entity.
Hence in the above scenario Veera Limited shareholder gets 67% Share [(100/150) x100]
and Zeera Limited shareholder gets 33.33% share in Meera Limited. Hence Veera Limited
is acquirer as per the principles of Ind AS 103.
QUESTION 21
Company A acquired Business ofCompany B for cash consideration. The relevant dates are
as under:
 Date of shareholder agreement 1st June, 20X1
 Appointed date as per shareholder agreement 1st April, 20X1
 Date of obtaining control over the board representation 1st July, 20X1
 Date of payment of consideration 15th July, 20X1
 Date of transfer of shares to Company A 1st August, 20X1
SOLUTION:
In this case, as the control over financial and operating policies are acquired through
obtaining board representation on 1st July, 20X1, it is this date that is considered as
the acquisition date. It may be noted that the appointed date as per the agreement is not
considered as the acquisition date, as the Company A did not have control over Company B
as at that date.
STEP III: DETERMINATION OF THE PURCHASE CONSIDERATION

The consideration transferred in a business combination shall be measured at fair value,
which shall be calculated as the total of the acquisition-date fair values of the assets
(including cash) transferred by the acquirer, the liabilities incurred by the acquirer to
former owners of the acquiree and the equity interests issued by the acquirer. Examples
of potential forms of consideration include cash, other assets, a business or a subsidiary of
the acquirer, contingent consideration, ordinary or preference equity instruments, options,
warrants and member interests of mutual entities.
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The consideration transferred may include assets or liabilities of the acquirer that have
carrying amounts that differ from their fair values at the acquisition date (for example,
non-monetary assets or a business of the acquirer). If so, the acquirer shall remeasure the
transferred assets or liabilities to their fair values as of the acquisition date and recognise
the resulting gains or losses, if any, in profit or loss.
This means that if the acquirer has transferred a land as a part of the business combination
arrangement to the owners of the acquiree then the fair value of the land will be considered
in determining the fair value of the consideration. Consequently, the land will be de-
recognised in the financial statements of the acquirer and the difference between the
carrying amount of the land and the fair value considered for purchase consideration will
be recorded in profit and loss.
STEP IV: RECOGNITION OF ASSETS & LIABILITIES

ACQUIRED ON ACQUISITION DATE
The assets and liabilities recognized based on the aforesaid recognition principles has to be
measured based on the following principle:
The acquirer shall measure the identifiable assets acquired and the liabilities assumed at
their acquisition – date fair values.
EXCEPTIONS (MEASUREMENT PERIOD)

Ind AS 103 provides a measurement period window wherein if all the required information
is not available on the acquisition date then the entity will be required to do the purchase
price allocation on a provision basis.
During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognised at the acquisition date to reflect new information obtained about facts
and circumstances that existed as of the acquisition date and, if known, would have affected
the measurement of the amounts recognised as of that date.
During the measurement period, the acquirer shall also recognise additional assets or
liabilities if new information is obtained about facts and circumstances that existed as of
the acquisition date.
The measurement period ends as soon as the acquirer receives the information it was
seeking about facts and circumstances that existed as of the acquisition date or learns
that more information is not obtainable. However, the measurement period shall not exceed
one year from the acquisition date.
Any change i.e. increase or decrease in the net assets acquired due to new information
available during the measurement period which existed on the acquisition date will be
adjusted against goodwill.
However, after the measurement period ends, any change in the value of assets and liabilities
due to an information which existed on the valuation date will be accounted as an error as
per Ind AS 8, Accounting policies, Changes in Accounting Estimates and Errors.
Whether information pertaining

to business acquisition obtained
within 1 year of acquisition date?
No
Yes
No Recognise increase/decrease
Whether conditions existed on
in asset or liability as error as
acquisition date?
per applicable Ind AS.
Yes
Then recognise increase/decrease

in identifiable asset or liability
by giving corresponding effect in
Goodwill.
QUESTION 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?
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SOLUTION:
No, as per the requirement of Ind AS 103, changes to the net assets are allowed which
results from the discovery of a fact which existed on the acquisition date. However, change
of facts resulting in recognition and de-recognition of assets and liabilities after the
acquisition date will be accounted in accordance with other Ind AS. In the above scenario
deferred tax asset was not eligible for recognition on the acquisition date and accordingly
the new contract on 31st March, 20X2 will tantamount to change of estimate and accordingly
will not impact the Goodwill amount.
QUESTION 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).
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?
SOLUTION:
The consolidated financial statements of ABC Ltd. for the year ended 31st March,
20X1 should include ` 1 crore towards the contingent liability in relation to the customer
claim.
When the customer presents additional information in support of its claim, the incremental
liability of ` 1 crore (` 2 crore – ` 1 crore) will be adjusted as a part of acquisition accounting
as it is within the measurement period.
Therefore, it will disclose that the comparative information for the year ending on 31st
March, 20X1 is adjusted retrospectively to increase the fair value of the item of liability
at the acquisition date by ` 1 crore, resulting in a corresponding increase in goodwill.
The amount determined in accordance with Ind AS 37 subsequently exceeds the previous
estimate of the fair value of the liability, then ABC Ltd. recognises an increase in the
liability. As the change has occurred after the end of the measurement period, the increase
in the liability amounting to ` 20 lakh ( ` 2.2 crore – ` 2 crore) is recognised in profit or loss.
STEP V: GOODWILL/BARGAIN PURCHASE
Goodwill – Recognition and Measurement

The acquirer shall recognize Goodwill as of the acquisition date measured as the excess of
(a) over (b) below:
a) The purchase consideration transferred at acquisition – date fair value;

b) The net of the acquisition – date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with this Ind AS.
Bargain Purchase
In extremely rate circumstances, an acquirer will make a bargain purchase in a business
combination in which the net assets value acquired in a business combination exceeds the
purchase consideration.
The acquirer shall recognise the resulting gain in other comprehensive income on the
acquisition date and accumulate the same in equity as capital reserve, if the reason for
bargain purchase gain is not clear. The gain shall be attributed to the acquirer and there
will no allocation to the non-controlling shareholders.
A bargain purchase might happen, for example, in a business combination that is a forced
sale in which the seller is acting under compulsion.
The Ind AS standard itself acknowledges that it is very rare that a bargain purchase in a
business combination will arise and accordingly the standard re-emphasis the above point
by requiring the entities to reassess and identify the clear reason why it is a bargain
purchase business combination. For e.g. acquisition of business in a bankruptcy sale, or sale
of business due to a regulatory requirement
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QUESTION 24
Entity X is one of the largest liquor manufacturing company in the world and it acquires
another Entity Y which has significant presence in India and UK. However, the competition
commission in UK has issued orders to sell one division of the UK assets of Entity Y in order
to comply with the local competition regulation in UK within a specified timeline. Entity Z
another boutique liquor manufacturer realizes the opportunity and Purcahse the assets of
Entity Y from Entity X.
SOLUTION:
In the given case above it is more likely than not that there could be an element of bargain
Purchase as the entity X was under compulsion to sell the assets within a specified timeline.
STEP VI: TREATMENT OF OTHER ASSETS & LIABILITIES
CONCEPT 1: PAYMENT FOR FUTURE SERVICES
If an acquirer has committed to management of acquiree a payment for future services

which may be required for smooth running of business then such type of payment will be
expensed over the period of service in future but it will not be considered as a part of
business combination. It will be treated as an entity is paying remuneration to its employees
or management for their normal services.
QUESTION 25
X Ltd. plans to acquire Y Ltd. It identifying assets acquired and liability assumed. The
company agrees to pay Y Ltd.’s existing management ` 10 million for running the business of
acquired business under the aegis of X Ltd. for I year during the post-acquisition period and
harmonization of post-acquisition activated. Should this agreement be treated as liability
assumed in a business combination?
CONCEPT 2: INDEMNIFICATION OF LIABILITIES & ASSETS

The seller in a business combination may contractually indemnify the acquirer for the
outcome of a contingency or uncertainty related to all or part of a specific asset or liability.
For example, the seller may indemnify the acquirer against losses above a specified amount
on a liability arising from a particular contingency; in other words, the seller will guarantee
that the acquirer’s liability will not exceed a specified amount. As a result, the acquirer
obtains an indemnification asset. The acquirer shall recognise an indemnification asset at
the same time that it recognizes the indemnified item measured on the same basis as the
indemnified item, subject to the need for a valuation allowance for uncollectible amounts.
QUESTION 26
Company A acquires Company B in a business combination on April 1, 2011. B is being sued

by one of its customers for breach of contract. The sellers of B provide an indemnification
to A for the reimbursement of any losses greater than ` 100. There are no collectability
issues around this indemnification. At the acquisition date, Company A determined that
there is a present obligation and therefore the fair value of the contingent liability of
` 250 is recognised by A in the acquisition accounting.
SOLUTION:
In the acquisition accounting A also recognizes an indemnification asset of ` 150 (` 250
- ` 100)
50 (` 250 – ` 100).
QUESTION 27
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 value of the liability is ` 1.2 crore instead of ` 70 lakh.
SOLUTION:
In the current scenario, ABC Ltd. measures the identifiable liability of entity PQR Ltd.
at ` 70 lakh and also recognises a corresponding indemnification asset of ` 70 lakhs on
its consolidated balance sheet. The net impact on goodwill from the recognition of the
contingent liability and associated indemnification asset is nil.
However, in the case where the liability’s fair value is more than ` 1 crore ie. ` 1.2 crore,
the indemnification asset will be limited to ` 1 crore only.
QUESTION 28
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
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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?
SOLUTION:
Since no liability is recognised in the given case, ABC Ltd. will also not recognise an
indemnification asset as part of the business combination accounting.
QUESTION 29
X Ltd. Acquires Y Ltd. Y Ltd. Has trade receivable of 50,00,000 in its books. X limited
estimates 40,00,000 as fair value of Y’ trade receivable. But Y guarantee’s minimum
collection of 45,00,000. Comment.
SOLUTION:
X limited will recognize indemnified assets of 5,00,000 in the given case.
CONCEPT 3 : RECOGNITION OF CONTINGENT LIABILITIES

Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets, defines a contingent
liability as:
(a) A possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or
(b) A present obligation that arises from past events but is not recognized because:
i. It is not probable that an outflow of resources embodying economic benefits will
be required to settle the obligation; or
ii. The amount of the obligation cannot be measured with sufficient reliability
The requirements in Ind AS 37 do not apply in determining which contingent liabilities

to recognise as of the acquisition date. Instead, the acquirer shall recognise as of the
acuqiisiton date a contingent liability assumed in a business combination if it is a present
obligation that arises from past events and its fair value can be measured reliably. Therefore,
contrary to Ind AS 37, the acquirer recognizes a contingent liability assumed in a business
combination at the acquisition date even if it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation.
QUESTION 30
A suit for damages worth ` 10 million was filed on Company B for alleged breach of
certain contract provisions. Company B had disclosed the same as a contingent liability
in its financial statements, as it considered that it is a present obligation for which it
was not probable that the amount would be payable. Company A acquire Company B and
determines the fair value of the contingent liability to be ` 2 million.
SOLUTION:
Company A would recognise ` 2 million in its financial statements as part of acquisition
accounting, even if it is not probable that payment will be required to settle the
obligation.
QUESTION 31
X Ltd. plans to acquire Y Ltd. it was identifying assets acquired and liabilities
assumed. It has analyzed the pending warranty claims. It is observed that that
Warranty Claim of ` 2 million may mature based on claims of certain customers. There is
remote chance of other claims amounting ` 5 million (as on acquisition date) to mature and
fair value which cannot be reliably measured.
SOLUTION:
In the given case, reliable estimate of ` 2 million can only be made due to which it can be
incorporated as liability, but other claims of 5 million for which reliable estimate is not
available should not be recognized as liability.
QUESTION 32
X Ltd. plans to acquire Y Ltd. It was identifying assets acquired and liabilities assumed. It
has analysed the pending tax cases_
(i) Y Ltd. recognised 20 pending cases amounting to ` 15 million as contingent liability of

which ` 3 million has been provided for; and
(ii) Y Ltd. did not recognise another 2 cases as it could not measure fair value of out of
these cases.
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X Ltd. assessed that ` 5 million should be the obligation out of 20 pending tax cases.
Although it is unlikely that liability against 2 cases would mature but the claim is ` 1 million
as on the acquisition date. How should X Ltd. recognise contingent liability?
CONCEPT 4: ACQUISITION COST INCURRED

IN BUSINESS ACQUISITION
The direct cost of acquisition is not included in determination of the purchase consideration.
Cost which include like finder’s fees, due diligence cost accounting, legal fees, investment
banker fees, even bonuses paid to employees for doing a successful acquisition will not be
included in the cost of acquisition.
QUESTION 33
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?
SOLUTION:
As per Ind AS 103, the acquisition-related costs incurred by an acquirer to effect a business
combination are not part of the consideration transferred.
Ind AS 103 states that, acquisition-related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder’s fees; advisory, legal, accounting, valuation
and other professional or consulting fees; general administrative costs, including the costs
of maintaining an internal acquisitions department; and costs of registering and issuing debt
and equity securities. The acquirer shall account for acquisition related costs as expenses
in the periods in which the costs are incurred.
Accordingly, stamp duty incurred in relation to land acquired as part of a business
combination transaction are required to be recognised as an expense in the period in which
the acquisition is completed and given effect to in the financial statements of the acquirer.
QUESTION 34
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?
SOLUTION:
As per Ind AS 103, the acquisition-related costs incurred by an acquirer to effect a business
combination are not part of the consideration transferred.
Paragraph 53 of Ind AS 103 states that, acquisition-related costs are costs the acquirer
incurs to effect a business combination. Those costs include finder’s fees; advisory, legal,
accounting, valuation and other professional or consulting fees; general administrative
costs, including the costs of maintaining an internal acquisitions department; and costs of
registering and issuing debt and equity securities. The acquirer shall account for acquisition-
related costs as expenses in the periods in which the costs are incurred and the services
are received.
The payment to the regulator represents a transaction cost and will be regarded as acquisition
related cost incurred to effect the business combination. Applying the requirements of
para 53 of Ind AS 103, it should be expensed as it is incurred.
It may be noted that had the right been acquired separately (i.e. not as part of business
combination), the transaction cost is required to be capitalised as part of the intangible
asset as per the requirements of Ind AS 38, Intangible Assets.
CONCEPT 5: PRE EXISTING RELATIONSHIPS

The acquirer and the acquiree may have a pre-existing relationship or other arrangement
before negotiations for the business combination began, or they may enter into an
arrangement during the negotiations that is separate from the business combination. In
either situation, the acquirer shall identify any amounts that are not part of what the
acquirer and the acquiree (or its former owners) exchanged in the business combination, ie
amounts that are not part of the exchange for the acquiree. The acquirer shall recognise as
part of applying the acquisition method only the consideration transferred for the acquiree
and the assets acquired and liabilities assumed in the exchange for the acquiree. Separate
transactions shall be accounted for in accordance with the relevant Ind AS.
As part of a business combination, an acquirer may reacquire a right that it had previously
granted to the acquiree to use one or more of the acquirer’s recognised or unrecognised
assets. Examples of such rights include a right to use the acquirer’s trade name under
a franchise agreement or a right to use the acquirer’s technology under a technology
licensing agreement. A reacquired right is an identifiable intangible asset that the
acquirer recognises separately from goodwill.
If the terms of the contract giving rise to a reacquired right are favourable or unfavourable
relative to the terms of current market transactions for the same or similar items, the
acquirer shall recognise a settlement gain or loss.
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(PLEASE REFER CLASS NOTES FOR SIMPLE EXPLANATION BY JINDAL SIR IN

CLASS ON CONTRACTUAL & NON CONTRACTUAL PRE EXISTING RELATIONSHIP)
QUESTIO NO 35 [TREATMENT OF PER-EXISTING LAW SUIT]
X Ltd. acquired the business of Y Ltd. for ` 40 cr. the purchase consideration includes
payment for settlement of a law suit against X Ltd. ` 30 lakhs. In the books of X Ltd. there
is provision for the law suit amounting to ` 40 lakhs.
Fair value of identified assets acquired is `45 cr. and fair value of liabilities assumed is `
10cr. Deferred tax liability worked out based on tax base-of acquirer and the fair value is
` 1 cr.
How should the company recognise the business combination transaction and pre-existing
relationship?
QUESTION NO 36
Progressive Ltd is being sued by Regressive Ltd for an infringement of its Patent. At 31st
March 2012, Progressive Ltd recognized a INR 10 million liability related to this litigation.
On 30th July 2012, Progressive Ltd acquired the entire equity of Regressive Ltd for INR 500
million. On the date, the estimated fair value of the expected settlement of the litigation
is INR 20 million.
SOLUTION:
In the above scenario the litigation is in substance settled with the business combination
transaction and accordingly the INR 20 million being the fair value of the litigation liability
will be considered as paid for settling the litigation claim and will be not included in the
business combination. Accordingly, the purchase price will reduce by 20 million and the
difference between 20 and 10 will be recorded in income statement of the Progressive
limited as loss on settlement of the litigation.
QUESTION 37
Vadapav Limited 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 Vadavap 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 2012. On the acquisition date, Vadapav determines that the license agreement
reflects current market terms.
SOLUTION:
Vadapav will record the finachisee right as an intangible asset (reacquired right) while doing
purchase price allocation and since it is at market terms no gain or loss will be recorded on
settlement.
QUESTION 38
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.
How is the license accounted for as part of the business combination?
CONCEPT 6: ASSEMBLED WORKFORCE

The acquirer subsumes into Goodwill the value of an acquired intangible asset that is not
identifiable as of the acquisition date. For example, an acquirer may attribute value to the
existence of an assembled workforce, which is an existing collection of employees that
permits the acquirer to continue to operate an acquired business from the acquisition date.
An assembled workforce does not represent the intellectual capital of
The skilled workforce—the (often specialized) knowledge and experience that employees
of an acquiree bring to their jobs. Because the assembled workforce is not an identifiable
asset to be recognized separately from goodwill, any value attributed to it is subsumed into
goodwill.
CONCEPT 7: INTANGIBLE ASSETS

An intangible asset should be recorded separately from Goodwill if either the separability
criteria is met or it arises out of contractual legal criterion.
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Recognition of Intangible Asset

in Business Combination
Transaction meets the Asset is identifiable either by Contractual/

definition of Asset Legal Criteria or Separability Criteria
Contractual Legal criterion

An intangible asset that meets the contractual-legal criterion is identifiable even if the asset
is not transferable or separable from the acquiree or from other rights and obligations.
For example:
a. An acquiree owns and operates a nuclear power plant. The licence to operate that
power plant is an intangible asset that meets the contractual-legal criterion for
recognition separately from goodwill, even if the acquirer cannot sell or transfer
it separately from the acquired power plant. An acquirer may recognise the fair
value of the operating licence and the fair value of the power plant as a single asset
for financial reporting purposes if the useful lives of those assets are similar.
b. An acquiree owns a technology patent. It has licensed that patent to others for
their exclusive use outside the domestic market, receiving a specified percentage
of future revenue in foreign exchange. Both the technology patent and the related
licence agreement meet the contractual-legal criterion for recognition separately
from goodwill even if selling or exchanging the patent and the related licence
agreement separately from one another would not be practical.
Separability Criteria
The separability criterion means that an acquired intangible asset is capable of being
separated or divided from the acquiree and sold, transferred, licensed, rented or exchanged,
either individually or together with a related contract, identifiable asset or liability. An
intangible asset that the acquirer would be able to sell, license or otherwise exchange
for something else of value meets the separability criterion even if the acquirer does not
intend to sell, license or otherwise exchange it. An acquired intangible asset meets the
separability criterion if there is evidence of exchange transactions for that type of asset
or an asset of a similar type, even if those transactions are infrequent and regardless of
whether the acquirer is involved in them.
Example:
An acquiree owns a registered trademark and documented but unpatented technical expertise
used to manufacture the trademarked product. To transfer ownership of a trademark, the
owner is also required to transfer everything else necessary for the new owner to produce a
product or service indistinguishable from that produced by the former owner. Because the
unpatented technical expertise must be separated from the acquiree or combined entity
and sold if the related trademark is sold, it meets the separability criterion.
Accordingly, as per the guidance above it follows that identification of intangible asset will
be judgemental and will vary in each case.
Following are the possible sources of information and broad indicator to be used to identify
any possible intangible separately from goodwill:
A. Internal sources:
• Financial statements of the acquiree-

Ø significant R&D cost may be indicator that there may be possible technology
related intangible
Ø Customer acquisition cost- lot of company spend money to acquire new customers
like online e-commerce companies provide incentive to register a customer as a
first time user or download their app. That may be a strong indicator of existence
of customer list as an intangible
QUESTION 39
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?
SOLUTION:
In this situation the customer database does not give rise to legal or contractual right.
Accordingly, the assessment of its separability will be assessed. The database can be useful
to other players and Company E has the ability to transfer this to them. Accordingly, the
intention not to transfer will not affect the assessment whether to record this as an
intangible or not. Hence customer list should be recorded as an intangible in a business
combination.
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QUESTION 40
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.?
SOLUTION:
This means that the acquirer recognises as an asset separately from goodwill an in-process
research and development project of the acquiree if the project meets the definition of an
intangible asset.
An acquiree’s in-process research and development project meets the definition of an
intangible asset when it:
(a) Meets the definition of an asset; and

(b) is identifiable, i.e. is separable or arises from contractual or other legal rights.
In accordance with above,
(i) The fair value of the first drug reflects the probability and the timing of the
regulatory approval being obtained. As per the standard, the recognition criterion
of probable future economic benefits is considered to be satisfied in respect of the
asset acquired accordingly an asset is recognised. Subsequent expenditure on an in-
process research or development project acquired separately is to be dealt with in
accordance with paragraph 43 of Ind AS 38.
(ii) The rights to the second drug also meet the recognition criteria in Ind AS 8 and are
recognised. The approval means it is probable that future economic benefits will flow
to ABC Ltd. This will be reflected in the fair value assigned to the intangible asset.
QUESTION 41
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) 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.
CONCEPT 8: CONTINGENT CONSIDERATION

The consideration the acquirer transfers in exchange for the acquiree includes any asset or
liability resulting from a contingent consideration arrangement. The acquirer shall recognise
the acquisition-date fair value of contingent consideration as part of the consideration
transferred in exchange for the acquiree.
The acquirer shall classify an obligation to pay contingent consideration as a liability or
as equity on the basis of the definitions of an equity instrument and a financial liability in
accordance with the requirement of Ind AS 32 Financial Instruments: Presentation, or
other applicable Indian Accounting Standards. The acquirer shall classify as an asset a
right to the return of previously transferred consideration if specified conditions are met.
Fair value of the assets transferred or liability incurred should be measured on the
acquisition date to determine the fair value. Any direct cost of acquisition should be
recorded directly in profit and loss account and should not be included in purchase
consideration.
Example:
Company A acquires Company B in April 2011 for cash. The acquisition agreement states
that an additional ` 20 million of cash will be paid to B’s former shareholders if B
succeeds in achieving certain specified performance targets. A determines the fair
value of the contingent consideration liability to be 15 million at the acquisition date.
At a later date, the probability of meeting the said performance target becomes lower.
296 ACCOUNTS
As certain consideration is based on achieving certain performance parameters in future,

the consideration is contingent on achieving those parameters. As such, the transaction
involves involves contingent consideration. Further, since the consideration is to be settled
for a variable amount in cash, such consideration would be in the nature of financial liability
rather than equity.
As at the acquisition date, the acquirer should consider the acquisition date fair value of
contingent consideration as part of business combination. Accordingly, such recognition
would increase goodwill (or reduce gain on bargain purchase, as the case may be).
In the above example, if the change of meeting the performance criteria becomes less
probable, then in such a case, the contingent consideration in the nature of financial liability
should be remeasured and the impact for the change in the fair value should be recogninsed
in statement of profit and loss.
QUESTION 42
[Issue of fixed number of shares] A Ltd. has completed negotiation with B Ltd. acquiring
its business. A Ltd. agrees to issue 1, 00,00,000 of its own shares to the shareholders
of B Ltd. in exchange of their holding. It also agrees to pay another 20, 00,000 shares
if revenue form the business of B Ltd. exceeds ` 100 cr. during the first year of post
combination operation.
Fair value of identifiable assets and liabilities of B Ltd. is ` 100 cr. and ` 20 cr. respectively.
On the date of acquisition, market price of A Ltd.’s share is ` 100.
The probability analysis of expected revenue of B Ltd.’s business:
Revenue = ` 100 cr. 40%
Revenue > ` 100 cr. 60%
(i) How should the arrangement to issue 20, 00,000 shares be classified?
(ii) Find out Goodwill.
(iii) At the end of first half of year 1, the probability revenue generation has been
reassessed:
How should the change in fair value be accounted for?
Assume that the arrangement is not linked to providing services. Acquirer’s incremental
borrowing rate is 11%.
QUESTION 43
How should contingent consideration payable in relation to a business combination be

accounted for on initial recognition and at the subsequent measurement as per Ind AS in
the following cases:
(i) On 1 April 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. 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.
CONCEPT 9: CONTINGENT PAYMENTS TO

EMPLOYEE SHAREHOLDERS
Whether arrangements for contingent payments to employees or selling shareholders
are contingent consideration in the business combination or are separate transactions
depends on the nature of the arrangements. Understanding the reasons why the acquisition
agreement includes a provision for contingent payments, who initiated the arrangement and
when the parties entered into the arrangement may be helpful in assessing the nature of
the arrangement.
Continuing employment—the terms of continuing employment by the selling shareholders who
become key employees may be an indicator of the substance of a contingent consideration
298 ACCOUNTS
arrangement. The relevant terms of continuing employment may be included in an employment

agreement, acquisition agreement or some other document. A contingent consideration
arrangement in which the payments are automatically forfeited if employment terminates
is remuneration for post-combination services. Arrangements in which the contingent
payments are not affected by employment termination may indicate that the contingent
payments are additional consideration rather than remuneration.
Duration of continuing employment—If the period of required employment coincides with
or is longer than the contingent payment period, that fact may indicate that the contingent
payments are, in substance, remuneration.
QUESTION 44
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.
SOLUTION:
In the above scenario the former shareholder is required to continue in employment and
the contingent consideration will be forfeited if the employment is terminated or if he
resigns. Accordingly, only USD 20 million is considered as purchase consideration and the
contingent consideration is accounted as employee cost and will be accounted as per the
other Ind AS.
QUESTION 45:
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?
SOLUTION:
Ind AS 103 provides an indication that a contingent consideration arrangement in which the
payments are automatically forfeited if employment terminates is remuneration for post-
combination services.
Arrangements in which the contingent payments are not affected by employment
termination may indicate that the contingent payments are additional consideration rather
than remuneration.
In accordance with the above, in the instant case, the additional consideration of `
1,50,00,000 to ` 2,00,00,000 represents compensation for post-combination services, as
the same represents that part of the payment which is forfeited if the former shareholder
does not remain in the employment of XYZ Ltd. for two years following the acquisition - i.e.,
only ` 60,00,000 is attributed to consideration in exchange for the acquired business.
CONCEPT 10: EMPLOYEES BENEFITS (RETIREMENT BENEFITS)

The acquirer records the fair value of the obligations for any post retirement obligation as
per the principles of Ind AS 19 which is an exception of the general fair value rule
CONCEPT 11: REPLACEMENT OF SHARE BASED PAYMENTS

The acquirer shall measure a liability or an equity instrument related to share-based
payment transactions of the acquiree or the replacement of an acquiree’s share-based
payment transactions with share-based payment transactions of the acquirer in accordance
with the method in Ind AS 102, Share-based Payment, at the acquisition date.
300 ACCOUNTS
Pre-combination period Post-combination
Computation- Market-based measure Computation- The difference

multiplied by ratio of the vesting between the fair value of the
period completed as on the acqusition award on the date of acqusition
date to the greater of -original vesting date and the value allocated to
period or revised vesting period pre- combination period
The incremental amount is

The value as computed above is allocated to post combination
included in Purchase consideration. period as a service cost over the
remaining vesting period.
QUESTION NO 46
[Under the replacement awards the employees are required to provide further service
after the acquisition date, but vesting period has been completed under the acqiree’s award]
Acquired A Ltd. issues a replacement award under a business combination transaction, the
market based measurement of which under Ind As 102 is ` 10 million. The employees are
required to render 2 years service after business combination to be entitled to the award.
The original award of acquiree has a market based measure of ` 9 million on the date of
acquisition, and a vesting period of 5 years which all the employees have completed. Should
the additional obligation be treated as liability assumed in a business combination? If not
allocate the obligation into pre-combination obligation and post-combination remuneration.
QUESTION NO 47
[Under the replacement awards the employees are required to provide further service
after the acquisition date, and vesting period has not been completed under the acquiree’s
award] acquirer A Ltd. issues a replacement award under a business combination transaction,
the market based measurement of which under Ind As 102 is ` 10 million The employees
are required to render 2 years service after business combination to be entitled to the
awards. The original award of acquiree has a market based measure of ` 9 million on the
date of acquisition, and a vesting period of 5 years of which the employees have completed
2 years only. Should the additional obligation be treated as liability assumed in a business
combination?
QUESTION NO 48
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 speciy 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 : INR 500
• Replacement awards: INR 600.
As of the acquisition date, all awards are expected to vest.
CONCEPT 12: NON-REPLACEMENT SHARE

BASED PAYMENTS AWARDS
The acquiree may have outstanding share-based payment transactions that the acquirer
does not exchange for its share-based payment transactions. If vested, those acquiree
share-based payment transactions are part of the non-controlling interest in the acquiree
and are measured at their market-based measure. If unvested, they are measured at their
market-based measure as if the acquisition date were the grant date in accordance with
paragraphs 19 and 30.
The market-based measure of unvested share-based payment transactions is allocated to
the non- controlling interest on the basis of the ratio of the portion of the vesting period
completed to the greater of the total vesting period and the original vesting period of the
share-based payment transaction. The balance is allocated to post-combination service.
The above means that the acquiree’s existing award will be settled in its own shares and
the consequential shareholders will become the Non-controlling shareholders. The above
principles can be summarized as follows:
Vested shares-
• the value credited to Share based payment reserve is classified as NCI. Unvested-
• Pre-combination period is considered as a part of NCI
• Post-combination period- is recorded as employee cost and the credit forms part of
the NCI in the balance sheet.
302 ACCOUNTS
QUESTION 49
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 acquisition date, Company Q’s employees have rendered 2 years of service.
None of the award 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 INR 500 (based on measurement principles and conditions at the acquisition date as per
Ind AS 102).
CONCEPT 13: PURCHASE CONSIDERATION PAID IN OTHER ASSETS
QUESTION NO 50
X Ltd. acquired Y Ltd. by transfer of its retail division (fair value of which is ` 360 million)
and 10,00,000 equity shares to the previous owners of Y Ltd. Market price of equity share
of X Ltd. (par value ` 10 each) as on the date of acquisition was ` 350 per share. It was
decided to pay the purchase consideration to the liquidator of y Ltd.
Assets and liabilities of retail segment of X Ltd. (Amount in ` million)
Carrying amount Acquisition date fair value

Equipment 120 130
Inventories 120 150
Receivables 110 110
As on the acquisition date assets and liabilities of Y Ltd. were as follows (Amount in
` million).
Carrying amount Acquisition date fair value

Land and Building 30 50
Plant and machinery 500 600
Equipment 20 10
Inventories 100 80
Receivables 100 80
Cash and Cash Equivalents 10 10
Assets 760 830

Loans 100 100
Trade Payables 30 30
Liabilities 130 130
Net Assets 630 700
Find out purchase consideration and goodwill on business combination. Show accounting
entry of acquirer for business combination.
QUESTION NO 51
AX Ltd. and BX Ltd. amalgamated on and from 1st January 2012. A new Company ABX Ltd.
was formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-2012
INR in ‘000
Note
ASSETS AX Ltd BX Ltd
No.
Non-current assets
Financial assets
Investments 1,050 550
Current assets
Trade receivable 1,800 4,000
Cash and Cash equivalent 450 400
13050 15200
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of INR 10 6,000 7,000
each)

Liabilities
304 ACCOUNTS
Borrowings 3,000 4,000
Current liabilities
Trade payable 1,000 1,500
13,050 15,200
ABX Ltd. issued requisite number of shares to discharge the claims of the equity
shareholders of the transferor companies.
Prepare a note showing purchase consideration and discharge thereof and draft the
Balance Sheet of ABX Ltd:
Assuming BX ltd is a larger entity and their management will take the control of the
entity. The fair value of net assets of AX and BX limited are as follows:
ASSETS AX LTD. BX LTD.

FIXED ASSETS 9500 10,000
INVENTORY 1300 2,900
FAIR VALUE OF BUSINESS 11000 14,000
QUESTION NO 52
A Ltd. acquired the business of B Ltd. on 1 April. 2015 on which date the acquiree had the
following assets and liabilities (` million):
Assets Amount liabilities Amount

Property, plant and Equipment at 100 8% Debentures 100
cost less depreciation
Assets under operating Lease at 100 Trade creditors (after 30
cost less depreciation setting off 25 due to A Ltd.)
Investments in Equity Shares 30 Provision for Retirement 30
Benefit of Employees
(Reassessed under Ind As 19
at 50)
Trade Receivables 40 24 Deferred Tax Liability 20

Less 40% doubtful debts 16
B Ltd. guarantees that loss will not
exceed 25%
Inventories 40
Short-term investments 30
Cash & Cash Equivalents 20
Total 344 Total 180
Other information:
(i) B Ltd. has not accounted for self-developed brand name which is valued at 20 million
and customer list which is valued at ` 10 million;
(ii) It has not recognised a warranty obligation as the company did not consider that there
will be cash outflow- the fair value of the obligation is ` 2 million. B Ltd. guarantees
that loss arising out of warranty obligation will not exceed ` 1 million.
Also b Ltd. guarantees collection of 75% of trade receivables.
(iii) A Ltd. has agreed to pay ` 5 million to Mr. B, the major shareholder and managing
director of B Ltd., for putting his efforts to integrate the functioning of A Ltd. and B
Ltd. in post-combination period extending to maximum one year.
There is no employment contract with Mr. B.
(iv) It was agreed that investment in equity shares, short-term investments and cash and
cash equivalents will be taken over by Mr. B of B Ltd. at Balance sheet value which is
the current market value.
(v) Fair value of property, plant and Equipment : ` 220 million;
(vi) A Ltd. agrees to pay upfront ` 250 million and additional ` 50 million to previous
owners of B Ltd. During the first year of acquisition if 80% of the costumers are
retained. The company expects that it is almost certain to retain existing customers
of B Ltd.
Prepare a worksheet detailing out identifiable assets and liabilities and goodwill.
306 ACCOUNTS
CONCEPT 14: DEFERRED TAXES IN RELATION

TO BUSINESS ACQUISITION
As per the requirement of Ind As 12, no deferred tax consequence should be recorded on
initial recognition of deferred tax except assets and liabilities acquired during business
combination. Accordingly, the acquirer shall recognize and measure a deferred tax asset or
liability arising From the assets acquired and liabilities assumed in a business combination
in accordance with Ind AS 12, Income Taxes.
The acquirer shall account for the potential tax effects of temporary differences and
carry forwards of an acuiree that exist at the acquisition date or arise as a result of the
acquisition in accordance with Ind AS 12.
QUESTION 53
On 1.1.2020 entity H acquired 100% share capital of entity S for 15,00,000. The book
values and fair values of the identifiable assets and liabilities of entity S at the date of
acquisition are set out below, together with tax bases in entity S’ tax jurisdictions. Any
goodwill arising on the acquisition is not deductible for tax purpose. The tax rates in entity
H and entity S jurisdiction are 30% and 40% respectively.
Acquisitions Book values Tax base Fair values

Land & buildings 600 500 700
Plant & machinery 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash Equivalents 130 130 130
Accounts Payable 160 160 160

Retirement benefit obligations 100 - 100
You are required to compute deferred tax on acquisition of business….also compute

goodwill on acquisition of business.
CONCEPT 15: LEASE CONTRACTS ON ACQUISITION DATE
ACQUIREE IS A LESSEE
• The acquirer shall recognise right-of-use assets and lease liabilities for leases
identified in accordance with Ind AS 116.
• The acquirer is not required to recognise right-of-use assets and lease liabilities for:
(a)
leases for which the lease term ends within 12 months of the acquisition date; or
(b)
leases for which the underlying asset is of low value.
• The acquirer shall measure the lease liability at the present value of the remaining
lease payments as if the acquired lease were a new lease at the acquisition date.
• The acquirer shall measure the right-of-use asset at the same amount as the lease
liability, adjusted to reflect favourable or unfavourable terms of the lease when
compared with market terms.
ACQUIREE IS A LESSOR
In measuring the acquisition-date fair value of an asset, the acquirer shall take into account
the terms of the lease. The acquirer does not recognise a separate asset or liability if the
terms of an operating lease are either favourable or unfavourable when compared with
market terms.
CONCEPT 16: ASSETS HELD FOR SALE WITH

ACQUIREE ON ACQUISITION DATE
The acquirer shall measure an acquired non-current asset (or disposal group) that is classified
as held for sale at the acquisition date in accordance with Ind AS 105, Non-current Assets
Held for Sale and Discontinued Operations, at fair value less costs to sell in accordance
with that Ind AS.
308 ACCOUNTS
UNIT 3: ACQUISITION METHOD

(IF BUSINESS COMBINATION IS IN THE FORM OF ACQUISITION OF SIGNIFICANT
EQUITY INTEREST)
NON CONTROLLING INTEREST IN AN ACQUIREE

Ind AS 103 allows the acquirer to measure a non-controlling interest in the acquiree at
its fair value at the acquisition date. Sometimes an acquirer will be able to measure the
acquisition-date fair value of a non-controlling interest on the basis of a quoted price in an
active market for the equity shares (ie those not held by the acquirer). In other situations,
however, a quoted price in an active market for the equity shares will not be available. In
those situations, the acquirer would measure the fair value of the non-controlling interest
using other valuation techniques.
The fair values of the acquirer’s interest in the acquiree and the non-controlling interest
on a per-share basis might differ. The main difference is likely to be the inclusion of
a control premium in the per-share fair value of the acquirer’s interest in the acquiree
or, conversely, the inclusion of a discount for lack of control (also referred to as a non-
controlling interest discount) in the per-share fair value of the non-controlling interest if
market participants would take into account such a premium or discount when pricing the
non-controlling interest.
QUESTION NO 54 (FAIR VALUE METHOD)
A Limited acquires 80% of B Limited at a valuation of ` 150.00 crores (excluding control

premium) by payment in cash of ` 120.00 crores. The value of non- controlling interest is
` 30 cores. Value of net assets is 130 crores.
QUESTION NO 55 (PROPORTIONATE SHARE METHOD)
WITH the help of given information as in above, Assume that the value of recognized amount
of subsidiary‘s identifiable net assets is ` 130.00 crores, as determined in accordance with
Ind 103.
QUESTION NO 56
In the aforesaid example, if the consideration is ` 90

QUESTION NO 57
GOODWILL RECOGNISED DEPENDS ON HOW NCI IS MEASURED.

Ram Ltd. acquires shyam Ltd. by purchasing 60% of its equity for ` 15 lakh in cash. The fair
value of non – controlling interest is determined as ` 10 lakh. The net aggregate value of
identifiable assets and liabilities, as measured in accordance with Ind 103 is determined as
` 5 lakh.
How much goodwill is recognized based on two measurements based of non- controlling
interest (NCI)?
QUESTION NO 58
GAIN ON A BARGAIN PURCHASE WHEN NCI IS MEASURED AT FAIR VALUE

Seeta Ltd. acquires Geeta Ltd. purchasing 70% of its equity for ` 15 lakh in cash. The fair
value of NCI is determined as ` 6.9 lakh. Management have elected to adopt full goodwill
method and to measure NCI at fair value. The net aggregate value of identifiable assets and
liabilities, as measured in accordance with the standard is determined as ` 22 lakh. (Tax
consequences being ignored).
QUESTION NO 59
GAIN ON A BARGAIN PURCHASE WHEN NCI IS MEASURED AT PROPORTIONATE

SHARE OF IDENTIFIABLE NET ASSETS.
Continuing the facts as stated in the above illustration, except, that seeta. Ltd. chooses
to measure NCI using a proportionate share method for this business combination. (Tax
consequences have been ignored).
QUESTION NO 60
Measurement of goodwill there is no non-controlling interest

X Ltd. acquired Y Ltd. on payment of ` 25 crore cash and transferring a retail business, the
fair value of which is ` 15 crore. Assets acquired and liabilities assumed in the acquisition
are ` 36 crore.
Find out the Goodwill.
310 ACCOUNTS
QUESTION NO 61
Measurement of Goodwill when there is non- non-controlling interest

Raja Ltd. purchased 60% share of Ram Ltd. paying ` 525 lakh. Number of issued capital of
Ram Ltd. is lakh. Fair value of identifiable assets of Ram of Ram Ltd. is ` 640 lakh and that
of liabilities is ` 50 lakh. As on the date of acquisition, market price share of Ram Ltd. is `
775. Find out the value of goodwill.
QUESTION 62
Company A acquired 90% equity interest in Company B on April 1, 2010 for a consideration of
` 85 crores in a distress sale. Company B did not have any instrument recognized in equity.
The company appointed a registered value 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.
Required:
Find the value at which NCI has to be shown in the financial statements by both
methods.
QUESTION 63
Company A acquires 70 percent of Company S on January 1, 2011 for consideration

transferred of ` 5 million. Company A intends to recognize the NCI at proportionate share
of fair value of identifiable net assets. With the assistance of a suitable 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.
Required:
State whether the procedures followed by A and the resulting measurements are appropriate
or not. Also calculate the bargain Purcahse gain in the process.
QUESTION 64
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
SOLUTION:
In this case Company a has the option to measure NCI as follows:
• Option 1: Measure NCI at fair value l.e., ` 15 crores as derived by the valuer;
• Option 2: Measure NCI as proportion of fair value of identifiable net assets i.e. ,` 10
crores (100 crores x 10%)
QUESTION 65
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.
or not. Also calculate the bargain purchase gain in the process.
SOLUTION:
• The amount of B’s identifiable net assets exceeds the fair value of the consideration
transferred plus the fair value of the NCI in B, resulting in an initial indication of a
gain on a bargain purchase. Accordingly, A reviews the procedures it used to identify
and measure the identifiable net assets acquired, to measure the fair value of both
the NCI and the consideration transferred, and to identify transactions that were
not part of the business combination.
• Following that review, A concludes that the procedures followed and the resulting
measurements were appropriate.
Identifiable net assets 1,00,00,000

Less: Consideration transferred (50,00,000)
NCI (10 million x 30%) (30,00,000)
Gain on bargain purchase 20,00,000
312 ACCOUNTS
QUESTION 66 POTENTIAL VOTING RIGHTS
Company P Ltd., a manufacturer of textile products, acquires 40,000 of the equity shares
of Company X (a manufacturer of complementary products) out of 1,00,000 shares in issue
As part of the same agreement, 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 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. Asseses whether control is acquired by Company P.
SOLUTION:
In assessing whether it has obtained control over Company X, Company P should consider
not only the 40,000 shares it owns but also its option to acquire another 25,000 shares (a
so-called potential voting right). In this assessment, the specific terms and conditions of
the option agreement and other factors are considered:
• The options are currently exercisable and there are no other required conditions
before such option can be exercised
• If exercised, these options would increase Company P’S ownership to a controlling
interest of over 50% before considering other shareholders’ potential voting rights
out of a total of 1,25,000 shares)
• although other shareholders also have potential voting rights, if all optional are
exercised Company P will own a majority (65,000 shares out of 1,29,000 shares)
• the premium included in the exercise price makes the option out-of the money.
However, the fact that the premium is small and the option could confer majority
ownership indicates that the potential voting rights have economic substance.
By considering all the above factors, Company P concludes that with the acquisition of the
40,000 shares together with the potential voting rights it has obtained control of Company
X.
QUESTION 67:
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.
SOLUTION:
Sita Ltd has more Board members and thereby have majority control in DLC. Therefore,
Sita Ltd is identified as acquirer and Beta Ltd as acquiree.
Since no consideration has been transferred, the goodwill needs to be calculated as the
difference of Part A and Part B:
Part A:
1) Consideration paid by Acquirer. - Nil

2) Controlling Interest in Acquiree – ` 80 crores
3) Acquirer’s previously held interest - Nil
Part B:
Fair value of net identifiable asset – ` 70 crores
Goodwill is recognised as ` 10 crores (80 – 70 crores) in business combination achieved
through contract alone when NCI is measured at fair value.
QUESTION 68
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?
SOLUTION:
The amount of B Ltd.’s identifiable net assets i.e., ` 20 crore exceeds the fair value of
the consideration transferred plus the fair value of the non-controlling interest in B Ltd.
i.e. ` 19.2 crore. Therefore, A Ltd. should review the procedures it used to identify and
measure the net assets acquired and the fair value of non-controlling interest in B Ltd. and
the consideration transferred. After the review, A Ltd. decides that the procedures and
resulting measures were appropriate.
314 ACCOUNTS
A Ltd. measures the gain on its purchase of the 80 per cent interest at ` 80 lakh, as the
difference between the amount of the identifiable net assets which is ` 20 crore and the
sum of purchase consideration and fair value of non-controlling interest, which is ` 19.2
crore (cash consideration of ` 15 crore and fair value of non-controlling interest of ` 4.2
crore).
Assuming there exists clear evidence of the underlying reasons for classifying the business
combination as a bargain purchase, the gain on bargain purchase of 80 per cent interest
calculated at ` 80 lakh, which will be recognised in other comprehensive income on the
acquisition date and accumulated the same in equity as capital reserve.
If the acquirer chose to measure the non-controlling interest in B Ltd. on the basis of its
proportionate share of identifiable net assets of the acquiree, the recognised amount of
the non- controlling interest would be ` 4 crore (` 20 crore × 0.20). The gain on the bargain
purchase then would be ` 1 crore (` 20 crore – (` 15 crore + ` 4 crore)).
ADDITIONAL CONCEPTS TO BE CONSIDERED UNDER UNIT 2
CONCEPT 1: STEP BY STEP ACQUISITION

An acquirer sometimes obtains control of an acquiree in which it held an equity interest
immediately before the acquisition date.
Example:
On 31st December 2011, Entity A holds a 35 per cent non-controlling equity interest in
Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B,
which gives it control of Entity B. This transaction is referred as a business combination
achieved in stages, sometime also referred to as a step acquisition.
In a business combination achieved in stages, the acquirer shall remeasure its previously
held equity interest in the acquiree at its acquisition-date fair value and recognise the
resulting gain or loss, if any, in profit or loss. In prior reporting periods, the acquirer
may have recognised changes in the value of its equity interest in the acquiree in other
comprehensive income. As per Ind AS 109 or Ind AS 27, an entity can elect to measure
investments in equity instruments at fair value through other comprehensive income.
However, once elected all gains and losses on that investment even on sale is recognized in
OCI. Therefore, if the investment is designated as fair value through OCI, the resulting
gain or loss, if any, will be recognized in OCI.
QUESTION 69
STEP ACQUISITION WHEN CONTROL IS OBTAINED.

Entity D has a 40% interest in entity E. the carrying value of the equity interest. Which
has been accounted for as an associate in accordance with Ind As 28 is ` 40 lakh. Entity D
purchases the remaining 60% interest in entity E for ` 600 lakh in cash. The fair value of
the 40% previously held equity interest is determined to be ` 400 lakh., the net aggregate
value of the identifiable assets and liabilities measured in accordance with Ind AS 103 is
determined to be identifiable ` 880 lakh. Tax consequences have been ignored. How entity
D account for the business combination?
QUESTION 70
Company A and Company B are in power business. Company A holds 25% of equity share
of Company B. On November 1, Company A obtains control of Company B when it acquires
of further 65% of Company B’s shares, thereby resulting ijn a total holding of 90%. The
acquisition had the following features.
316 ACCOUNTS
Consideration: Company A transfers cash of ` 59,00,000 and issues 1,00,000 shares of

November 1. The market price of Company A’s shares on the date of issues is ` 10 per share.
The equity shares issued as per this transaction will comprise 5% of the post-acquisition
equity capital of Company A.
Contingent Consideration: Company a agrees to pay additional consideration of ` 7,00,000
if the comulative 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 71
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
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?

at the acquisition date based on market price. Company A elects to measure non-controlling
in Company B for several years. At November 1, the investment is included in Company A’s
consolidated statement of financial position 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 indentifiable assets at November 1 is ` 60,00,000,
determined in accordance with IND AS 103.
Required:
Dertermine the accounting under acquisition method for the business combination by
Company A.
QUESTION NO 72
A Ltd. holds 30% shares in B Ltd. which was acquired on 15.7.2012. In separate financial
statements, the investment in associate is carried at cost ` 200 million. In the consolidated
financial statements as at 31 March, 2015, the investment is recognised applying equity
method accounting at ` 300 million. Changes in equity were recognized as FVOCI.
On 1 April, 2015, A Ltd. acquired another 30% stake of B Ltd. for ` 350 million.
AS on the date of acquisition, fair value of identifiable assets and liabilities of B Ltd were
determined as ` 1200 million and ` 200 million respectively. Deferred tax liability has been
reassessed based on acquisition date fair value of assets and liabilities at ` 40 million.
Market price of previously held 30% interest is ` 330 million.
How should A Ltd. recognise the acquisition of controlling stake in B Ltd.?
318 ACCOUNTS
CONCEPT 2: CONTROL IN BUSINESS WITHOUT

ACQUISITION OF SHARES
QUESTION NO 73
X holds 46% of 100 million equity shares issued by Y Ltd. This is recognised as investment in
associate in the separate financial statements at cost of ` 4600 million. In the consolidated
financial statements, the investment is accounted for applying equity method accounting
at ` 6300 million. The difference of 2300 million has been recognised in the consolidate
profit and loss as share of profit form the associate. Fair value of identifiable assets and
liabilities of Y Ltd. as on 1.4.2015: Assets (other than cash and cash equivalents) ` 14000
million, Cash and cash equivalents ` 1800 million, Liabilities ` 2000 million.
As on 1 April 2015, Y Ltd. repurchases 10 million equity shares @ ` 160 share (i.e for ` 1600
million)
This repurchase gives controlling interest to X Ltd.
How should the company recognise the impact of gaining controlling interest in Y Ltd.?
UNIT 4: COMMON CONTROL TRANSACTIONS

(APPENDIX C)
Common control business combinations will include transactions, such as transfer of
subsidiaries or businesses, between entities within a group.
The extent of non-controlling interests in each of the combining entities before and after
the business combination is not relevant to determining whether the combination involves
entities under common control. This is because a partially-owned subsidiary is nevertheless
under the control of the parent entity.
An entity can be controlled by an individual, or by a group of individuals acting together
under a contractual arrangement, and that individual or group of individuals may not be
subject to the financial reporting requirements of Ind AS. Therefore, it is not necessary
for combining entities to be included as part of the same consolidated financial statements
for a business combination to be regarded as one having entities under common control.
A group of individuals are regarded as controlling an entity when, as a result of contractual
arrangements, they collectively have the power to govern its financial and operating policies
so as to obtain benefits from its activities, and that ultimate collective power is not
transitory.
Common control combinations are the most frequent. Broadly, these are transactions in
which an entity obtains control of a business (hence a business combination) but both
combining parties are ultimately controlled by the same party or parties both before and
after the combination. These combinations often occur as a result of a group reorganisation
in which the direct ownership of subsidiaries changes but the ultimate parent remains the
same. However, such combinations can also occur in other ways and careful analysis and
judgement are sometimes required to assess whether some combinations are covered by
the definition (and the scope exclusion). In particular:
• an assessment is required as to whether common control is ‘transitory’ (if so, the

combination is not a common control combination and Ind AS 103 applies). The term
transitory is not explained in the standard. In our view it is intended to ensure that Ind
AS 103 is applied when a transaction that will lead to a substantive change in control is
structured such that, for a brief period before and after the combination, the entity
to be acquired/sold is under common control. However, common control should not be
considered transitory simply because a combination is carried out in contemplation of
an initial public offering or sale of combined entities.
• when a group of two or more individuals has control before and after the transaction,
an assessment is needed as to whether they exercise control collectively as a result
of a contractual agreement.
320 ACCOUNTS
Examples of common control transaction

¨ Merger between fellow subsidiaries
¨ Merger of subsidiary with parent
¨ Acquisition of an entity from an entity within the same group
¨ Bringing together entities under common control in a corporate legal structure.
QUESTION 74
Company X, the ultimate parent of a large number of subsidiaries, reorganizes the retail
segment of its business to consolidate all of its retail businesses in a single entity. Under
the reorganization, 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
it sown shares to Company X. After the transaction, Company X will directly control the
operating and financial policies of Companies Y.
Company X
Company Y Company Z Company M Other Subsidies
Company X
Other Subs Company Z
Company Y
SOLUTION:
In this situation, Company Z pays consideration to Company X to obtain control of Company Y.
The transaction meets the definition of a business combination. Prior to the reorganization,
each of the parties are controlled by Company X. After the reorganization, although
Company Y are now owned by Company Z, all two companies are still ultimately owned and
controlled by Company X. From the perspective of Company X, there has been no change as
a result of the reorganization. This transaction therefore meets the definition of a common
control combination and is within the scope of Ind AS 103.
QUESTION 75
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?
B C D E B C D E
75% 75%
25% 25%
ABC Ltd. XYZ LTd.
SOLUTION:
Appendix C to Ind AS 103 defines common control business combination as a business
combination involving entities or businesses in which all the combining entities or businesses
are ultimately controlled by the same party or parties both before and after the business
combination, and that control is not transitory.
In the instant case, both ABC Ltd. and XYZ Ltd. are jointly controlled by group of
individuals (B, C and D) as a result of contractual arrangement. Therefore, in the current
scenario, ABC Ltd. and XYZ Ltd. are considered to be under common control.
QUESTION 76
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?
322 ACCOUNTS
SOLUTION:
Appendix C to Ind AS 103 defines ‘Common control business combination’ as business
combination involving entities or businesses in which all the combining entities or businesses
are ultimately controlled by the same party or parties both before and after the business
combination, and that control is not transitory.
In the present case, there is no contractual arrangement between the shareholders who
exercise control collectively over either company. Thus, ABC Ltd. and XYZ Ltd. are not
considered to be under common control even if there is an established pattern of voting
together.
METHOD OF ACCOUNTING FOR COMMON

CONTROL BUSINESS COMBINATIONS
Business combinations involving entities or businesses under common control shall be
accounted for using the pooling of interest method.
The pooling of interest method is considered to involve the following:
(i) The assets and liabilities of the combining entities are reflected at their carrying
amounts.
(ii) No adjustments are made to reflect fair values, or recognize any new assets or
liabilities. The only adjustments that are made are to harmonise accounting policies.
(iii) The financial information in the financial statements in respect of prior periods
should be restated as if the business combination had occurred from the beginning
of the earliest period presented in the financial statements, irrespective of the
actual date of the combination. However, if business combination had occurred
after that date, the prior period information shall be restated only from that date.
The consideration for the business combination may consist of securities, cash or other
assets. Securities shall be recorded at nominal value. In determining the value of the
consideration, assets other than cash shall be considered at their fair values.
The balance of the retained earnings appearing in the financial statements of the transferor
is aggregated with the corresponding balance appearing in the financial statements of the
transferee. Alternatively, it is transferred to General Reserve, if any.
The identity of the reserves shall be preserved and shall appear in the financial statements
of the transferee in the same form in which they appeared in the financial statements of
the transferor. Thus, for example, the General Reserve of the transferor entity becomes
the General Reserve of the transferee, the Capital Reserve of the transferor becomes the
Capital Reserve of the transferee and the Revaluation Reserve of the transferor becomes
the Revaluation Reserve of the transferee. As a result of preserving the identity, reserves
which are available for distribution as dividend before the business combination would also
be available for distribution as dividend after the business combination.
The difference, if any, between the amount recorded as share capital issued plus any
additional consideration in the form of cash or other assets and the amount of share capital
of the transferor shall be transferred to capital reserve and should be presented separately
from other capital reserves with disclosure of its nature and purpose in the notes.
The acid test in assessing common control transaction is that before and after the
reorganization the entity should be controlled by the same shareholders.
QUESTION NO 77
AX Ltd. and BX Ltd. amalgamated on and from 1st January 2012. A new Company ABX Ltd.
was formed to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-2012

INR in ‘000
Note
ASSETS AX Ltd BX Ltd
No.
Non-current assets
Financial assets
Investments 1,050 550
Current assets
Trade receivable 1,800 4,000
Cash and Cash equivalent 450 400
13050 15200
Equity
Equity share capital (of face value of INR 10 6,000 7,000
each)

Liabilities
324 ACCOUNTS
Current liabilities
Trade payable 1,000 1,500
13,050 15,200
ABX Ltd. issued requisite number of shares to discharge the claims of the equity
shareholders of the transferor companies.
Prepare a note showing purchase consideration and discharge thereof and draft the
Balance Sheet of ABX Ltd:
Assuming that both the entities are under common control.
QUESTION NO 78
Maxi Mini Ltd. has 2 divisions - Maxi and Mini. The draft information of assets and liabilities
as at 31st October, 2012 was as under:
Maxi division Mini division Total (in crores)
Fixed assets:
Cost 600 300 900
Depreciation 500 100 600
W.D.V. (A) 100 200 300
Net current assets:
Current assets 400 300 700
Less: Current liabilities 100 100 200
(B) 300 200 500
Total (A+B) 400 400 800
Financed By:
Loan Funds (A) - 100 100
(secured by a charge on fixed assets

Own funds:
Equity capital 50
(Fully paid up ` 10 per share)
Reserves and surplus 650
(B) ? ? 700
Total (A+B) 400 400 800
It is decided to form a new company Mini Ltd. to take over the assets and liabilities ofMini
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 r 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”.
QUESTION NO 79
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, 2012, the division – wise draft extract of the Balance Sheet was:
(` in crores)
Laptops Mobiles Total

Fixed assets cost 250 500 750
Depreciation 225 500 (625)
Net Assets (A) 25 100 125
Current assets: 200 500 700
326 ACCOUNTS
Less Current liabilities (2 (400) (425)

(B) 175 100 275
Total (A+B) 200 200 400
Financed by:
Loan Funds - 300 300
Capital: Equity R 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 I crore equity shares of Rs 10 each at a premium of Rs
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.

(ii) Prepare the Balance Sheet of Enterprise Ltd. After the entries in (i)
(iii) Prepare the Balance Sheet of Turnaround Ltd.
UNIT 5: REVERSE ACQUISITION

A reverse acquisition occurs when the entity that issues securities (the legal acquirer)
is identified as the acquiree for accounting purposes on the basis of the guidance above.
The entity whose equity interests are acquired (the legal acquiree) must be the acquirer
for accounting purposes for the transaction to be considered a reverse acquisition. For
example, reverse acquisitions sometimes occur when a private operating entity wants to
become a public entity but does not want to register its equity shares. To accomplish that,
the private entity will arrange for a public entity to acquire its equity interests in exchange
for the equity interests of the public entity. In this example, the public entity is the
legal acquirer because it issued its equity interests, and the private entity is the legal
acquireebecause its equity interests were acquired. However, application of the guidance
given in above paragraph results in identifying:
a) the public entity as the acquireefor accounting purposes (the accounting acquiree);
and
b) the private entity as the acquirer for accounting purposes (the accounting acquirer).
The accounting acquiree must meet the definition of a business for the transaction to be
accounted for as a reverse acquisition, and all of the recognition and measurement principles
of Ind AS 103, including the requirement to recognize goodwill, will apply.
QUESTION NO 80
On September 30, 2011 Entity A issue 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 oridnary shares of Entity B.
The fair value of each ordinary share of Entity B at September 30, 2011 is 40. The quoted
market price of Entity A’s ordinary shares at that date is 16.
The fair values of Entity’s A’s identifiable assets and liabilities at September 30, 2011 are
the same as their carrying amounts, except that the fair value of Entity A’s non-current
assets at September 30, 2011 is 1,500.
The statements of financial position of Entity A and Entity B immediately before the
business combination are:
328 ACCOUNTS
Entity A Entity B
(legal parent accounting ( legal subsidiary,
acquire) accounting acquirer)
Current Assets 500 700
Non-current assets 1,300 3,000
Current liabilities 300 600
Non-Current liabilities 400 1,100
Total liabilities 700 1,700
Shareholder’s equity
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total sahreholders equity 1,100 2,000
Total liabilities and 1,800 3,700
shareholders equity
UNIT 6: IND AS 103 VS AS 14
(NOT RELEVANT FOR EXAMS)
S.No. Basic Ind AS Accounting Standards

1. Goodwill Gain on bargain Difference between the purchase
or capital purchase is recognised consideration and the net assets
reserve (gain in CAP.RES. If acquired is recorded as goodwill
on bargain there is sufficient or capital Reserve (presented as
purchase) evidence that shows equity) as the case may be.
the appropriateness Goodwill arising on Amalgamation is
of bargain purchase amortized over its useful life not
gain. Goodwill is not exceeding five Years unless a longer
amortised but tested period is justified.
for impairment annually
There is no specific guidance on
(IND AS 38)
goodwill Arising on subsidiaries
acquired which are not amalgamations.
In practice, such goodwill is not
amortized but tested for impairment.
2. Contingent Initially recognized at Period end until Contingent

consideration acquisition date fair consideration is included in the
value. purchase consideration as at the
date of amalgamation, if payment is
• Initially recognized
probable and a reasonable estimate
at acquisition date
of the amount can be made. In other
fair value
cases the adjustment is recognized
• Subsequent in the profit and loss account as and
measurement when it becomes determinable.
• Contingent Others:
consideration
There is no specific guidance. In
classified as equity
practice. In practice, contingent
is not remeasured.
consideration is recognized when the
• Contingent contingency is resolved.
consideration
classified as
liability generally
remeasured at fair
330 ACCOUNTS

value with changes
at every reporting
settlement with
changes in fair value
recognized in profit
or loss.
3. In-process • Initially recognized There is no specific guidance.

research and at acquisition date
development fair value
• Subsequently
measured in
accordance with Ind
AS 38
4. Measurement Ind AS 103 provides for There is no specific guidance.

period a measurement period
after the acquisition
date for the acquirer to
adjust the provisional
amounts recognized to
reflect the additional
information that
existed as at the date
of acquisition.
The measurement
period is limited to
one year from the
acquisition date.
5. Business Any equity interest If two or more investment are made

combination in the acquiree held over a period of time, the equity of the
achieved in by the acquirer subsidiary at the date of investment
stages (step immediately before is generally determined on a step-by
acquisition) the obtaining control step basis.
over the acquiree is
adjusted to acquisition-
date fair value.

Any resulting gain or
loss is recognized in the
profit or loss
6. Trasactions Appendix C to Ind AS There is no specific guidance. In

between 103 provides detailed practice, the determined by the
entities guidance on which is scheme approved through a court
under very similar to the order.
common pooling of interest
control method as specified by
AS 14.
332 ACCOUNTS
ADDITIONAL QUESTIONS TO BE DISCUSSED
QUESTION NO 81
(DISCUSSED IN MTP 1…..Q1….PLS REFER MTP VIDEOS)

The balance sheet of Professional Ltd. and Dynamic Ltd. as of 31 March 2012 is given below:
Assets Professional Ltd Dynamic Ltd
Non-Current Assets:
Property plant and equipment 300 500
Investments 400 100
Current assets:
Inventories 250 150
Financial assets
Trade receivable 450 300
Others 400 230
Total 2 000 1 380
Equity
Share capital- Equity shares of rs. 100 each 500 400
Reserve and surplus 810 225
Non-Current liabilities:
Long term borrowings 250 200
Long term provisions 50 70
Deferred tax 40 35
Current Liabilities:
Short term borrowings 100 150
Trade payable 250 300
Total 2 000 1 380
Other Information
1. Professional Ltd. acquired 70% of Dynamic Ltd on 1 April 2012 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 share of Professional Ltd was ` 40 per share.
2. The fair value exercise resulted in the following : (all nos in Lakh)
a. PPE fair value on 1st April 2012 was ` 350 lakhs
b. Professional Ltd aslo agreed to pay an additional payment that is higher of 35
lakh and 25% of any excess of Dynamic Ltd in the first year after acquisition
over its profit in the preceding 12 months. 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.
c. In additional to above, Professional Ltd also had agreed to pay one of the founder
shareholder a payment of ` 20 lakh provided he stays with the Company for two
year after the acquisition.
d. 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 wards 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:
i. Original award ` 5 Lakh
ii. Replacement award ` 8 lakh.
e. Dynamic Ltd had a lawsuit pending with a customer who had made a claim of ` 50
lakh. Management reliably estimated the fair value of the liability to be ` 5 lakh.
f. 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 2012. Assume 10% discount rate.
334 ACCOUNTS
QUESTION 82
1. 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.
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.
SOLUTION:
Scenario 1: The new information obtained by F subsequent to the acquisition relates to

facts and circumstances that existed at the acquisition date. Accordingly, an adjustment
(i.e., decrease) to in the provisional amount should be recognised for loan to B with a
corresponding increase in goodwill.
Scenario 2: Basis this, the fair value of the loan to B will be less than the amount
recognised earlier at the acquisition date. The new information resulting in the change in
the estimated fair value of the loan to B does not relate to facts and circumstances that
existed at the acquisition date, but rather is due to a new event i.e., the loss of a major
customer subsequent to the acquisition date. Therefore, based on the new information,
F should determine and recognise an allowance for loss on the loan in accordance with
Ind AS 109, Financial Instruments: Recognition and Measurement, with a corresponding
charge to profit or loss; goodwill is not adjusted.
QUESTION 83
(DISCUSSED IN MTP 2…..Q1…REFER MTP VIDEOS)

H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as mentioned in
the below table:
Date Equity stake purchased Remarks
1st November, 20X6 15% The shares were purchased based

1st January, 20X7 45% on the quoted price on the stock
exchange on 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 value Fair value

(` in crore) (` in crore)
ASSETS:
Non-current assets
Property, plant and equipment 40.0 90.0
Intangible assets 20.0 30.0
Financial assets
- Investments 100.0 350.0
Current assets
Inventories
Financial assets
- Trade receivables 20.0 20.0
- Cash held in functional currency 20.0 20.0
Other current assets 4.0 4.5

Non-current asset held for sale 4.0 4.5
TOTAL ASSETS 208
336 ACCOUNTS
EQUITY AND LIABILITIES:

Equity
(a) Share capital (face value ` 100) 12.0 50.4
(b) Other equity 141.0 Not applicable
(a) Financial liabilities
- Borrowings 20.0 20.0
Current liabilities
(a) Financial liabilities
- Trade payables 28.0 28.0
(b) Provision for warranties 3.0 3.0
(c) Current tax liabilities 4.0 4.0
TOTAL EQUITY AND LIABILITIES 208.0
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 customer 0.5 It is not probable that an outflow
for a claim of of resources embodying economic
` 2 crore benefits will be required to settle the
claim.
Any amount which would be paid
in respect of law suit will be tax
deductible.
Income tax demand of 2.0 It is not probable that an outflow
` 7 crore raised by tax of resources embodying economic
authorities; S Ltd. has challenged benefits will be required to settle the
the demand in the court. claim.
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 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%.
338 ACCOUNTS
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 (a) 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 on 31st
March, 20X7?
QUESTION 84
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 question.
SOLUTION:
At the acquisition date A recognises the gain of ` 5,000 in OCI as the gain or loss is not
allowed to be recycled to income statement as per the requirement of Ind AS 109. A’s
investment in B would be at fair value and therefore does not require remeasurement as a
result of the business combination. The fair value of the 5 percent investment (1,05,000)
plus the fair value of the consideration for the 95 percent newly acquired interest is
included in the acquisition accounting.
QUESTION 85
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?
SOLUTION:
No. This is not a business combination of entities under common control. Mr. Ram’s control
of both entities before the business combination was transitory. The substance of the
transaction is that entity B has obtained control of entity A. Entity B accounts for this
transaction as a business combination under Ind AS 103 using acquisition accounting.
QUESTION 86
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. on the basis of proportionate interest method, if alternatively applied?
SOLUTION:
The amount of Beta Pvt. Ltd. identifiable net assets [` 400, calculated as ` 500 - ` 100)
exceeds the fair value of the consideration transferred plus the fair value of the non
controlling interest in Beta Pvt. Ltd. [` 384 calculated as 300 + 84]. Alpha Ltd. measures
the gain on its purchase of the 80 per cent interest as follows:
340 ACCOUNTS
` in lakh
Amount of the identifiable net assets acquired (` 500 - ` 100) 400
Less: Fair value of the consideration transferred for Alpha
Ltd. 300
80 per cent interest in Beta Pvt. Ltd.
Add: Fair value of non controlling interest in Beta Pvt. Ltd. 84 (384)
Gain on bargain purchase of 80 per cent interest 16
Journal Entry
` in lakh
Amount of the identifiable net assets acquired (` 500 - ` 100) 400
Less: Fair value of the consideration transferred for Alpha 300
Ltd.
80 per cent interest in Beta Pvt. Ltd.
Add: Fair value of non controlling interest in Beta Pvt. Ltd. 84 (384)
Gain on bargain purchase of 80 per cent interest 16
If the acquirer chose to measure the non controlling interest in Beta Pvt. Ltd. on the basis
of its proportionate interest in the identifiable net assets of the acquire, the recognized
amount of the non controlling interest would be ` 80 (` 400 x 0.20). The gain on the bargain
purchase then would be ` 20 (` 400- (` 300 + ` 80)
QUESTION 87
ABC Ltd. prepares consolidated financial statements upto 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 88 (RTP NOV 2021….ALREADY DISCUSSED IN RTP VIDEOS)
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%
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.
342 ACCOUNTS
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
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 5,50,000 11,00,000 1,50,000 3,00,000

Liabilities
Current Liabilities
Financial 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
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?
344 ACCOUNTS
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.
ANSWER
1. Ind AS 103 defines business as an integrated set of activities and assets that is
capable of being conducted and managed for the purpose of providing goods or
services to customers, generating investment income (such as dividends or interest)
or generating other income from ordinary activities.
For a transaction to meet the definition of a business combination (and for the
acquisition method of accounting to apply), the entity must gain control of an integrated
set of assets and activities that is more than a collection of assets or a combination
of assets and liabilities.
To be capable of being conducted and managed for the purpose identified in the
definition of a business, an integrated set of activities and assets requires two
essential elements—inputs and processes applied to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an
input and a substantive process that together significantly contribute to the ability to
create output.
In the aforesaid transaction, Company X acquired share of participating rights owned
by Company Z for the producing Block (AWM/01). The output exist in this transaction
(Considering AWM/01) is a producing block. Also all the manpower and requisite facilities
/ machineries are owned by Joint venture and thereby all the Joint Operators. Hence,
acquiring participating rights tantamount to acquire inputs (Expertise Manpower &
Machinery) and it is critical to the ability to continue producing outputs. Thus, the
said acquisition will fall under the Business Acquisition and hence standard Ind AS 103
is to be applied for the same.
(2) As per paragraph 8 of Ind AS 103, acquisition date is the date on which the acquirer
obtains control of the acquiree. Further, paragraph 9 of Ind AS 103 clarifies that
the date on which the acquirer obtains control of the acquiree is generally the date
on which the acquirer legally transfers the consideration, acquires the assets and
assumes the liabilities of the acquiree—the closing date. However, the acquirer might
obtain control on a date that is either earlier or later than the closing date.
An acquirer shall consider all pertinent facts and circumstances in identifying the
acquisition date. Since government of India (GOI) approval is a substantive approval
for Company X to acquire control of Company Z’s operations, the date of acquisition
cannot be earlier than the date on which approval is obtained from GOI. This is
pertinent given that the approval from GOI is considered to be a substantive process
and accordingly, the acquisition is considered to be completed only on receipt of such
approval. Hence acquisition date in the above scenario is (30.6.20X1.
Journal entry for acquisition
Particulars Amount (`) Amount (`)

Property Plant & Equipment Dr. 1,66,650
Right-of-use Asset Dr. 6,666
Development CWIP Dr. 66,660
Financial Assets - Loan Receivables Dr. 16,665
Inventories Dr. 9,999
Trade Receivables Dr. 33,330
Other Current Assets Dr. 16,665
To Provisions 66,660
To Other Liabilities 33,330
To Trade Payables 66,660
To Deferred Tax Liability 29,997
To Cash & Cash Equivalent (purchase consideration) 1,00,000
To Gain on bargain purchase (Other Comprehensive 19,988

Income)
(Being assets acquired and liabilities assumed from Company Z recorded at fair value
along gain on bargain purchase)
(4) Balance Sheet of Company X as at 30.6.20X1

(Pre & Post Acquisition of PI rights pertaining to Company Z)
Particulars Pre- Acquisition Adjustments Post- Acquisition
30.6.20X1 30.6.20X1
Assets
Non - Current Assets
Property Plant & Equipment 10,00,000 1,66,650 11,66,650
Right of Use Asset 2,00,000 6,666 2,06,666

346 ACCOUNTS
Development CWIP 1,00,000 33,330 1,66,660
Financial Assets
Loan receivable 50,000 16,665 66,665
Total Non-Current Assets 13,50,000 16,06,641
Current assets
Inventories 2,00,000 9,999 2,09,999
Financial Assets
Trade receivables 3,00,000 33,330 3,33,330
Cash and cash equivalents 4,00,000 (1,00,000) 3,00,000
Other Current Assets 50,000 16,665 66,665
Total Current Assets 9,50,000 9,09,994
Total Assets 23,00,000 25,16,635
Equity
Equity share capital 3,00,000 3,00,000
Other equity 3,00,000 3,00,000
Capital Reserve (OCI) 19,988 19,988
Total Equity 6,00,000 6,19,988
Liabilities
Provisions 8,00,000 66,660 8,66,660
Other Liabilities 3,00,000 33,330 3,33,330
Deferred Tax Liability 29,997 29,997
Total Non-Current Liabilities 11,00,000 12,29,987
Current Liabilities
Trade Payables 6,00,000 66,660 6,66,660
Total Current Liabilities 6,00,000 6,66,660
Total Equity and Liabilities 23,00,000 25,16,635
Working Notes
1. Determination of Company Z’s balance acquired by Company X on 30.6.20X1

(Acquisition Date)
Particulars As per Carrying Acquisition Remarks

Company Value Date
Z Books 33.33% Value
30.6.20X1 Share
` ` `
Assets
Non-Current Assets
Property Plant & Equipment 3,00,000 99,990 1,66,650 Note 1
Right of Use Asset 20,000 6,666 6,666
Development CWIP 1,00,000 33,330 66,660 Note 2
Financial Assets
Loan receivable 50,000 16,665 16,665
Total Non-Current Assets 4,70,000 1,56,651 2,56,641
Current assets
Inventories 30,000 9,999 9,999
Financial Assets
Trade receivables 1,00,000 33,330 33,330
Cash and cash equivalents 2,00,000 66,660 66,660
Other Current Assets 50,000 16,665 16,665
Total Current Assets 3,80,000 1,26,654 1,26,654

348 ACCOUNTS
Liabilities
Provisions 2,00,000 66,660 66,660
Other Liabilities 1,00,000 33,330 33,330
Total Non-Current 3,00,000 99,990 99,990

Liabilities
Current Liabilities
Trade Payables 2,00,000 66,660 66,660
Total Current Liabilities 2,00,000 66,660 66,660
Note 1: Fair Value of PPE:
Fair Value of PPE in Company Z Books ` 5,00,000

33.33% Share acquired by Company X ` 1,66,650
Note 2: Fair Value of Development CWIP:
Fair Value of PPE in Company Z Books ` 2,00,000

33.33% Share acquired by Company X ` 66,660
Computation Goodwill/Bargain Purchase Gain
Particulars As at 30.6.20X1
(`)
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of 59,994

` 66,660) (1,26,654 – 66,660)
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Total Deferred Tax Liability (Refer Working note 3) (29,997)

Net Assets Acquired 1,19,988
Less: Consideration Paid (1,00,000)
Gain on Bargain Purchase (To be transferred to OCI) 19,988
*In extremely rare circumstances, an acquirer will make a bargain purchase in a business
combination in which the value of net assets acquired in a business combination exceeds
the purchase consideration. The acquirer shall recognise the resulting gain in other
comprehensive income on the acquisition date and accumulate the same in equity as capital
reserve, if the reason for bargain purchase gain is clear and evidence exist. If there does
not exist clear evidence of the underlying reasons for classifying the business combination
as a bargain purchase, then the gain shall be recognised directly in equity as capital reserve.
Since in above scenario it is clearly evident that due to liquidity issues, Company Z has to
withdraw their participating right from AWM/01. The said bargain purchase gain should be
transferred to other comprehensive income on the acquisition date.
1. Computation of Deferred Tax Liability arising on Business Combination
Particulars Acquisition
Date Value
(`)
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of ` 66,660) 59,994
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Net Assets Acquired at Fair Value 1,49,985
Book value of Net Assets Acquired (49,995)
Temporary Difference 99,990
DTL @ 30% on Temporary Difference 29,997
Note: As per Ind AS 103, in case an entity acquires another entity step by step through
series of purchase then the acquisition date will be the date on which the acquirer obtains
control. Till the time the control is obtained the investment will be
350 ACCOUNTS
accounted as per the requirements of other Ind AS 109, if the investments are covered
under that standard or as per Ind AS 28, if the investments are in Associates or Joint
Ventures.
If a business combination is achieved in stages, the acquirer shall remeasure its previously
resulting gain or loss, if any, in profit or loss or other comprehensive income, as appropriate.
Since in the above transaction, company X does not hold any prior interest in Company Z &
company holds only 30% PI rights in Block AWM/01 trough unincorporated joint venture,
this is not a case of step acquisition.
CONTENTS
S.No. TOPIC Page no.
1. IND AS 110: CONSOLIDATED FINANCIAL 1 — 92

STATEMENTS
2. IND AS 19: EMPLOYEES BENEFITS 93 — 142
3. IND AS 28: INVESTMENT IN ACCOCIATES & JOINT 143 — 164

VENUTRUES
4. IND AS 111: JOINT ARRANGEMENTS 165 — 178
5. IND AS 111: JOINT ARRANGEMENTS 179 — 182
6. IND AS 112: DISCLOSURES 183 — 188
7. IND AS 101: FIRST –TIME ADOPTION OF IND AS 189 — 208
8. IND AS 12: INCOME TAXES 209 — 236
9. IND AS 113: FAIR VALUE MEASUREMENT 237 — 258
10. ANALYSIS OF FINANCIAL STATEMENTS 259 — 288

IND AS 110: CONSOLIDATED FINANCIAL STATEMENTS 1
CONSOLIDATED FINANCIAL STATEMENTS
IMPORTANT DEFINITIONS
• Associate: An associate is an entity over which the investor has significant influence.
• Consolidated Financial Statements: The financial statements of a group in which
the assets, liabilities, equity, income, expenses and cash flows of the parent and its
subsidiaries are presented as those of a single economic entity.
• Control over an investee: An investor controls an investee when the investor is exposed,
or has rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee.
• Group: A parent and its subsidiaries.
• Joint arrangement: A joint arrangement is an arrangement of which two or more
parties have joint control.
• Joint control: Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities require the
unanimous consent of the parties sharing control.
• Joint operation: A joint operation is a joint arrangement whereby the parties that
have joint control of the arrangement have rights to the assets, and obligations for the
liabilities, relating to the arrangement.
• Joint venture: A joint venture is a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement.
• Non-controlling interest: Equity in a subsidiary not attributable, directly or indirectly,
to a parent.
• Parent: An entity that controls one or more entities.
• Power: Existing rights that give the current ability to direct the relevant activities.
• Separate financial statements: Separate financial statements are those presented by
a parent (i.e. an investor with control of a subsidiary) or an investor with joint control
of, or significant influence over, an investee, in which the investments are accounted
for at cost or in accordance with Ind AS 109 ‘Financial Instruments’.
• Significant influence: Significant influence is the power to participate in the financial
and operating policy decisions of the investee but is not control or joint control of those
policies.
• Subsidiary: An entity that is controlled by another entity.
2 ACCOUNTS
CONCEPT 1
EXEMPTIONS FROM CONSOLIDATED FINANCIAL STATEMENTS
OBJECTIVE
The objective of Ind AS 110 ‘ Consolidated Financial Statements’ is to establish principles

for the presentation and preparation of consolidated financial statements when an entity
(the parent) controls one or more other entities (subsidiaries).
SCOPE
A parent who controls one or more entities is required to present consolidated financial
statements.
However, a parent is not required to present consolidated financial statements if it meets
all of the following four conditions.
Condition 1: The parent is either a wholly owned subsidiary or a partially owned subsidiary
of another entity. Further its other owners (including those not entitled to vote) have
been informed and do not object, to the parent not presenting the consolidated financial
statements.
Condition 2: The equity instruments or the debt instruments of the parent are not traded
in a public market. The public market could be a domestic or foreign stock exchange or an
over the counter market including local and regional markets.
Condition 3: The parent has neither filed nor is in the process of filing, its financial
statements with a securities commission or other regulatory organization for the purpose
of issuing any class of instruments in a public market.
Condition 4: The ultimate or any intermediate parent, of the parent ( that is required
to present consolidated financial statements), produces financial statements that are
available for public use and comply with Ind AS, in which subsidiaries are consolidated or
are measured at fair value through profit or loss in accordance with Ind AS 110.
QUESTION 1
Exemption from preparing consolidated financial statements.
Entity X owns the following other entities:

1. 100% interest in entity Y. Entity Y owns 60% interest in entity Z.
2. 80% interest in entity M. Entity M owns 60% interest in entity N.
The structure is illustrated as follows:
100% 80%
Y M
60% 60%
Z N
Entity X is a listed company and prepares IND AS compliant consolidated financial

statements. Entities Y & M do not have their securities publically traded & they are not in
the process of issuing securities in public markets. Entity X does not require its subsidiary
M to prepare consolidated financial statements.
ANALYSE HOW M & Y CAN GET EXEMPTIONS FROM CONSOLIDATION
QUESTION 2:
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?
4 ACCOUNTS
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?
QUESTION 3:
Exception to prepare consolidated financial statements

Scenario A:
Following is the structure of a group headed by Company A.
Company A
100% 100%
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.
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)?
EXCEPTION 1
Ind AS 110 does not apply to post-employment benefit plans or other long-term employee
benefit plans to which Ind AS 19 ‘Employee Benefits’ applies. Therefore, an entity which has
set up such plans should not consolidate them.
Example
Company A has set up an Employee Gratuity Plan trust for the purpose of giving gratuity
benefits to its employees. The gratuity benefit given by the company is a post-employee
benefit plan which is accounted as per Ind AS 19 (refer Unit 1 of Chapter 9 for the
accounting of employee benefit plans as per Ind AS 19). So, Company A is not required to
evaluate whether it controls the trust and should not consolidate it.
EXCEPTION 2
An investment entity that is required to measure all of its subsidiaries at fair value through
profit or loss need not present consolidated financial statements. This exception is further
explained subsequently in this unit.
6 ACCOUNTS
CONCEPT 2: CONTROL EVALUATION
As per Ind AS 110, an investor needs to determine whether it controls an investee and if
yes then the investor would be treated as a parent and the investee would be treated as a
subsidiary of the parent.
An investor controls an investee if and only if the investor has all of the following three
elements:
Ability to
Exposure,
use power over
or rights, to
Power over the the investee Control over the
variable returns
investee to affect the investee
from the
investor’s
investee
returns
EXPLNATION ON POWER
The first criterion of control evaluation is to determine whether the investor has power
over the investee. An investor gets power over an investee if it has three elements:
A. existing rights that give it
B. the current ability
C. to direct the relevant activities of the investee.
How to identify the relevant activities and how the decisions about those activities are
made?
Relevant activities are the activities of investee that significantly affect the investee’s
returns.
There may be range of operating and financing activities that would significantly affect the
returns of an investee. Examples of activities related to operating and financing activities
that can be relevant activities include, but not limited to:
Managing financial
Selling and purchasing Selecting, acquiring or
assets during their life
of goods and services disposing of assets
(including upon default)
Researching and Determining a funding Establishing operating and

developing new structure or obtaining capital decisions of the
products or processes funding investee, including budgets
Appointing, terminating and remunerating

an investee’s key management personnel or
service providers
QUESTION 4
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.?
SOLUTION:
In this case, both the investors A Ltd. and B Ltd. have the rights to unilaterally direct
different relevant activities of AB Ltd. Here, investors shall determine which activities can
most significantly affect the returns of the investee and the investor having the ability to
direct those activities would be considered to have power over the investee. Hence, if the
investors conclude that the construction related activities would most significantly affect
the returns of AB Ltd. then A Ltd. would be said to have power over AB Ltd. On the other
hand, if it is concluded that marketing and selling related activities would most significantly
affect the returns of AB Ltd. then B Ltd. would be said to have power over AB Ltd.
8 ACCOUNTS
QUESTION 5
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 unitholders 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?
SOLUTION:
In this case, A Ltd. is able to direct the activities that can most significantly affect the
returns of Fund X. Hence A Ltd. has power over the investee. However, this does not mean
that A Ltd. has control over the fund and consideration will have to be given to other
elements of control evaluation as well i.e. exposure to variable returns and link between
power and exposure to variable returns.
RIGHTS THAT GIVE POWER TO AN INVESTOR
Power arises from rights. To have power over an investee, an investor must have existing
rights that give the investor the current ability to direct the relevant activities.
The rights that give an investor power over an investee can differ investee by investee.
Following are some of the examples (not an exhaustive list) of various forms of rights that,
either individually or in combination with other rights, can give power to an investor:
Form of right Illustration

Voting rights or potential voting rights An investor holding majority of the equity
of an investee (this is further explained share capital of an investee. Concepts of
subsequently in this unit). power through voting or potential voting
rights
Rights to appoint, reassign or remove An investor having right to appoint majority
members of an investee’s key management of the members of the Board of Director
personnel who have the ability to direct who have power to take decisions related to
the relevant activities. relevant activities.
Rights to appoint or remove another entity Right with an investor to appoint or remove
that directs the relevant activities. an asset manager who takes decisions related
to investments / divestments by a venture
capital fund.
Other rights (such as decision-making Right related to relevant activities given to a

rights specified in a management contract) single investor by all other investors through
that give the holder the ability to direct a shareholders’ agreement
the relevant activities.
SUBSTANTIVE RIGHTS VS PROTECTIVE RIGHTS
For the purpose of determination of power over an investee, an investor shall consider
only those rights which are substantive. Protective rights are not considered for the
determination of power. Below table summarises the difference between substantive rights
and protective rights:
Substantive rights Protective rights

Substantive rights can give the investor Protective rights do not give investor power
power over the investee. over the investee.
Substantive rights relate to the Protective rights relate to protect the interest
relevant activities of the investee. of the party holding those rights without giving
the holder the right over the relevant activities
of the investee.
Both the above rights are discussed below in detail.

1. Substantive rights
For a right to be substantive, the holder must have the practical ability to exercise that
right.
Assessment of whether the rights are substantive requires judgement taking into
consideration all the facts and circumstances. Following are some of the factors (not an
exhaustive list) that should be considered while assessing whether the rights are substantive
or not:
a) Whether there are any barriers that prevent the holder from exercising the rights.
Example of such barriers (not an exhaustive list) can be as follows:
 Financial penalties and incentives
 High exercise or conversion price
 Operational barriers or incentives. For example, in case of a venture capital fund
managed by an asset manager, there is absence of other managers willing or able
to provide specialised services or provide the services and take on other interests
held by the existing manager.
10 ACCOUNTS
 legal or regulatory requirements. For example, where a foreign investor is

prohibited from exercising its rights
b) When the exercise of rights requires agreement of more than one party, or when the
rights are held by more than one party, whether a mechanism is in place that provides
those parties with the practical ability to exercise their rights collectively if they
choose to do so. The lack of such a mechanism is an indicator that the rights may not
be substantive.
c) Whether the party or parties that hold the rights would benefit from the exercise
of those rights. For example, the holder of potential voting rights in an investee shall
consider the exercise or conversion price of the instrument. The potential voting
rights are more likely to be substantive when the exercise price is lower than the
market price or when there are other synergies anticipated between the investor and
the investee.
QUESTION 6
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?
SOLUTION:
Managing the investee’s asset portfolio is the relevant activity of the investee.
The asset manager has the ability to direct the relevant activities until defaulted assets
reach the specified proportion of the portfolio value; the debt investor has the ability to
direct the relevant activities when the value of defaulted assets surpasses that specified
proportion of the portfolio value.
The asset manager and the debt investor each need to determine whether they are able
to direct the activities that most significantly affect the investee’s returns, including
considering the purpose and design of the investee as well as each party’s exposure to
variability of returns.
QUESTION 7:
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?
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?
12 ACCOUNTS
SOLUTION:
Scenario A:
If the investors holding 90% of the voting power exercise their right to terminate the
management agreement, then it will result in B Ltd. having to pay huge penalty which will
affect the returns of B Ltd. This is a barrier that prevents such investors from exercising
their rights and hence such rights are not substantive.
Scenario B:
To take back the decision-making rights from A Ltd., investors holding majority of the
voting power need to vote in favour of removal of rights from A Ltd. However, the investors
having disputes with A Ltd. do not have majority voting power and hence the rights held by
them are not substantive.
QUESTION 8:
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 month’s 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?
SOLUTION:
Scenario A:
The right to exercise purchase option is not substantive since the option exercise price is
too high as compared to current market price of ABC Ltd.
Scenario B:
The right to exercise purchase option is not substantive since the time period for the
investor to arrange for the requisite amount for exercising the option is too narrow.
Scenario C:
The right to exercise purchase option is not substantive. This is because the investor is not
able to obtain information about the market value of ABC Ltd. which is necessary in order
to compare the option exercise price with market price so that it can decide whether the
exercise of purchase option would be beneficial or not.
QUESTION 9:
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?
SOLUTION:
If the other investors exercise their removal rights, then it will impact the operations of
the fund and ultimately the returns of the fund since there is no substitute of the current
asset manager available who can manage the corpus of the fund. Hence the removal rights
held by other investors are not substantive.
14 ACCOUNTS
EXCEPTIONS TO SUBSTANTIVE RIGHTS
For a right to be substantive, it should be exercisable when decisions about the direction
of the relevant activities need to be made. In most of the cases a right, to be a substantive
right, rights need to be currently exercisable.
However, there may be some situations where a right can be substantive, even though it
may not be currently exercisable.
QUESTION 10
In case of an investor currently holding only 30% voting rights in a company has an option to
purchase additional 40% voting rights to increase its voting rights to 70%. The option can
be exercised within next 25 days. Also, there is a meeting of shareholding scheduled to be
held after 30 days to take decision about relevant activities of the company.
SOLUTION:
In such case, even though the investor is not currently holding majority voting power, it can
exercise the purchase option and increase its voting power to 70% by the time when the
decisions about the relevant activities are to be made. Hence such rights are substantive
rights.
2. PROTECTIVE RIGHTS
Protective rights are the rights designed to protect the interest of the party holding those
rights without giving that party power over the entity to which those rights relate.
Protective rights do not give its holder power or prevent another party from having power
over an investee. The examples of protective rights include, but not limited to, following:
A right exercisable by an investor only in the event of a fraud or default by other investors having power
to take decisions about relevant activities
*A lender’s right to appoint its nominee director in the Board of a borrower to ensure the
borrower do not engage in any activities that significantly increase the credit risk of borrower
Rights held by minority shareholders to approve decisions related to capital expenditure greater
than required in normal course of business or to approve issue of equity or debt instruments
A lender’s right to seize the assets of a borrower if the borrower defaults in repayment of loan
instalments
Rights of investors to approve or block decisions related to change in the name of the investee,
amendment to constitutional documents of the investee to enter into a new business, change in the
registered office of the investee, etc.
The effect of substantive and protective rights is summarised below:
Types of rights held Types of rights held Conclusion

by investor by other parties on ‘power’?
Substantive Protective Investor has power
Protective Substantive Other parties have power
Substantive Substantive Further evaluation needed

16 ACCOUNTS
FRANCHISES (PROTECTIVE RIGHTS)
Apart from the examples of protective rights mentioned above, one more example can be
of rights of a franchisor in a franchise agreement. In a franchise agreement, the investee
i.e. the franchisee usually give the franchisor the rights that are related to protect the
franchise brand.
QUESTION 11:
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?
SOLUTION:
The activities that most significantly affect the returns of PQR Ltd. are the funding and
capital structure of PQR Ltd., hiring of employees and their remuneration, vendors for
capital items, etc.
which are exercisable by PQR Ltd. Further, the retails outlet is being set up by PQR Ltd.
without any financial support from ABC Ltd. The rights available with ABC Ltd. are to
protect the brand name of ABC Ltd. and such rights do not affect the ability of PQR Ltd. to
take decisions about relevant activities. Hence, the rights held by ABC Ltd. are protective
rights.
VOTING RIGHTS
POWER THROUGH VOTING RIGHTS

In the most straightforward cases, the investor that holds a majority of voting rights has
power over an investee. However, there can be certain cases where an investor can have
power even if it holds less than a majority of the voting rights of an investee.
A. Power with a majority of the voting rights
An investor that holds more than half of the voting rights of an investee has power in the
following situations:
A majority of the members of the

The relevant activities are
governing body that directs the
directed by a vote of the
OR relevant activities are appointed by
holder of the majority of
a vote of the holder of the majority
the voting rights
of the voting rights
For example, in case of a company where the decisions related to relevant activities are
taken by Board of Directors of the company and the Board members are appointed by
shareholder holding majority of the voting rights. Then the shareholder holding majority
of the voting rights has power over the company.
B. Power without a majority of voting rights
There can be certain cases where an investor can have power even if it holds less than a
majority of the voting rights of an investee. Following are the examples of power without
majority voting rights:
Contractual Rights from

The investor’s
arrangement with other contractual
voting rights
other vote holders arrangements
Potential voting Combination of all

rights of above
18 ACCOUNTS
Contractual arrangement with other vote holders

An investor, who is not holding voting rights that are sufficient to given it power over the
investee, may enter into a contract with other vote holders to give the investor rights to
exercise voting rights which are sufficient to have power over the investee. In such case,
the investor would direct the other vote holders on how they should vote whereby the
investor gets power to direct the decision related to relevant activities.
Rights from other contractual arrangements

Apart from holding voting rights, an investor might be having decisions-making rights
related to relevant activities of the investee pursuant to a contractual arrangement. Such
contractual rights in combination with voting rights may give investor power to direct
the relevant activities like manufacturing process of the investee or other operating and
financing activities of the investee.
However, in the absence of any other rights, economic dependence of an investee on the
investor (such as relations of a supplier with its main customer) does not lead to the investor
having power over the investee.
The investor’s voting rights

There may be certain situations where even though an investor is not holding majority of
the voting rights, but the voting rights held by it are sufficient to give it practical ability
to have power over the investee unilaterally. Generally, this is termed as de-facto control.
In assessing the sufficiency of the voting rights of an investor, one should consider the size
of the investor’s holding of voting rights relative to the size and dispersion of holdings of
the other vote holders. This is interpreted as follows:
Particulars Higher number or Lower number or

size size
Number of voting rights held by investor More likely to have Less likely to have
power power
Size of investor’s voting rights relative to More likely to have Less likely to have
voting rights held by other holders power power
Number of parties required to outvote the More likely to have Less likely to have
investor power power
QUESTION 12:
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?
SOLUTION:
On the basis of the absolute size of its holding by the investor and the relative size of
the voting rights held by other shareholders, it is more likely that the investor would have
power over the investee.
QUESTION 13:
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?
SOLUTION:
In this case, it is less likely that ABC Ltd. will have power over XYZ Ltd. since the size of
the number of shareholders required to outvote ABC Ltd. is not so high. Additional facts
and circumstances should also be considered to determine whether ABC Ltd. has power or
not.
QUESTION 14:
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?
20 ACCOUNTS
SOLUTION:
In this case, the active participation of the other shareholders at recent shareholders’
meetings indicates that the investor would not have the practical ability to direct the
relevant activities unilaterally, regardless of whether the investor has directed the relevant
activities because a sufficient number of other shareholders voted in the same way as the
investor.
POTENTIAL VOTING RIGHTS
Potential voting rights are rights to obtain voting rights of an investee, such as those arising
from convertible instruments or options or forward contracts. Those potential voting rights
are considered only if the rights are substantive as per the guidance discussed earlier.
When considering potential voting rights, an investor shall consider the purpose and design
of the instrument giving those rights as well as any other benefits that the investor would
get from the exercise of those rights.
Potential voting rights are to be considered in combination with voting or other decisions-
making rights that the investor might have to assess whether investor has power or not.
QUESTION 15:
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?
SOLUTION:
Investor A has power over the investee because it holds voting rights of the investee
together with substantive potential voting rights that give it the current ability to direct
the relevant activities.
POWER OTHER THAN THROUGH VOTING RIGHTS
When voting rights cannot have a significant effect on an investee’s returns, such as when
voting rights relate to administrative tasks only the investor shall consider following factors
to determine whether it has power over the investee:
• Purpose and design of the investee
• Contractual arrangements
• Special relation between investor and investee
Purpose and design of the investee
Evaluation of purpose and design of the investee helps in:
• identification of relevant activities of the investee,
• how decisions about the relevant activities are made,
• who has the current ability to direct those activities, and
• who receives returns from those activities.
In assessing the purpose and design of an investee, an investor shall consider its involvement
and decisions made at the time of design of the investee and evaluate whether such
involvement provide the investor with rights that are sufficient to give it power. Being
involved in the design of an investee alone is not sufficient to give an investor control.
However, involvement in the design may indicate that the investor had the opportunity to
obtain rights that are sufficient to give it power over the investee.
QUESTION 16:
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.?
SOLUTION:
PQR Ltd. was involved in the design of XYZ Ltd. Accordingly, its involvement in the design
may indicate that the investor had the opportunity to obtain rights that are sufficient to
give it power over the investee. However, being involved in the design of XYZ Ltd. alone is not
sufficient to give PQR Ltd. control over XYZ Ltd. and hence other facts and circumstances,
such as other contractual arrangements, should also be considered.
22 ACCOUNTS
Contractual arrangements
An investor shall consider contractual arrangements such as call rights, put rights and
liquidation rights that give it explicit or implicit decision-making rights that are closely
related to the relevant activities of the investee even though they may occur outside the
legal boundaries of the investee.
For some investees, decisions about relevant activities are required to be taken only when
particular circumstances arise or events occur. The investee may be designed so that the
direction of its activities and its returns are predetermined unless and until those particular
circumstances arise or events occur. In this case, only those decisions that are required to
be taken when those circumstances or events occur would significantly affect its returns
and thus be relevant activities. However, it is not necessary for those circumstance or
events to actually occur to establish that investor has power over the investee. The fact
that the investor has rights to take those decisions whenever required is sufficient to
establish power.
QUESTION 17:
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?
SOLUTION:
In this question, the design of the investee ensures that the investor has decision-making
power only in case of default of a receivable. The terms of the agreement between investee
and investor are integral to the overall transaction and the establishment of the investee.
Therefore, the terms of the agreement together with the founding documents of the
investee lead to the conclusion that the investor has power over the investee even though
the investor takes ownership of the receivables only upon default and manages the defaulted
receivables outside the legal boundaries of the investee.
QUESTION 18:
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 from any other vendors because the materials supplied
by other vendors are of inferior quality. Whether A Ltd. has power over B Ltd.?
SOLUTION:
A Ltd. would be the most affected by the operations of B Ltd. since it is dependent on B
Ltd. for the supply of packing materials. Therefore A Ltd. would be committed to ensure
that B Ltd. operates as designed. This can be an indicator of A Ltd. having power over B Ltd.
But it has to consider other facts and circumstances as well to conclude whether it control
B Ltd. or not.
EXPOSURE, OR RIGHTS, TO VARIABLE RETURNS FROM AN INVESTEE
When assessing whether an investor has control of an investee, the investor determines
whether it is exposed, or has rights, to ‘variable returns’ from its involvement with the
investee.
Variable returns are returns that are not fixed and have the potential to vary as a result of
the performance of an investee. Variable returns can be only positive, only negative or both
positive and negative. It should be noted that the term used is ‘returns’ and not ‘benefits’
which are often interpreted as implying only positive returns.
24 ACCOUNTS
Following are some of the examples of variable returns:
Variable returns from an investee

Dividends, other Remuneration for servicing Returns that are not available
distributions of an investee’s assets or to other interest holders
economic benefits from liabilities
an investee (eg interest Fees and exposure to loss
from debt securities) from providing credit or
Changes in the value of liquidity support
the investor’s investment Residual interests in the
in that investee. investee’s assets and
liabilities on liquidation
Tax benefits Access to
future liquidity
Exposure to variable returns is not in itself enough to conclude the assessment of control.
An investor should have power over the investee and the ability to use its power to affect
the amount of the investor’s returns from its involvement with the investee.
For example, it is common for a lender to have an exposure to variable returns from
a borrower through interest payments that it receives from the borrower, that are
subject to credit risk. However, the lender would not control the borrower if it does not
have the ability to affect those interest payments (which is frequently the case).
LINK BETWEEN POWER AND RETURNS
An investor controls an investee if the investor not only has power over the investee and
exposure or rights to variable returns from its involvement with the investee, but also has
the ability to use its power to affect the investor’s returns from its involvement with the
investee.
Thus, an investor with decision-making rights shall determine whether it is a principal or
an agent. An investor shall also determine whether another entity with decision-making
rights is acting as an agent for the investor. An agent is a party primarily engaged to act on
behalf and for the benefit of another party or parties (the principal(s)). An investor that
is an agent does not control an investee when it exercises decision-making rights delegated
to it.
An investor may delegate its decision-making authority to an agent on some specific issues
or on all relevant activities. When assessing whether it controls an investee, the investor
shall treat the decision-making rights delegated to its agent as held by the investor directly.
A decision maker shall consider the overall relationship between itself, the investee being
managed and other parties involved with the investee, in particular all the factors below, in
determining whether it is an agent:
Exposure to variable
Rights held by Remuneration from
returns from other
other parties the investee
interests in the investee
Rights held by other parties

Substantive removal or other rights may indicate that the decision maker is an agent.
Removal rights
Removal rights are rights to deprive the decision-maker of its decision making authority.
The removal rights held by other should be considered as follows:
Single party holds substantive removal rights and can remove the decision maker without
cause, this, in isolation, is sufficient to conclude that the decision maker is an agent.
If more than one party holds such rights (and no individual party can remove the decision
maker without the agreement of other parties) those rights are not, in isolation, conclusive
in determining that a decision maker is an agent.
The greater the number of parties required to act together to exercise removal rights and
the greater the magnitude of, and variability associated with, the decision maker’s other
economic interests (ie remuneration and other interests), the less the weighting that shall
be placed on removal rights.
Other substantive rights

If other parties hold substantive rights that can restrict the decision maker from exercising
its discretion shall be considered in similar manner to removal right when evaluating whether
the decision maker is an agent.
For example, a decision maker that is required to obtain approval from a small number of
other parties for its actions is generally an agent.
26 ACCOUNTS
Consideration of the rights held by other parties shall include an assessment of any rights
exercisable by an investee’s board of directors (or other governing body) and their effect
on the decision-making authority.
Rights to remuneration
The remuneration of the decision maker is commensurate with the services

provided
Yes
No The remuneration agreement includes only terms, conditions or amounts that

are customarily present in arrangements for similar services and level of
skills negotiated on an arm’s length basis.
No Yes
More likely to be an agent but other facts and

Not an agent
circumstances should also be considered
Exposure to variable returns from other interests in the investee

A decision maker that holds other interests in an investee (like investments in the investee
or provides guarantees with respect to the performance of the investee), shall consider its
exposure to variability of returns from those interests in assessing whether it is an agent.
Holding other interests in an investee indicates that the decision maker may be a principal.
In evaluating the exposure to variability of returns, the decision maker shall consider the
magnitude of variability as follows:
Decision maker is a principal
Higher
The magnitude of, and variability associated with, its economic interests,
considering its remuneration and other interests in aggregate
Lower
Decision maker is an agent

It is to be noted that here the decision maker needs to consider the remuneration and
other interests in aggregate. Hence, even though in case the decision maker had concluded
in the initial assessment about remuneration that it is an agent, it needs to again consider
remuneration in the assessment of exposure to variable returns.
The decision maker shall evaluate its exposure relative to the total variability of returns
of the investee. This evaluation is made primarily on the basis of returns expected from
the activities of the investee but shall not ignore the decision maker’s maximum exposure
to variability of returns of the investee through other interests that the decision maker
holds.
For example, if a variation in investees returns by 1% causes variation in decision maker’s
returns from investee by less than 1%. However, a variation in investee’s returns by ` 100
causes variation in decision maker’s returns from investee by ` 150 because of significant
variation in the market price of the equity shares of the investee.
QUESTION 19:
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?
28 ACCOUNTS
SOLUTION:
Although operating within the parameters set out in the investment mandate and in
accordance with the regulatory requirements, the fund manager has decision-making rights
that give it the current ability to direct the relevant activities of the fund—the investors do
not hold substantive rights that could affect the fund manager’s decision-making authority.
The fund manager receives a market-based fee for its services that is commensurate with
the services provided and has also made a pro rata investment in the fund. The remuneration
and its investment expose the fund manager to variability of returns from the activities of
the fund without creating exposure that is of such significance that it indicates that the
fund manager is a principal.
In this case, consideration of the fund manager’s exposure to variability of returns from
the fund together with its decision-making authority within restricted parameters indicates
that the fund manager is an agent. Thus, the fund manager concludes that it does not
control the fund.
QUESTION 20:

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.
SOLUTION:
Scenario A
The fund manager’s 2% investment increases its exposure to variability of returns from
the activities of the fund without creating exposure that is of such significance that it
indicates that the fund manager is a principal. The other investors’ rights to remove the
fund manager are considered to be protective rights because they are exercisable only for
breach of contract. In this example, although the fund manager has extensive decision-
making authority and is exposed to variability of returns from its interest and remuneration,
the fund manager’s exposure indicates that the fund manager is an agent. Thus, the fund
manager concludes that it does not control the fund.
Scenario B
In this scenario, the other investors’ rights to remove the fund manager are considered to
be protective rights because they are exercisable only for breach of contract. Although
the fund manager is paid fixed and performance-related fees that are commensurate with
the services provided, the combination of the fund manager’s investment together with its
remuneration could create exposure to variability of returns from the activities of the fund
that is of such significance that it indicates that the fund manager is a principal. The greater
the magnitude of, and variability associated with, the fund manager’s economic interests
(considering its remuneration and other interests in aggregate), the more emphasis the
fund manager would place on those economic interests in the analysis, and the more likely
the fund manager is a principal.
For example, having considered its remuneration and the other factors, the fund manager
might consider a 20% investment to be sufficient to conclude that it controls the fund.
However, in different circumstances (i.e. if the remuneration or other factors are different),
control may arise when the level of investment is different.
30 ACCOUNTS
Scenario C
Although the fund manager is paid fixed and performance-related fees that are commensurate
with the services provided, the combination of the fund manager’s 20% investment together
with its remuneration creates exposure to variability of returns from the activities of the
fund that is of such significance that it indicates that the fund manager is a principal.
However, the investors have substantive rights to remove the fund manager—the board of
directors provides a mechanism to ensure that the investors can remove the fund manager
if they decide to do so.
In this scenario, the fund manager places greater emphasis on the substantive removal rights
in the analysis. Thus, although the fund manager has extensive decision-making authority
and is exposed to variability of returns of the fund from its remuneration and investment,
the substantive rights held by the other investors indicate that the fund manager is an
agent. Thus, the fund manager concludes that it does not control the fund.
QUESTION 21:

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?
SOLUTION:
The asset manager is paid fixed and performance-related fees that are commensurate
with the services provided. The remuneration aligns the interests of the fund manager
with those of the other investors to increase the value of the fund. The asset manager has
exposure to variability of returns from the activities of the fund because it holds 35% of
the equity and from its remuneration.
Although operating within the parameters set out in the investee’s prospectus, the asset
manager has the current ability to make investment decisions that significantly affect the
investee’s returns - the removal rights held by the other investors receive little weighting in
the analysis because those rights are held by a large number of widely dispersed investors.
In this example, the asset manager places greater emphasis on its exposure to variability of
returns of the fund from its equity interest, which is subordinate to the debt instruments.
Holding 35% of the equity creates subordinated exposure to losses and rights to returns
of the investee, which are of such significance that it indicates that the asset manager is a
principal. Thus, the asset manager concludes that it controls the investee.
QUESTION 22:]

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 of
the sponsor. Whether the sponsor has control over the fund?
32 ACCOUNTS
SOLUTION:
Even though the sponsor is paid a market-based fee for its services that is commensurate
with the services provided, the sponsor has exposure to variability of returns from the
activities of the fund because of its rights to any residual returns of the fund and the
provision of credit enhancement and liquidity facilities (i.e. the fund is exposed to liquidity
risk by using short-term debt instruments to fund medium-term assets). Even though each
of the transferors has decision-making rights that affect the value of the assets of the
fund, the sponsor has extensive decision-making authority that gives it the current ability
to direct the activities that most significantly affect the fund’s returns (i.e. the sponsor
established the terms of the fund, has the right to make decisions about the assets
(approving the assets purchased and the transferors of those assets) and the funding of
the fund (for which new investment must be found on a regular basis)). The right to residual
returns of the fund and the provision of credit enhancement and liquidity facilities expose
the sponsor to variability of returns from the activities of the fund that is different from
that of the other investors. Accordingly, that exposure indicates that the sponsor is a
principal and thus the sponsor concludes that it controls the fund. The sponsor’s obligation
to act in the best interest of all investors does not prevent the sponsor from being a
principal.
CONCEPT 3
ACCOUNTING FOR SUBSIDIARIES
STATUTORY REQUIREMENTS
The Companies Act, 2013 requirements

Section 129 sub-section (3) & (4) of the Companies Act, 2013 provides for the consolidation
of accounts. The relevant text is as under:
• 129 (3) : Where a company has one or more subsidiaries, it shall, in addition to financial
statements provided under sub—section (2), prepare a consolidated financial statement
of the company and all its subsidiaries in the same form and manner as that of its own
which shall also be laid before the annual general meeting of the company along with the
laying of its financial statement under sub—section (2).
Provided that the company shall also attach along with its financial statement a separate
statement containing the salient features of the financial statement of its subsidiary or
subsidiaries in such form as may be prescribed.
Provided further that the Central Government may provide for the consolidation of accounts
of companies in such manner as may be prescribed.
Explanation: For the purpose of this sub—section, the word ‘subsidiary’ shall include
associate and joint venture.
• 129 (4): The provisions of this Act, applicable to the preparation, adoption and audit
of the financial statements of a holding company shall, mutatis mutandis, apply to the
consolidated financial statements referred to in sub-section (3).
The Companies (Accounts) Rules, 2014

The relevant rules are rules 5 & 6 of the Companies (Accounts) Rules, 2014. The relevant
extracts of these rules are reproduced as under:
• Form of statement containing salient features of financial statements of subsidiaries
— Rule 5 : The statement containing the salient features of the financial statement of
a company’s subsidiary or subsidiaries, associate company or companies and joint venture
or ventures under the first proviso to sub—section (3) of section 129 shall be in Form
AOC — 1 (appended as Annexure I at the end of this chapter).
• Manner of consolidation of accounts — Rule 6: The consolidation of financial
statements of the company shall be made in accordance with the
• provisions of Schedule III of the Act and
• the applicable standards.
34 ACCOUNTS
Provided that in case of a company covered under sub—section (3) of section 129 which is
not required to prepare consolidated financial statements under the Accounting Standards,
it shall be sufficient if the company complies with provisions on consolidated financial
statements provided in Schedule III of the Act. (Refer Annexure II at the end of the
chapter)
Provided further that nothing in this rule shall apply in respect of preparation of consolidated
financial statements by a company if it meets the following conditions:
It is a wholly owned subsidiary or is a partially owned subsidiary of another company
and all its members, including those not otherwise entitled to vote, having been intimated in
writing and for which proof of delivery of such intimation is available with the company, do
not object to the company not presenting consolidated financial statements;
It is a company whose securities are not listed or are not in the process of listing on any
stock exchange, whether in India or outside India; and
Its ultimate or any intermediate holding company files consolidated financial statements
with the Registrar which are in compliance with the applicable Accounting Standards.
Ind AS 110, ‘Consolidated Financial Statements’ and Division II of Schedule III to
the Companies Act, 2013 (Refer Annexure II) should be applied in the preparation and
presentation of consolidated financial statements which includes:
i Consolidated Balance Sheet;
ii Consolidated Statement of Profit and Loss;
iii Consolidated Statement of Changes in Equity;
iv Consolidated Cash Flow Statement;
v Consolidated Notes to the Financial Statements.
When a company is required to prepare Consolidated Financial Statements, the company
shall mutatis mutandis follow the requirements of Schedule III to the Companies Act,
2013 as applicable to a company in the preparation of balance sheet, statement of changes
in equity and statement of profit and loss in addition, the consolidated financial statements
shall disclose the information as per the requirements specified in the applicable Indian
Accounting Standards notified under the Companies (Indian Accounting Standards) Rules
2015. In addition, the company shall disclose additional information as required by Ind AS
27 and Ind AS 112 (Refer Unit 8).
CONSOLIDATION PROCEDURES for CONSOLIDATED BALANCE SHEET
Process
1. Consolidation of an investee shall begin from the date the investor obtains control of
the investee and cease when the investor loses control of the investee.
2. Consolidated financial statements:
Ø Combine like items of assets, liabilities, equity, income, expenses and cash flows
of the parent with those of its subsidiaries.
Ø Offset (eliminate) the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary (Ind AS 103
Business Combination’ explains how to account for any related goodwill).
Ø Eliminate in full intragroup assets and liabilities, equity, income, expenses and
cash flows relating to transactions between entities of the group (profits or
losses resulting from intragroup transactions that are recognized in assets, such
as inventory and fixed assets, are eliminated in full).
3. Intragroup losses may indicate an impairment that requires recognition in the
consolidated financial statements.
4. Ind AS 12, Income Taxes, applies to temporary differences that arise from the
elimination of profits and losses resulting from intragroup transactions.
Calculation of goodwill / capital reserve
1. It will be useful to refer the provisions of Ind AS 103, ‘Business Combinations’ when
computing the goodwill / capital reserve in the case of acquisition of a subsidiary. As
per Ind AS 103:
Ø Business combination is a transaction or other event in which an acquirer obtains
control of one or more businesses;
Ø Non—controlling interest is the equity not attributable, directly or indirectly, to
a parent.
2. As per para 32 of Ind AS 103, the acquirer shall recognize goodwill as of the acquisition
date Measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i)
the consideration transferred is measured in accordance with Ind AS 103,
which generally requires acquisition – date fair value; and
(ii)
the amount of any non – controlling interest in the subsidiary measured in
accordance with Ind AS 103:
(b) The net of the acquisition-date amounts of the identifiable assets acquired and
the liabilities assumed measured in accordance with Ind AS 103.
36 ACCOUNTS
3. As per para 19 of Ind AS 103, for each acquisition of a subsidiary, the investor shall
measure at the acquisition date components of non-controlling interest in the subsidiary
that are present ownership interests and entitle their holders to a proportionate
share of the entity’s net assets in the event of liquidation at either:
(a) Fair value; or
(b) The present ownership instruments’ proportionate share in the recognized
amounts of the subsidiary’s identifiable net assets.
The computation of goodwill / bargain purchase price (capital reserve) involves
following steps:
Step 1: Determine the fair value of consideration transferred by the parent;
Step 2: Determine the amount of non – controlling interest.
As per method 1 : ‘Fair Value method’
As per method 2 : ‘Proportionate Share Method’
Step 3: The value of recognized amount of subsidiary’s identifiable net assets, as
determined in accordance with Ind AS 103:
Step 4: Determine goodwill / bargain purchase price:
Goodwill arises where aggregate of amount determined in step1 and step2 exceeds
amount determined in step3.
QUESTION NO 23 (Q54 IN 103) (FAIR VALUE METHOD)
A Limited acquires 80% of B Limited at a valuation of ` 150.00 crores (excluding control

premium) by payment in cash of ` 120.00 crores. The value of non- controlling interest is `
30 cores. Value of net assets is 130 crores.
QUESTION NO 24 (Q55 IN 103) (PROPORTIONATE SHARE METHOD)
WITH the help of given information as in above, Assume that the value of recognized amount
of subsidiary‘s identifiable net assets is ` 130.00 crores, as determined in accordance with
Ind 103.
QUESTION NO 25 (Q56 IN 103)
In the aforesaid example, if the consideration is ` 90

GOODWILL RECOGNISED DEPENDS ON HOW NCI IS MEASURED.

Ram Ltd. acquires shyam Ltd. by purchasing 60% of its equity for ` 15 lakh in cash. The fair
value of non – controlling interest is determined as ` 10 lakh. The net aggregate value of
identifiable assets and liabilities, as measured in accordance with Ind 103 is determined as
` 5 lakh.
How much goodwill is recognized based on two measurements based of non- controlling
interest (NCI)?
GAIN ON A BARGAIN PURCHASE WHEN NCI IS MEASURED AT FAIR VALUE

Seeta Ltd. acquires Geeta Ltd. purchasing 70% of its equity for ` 15 lakh in cash. The fair
value of NCI is determined as ` 6.9 lakh. Management have elected to adopt full goodwill
method and to measure NCI at fair value. The net aggregate value of identifiable assets and
liabilities, as measured in accordance with the standard is determined as ` 22 lakh. (Tax
consequences being ignored).
GAIN ON A BARGAIN PURCHASE WHEN NCI IS MEASURED AT PROPORTIONATE

SHARE OF IDENTIFIABLE NET ASSETS.
Continuing the facts as stated in the above illustration, except, that seeta. Ltd. chooses
to measure NCI using a proportionate share method for this business combination. (Tax
consequences have been ignored).
Measurement of goodwill there is no non-controlling interest

X Ltd. acquired Y Ltd. on payment of ` 25 crore cash and transferring a retail business, the
fair value of which is ` 15 crore. Assets acquired and liabilities assumed in the acquisition
are ` 36 crore.
Find out the Goodwill.
38 ACCOUNTS
QUESTION NO 30(Q61 IN 103)
Measurement of Goodwill when there is non- non-controlling interest

Raja Ltd. purchased 60% share of Ram Ltd. paying ` 525 lakh. Number of issued capital of
Ram Ltd. is lakh. Fair value of identifiable assets of Ram of Ram Ltd. is ` 640 lakh and that
of liabilities is ` 50 lakh. As on the date of acquisition, market price share of Ram Ltd. is `
775. Find out the value of goodwill.
QUESTION 31 (Q62 IN 103)
Company A acquired 90% equity interest in Company B on April 1, 2010 for a consideration of
` 85 crores in a distress sale. Company B did not have any instrument recognized in equity.
The company appointed a registered value 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.
Required:
Find the value at which NCI has to be shown in the financial statements by both methods.
Company A acquires 70 percent of Company S on January 1, 2011 for consideration

transferred of ` 5 million. Company A intends to recognize the NCI at proportionate share
of fair value of identifiable net assets. With the assistance of a suitable 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.
Required:
or not. Also calculate the bargain Purcahse gain in the process.
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
SOLUTION:
In this case Company a has the option to measure NCI as follows:
• Option 1: Measure NCI at fair value l.e., ` 15 crores as derived by the valuer;
• Option 2: Measure NCI as proportion of fair value of identifiable net assets i.e. ,` 10
crores (100 crores x 10%)
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.
or not. Also calculate the bargain purchase gain in the process.
SOLUTION:
• The amount of B’s identifiable net assets exceeds the fair value of the consideration
transferred plus the fair value of the NCI in B, resulting in an initial indication of a
gain on a bargain purchase. Accordingly, A reviews the procedures it used to identify
and measure the identifiable net assets acquired, to measure the fair value of both
the NCI and the consideration transferred, and to identify transactions that were
not part of the business combination.
• Following that review, A concludes that the procedures followed and the resulting
measurements were appropriate.
Identifiable net assets 1,00,00,000

Less: Consideration transferred (50,00,000)
NCI (10 million x 30%) (30,00,000)
Gain on bargain purchase 20,00,000
40 ACCOUNTS
QUESTION 35 (Q66 IN 103) POTENTIAL VOTING RIGHTS
Company P Ltd., a manufacturer of textile products, acquires 40,000 of the equity shares
of Company X (a manufacturer of complementary products) out of 1,00,000 shares in issue
As part of the same agreement, 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 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. Asseses whether control is acquired by Company P.
SOLUTION:
In assessing whether it has obtained control over Company X, Company P should consider
not only the 40,000 shares it owns but also its option to acquire another 25,000 shares (a
so-called potential voting right). In this assessment, the specific terms and conditions of
the option agreement and other factors are considered:
• The options are currently exercisable and there are no other required conditions before
such option can be exercised
• If exercised, these options would increase Company P’S ownership to a controlling
interest of over 50% before considering other shareholders’ potential voting rights out
of a total of 1,25,000 shares)
• although other shareholders also have potential voting rights, if all optional are exercised
Company P will own a majority (65,000 shares out of 1,29,000 shares)
• the premium included in the exercise price makes the option out-of the money. However,
the fact that the premium is small and the option could confer majority ownership
indicates that the potential voting rights have economic substance.
By considering all the above factors, Company P concludes that with the acquisition of
the 40,000 shares together with the potential voting rights it has obtained control of
Company X.
QUESTION 36 (Q67 IN 103):
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.
SOLUTION:
Sita Ltd has more Board members and thereby have majority control in DLC. Therefore,
Sita Ltd is identified as acquirer and Beta Ltd as acquiree.
Since no consideration has been transferred, the goodwill needs to be calculated as the
difference of Part A and Part B:
Part A:
1) Consideration paid by Acquirer. - Nil
2) Controlling Interest in Acquiree – ` 80 crores
3) Acquirer’s previously held interest - Nil
Part B:
Fair value of net identifiable asset – ` 70 crores
Goodwill is recognised as ` 10 crores (80 – 70 crores) in business combination achieved
through contract alone when NCI is measured at fair value.
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?
SOLUTION:
The amount of B Ltd.’s identifiable net assets i.e., ` 20 crore exceeds the fair value of
the consideration transferred plus the fair value of the non-controlling interest in B Ltd.
i.e. ` 19.2 crore. Therefore, A Ltd. should review the procedures it used to identify and
measure the net assets acquired and the fair value of non-controlling interest in B Ltd. and
the consideration transferred. After the review, A Ltd. decides that the procedures and
resulting measures were appropriate.
42 ACCOUNTS
A Ltd. measures the gain on its purchase of the 80 per cent interest at ` 80 lakh, as the
difference between the amount of the identifiable net assets which is ` 20 crore and the
sum of purchase consideration and fair value of non-controlling interest, which is ` 19.2
crore (cash consideration of ` 15 crore and fair value of non-controlling interest of ` 4.2
crore).
Assuming there exists clear evidence of the underlying reasons for classifying the business
combination as a bargain purchase, the gain on bargain purchase of 80 per cent interest
calculated at ` 80 lakh, which will be recognised in other comprehensive income on the
acquisition date and accumulated the same in equity as capital reserve.
If the acquirer chose to measure the non-controlling interest in B Ltd. on the basis of its
proportionate share of identifiable net assets of the acquiree, the recognised amount of
the non- controlling interest would be ` 4 crore (` 20 crore × 0.20). The gain on the bargain
purchase then would be ` 1 crore (` 20 crore – (` 15 crore + ` 4 crore)).
ADDITIONAL CONCEPTS TO BE CONSIDERED
CONCEPT 1: STEP BY STEP ACQUISITION
An acquirer sometimes obtains control of an acquiree in which it held an equity interest

immediately before the acquisition date.
Example:
On 31st December 2011, Entity A holds a 35 per cent non-controlling equity interest in
Entity B. On that date, Entity A purchases an additional 40 per cent interest in Entity B,
which gives it control of Entity B. This transaction is referred as a business combination
achieved in stages, sometime also referred to as a step acquisition.
In a business combination achieved in stages, the acquirer shall remeasure its previously
resulting gain or loss, if any, in profit or loss. In prior reporting periods, the acquirer
may have recognised changes in the value of its equity interest in the acquiree in other
comprehensive income. As per Ind AS 109 or Ind AS 27, an entity can elect to measure
investments in equity instruments at fair value through other comprehensive income.
However, once elected all gains and losses on that investment even on sale is recognized in
OCI. Therefore, if the investment is designated as fair value through OCI, the resulting
gain or loss, if any, will be recognized in OCI.
STEP ACQUISITION WHEN CONTROL IS OBTAINED.

Entity D has a 40% interest in entity E. the carrying value of the equity interest. Which
has been accounted for as an associate in accordance with Ind As 28 is ` 40 lakh. Entity D
purchases the remaining 60% interest in entity E for ` 600 lakh in cash. The fair value of
the 40% previously held equity interest is determined to be ` 400 lakh., the net aggregate
value of the identifiable assets and liabilities measured in accordance with Ind AS 103 is
determined to be identifiable ` 880 lakh. Tax consequences have been ignored. How entity
D account for the business combination?
Company A and Company B are in power business. Company A holds 25% of equity share
of Company B. On November 1, Company A obtains control of Company B when it acquires
of further 65% of Company B’s shares, thereby resulting ijn a total holding of 90%. The
acquisition had the following features.
44 ACCOUNTS
Consideration: Company A transfers cash of ` 59,00,000 and issues 1,00,000 shares of

November 1. The market price of Company A’s shares on the date of issues is ` 10 per share.
The equity shares issued as per this transaction will comprise 5% of the post-acquisition
equity capital of Company A.
Contingent Consideration: Company a agrees to pay additional consideration of ` 7,00,000
if the comulative 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.
at the acquisition date based on market prices. Company A elects to measure non-controlling
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.
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
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?
A Ltd. holds 30% shares in B Ltd. which was acquired on 15.7.2012. In separate financial
statements, the investment in associate is carried at cost ` 200 million. In the consolidated
financial statements as at 31 March, 2015, the investment is recognised applying equity
method accounting at ` 300 million. Changes in equity were recognized as FVOCI.
On 1 April, 2015, A Ltd. acquired another 30% stake of B Ltd. for ` 350 million.
AS on the date of acquisition, fair value of identifiable assets and liabilities of B Ltd were
determined as ` 1200 million and ` 200 million respectively. Deferred tax liability has been
reassessed based on acquisition date fair value of assets and liabilities at ` 40 million.
Market price of previously held 30% interest is ` 330 million.
How should A Ltd. recognise the acquisition of controlling stake in B Ltd.?
46 ACCOUNTS
CONCEPT 2:
CONTROL IN BUSINESS WITHOUT ACQUISITION OF SHARES
X holds 46% of 100 million equity shares issued by Y Ltd. This is recognised as investment in
associate in the separate financial statements at cost of ` 4600 million. In the consolidated
financial statements, the investment is accounted for applying equity method accounting
at ` 6300 million. The difference of 2300 million has been recognised in the consolidate
profit and loss as share of profit form the associate. Fair value of identifiable assets and
liabilities of Y Ltd. as on 1.4.2015: Assets (other than cash and cash equivalents) ` 14000
million, Cash and cash equivalents ` 1800 million, Liabilities ` 2000 million.
As on 1 April 2015, Y Ltd. repurchases 10 million equity shares @ ` 160 share (i.e for ` 1600
million)
This repurchase gives controlling interest to X Ltd.
How should the company recognise the impact of gaining controlling interest in Y Ltd.?
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 question.
SOLUTION:
At the acquisition date A recognises the gain of ` 5,000 in OCI as the gain or loss is not
allowed to be recycled to income statement as per the requirement of Ind AS 109. A’s
investment in B would be at fair value and therefore does not require remeasurement as a
result of the business combination. The fair value of the 5 percent investment (1,05,000)
plus the fair value of the consideration for the 95 percent newly acquired interest is
included in the acquisition accounting.
CONCEPT 3: ACCOUNTING FOR POST ACQUISITION PROFITS
QUESTION 44
From the following data, determine in each case:

1) Non-controlling interest at the date of acquisition (using proportionate share method)
and at the date of consolidation
2) Goodwill or Gain on bargain purchase.
3) Amount of holding company’s share of profit in the consolidated Balance Sheet assuming
holding company’s own retained earnings to be ` 2,00,000 in each case
Case Subsidiary % of Cost Date of Acquisition Consolidation date

Company shares 1.04.20X1 31.03.20X2
owned
Share Retained Share Retained
Capital earnings Capital [C] earnings
[A] [B] [D]
Case 1 A 90% 1,40,000 1,00,000 50,000 1,00,000 70,000
Case 2 B 85% 1,04,000 1,00,000 30,000 1,00,000 20,000
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.
48 ACCOUNTS
CONCEPT 4: NEGATIVE NON CONTROLLING INTEREST
QUESTION 45:
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.
CONCEPT 5: UNIFORM ACCOUNTING POLICIES
A parent shall prepare consolidated financial statements using uniform accounting policies
for like transactions and other events in similar circumstances.
If a member of the group uses accounting policies other than those adopted in the
consolidated financial statements for like transactions and events in similar circumstances,
appropriate adjustments are made to that group member’s financial statements in preparing
the consolidated financial statements to ensure conformity with the group’s accounting
policies.
QUESTION 46
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?
QUESTION 47
H Limited has a subsidiary, S Limited and an associate, A Limited. The three companies are
engaged in different 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?
CONCEPT 6: REPORTING PERIOD OF PARENT AND SUBSIDIARY
The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date.
When the end of the reporting period of the parent is different from that of a subsidiary
(e.g. parent’s financial year ends on 31 March 20X1 but the subsidiary’s financial year ends
on 31 December 20X0), the subsidiary prepares, for consolidation purposes, additional
financial information as of the same date as the financial statements of the parent to
enable the parent to consolidate the financial information of the subsidiary, unless it is
impracticable to do so.
If it is impracticable to do so, the parent shall consolidate the financial information of
the subsidiary using the most recent financial statements of the subsidiary adjusted for
the effects of significant transactions or events that occur between the date of those
financial statements and the date of the consolidated financial statements. In any case,
the difference between the date of the subsidiary’s financial statements and that of the
consolidated financial statements shall be no more than three months.
The length of the reporting periods and any difference between the dates of the financial
statements shall be the same from period to period. This means that if the financial
statements of a subsidiary used for consolidation in previous periods were ending on
different dates than that of the parent whereas the financial statements used for current
period end on the same date as that of the parent then the comparatives for previous
period should be restated to have comparison of equivalent periods.
50 ACCOUNTS
QUESTION 48
How should assets and liabilities be classified into current or non-current in consolidated
financial statements when parent and subsidiary have different reporting dates?
QUESTION 49
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?
CONCEPT 7
ACCOUNTING OF DIVIDEND FROM SUBSIDIARY
AND ITS IMPACT ON NON- CONTROLLING INTEREST
As per para 5.7.1A of Ind AS 109, dividends are recognized in profit or loss by an investor
entity only when:
• The entity’s right to receive payment of the dividend is established,
• It is probable that the economic benefits associated with the dividend will flow to
the entity, and
• The amount of the dividend can be measured reliably.
As per para 12 of Ind AS 27, an entity shall recognize a dividend from a subsidiary in its
separate financial statements when its right to receive the dividend is established.
As per the Companies Act, 2013, the entity’s right to receive the dividend is established
when it is declared by the shareholders in the annual general meeting of the company.
An investor should recognise a dividend from a subsidiary, a joint venture or an associate as
income in its separate financial statements. As per Ind AS 36, declaration of dividend by a
subsidiary, associate or joint venture coupled with a few more evidences is an indication of
impairment of investment.
QUESTION 50: 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.
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.
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.
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.
52 ACCOUNTS
CONCEPT 8: ELIMINATION OF INTRA-GROUP TRANSACTIONS
In order to present financial statements for the group in a consolidated format, the effect
of transactions between group entities should be eliminated. Intra – group balances and
intra – group transactions and resulting unrealized profits should be eliminated in full.
Unrealized losses resulting from intra – group transactions should also be eliminated unless
cost cannot be recovered.
Liabilities due to one group entity by another will be set off against the corresponding asset
in the other group entity’s financial statements; sales made by one group entity to another
should be excluded from turnover and from purchase (or related head) or the appropriate
expense heading in the consolidated statement of profit and loss.
To the extent that the buying entity has further sold the goods in question to a third party,
the eliminations to sales and cost of sales are all that is required, and no adjustments to
consolidated profit or loss for the period, or to net assets, are needed. However, to the
extent that the goods in question are still on hand at year end, they may be carried at an
amount that is in excess of cost to the group and the amount of the intra-group profit must
be eliminated, and assets are reduced to cost to the group.
For transactions between group entities, unrealized profits resulting from intra-group
transactions that are included in the carrying amount of assets, such as inventories and
Property, Plant and Equipment, Intangible Assets and Investment Property, are eliminated
in full. The requirement to eliminate such profits in full applies to the transactions of all
subsidiaries that are consolidated – even those in which the group’s interest is less than
100%.
Unrealised profit on inventories

Where a group entity sells goods to another, the selling entity, as a separate legal entity,
records profits made on those sales. If these goods are still held in inventory by the buying
entity at the year end, however, the profit recorded by the selling entity, when viewed from
the standpoint of the group as a whole, has not yet been earned, and will not be earned until
the goods are eventually sold outside the group. On consolidation, the unrealized profit on
closing inventories will be eliminated from the group’s profit, and the closing inventories of
the group will be recorded at cost to the group.
Unrealised profit on transfer of non-current assets

Similar to the treatment described above for unrealized profits in inventories, unrealized
intercompany profits arising from intra-group transfers of Property, Plant and Equipment,
Intangible Assets and Investment Property are also eliminated from the consolidated
Unrealised losses
Unrealised losses resulting from intra-group transactions that are deducted in arriving at
the carrying amount of assets are also eliminated unless cost cannot be recovered.
QUESTION 54:
Elimination of intra-group profit on sale of assets by a subsidiary to its 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.
QUESTION 55:
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.
QUESTION 56:
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.
QUESTION 57:
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.
54 ACCOUNTS
QUESTION 58:
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).
CONCEPT 9: CHANGE IN THE PROPORTION HELD BY

CONTROLLING AND NON-CONTROLLING INTERESTS
A parent’s ownership interest may change without a loss of control, for example, in following
situations:
• Parent buys shares from non-controlling interest (say, increase in stake from 60% to
70%)
• Parent sells shares to non-controlling interest (say, decrease in stake from 70% to
60%)
Changes in a parent’s ownership interest in a subsidiary that do not result in the parent
losing control of the subsidiary are equity transactions (i.e. transactions with owners in
their capacity as owners).
Example
M Ltd. holds 70% stake in N Ltd. Now if M Ltd. purchases additional 10% stake in N Ltd. or
sells 10% of its existing stake (i.e. without losing control) then it is an equity transaction.
When the proportion of the equity held by non-controlling interests changes, an entity shall
adjust the carrying amounts of the controlling and non-controlling interests to reflect the
changes in their relative interests in the subsidiary. The entity shall recognise directly
in equity any difference between the amount by which the non-controlling interests are
adjusted and the fair value of the consideration paid or received, and attribute it to the
owners of the parent.
Further, it must be noted that due to such changes in controlling and non-controlling
interests, no changes are made to subsidiary’s assets (including goodwill) and liabilities. It
is again emphasized that no gain or loss is recognized in such transactions.
QUESTION 59:
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.
QUESTION 60:
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.
QUESTION 61:

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
56 ACCOUNTS
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?
QUESTION 62:

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.
QUESTION 63:
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.
QUESTION 64:
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?
CONCEPT 10: LOSS OF CONTROL
A parent can lose control over a subsidiary in a number of ways. These include:
• Loss of control due to outright sale – where the entire stake is sold off,
• Loss of control due to partial sale – where the parent retains interest as an associate,
jointly controlled entity or a financial asset,
• Deemed loss of control where no consideration is received but the parent’s interest
is diluted in some other manner such as:
Voting rights issued to a new investor,
Control on relevant activities,
Consolidation of voting rights of other shareholders;
An investor acquiring substantial stake from the stock exchange.
58 ACCOUNTS
In this section we will discuss following two things:

• Accounting treatment of loss of control of a subsidiary
• Loss of control of a subsidiary in two or more arrangements (transactions)
Accounting treatment on loss of control of a subsidiary
If a parent loses control of a subsidiary, it shall follow the accounting treatment mentioned
below:
If a parent loses control of a subsidiary, it shall
Derecognise: Recognise: Reclassify: Recognises gain /

loss:
• the a s s e t s • the fair value of the • to profit or • recognise a n y

(including any consideration received loss, or transfer resultingdifference
goodwill) and • if loss of control directly to as a gain or loss
liabilities of involves a distribution retained earnings in profit or loss
the subsidiary of shares of the if required by attributable to
• the c a r r y i n g subsidiary to owners, other Ind ASs, the parent
amount of then that distribution; the amounts
any non- and • r e c o g n i s e d
c o n t r o l l i n g • any investment in other
interests in retained in the former comprehensive
the former subsidiary at its fair income in relation
subsidiary value at the date when to the subsidiary
control is lost (refer (refer n o t e
note 1 below) 2 below)
QUESTION 65:
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.
QUESTION 66:
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.
QUESTION 67:
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.
QUESTION 68:
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)
60 ACCOUNTS
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.
QUESTION 69:
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?
CONCEPT 11: CHAIN-HOLDING UNDER CONSOLIDATION
QUESTION 70: CHAIN HOLDING
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 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
Reserves 80 60
Retained earnings 20 30
62 ACCOUNTS
(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.
QUESTION 71:
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.
How should that goodwill be reflected in consolidated financial statement of entity A?
Should it be reflected as
a) 100% of the goodwill with 20% then being allocated to the non- controlling interest, or
b) 80% of the goodwill that arises?
SOLUTION:
Assuming that entity B prepares consolidated financial statements, 100% of the goodwill
would be recognized on the acquisition of entity C in those financial statements. Entity
A should reflect 100% of goodwill and allocate 20% to the non- controlling interest in its
consolidated financial statements. This is because the non-controlling interest is a party to
the transaction and the goodwill forms part of the net assets of the sub group (in this case,
the sub group being the group headed by entity B).
CONCEPT 12: CUMULATIVE PREFERENCE SHARES HELD BY NCI
If a subsidiary has outstanding cumulative preference shares that are classified as equity
and are held by non-controlling interests, the entity shall compute its share of profit or
loss after adjusting for the dividends on such shares, whether or not such dividends have
been declared.
QUESTION 72
R Ltd. Hold 80% stake on Y Ltd. Y Ltd. Has also issued 10% cumulative preference shares
worth ` 10,00,000 to the non-controlling interest. During the year, Y Ltd. Earned profit of `
5,00,000. Y Ltd. Has not declared any dividend on cumulative preference share for current
year. Calculate the profit attributable to holding company in post acquisition profits.
PREPARATION OF CONSOLIDATED PROFIT & LOSS
• The items of income and expenses are added on line by line basis.
• Intra-group transactions are eliminated in full (e.g. sales made by parent to a subsidiary
which is recorded as purchase by subsidiary are eliminated from the consolidated profit
& loss by reducing both sales of parent and purchase of subsidiary)
PREPARATION OF CONSOLIDATED CASH FLOWS
• Items of cash flow from various activities are to be added on line by line basis and from
the consolidated items, inter-company transactions should be eliminated.
QUESTION 73:
PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS

Given below are the financial statements of P Ltd and Q Ltd as on 31.3.20X1:
Balance Sheet
(` 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
Financial Assets:
Cash and Cash Equivalents 38,000 1,000
Total Assets 1,88,000 66,000
Shareholders Fund
64 ACCOUNTS
Other equity 1,20,000 40,000

Long term liabilities 30,000 10,000
Deferred tax liabilities 5,000 1,000
Long term provisions 5,000 1,000
Current Liabilities
Short term Provisions 2,000 2,000
Total Equity & Liabilities 1,88,000 66,000
Notes to Financial Statements P Ltd. Q Ltd
Reserve & Surplus
General Reserve 1,00,000 30,000
Retained earnings 20,000 10,000
Inventories 1,20,000 40,000
Raw Material 10,000 5,000
Finished Goods 10,000 5,000
20,000 10,000
(` in Lakhs)
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 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 1,55,050 66,040
Profit Before Tax 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 8 1,000 0

subsidiary
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
P Ltd. Share General Profit & Fair Value Total

Capital Reserve Loss Reserve
Balance as on 1.4.20X1 20,000 1,00,000 20,000 1,40,000

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

investment in subsidiary
See Note 7
Fair value gain on other 500 500
non- current investments
in subsidiary See Note 7
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 (2,400) (2,400)
20X1- 20X2
Dividend distribution tax (400) (400)
Profit for the year 20X1- 8,960 8,960
20X2
Fair value gain on other 250 250
non- current investments
in subsidiary 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
Financial Assets:
Cash and Cash Equivalents
(See Statement of Cash Flows) 930 4,200
Total Assets 2,15,430 73,450

Other equity 1,44,780 46,410
(See Statement of changes in Equity)
1,64,780 56,410
Deferred tax liabilities 7,000 2,000
Long term provisions 9 4,600 930
Current Liabilities 41,600 12,930
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
68 ACCOUNTS
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 1.4.20X1 38,000 1,000
Balance of Cash and Cash Equivalents as on 31.3.20X2 930 4,200
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
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
70 ACCOUNTS
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
Other Investments 5,500 1,250
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
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 Non- Total
Dividend for the year 20X1-20X2 P 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.
72 ACCOUNTS
COMPREHENSIVE PROBLEMS ON CONSOLIDATION
QUESTION 1
DEF Ltd. acquired 100% ordinary share of ` 100 each XYZ Ltd. on 1st October 2011. On
March 31, 2012 the summarized 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
Equities & 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
2011 out of which a dividend of 10% was paid on 1st November; DEF Ltd has credit the
dividend received to retained earnings account; Fair value of P & M as on 1 st October
2011 was ` 20,00,000. The rate of depreciation on plant & machinery is 10%
Following are the changes in fair value as per respective IND AS from Book value as
on 1st October 2011 which is 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
Prepare consolidated Balance Sheet as on March 31, 2012
QUESTION NO 2
Ram Ltd acquired 60% ordinary share of ` 100 each of Krishan Ltd. on 1st October 2011 on
March 31, 2012 the summarized Balance Sheets of the two companies were as given below:
Ram Ltd. Krishan Ltd.

Assets
Property, Plant Equipment
Land & Buildings 3,00,000 3,60,000
Plant & Machinery 4,80,000 2,70,000
Investment in Krishan Ltd 8,00,000 -
Inventory 2,40,000 72,800
Financial Assets
Trade Receivable 1,19,600 80,000
Cash 29,000 16,000
Total 19,68,600 7,98,800
Equity Capital 10,00,000 4,00,000
(Shares of ` 100 each fully paid)
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
74 ACCOUNTS
The Retained earnings of Krishan Ltd. showed a credit balance of ` 60,000 on 1st April
2011 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 2011
was ` 4,00,000; The rate of depreciation on plant & machinery is 10%.
Following are the changes in fair value as per respective IND As from book value as on 1st
October 2011 which is to be considered while consolidating the Balance Sheets.
Liabilities Amount Assets Amount

Trade Payables 20,000 Land & Buildings 2,00,000
Inventories 30,000
Prepare consolidated Balance Sheet as on March 31, 2012
QUESTION 3
On 31st March 2012, Blue Heavens Ltd. acquired 100% ordinary shares caryring 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 Country Ltd. and the fair values of the assets and liabilities recognized on
Orange County Ltd. Statement of Financial position were:
Blue Heavens Ltd. Orange Country Fair Value

Carrying Amount Ltd. Carrying
Amount
` (Lakh) ` (Lakh) ` (lakh)
Assets
Non-current assets
Building and other PPE 7,000 3,000 3,300
Investment in Orange 6,000
County Ltd.
Current Assets
Inventories 700 500 600
Trade receivables 300 250 250
Cash 1500 700 700

Equity
Current Liabilities
Trade payables 300 150 150
Total liabilities and equity 15,500 4,450
Prepare the Consolidated Balance sheet as on March 31, 2012 of group of entities Blue
Heavens Ltd. and Orange county Ltd.
QUESTION NO 4
The facts are the same as in Question 3 above. However, Blue Heavens Ltd. Acquires ony
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, 2012 of group of entities Blue Heavens Ltd. and Orange Country
Ltd.
QUESTION NO 5
Facts are same as in Question 3 & 4, Blue Heavens Ltd. acquires 75% of Orange country
Ltd. Blue Heavens Ltd. pays ` 4,500 lakhs for the shares. At 31 March 2013, 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 Country Ltd.

Carrying Amount Carrying Amount
` (Lakh) ` (Lakh)
Assets
Non-current assets
Building and other PPE 6,500 2,750
Investment in Orange County 4,500 ____
Ltd.
11,000 2,750
76 ACCOUNTS
Inventories 800 550

Trade receivables 380 300
Cash 4170 1420
5350 2270
Equity
16,000 4,850
Current Liabilities
350 170
Total liabilities and equity 16,350 5,020
Statements of comprehensive income

for the year ended 31st March 2013.
Blue Heavens Ltd. Orange Country

Carrying Amount Ltd. Carrying
Amount
` (Lakh) ` (Lakh)
Revenue 3,000 1,900
Cost of Sales (1,800) (1,000)
Gross Profit 1,200 900
Administrative Expenses (400) (350)
Profit for the year 800 550
Note: Blue Heavens Ltd. is unable to make a reliable estimate of the useful life of
goodwill and consequently, the useful life is presumed to be ten years. Blue Heavens
Ltd. uses the straight-line amortisation method for goodwill. 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 2012 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 2012 was sold during 2013.
Prepare the Consolidated Balance Sheet as on March 31, 2012 of group of entities Blue
Heavens Ltd. and Orange County Ltd.
QUESTION NO 6
P Pvt. Ltd. has a number of wholly-owned subsidiaries including S Pvt. Ltd. at 31st March
2012. P Pvt. Ltd. consolidated statement of financial position and the group carrying amount
of S Pvt. Ltd. assets and liabilities (ie the amount included in that consolidated statement
of financial position in respect of S Pvt. Ltd. assets and liabilities) at 31st March 2012 are
as follows:
Particulars Consolidated Group carrying amount

` in millions of S Pvt. Ltd. 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 8560 3,460
Equities & Liabilities
Equity
Share Capital 1,600
Other Equity
Retained Earnings 4,260
Current liabilities
Trade Payables 2,700 900
Total Equity & Liabilities 8,560 900
78 ACCOUNTS
Prepare consolidated Balance Sheet after disposal as on 31st March, 2012 when P Pvt.
Ltd. group sold 100% shares of S Pvt. Ltd. to Independent party for ` 3,000 millions.
QUESTION NO 7
Reliance Ltd. has a number of wholly-owned subsidiaries including Reliance Jio Infocomm
Ltd. at 31st March 2012
Reliance Ltd. consolidated statement of financial position and the group carrying amount
of Reliance Jio Infocomm Ltd. assets and liabilities (i.e. the amount included in that
consolidated statement of financial position in respect of Reliance Jio Infocomm Ltd. assets
and liabilities at 31st March 2012 are as follows:
Particulars Consolidated Group carrying amount of Reliance

(` In ‘000) 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
Trade Receivables 850 450
Cash 1,550 500
Equity
Share Capital 800

Other Equity
Retained earnings 2,130
2930
Current liabilities
Trade Payables 1,350 450

Total Equity & Liabilities 4,280 450
Prepare consolidated Balance Sheet after disposal as on 31st March, 2012 when Reliance
Ltd. group sold 90% shares of Reliance Jio Infocomm Ltd. to independent party for
` 1000 (` 000).
QUESTION 8
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 as its new
headquarters office.
Airtel Infrastructures Pvt. Ltd. had purchased the building from a third party on 1 April
20X0 for ` 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 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 9
As at the beginning of its current financial year, AB Limited holds 90% equity interest in
BC Limited. During the financial year, AB Limited sells 70% of its equity interest in BC
Limited to PQR Limited for a total consideration of ` 56 crore and consequently loses
control of BC Limited. At the date of disposal, fair value of the 20% interest retained by
AB Limited is ` 16 crore and the net assets of BC Limited are fair valued at ` 60 crore.
These net assets include the following:
(a) Debt investments classified as fair value through other comprehensive income
(FVOCI) of ` 12 crore and related FVOCI reserve of ` 6 crore.
(b) Net defined benefit liability of ` 6 crore that has resulted in a reserve relating to
net measurement losses of ` 3 crore.
(c) Equity investments (considered not held for trading) of ` 10 crore for which
irrevocable option of recognising the changes in fair value in FVOCI has been availed
and related FVOCI reserve of ` 4 crore.
(d) Net assets of a foreign operation of ` 20 crore and related foreign currency
translation reserve of ` 8 crore.
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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.
QUESTION 10
Company A acquires 70% of the equity stake in Company B on July 20, 20X1. The consideration
paid for this transaction is as below :
(a) Cash consideration of ` 15,00,000
(b) 200,000 equity shares having face of ` 10 and fair value of ` 15 per share.
On the date of acquisition, Company B has cash and cash equivalent balance of ` 2,50,000
in its books of account.
On October 10, 20X2, Company A further acquires 10% stake in Company B for cash
consideration of ` 8,00,000.
Advise how the above transactions will be disclosed / presented in the statement of cash
flows as per Ind AS 7.
QUESTION 11 (RTP MAY 2020 Q.2…………….DISCUSSED IN RTP)
(SAME QUESTION ASKED IN NOV 2020 EXAMS)
Entity A acquired a subsidiary, Entity B, during the year. Summaries information from the
Consolidated Statement of Profit and Loss and Balance Sheet is provided, together with
some supplementary information.
Consolidated Statement of Profit and Loss
Amount (`)
Revenue 3,80,000
Cost of sales (2,20,000)
Gross profit 1,60,000
Other operating expenses (56,000)
Interest cost (4,000)
Taxation (15,000)
Consolidated balance sheet
20X2 20X1
Assets Amount (`) Amount (`)
Cash and cash equivalents 8,000 5,000
Trade receivables 54,000 50,000
Property, plant and equipment 1,60,000 80,000
Goodwill 18,000 —
Total assets 2,70,000 1,70,000
Liabilities
Trade payables 68,000 60,000
Income tax payable 12,000 11,000
Long term debt 1,00,000 64,000
Total Liabilities 1,80,000 1,35,000
Shareholders’ equity 90,000 35,000
Total liabilities and shareholders’ 2,70,000 1,70,000
Other information
All of the shares of entity B were acquired for ` 74,000 in cash. The fair values of assets
acquired and liabilities assumed were:
Amount (`)
Inventories 4,000
Cash 2,000
Trade payables (32,000)
Long term debt (36,000)
Goodwill 18,000
Cash consideration paid 74,000
Prepare the Consolidated Statement of Cash Flows for the year 20X2, as per Ind AS 7.
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QUESTION 12 (ALREADY DISCUSSED IN RTP MAY 20…Q14 IN RTP)
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
ANSWER
As per paragraph 4(a) of Ind AS 110, an entity that is a parent shall present consolidated
financial statements. This Ind AS applies to all entities, except as follows:
A parent need not present consolidated financial statements if it meets all the following
conditions:
(i) it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity
and all its other owners, including those not otherwise entitled to vote, have been
informed about, and do not object to, the parent not presenting consolidated
financial statements;
(ii) its debt or equity instruments are not traded in a public market (a domestic or
foreign stock exchange or an over-the-counter market, including local and regional
markets);
(iii) it did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of
instruments in a public market; and
(iv) its ultimate or any intermediate parent produces financial statements that are
available for public use and comply with Ind ASs, in which subsidiaries are consolidated
or are measured at fair value through profit or loss in accordance with this Ind AS.
In accordance with the above, it may be noted that as per paragraph 4(a)(i) above, a parent
need not present consolidated financial statements if it is a:
— wholly-owned subsidiary; or
is a partially-owned subsidiary of another entity and all its other owners, including those
not otherwise entitled to vote, have been informed about, and do not object to, the
parent not presenting consolidated financial statements. Although GD Limited is a partly-
owned subsidiary of G Limited, it is the wholly-owned subsidiary of Gamma Limited (and
therefore satisfies the condition 4(a)(i) of Ind AS 110 without regard to the relationship
with its immediate owners, i.e. G Limited and D Limited). Thus, GD Limited being the
wholly owned subsidiary fulfils the conditions as mentioned under paragraph 4(a)(i) and
is not required to inform its other owner D Limited of its intention not to prepare the
Thus, in accordance with the above, GD Limited may take the exemption given under
paragraph 4(a) of Ind AS 110 from presentation of consolidated financial statements.
In Alternative Scenario, where both G Limited and D Limited are owned by an individual
Mr. X, then GD Limited is ultimately wholly in control of Mr. X (i.e., an individual) and
hence it cannot be considered as a wholly owned subsidiary of an entity.
This is because Ind AS 110 makes use of the term ‘entity’ and the word ‘entity’ includes a
company as well as any other form of entity. Since, Mr. X is an ‘individual’ and not an ‘entity’,
therefore, GD Limited cannot be considered as wholly owned subsidiary of an entity.
Therefore, in the given case, GD Limited is a partially-owned subsidiary of another
entity. Accordingly, in order to avail the exemption under paragraph 4(a), its other owner,
D Limited should be informed about and do not object to GD Limited not presenting
consolidated financial statements. Further, for the purpose of consolidation of G Limited
and D Limited, GD Limited will be required to provide relevant financial information as
per Ind AS.
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INVESTMENT ENTITIES
Determining whether an entity is an investment entity

A parent shall determine whether it is an investment entity. An entity is an investment
entity if it fulfils all the following conditions:
Commits to its investor(s)

Obtains funds from Measures and evaluates
that its business purpose
one or more investors the performance of
is to invest funds solely
for providing those substantially all of its
for returns from capital
investor(s) with investment investments on a fair
appreciation, investment
management services value basis
income, or both
In assessing whether an entity meets the definition of investment entity as above, the
entity shall consider whether it has the following typical characteristics of an investment
entity:
More than one investment More than one investor
Typical characteristics of an
investment entity
Investors are not related Entity has ownership interests in the

parties of the entity form of equity or similar interests
The absence of one or more of these typical characteristics does not necessarily disqualify
an entity from being classified as an investment entity but indicates that additional
judgement is required in determining whether the entity is an investment entity.
If facts and circumstances indicate that there are changes to one or more of the three
elements that make up the definition of an investment entity or the typical characteristics
of an investment entity, a parent shall reassess whether it is an investment entity.
Following is the detailed discussion on two of the three elements of the definition
of an investment entity (business purpose and fair value measurement) and the typical
characteristics of an investment entity. As regards the first element, i.e. provision of

investment management services, that essentially differentiates an investment entity from
other entities.
Business Purpose
The definition of an investment entity requires that the purpose of the entity is to invest
solely for capital appreciation, investment income (such as dividends, interest or rental
income), or both.
Documents or other evidence that indicate the entity’s investment objectives are include:
offering memorandum of the entity
publications distributed by the entity and other corporate
partnership documents of the entity
manner in which the entity presents itself to other parties (such as potential investors or
potential investees)
For example, an entity may present its business as providing medium-term investment
for capital appreciation. In contrast, an entity that presents itself as an investor whose
objective is to jointly develop, produce or market products with its investees has a business
purpose that is inconsistent with the business purpose of an investment entity, because the
entity will earn returns from the development, production or marketing activity as well as
from its investments.
Apart from the business purpose of investing for capital appreciation and investment income,
an investment entity may provide investment-related services (e.g. investment advisory
services, investment management, investment support and administrative services), to third
parties as well as to its investors, even if those activities are substantial to the entity,
subject to the entity continuing to meet the definition of an investment entity.
An investment entity may also participate in the following investment-related activities if
these activities are undertaken to maximise the investment return (capital appreciation or
investment income) from its investees and do not represent a separate substantial business
activity or a separate substantial source of income to the investment entity:
a) providing management services and strategic advice to an investee; and
b) providing financial support to an investee, such as a loan, capital commitment or
guarantee.
86 ACCOUNTS
QUESTION 1: 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?
Exit strategies
One feature that differentiates an investment entity from other entities is that an
investment entity does not plan to hold its investments indefinitely; it holds them for a limited
period. Because equity investments and non-financial asset investments have the potential
to be held indefinitely, an investment entity shall have an exit strategy documenting how the
entity plans to realise capital appreciation from substantially all of its equity investments
and non-financial asset investments.
An investment entity shall also have an exit strategy for any debt instruments that have
the potential to be held indefinitely, for example perpetual debt investments. The entity
need not document specific exit strategies for each individual investment but shall identify
different potential strategies for different types or portfolios of investments, including
a substantive time frame for exiting the investments. Exit mechanisms that are only put
in place for default events, such as a breach of contract or non-performance, are not
considered exit strategies for the purpose of this assessment.
Exit strategies can vary by type of investment.
• For investments in private equity securities, examples of exit strategies include an
initial public offering, a private placement, a trade sale of a business, distributions
(to investors) of ownership interests in investees and sales of assets (including the
sale of an investee’s assets followed by a liquidation of the investee).
• For equity investments that are traded in a public market, examples of exit
strategies include selling the investment in a private placement or in a public market.
• For real estate investments, an example of an exit strategy includes the sale of the
real estate through specialized property dealers or the open market.
An investment entity may have an investment in another investment entity that is formed in
connection with the entity for legal, regulatory, tax or similar business reasons. In this case,
the investment entity investor need not have an exit strategy for that investment, provided
that the investment entity investee has appropriate exit strategies for its investments.
QUESTION 2:
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?
SOLUTION:
The exit strategies are in place for investments done in equity shares. But not in place for
investments done in debt instruments. However, it should be noted that the debt instruments
have fixed maturity period and they cannot be held for indefinite period. Hence, there is
no need for having exit strategies for such instruments. Accordingly, the exit strategy
condition is fulfilled for being classified as investment entity.
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Earnings from investments

To be an investment entity, an entity must commit to its investors that its business purpose
is to invest funds solely for returns from capital appreciation, investment income, or both.
An entity is not an investment entity if the entity, or another member of the group containing
the entity obtains, or has the objective of obtaining, other benefits from the entity’s
investments that are not available to other parties unrelated to the investee.
Such other benefits include following:
Acquisition, use, exchange or exploitation Joint arrangements or other

of the processes, assets or technology of agreements between the entity
an investee. This would include the entity or or another group member and
another group member having disproportionate, an investee to develop, produce,
or exclusive, rights to acquire assets, market or provide products or
technology, etc. of any investee services;
Financial guarantees or assets provided by an

An option held by a related
investee for borrowing arrangements of the
party of the entity to purchase,
entity or another group member (however, an
from that entity or another group
investment entity would still be able to use an
member, an ownership interest in
investment in an investee as collateral for any
an investee of the entity;
of its borrowings)
Transactions (except as mentioned in next paragraph) between the entity or another

group member and an investee that are
• on terms that are unavailable to unrelated parties; or
• not at fair value; or
• represent a substantial portion of the investee’s or the entity’s or other group entities’
business
An investment entity may have a strategy to invest in more than one investee in the same
industry, market or geographical area in order to benefit from synergies that increase
the capital appreciation and investment income from those investees. An entity is not
disqualified from being classified as an investment entity merely because such investees
trade with each other.
QUESTION 3:
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
Subsidiareis
PQR Ltd. DEF Ltd.
Contractual
Investment in arrangements
equity shares of
pharmaceutical
companies
Determine whether PQR Ltd. Can be classified as investment entity?
SOLUTION:
PQR Ltd. And DEF Ltd. Are part of same group. Further, DEF Ltd. Have exclusive right to
acquire the patent and distributions rights from the investees of PQR Ltd. And that too
at less then the market price. Hence, the related party of PQR Ltd. Is in position to obtain
benefits other than capital appreciation and investment income from the investees that are
not available to other parties unrelated to the investee. Accordingly, PQR Ltd. Cannot be
classified as investment entity.
Exemptions to investment entities
An investment entity shall not consolidate its subsidiaries or apply Ind AS 103 ‘Business
Combinations’ when it obtains control of another entity; and measure an investment in a
subsidiary at fair value through profit or loss in accordance with Ind AS 109.
If an investment entity has a subsidiary that is not itself an investment entity and whose
main purpose and activities are providing services related to the investment entity’s
investment activities, it shall consolidate that subsidiary and apply the requirements of
Ind AS 103 to the acquisition of any such subsidiary. If the subsidiary that provides the
90 ACCOUNTS
investment-related services or activities is itself an investment entity then the investment

entity parent shall measure that subsidiary at fair value through profit or loss.
A parent of an investment entity shall consolidate all entities that it controls, including
those controlled through an investment entity subsidiary, unless the parent itself is an
investment entity. This is explained in following diagram form:
QUESTION 4
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.
SOLUTION:
Even though HTF Ltd.’s business purpose is investing for capital appreciation and it provides
investment management services to its investors, HTF Ltd. Is not an investment entity
because of the following arrangements and circumstances:
(a) T Ltd., the parent of HTF Ltd. Holds options to acquire investments in investees held
by HTF Ltd. If the assets developed by the investees would benefit the operations of
T Ltd. This provides a benefit in addition to capital appreciation or investment income;
and
(b) the investment plans of HTF Ltd. Do not include exit strategies for its investments,
which are equity investments. The options held by T Ltd. Are not controlled by HTF
Ltd. And do not constitute an exit strategy.
Accounting when an entity becomes an investment entity

When an entity becomes an investment entity, it shall cease to consolidate its subsidiaries at
the date of the change in status (except for any subsidiary that itself is not an investment
entity but provide services related to the investment entity’s investment activities. Such
subsidiaries shall be continued to be consolidated). The investment entity shall apply the
requirements of loss of control explained earlier in this unit to those subsidiaries that it
ceases to consolidate as if the investment entity had lost control of those subsidiaries at
that date.
QUESTION 5:
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.
SOLUTION:
The gain on the disposal will be calculated as follows:
Fair value of retained interest (100%) 25,00,000

Less: Net assets disposed, including goodwill (23,00,000)
(19,00,000 + 4,00,000)
Gain on the date of change in investment entity 2,00,000

status of CD Ltd.
92 ACCOUNTS
NOTES
IND AS 19: EMPLOYEES BENEFITS 93
IND AS 19: EMPLOYEES BENEFITS
CONCEPT 1: OBJECTIVE OF IND AS 19
• The objective of this standard is to prescribe the accounting and disclosure for employee
benefits.
• Ind AS 19 requires an entity to recognise:
(a) a liability for advance services received from an employee; and
(b) an expense for consumption of economic benefits raised from the service provided
by an employee in exchange for employee benefits.
Financial statements are prepared on the accrual basis of accounting. Under this basis, the
effects of transactions and other events are recognised when they occur (and not when
cash or its equivalent is received or paid) and they are recorded in the accounting records
and reported in the financial statements of the periods to which they relate.
When employees provide services to their employer during a period, their services lead to
generation of benefits (revenues or profits or increased efficiency), directly or indirectly,
for their employers for that period. The underlying assumption of accrual requires that for
the benefit earned in a particular period, the costs incurred in earning that benefit need to
be recognised entirely.
Provides service i.e. work
to
ts
c os s
ch e fit
Mat ben
e  Entity should recognise liability for Employee Be
th re ne
Benefits paid and to be paid in the future in ve fit
nu s
e, (e
respect of services provided by the employee. pr .g
Employee Employer ac
cu of .
re its
 As benefit from the service provided by the )
employee is consumed, the entity should recognize
the related employee benefit expense.
Provides benefits e.g. salary, leave encashment, gratuity, pension etc.

94 ACCOUNTS
CONCEPT 2: SCOPE
The concept of ‘Employee Benefits’ has evolved over the years to encompass more than just
the salaries, wages and social welfare contributions. The companies of today – established
or start-ups – provide a host of benefits to its employees including, but not limited to,
Employees’ Stock Option Plans, jubilee bonuses, long-term disability benefits etc. In fact,
companies like Google even provide unusual benefits such as ‘death benefits’, which involve
paying the deceased’s spouse or domestic partner 50% of their salary for 10 years after
death of the employee.
• This Standard shall be applied by an employer in accounting for all employee benefits
other than benefits to which Ind AS 102, Share-based Payment, is applicable (e.g.
Employees Stock Option Plans).
• This Standard does not deal with reporting by employee benefit plans.
• Employee benefits to which this Standard applies include those provided
 under formal plans/agreements between an entity and its individual employees/
group of employees/their representatives,
 as required by law or as required by any type of industry arrangements whereby
an entity is required to contribute to any nation/state/industry or other multi-
employer plans; or
 by those informal practices that give rise to a constructive obligation. Informal
practices give rise to a constructive obligation where the entity has no realistic
alternative but to pay employee benefits.
Example of a constructive obligation - Where a change in the entity’s informal practices
would cause unacceptable damage to its relationship with employees.
CONCEPT 3: EMPLOYEE BENEFITS
Employee benefits include:

(i) Short employee benefits,
(ii) Post-employment benefits,
(iii) Other long term employee benefits and
(iv) Termination benefits.
All these categories have different characteristics and hence the Standard has specified
separate accounting requirements for each such category.
Short Term Benefits
Employee Benefits
Post Employee Benefits
Other Long Term Benefits
Termination Benefits
• Employee benefits include benefits provided either to

 Employees; or
 Their dependants; or
 Their beneficiaries.
• Employee benefits may be settled by payments (or the provision of goods or services)
made either
 directly to the employees; or
 their spouses; or
 their children; or
 their other dependants; or
 Others, such as insurance companies.
• An employee may provide services to an entity on a
 full-time; or
 part-time; or
 permanent; or
 casual; or
 Temporary basis.
Note: For the purpose of this Standard, employees include directors and other management
personnel.
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Employee benefits include

Payments in cash or Payments by provision of
equivalents goods or services
Employee benefits are paid to

Employees Dependants of Beneficiaries of Others such as
employees employees insurance companies
Employees include
Full-time Part Time Permanent Casual Temporary Directors
Employees Employees Employees Employees Employees and Other
Management
Personnel
SECTION A: SHORT-TERM EMPLOYEE BENEFITS
• Short-term employee benefits include items expected to be settled wholly before twelve
months after the end of the annual reporting period in which the employees render the
related services.
• It includes
(a) Wages, salaries and social security contributions;
(b) Paid annual leave and paid sick leave;
(c) Profit-sharing and bonuses; and
(d) Non-monetary benefits (such as medical care, housing, cars and free or subsidised
goods or services) for current employees.
Short-term employee benefits include
Wages, Paid annual Non-monetary benefits (such as

Profit-
salaries and leave and medical care, housing, cars and free
sharing and
social security paid sick or subsidised goods or services)
bonuses
contributions leave for current employees
• Reclassification of a short-term employee benefit is not required if the entity’s

expectations of the timing of settlement of such benefits changes temporarily.
• Reclassification may be considered-
If the characteristics of the benefit change (such as a change from a non-accumulating
benefit to an accumulating benefit) or
If a change in expectations of the timing of settlement is not temporary.
A. RECOGNITION AND MEASUREMENT OF SHORT-TERM BENEFITS
Accounting for short term benefits has two characteristics:

(a) short-term benefits are measured on an undiscounted basis; and
(b) they don’t involve any actuarial valuation for their measurement.
The undiscounted amount of short-term employee benefits expected to be paid in exchange
for that service shall be recognised:
(a) as a liability (accrued expense), after deducting any amount already paid.
If the amount already paid exceeds the undiscounted amount of the benefits, an
entity shall recognise that excess as an asset (prepaid expense) to the extent that
the prepayment will lead to, for example, a reduction in future payments or a cash
refund; and
(b) As an expense, if it doesn’t form part of the cost of an asset as per any other Ind AS
(e.g. Ind AS 2, Inventories or Ind AS 16 Property, Plant and Equipment).
Note: Recognition of short-term employee benefit is in the form of either paid expenses
or profit sharing or bonus plans.
B. SHORT-TERM PAID ABSENCES
An employer may compensate an employee for absence for various reasons including holidays,
sickness and short-term disability, maternity or paternity, jury service and military service.
Entitlement to paid absences (i.e. compensated balances) fall into two categories and are
recognized as follows:
(a) Accumulating paid absences - recognized when the employees render service that
increases their entitlement to future paid absences; and
(b) Non-accumulating paid absences - recognized when the absences occur.
98 ACCOUNTS
ACCUMULATING PAID ABSENCES
• These are the absences that are carried forward and can be used in future periods if
the employee is not able to use them in current reporting period of the employer. They
can be either:
(i) Vesting: In this case, employees are entitled to a cash-payment for the unutilised
entitlement at the time of leaving the entity; and
(ii)
Non-vesting: In this case, employees are not entitled to a cash payment for
unused entitlement on leaving.
• This obligation exists and is recognized, even if the compensated absences are non-
vesting. However, in case an employee leaves the entity before they use an accumulated
non-vesting entitlement, it will affect the measurement of this obligation.
• An entity shall measure the expected cost of accumulating compensated absences as the
additional amount that the entity expects to pay as a result of the unused entitlement
that has accumulated at the end of the reporting period.
QUESTION 1: VESTED ACCUMULATING BENEFITS
Mr. Rajan is working for Infotech Ltd. Consider the following particulars: Annual salary of
Mr. Rajan = ` 30,00,000
Total working days in 20X0-X1 = 300 days
Leaves allowed in 20X0-X1 as per company policy = 10 days
Leaves utilized by Mr. Rajan in 20X0-X1 = 8 days
The unutilized leaves are settled by way of payment and accordingly, carry forward of such
leaves to the subsequent period is not allowed.
Compute the total employee benefit expense for Infotech Ltd. in respect of 20X0-X1.
QUESTION 2: NON-VESTED ACCUMULATING BENEFITS
Mr. Niranjan is working for Infotech Ltd. Consider the following particulars:
Year 20X0- Year 20X1-

20X1 20X2
Annual Salary ` 30,00,000 ` 30,00,000
No. of working days during the year 300 days 300 days
Leaves Allowed 10 days 10 days
Leaves Taken 7 days 13 days

Leave utilized carried forward to next year 3 days NIL
Based on past experience, Infotech Ltd. assumes that Mr. Niranjan will avail the unutilized
leaves of 3 days of 20X0-20X1 in 20X1-20X2.
Infotech Ltd. contends that it will record ` 30,00,000 as employee benefits expense in
each of the years 20X0-20X1 and 20X1-20X2, stating that the leaves will, in any case, be
utilized by 20X1-20X2.
Comment on the accounting treatment proposed to be followed by Infotech Ltd. Also pass
journal entries for both the years.
QUESTION 3: NON-VESTED ACCUMULATING BENEFITS
Assume same information as in Illustration 2.

Based on past experience, Infotech Ltd. assumes that Mr. Niranjan will avail the unutilized
leaves of 2 days of 20X0-20X1 subsequently.
However, in 20X1-20X2, Mr. Niranjan availed in actual all 3 days of brought forward leave.
Compute the expense to be recognised in 20X0-20X1 and 20X1-20X2. Also pass journal
entries for both the years.
QUESTION 4
Sunderam Pvt. Ltd. has a headcount of 100 employees in 20X0-20X1. As per the employee
policy, the employees are entitled to:
• 30 casual leaves out of which 10 casual leaves may be carried forward to the next year;
and
• 10 sick leaves out of which 2 sick leaves may be carried forward as paid leave.
At 31st March, 20X1, the average unused entitlement is 5 days per employee for casual
leaves and 1 day per employee for sick leave. On an average, it is found that the number of
such employees who would be claiming casual leaves would be 30 and 10 employees who would
claim sick leaves.
Compute the liability to be recognised in respect of sick leaves and casual leaves by the
entity at the end of the financial year 20X0-20X1.
100 ACCOUNTS
QUESTION 5
An entity has 100 employees, who are each entitled to ten working days of paid sick leave
for each year. Unused sick leave may be carried forward for one financial year. Sick leave
is taken first out of the current year’s entitlement and then out of any balance brought
forward from the previous year (a LIFO basis).
At 31 March 20X1, the average unused entitlement is two days per employee. Based on past
experience, the management expects that only 20% of the employees will use 1 day from
their carried forward leave. Salary per day is ` 2,500.
Compute the expenses in respect of the short-term compensated absences, if they are
assumed to be (a) vested short-term compensated absences, and (b) non-vested short-term
compensated absences.
QUESTION 6
Acer Ltd. has 350 employees (same as a year ago). The average staff attrition rates
observed during past 10 years represents 6% per annum. Acer Ltd. provides the following
benefits to all its employees:
Paid vacation - 10 days per year regardless of date of hiring. Compensation for paid vacation
is 100% of employee’s salary and unused vacation can be carried forward for 1 year. As
of 31st March, 20X1, unused vacation carried forward was 3 days per employee, average
salary was ` 15,000 per day and accrued expense for unused vacation in 20X0-20X1 was
` 65,00,000. During 20X1-20X2, employees took 9 days of vacation in average. Salary
increase in 20X1-20X2 was 10%.
How would Acer Ltd. recognize liabilities and expenses for these benefits as of 31st March,
20X2?. Pass the journal entry to show the accounting treatment.
QUESTION 7
An entity has 100 employees, who are each entitled to five working days of paid sick leaves
for each year. Unused sick leave may be carried forward for one calendar year. Sick leave
is taken first out of the current year’s entitlement and then out of any balance brought
forward from the previous year (LIFO basis).
At 31st March, 20X1, the average unused entitlement is two days per employee. The entity
expects, on the basis of experience that is expected to continue, that 92 employees will
take no more than five days of paid sick leaves in 20X1-20X2 and that the remaining eight
employees will take an average of six and a half days each.
The entity expects that it will pay an additional twelve days of sick pay as a result of the
unused entitlement that has accumulated at 31st March, 20X1 (one and a half days each, for
eight employees). Would the entity require to recognize any liability in respect of leaves?
QUESTION 8
Cisca Pvt. Ltd. has a headcount of around 1,000 employees in the organisation in 20X0-
20X1. As per the company’s policy, the employees are given 35 days of privilege leaves (PL),
15 days of sick leaves (SL) and 10 days of casual leaves. Out of the total PL and sick leaves,
10 PL leaves and 5 sick leaves can be carried forward to next year. On the basis of past
trends, it has been noted that 200 employees will take 5 days of PL and 2 days of SL and
800 employees will avail 10 days of PL and 5 days of SL.
Also the company has been incurring profits since 20XX. It has decided in 20X0-20X1 to
distribute profits to its employees @ 4% during the year. However, due to the employee
turnover in the organisation, the expected pay-out of the Cisca Pvt. Ltd. is expected to be
around 3.5%. The profits earned during 20X0-20X1 is ` 2,000 crores.
Cisca Pvt. Ltd. has a post-employment benefit plan also available which is in the nature of
defined contribution plan where contribution to the fund amounts to ` 100 crores which will
fall due within 12 months from the end of accounting period.
The company has paid ` 20 crores to its employees in 20X0-20X1.
What would be the treatment of the short-term compensating absences, profit-sharing
plan and the defined contribution plan in the books of Cisca Pvt. Ltd?
NON-ACCUMULATING PAID ABSENCES
• These are the absences that do not carry forward and they will lapse if the current
period’s entitlement is not used in full by the employee.
• They do not entitle employees to a cash payment for unused entitlement on leaving the
entity.
Example: Sick pay (to the extent that unused past entitlement does not increase future
entitlement).
• An entity shall recognise no liability or expense until the time of the absence because
the employee service does not increase the amount of the benefit.
102 ACCOUNTS
C.PROFIT-SHARING AND BONUS PLANS
• Expected costs of profit-sharing and bonus plans shall be recognised when and only
when:
(a) the entity has a present legal or constructive obligation to make such payments
as a result of past events; and
(b) a reliable estimate of the obligation can be made by the entity.
• Under some profit-sharing plans, employees receive a share of the profit only if they
remain with the entity for a specified period. Such plans create a constructive obligation
as employees render service that increases the amount to be paid if they remain in
service until the end of the specified period. The measurement of such constructive
obligations reflects the possibility that some employees may leave without receiving
profit-sharing payments.
• An entity may have no legal obligation to pay a bonus. Nevertheless, in some cases, an
entity has a practice of paying bonuses. In such cases, the entity has a constructive
obligation because the entity has no realistic alternative but to pay the bonus. The
measurement of the constructive obligation reflects the possibility that some employees
may leave without receiving a bonus.
• An entity can make a reliable estimate of its legal or constructive obligation under a
profit- sharing or bonus plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amount of the
benefit;
(b) the entity determines the amounts to be paid before the financial statements are
approved for issue; or
(c) past practice gives clear evidence of the amount of the entity’s constructive
obligation.
• An obligation under profit-sharing and bonus plans results from employee service and
not from a transaction with the entity’s owners.
• Therefore, an entity recognises the cost of profit-sharing and bonus plans not as
a distribution of profit but as an expense.
QUESTION 9
Laxmi Mills is a profit-making entity and has reported profit of ` 200 crore in the financial
year 20X1-20X2. According to its profit–sharing plan, it distributes and pays 5% as its
portion of profit to its employees if they complete 1 year with the organisation.
Under this plan, an entity is under an obligation to pay if the employees complete a specified
period with the organisation. Laxmi Mills has estimated that due to staff turnover in the
organisation, the estimated pay-out would be around 4.5%.
Compute the liability and expense of the company under this plan.
QUESTION 10
Acer Ltd. has 350 employees (same as a year ago). The average staff attrition rates as
observed during past 10 years represents 6% per annum. Acer provides the following
benefits to all its employees:
Annual bonus - during past 10 years.
Acer paid bonus to all employees who were in service during the entire financial year. Bonus
was paid in June following the financial year-end. Amount of bonus for 20X1-20X2 paid in
June 20X2 represented ` 1,25,000 per employee. Acer Ltd. used to increase amount of
bonus based on official inflation rate which is 8.5% for 20X2-20X3, although there was no
legal obligation to increase the bonus by such inflation rate.
How would Acer Ltd. recognize liabilities and expenses for these employee benefits as on
31st March, 20X3? Pass the journal entry to show the accounting treatment.
104 ACCOUNTS
SECTION B: POST EMPLOYMENT BENEFITS
POST-EMPLOYMENT BENEFITS
• Post-employment benefits include:

(a) Retirement benefits such as pensions and lump sum payments on retirement; and
(b) Other post-employment benefit such as post-employment life insurance and post-
employment medical care.
• Depending upon the economic substance of the plan which is derived from its principal
terms and conditions, post-employment benefit plans are classified as
(i) Either defined contribution plans
(ii) Or defined benefit plans
Retirement benefits such as pensions and

lump sum payments on retirement
Post-employment
benefits
Other post-employment benefit plans such
as post-employment life insurance and
post-employment medical care
Defined
Defined benefit
contribution
plans
plans
Classification of Post-employment Benefit Plans into Defined Contribution Plan vs Defined

Benefit Plans
Defined
Contribution
Plans Defined Benefit
Plans
DEFINED CONTRIBUTION PLANS
(a) The entity’s legal or constructive obligation is limited to the amount that it agrees to
contribute to the fund.
(b) Thus, the amount of the post-employment benefits received by the employee is
determined by the amount of contributions paid by an entity (and perhaps also the
employee) to a post- employment benefit plan or to an insurance company, together
with investment returns arising from the contributions.
(c) As a result of this, actuarial risk (which means that benefits will be less than expected)
and investment risk (that assets invested will be insufficient to meet expected
benefits) fall, in substance on the employee (and not on the entity like in defined
benefit plan).
DEFINED BENEFIT PLANS
(a) The entity’s obligation is to provide the agreed benefits to current and former
employees; and
(b) Actuarial risk (that benefits will cost more than expected) and investment risk
fall, in substance, on the entity (and not on the employee like in the case of defined
contribution plan).
(c) Thus, if actuarial or investment experience are worse than expected, the entity’s
obligation may be increased.
The above differences can be summarized as follows:
S. No. Particulars Defined Contribution Plans Defined Benefit Plans

1. Entity’s The entity’s legal or The entity’s obligation is to
obligation constructive obligation is provide the agreed benefits
limited to the amount that it to current and former
agrees to contribute to the employees.
fund.
2. Risk bearer Actuarial risk and investment Actuarial risk and

risk fall on the employee and investment risk fall on
not on the entity. the entity and not on the
employee.
106 ACCOUNTS
3. Change in the Generally, no change in the If actuarial or investment

obligation contribution of an entity is experience are worse than
made except in certain cases. expected, the entity’s
obligation may be increased
for providing to the
employees.
4. Determination The amount of the post- Pre-determined / Agreed

of the amount of employment benefits post- employment benefits
post- received by the employee is are received by the
employment determined by the amount employee.
benefit of contributions paid by an
entity and employee as well.
QUESTION 11
A company pays each employee a lump-sum one-time benefit upon retirement. This benefit is
computed based on the employee’s years in service in the company and the final salary prior
to retirement. To cover its liabilities from this remuneration, the company contributes 3%
of annual gross salaries to the fund. Would this obligation represent a defined contribution
plan or a defined benefit plan and why?
SOLUTION:
Defined benefit plan.
Reason: Although the Company pays contributions to the fund to cover its liabilities, amount
of remuneration is determined in advance and Company will have to carry the risk in case
the fund’s assets are not sufficient to cover remuneration in full.
QUESTION 12
In accordance with applicable legislation, company contributes 12% and employees 12% of
annual gross salaries to the provident and pension fund. Upon retirement, the employees
will get the accumulated balance that is calculated based on employee’s years of service and
his average salary for past 15 years before retirement. The pension will be paid out of the
state fund assets and the company has no further obligation except to make contributions.
Would this obligation represent a defined contribution plan or a defined benefit plan?
SOLUTION:
Defined contribution plan.
Reason: Although employee’s pension is determined in advance by the formula (and thus
employees neither carry actuarial nor investment risks), Company’s liability is limited to
contributions to the fund. In this case, as pension will be paid out of the state fund, it is a
state fund which carries all the risks.
MULTI-EMPLOYER PLANS
• An entity shall classify a multi-employer plan as a defined contribution plan or a defined

benefit plan under the terms of the plan (including any constructive obligation that
goes beyond the formal terms).
• In the case of a multi-employer defined benefit plan, normally
 The amount of contributions is decided keeping in mind the amount of benefits
that an entity is required to pay in the same period and
 The future benefits that an entity gets during the current period will be paid out
of future contributions.
 Employers have no realistic means of withdrawing from the plan without paying a
contribution for the benefits earned.
 Employees’ benefits are determined by the length of their service in the entity
as a future amount which is required to be paid to them. Such a plan would create
actuarial risk to the entity (i.e. if the ultimate cost of benefits already earned
at the end of the reporting period is more than expected, the entity will have to
either increase its contributions or to persuade employees to accept a reduction
in benefits).
• In case the multi-employer plan is a defined benefit plan, an entity shall:
(a) account for its proportionate share of the
(i) defined benefit obligation,
(ii) plan assets and
(iii) cost associated with the plan
in the same way as for any other defined benefit plan; and
(b) disclose the information required.
• When sufficient information is not available to use defined benefit accounting for a
multi- employer plan that is a defined benefit plan, an entity shall:
(a) account for the plan as if it were a defined contribution plan;
108 ACCOUNTS
(b) disclose:
(i) the fact that the plan is a defined benefit plan;
(ii) the reason why sufficient information is not available to enable the entity
to account for the plan as a defined benefit plan; and
(iii) the expected contributions to the plan for the next annual reporting period;
and
DEFINED BENEFIT PLANS THAT SHARE RISKS

BETWEEN ENTITIES UNDER COMMON CONTROL
• Defined benefit plans that share risks between entities under common control, for
example, a parent and its subsidiaries, are not multi-employer plans.
• An entity who is participating in such a plan shall obtain information about the plan as a
whole on the basis of assumptions that apply to whole plan as a whole.
• The entity shall, in its separate or individual financial statements, recognise the net
defined benefit cost it charged, if there is a contractual agreement or stated policy for
charging the net defined benefit cost for the whole plan to individual group entities.
• In case there is no such agreement or policy, the net defined benefit cost shall be
recognised in the separate or individual financial statements of the group entity that is
legally the sponsoring employer for the plan.
• The other group entities shall, in their separate or individual financial statements,
recognise a cost equal to their contribution payable for the period.
STATE PLANS
• A state plan is accounted for in the same way as a multi-employer plan.

• State plans are normally established by legislation to cover all entities (or all entities
in a particular category, for example, a specific industry) and are operated by national
or local government or by another body (for example, an autonomous agency created
specifically for this purpose) which is not subject to control or influence by the
reporting entity.
• Some plans established by an entity provide both compulsory benefits, as a substitute
for benefits that would otherwise be covered under a state plan, and additional
voluntary benefits. Such plans are not state plans.
• State plans are characterised as defined benefit or defined contribution, depending
on the entity’s obligation under the plan.
• Many state plans are funded on a pay-as-you- go basis which implies that contributions
are set at a level that is expected to be sufficient to pay the required benefits falling
due in the same period. In such kind of a case, future benefits earned during the current
period will be paid out of future contributions.
• In most of the state plans, the entity has no legal or constructive obligation to pay those
future benefits as its only obligation as an entity is to pay the contributions as they fall
due and in case the entity does not employ members of the state plan, it will have no
obligation to pay the benefits earned by its own employees in previous years. For this
reason, state plans are normally defined contribution plans.
INSURED BENEFITS
• An entity normally pays insurance premiums for funding a post-employment benefit plan.
The entity shall treat such a plan as a defined contribution plan.
• The entity shall treat the plan as a defined benefit plan in case an entity has (either
directly, or indirectly through the plan) a legal or constructive obligation, either to pay:
(a) the employee benefits directly when they fall due; or
(b) further amounts if the insurer does not pay all future employee benefits which
are relating to employee service in the current and prior periods.
• Where an entity is funding a post-employment benefit obligation and contributes to
an insurance policy under which the entity retains a legal or constructive obligation,
in this case the payment of the premiums does not amount to a defined contribution
arrangement. This can be either directly or indirectly through the plan, through the
mechanism for setting future premiums or through a related party relationship with the
insurer. Hence the entity shall:
(a) account for a qualifying insurance policy as a plan asset; and
(b) recognise other insurance policies as reimbursement rights.
• The entity has no obligation to pay benefits to the employees and the insurer has sole
responsibility for paying the benefits where an insurance policy is in the name of a
specified plan participant or a group of plan participants and the entity does not have
any legal or constructive obligation to cover any loss on the policy.
• The payment of fixed premiums under such kind of arrangement is a settlement of the
employee benefit obligation rather than an investment to meet the obligation. Therefore,
an entity treats such payments as contributions to a defined contribution plan.
110 ACCOUNTS
ACCOUNTING FOR DEFINED CONTRIBUTION PLANS
• The reporting entity’s obligation for each period is determined by the amounts to be
contributed for that period.
• No actuarial assumptions are required to measure the obligation or the expense and
there is no possibility of any actuarial gain or loss.
• The obligations are measured on an undiscounted basis.
When an employee has rendered service to an entity during a period, the entity shall
recognise the contribution payable to a defined contribution plan in exchange for that
service:
As a liability (accrued expense), after deducting any contribution already paid.
In case the amount of contribution already paid under a defined contribution plan exceeds
the contribution due for service before the end of the reporting period, an entity shall
recognise that excess as an asset (prepaid expense) to the extent that the prepayment will
lead to, a reduction in future payments or a cash refund;
Where contributions to a defined contribution plan do not fall due wholly before twelve
months after the end of the annual reporting period in which the employees render the
related service, the contributions shall be discounted using the discount rate as specified
in this Standard.
QUESTION 13
Acer Ltd. provides lump-sum remuneration upon retirement to its employees. Remuneration
is paid out of the fund to which Acer Ltd. contributes 12% of annual gross salaries.
Contributions are made twice a year ie in November of the related financial year and in June
after the financial year-end. Total annual gross salaries for 20X0-X1 amounted to ` 50
crores. Contribution made by Acer Ltd. in November 20X0 was ` 2.8 crores. Remuneration
depends on the number of employee’s service and amount of cash in the fund at retirement
date (Acer Ltd. has no further obligations except for contributions).
How should this transaction appear in the financial statements of Acer Ltd. as of 31 March
20X1?
ACCOUNTING FOR DEFINED BENEFIT PLANS
Accounting for defined benefit plans is complex because -

• Actuarial assumptions are required to measure the obligation and the expense;
• There is a possibility of actuarial gains and losses;
• The obligations are measured on a discounted basis because they may be settled many
years after the employees render the related service.
QUESTION 14
Dinkar Ltd., a large IT company, accounts for gratuity on payment basis, and supports such
accounting policy by making the following disclosure in the Financial Statements:
“Due to high labour turnover, a large degree of uncertainty is involved in estimating the
liability of gratuity. Accordingly, the management opines that as the estimates of the
uncertainty would confuse the readers by complicating the financial statements, such
liability would be recorded on payment basis.”
The management opines that by making the above disclosures, the company is complying
with the requirements of all the Ind AS, as a disclosure to the effect of the above is
given. The management is also willing to specifically highlight the above aspect by making it
conspicuous in the financial statements.
Is the contention of management correct as per the provisions of Ind AS?
SOLUTION:
In the given case, compliance with Ind AS would not be a conflict, as the compliance with
Ind AS 19 would ensure that the accrual assumption laid down in the Framework is complied
with. Further, a disclosure cannot be a remedy for non-compliance. Therefore, the company
have to state that the Ind AS have not been complied with by the company in the preparation
and presentation of its Financial Statements.
Hence, the company will have to suitably modify the financial statements considering the
materiality and pervasiveness of the non-compliance.
112 ACCOUNTS
• Defined benefit plans can be:

 Unfunded or
 Funded.
They may be funded wholly or partly by contributions by an entity, and sometimes its
employees, into an entity, or fund, that is legally separate from the reporting entity and
from which the employee benefits are paid.
• The payment of funded benefits when they fall due depends on
 The financial position and the investment performance of the fund; and
 An entity’s ability (and willingness) to make good any shortfall in the fund’s assets.
• Therefore, the entity, in substance, underwrites the actuarial and investment risks
associated with the plan.
• Hence the expense recognised for a defined benefit plan is not necessarily the amount
of the contribution due for the period.
STEPS INVOLVED IN ACCOUNTING BY

AN ENTITY FOR DEFINED BENEFIT PLANS
• PUCM (Projected Unit Credit Method)

Determine the deficit or
• Discounting
surplus
• Fair value of plan assets
Determine the amount of

the net defined benefit • As the amount of the deficit or surplus
liability (asset)
Determine the amounts to • Current service cost

be recognised in Profit or • Past service cost
Loss • Net interest
Determine the • Acturial Gain or Loss

remeasurements of
• Return on Plan Assets
the net defined benefit
liability (asset) • Any Change in effect of Asset Ceiling
Step I: Determining the Deficit or Surplus

This involves:
(a) using actuarial techniques, the projected unit credit method, to make a reliable
estimate of the amount of benefit that employees have earned in return for their
service in the current and prior periods.
This requires an entity to -
(i) determine how much benefit is attributable to the current and prior periods and
(ii) make estimates (actuarial assumptions) about
• demographic variables (such as employee turnover and mortality); and
• financial variables (such as future increases in salaries and medical costs) that
will influence the cost of the benefit;
(b) discounting that benefit in order to determine the present value of the defined benefit
obligation; and the current service cost
(c) deducting the fair value of any plan assets from the present value of the defined
benefit obligation.
Step II: Determining the amount of the net defined benefit liability (asset)
Determining the amount of the net defined benefit liability (asset) as the amount of the
deficit or surplus determined in step I above, adjusted for any effect of limiting a net
defined benefit asset to the asset ceiling.
Step III: Determining amounts to be recognised in profit or loss:

(i) current service cost.
(ii) any past service cost and gain or loss on settlement.
(iii) net interest on the net defined benefit liability (asset).
Step IV: Determining the remeasurements of the net defined benefit liability (asset),
to be recognised in other comprehensive income, comprising:
(i) actuarial gains and losses;
(ii) return on plan assets, excluding amounts included in net interest on the net defined
benefit liability (asset); and
(iii) any change in the effect of the asset ceiling, excluding amounts included in net interest
on the net defined benefit liability (asset).
114 ACCOUNTS
In case an entity has more than one defined benefit plan, the entity applies these procedures
for each material plan separately.
An entity shall determine the net defined benefit liability (asset) with sufficient regularity
that the amounts recognised in the financial statements do not differ materially from
the amounts that would be determined at the end of the reporting period
CONCEPT 1: PRESENT VALUE OF DEFINED BENEFIT OBLIGATIONS

AND CURRENT SERVICE COST
In order to measure the present value of the post-employment benefit obligations and the
related current service cost, it is necessary to:
(a) Apply an actuarial valuation method;
(b) Attribute benefit to periods of service; and
(c) Make actuarial assumptions.
ACTUARIAL VALUATION METHOD: PROJECTED UNIT CREDIT METHOD
• Projected Unit Credit Method (PUCM) is used by an entity to determine the present
value of its defined benefit obligations and the related current service cost and, where
applicable, past service cost.
• The Projected Unit Credit Method (which is also sometimes known as the accrued benefit
method pro-rated on service or as the benefit/years of service method) perceives each
period of service as which gives rise to an additional unit of benefit entitlement and
measures each unit separately to build up the final obligation.
QUESTION 15
AJ Ltd is engaged in the business of trading of chemicals having a net worth of ` 150
crores. The company’s profitability is good and hence the company has introduced various
benefits for its employees to keep them motivated and to ensure that they stay with
the organization. The company is an associate of RJ Ltd which is listed on Bombay Stock
Exchange in India.
The company initially did not have any HR function but over the last 2 years, the management
set up that function and now HR department takes care of all the benefits related to the
employees and how they can be structured in a manner beneficial to both the employees and
the objectives of the company.
One of the employee benefits involves a lump sum payment to employee on termination of
service and that is equal to 1 per cent of final salary for each year of service. Consider the
salary in year 1 is ` 10,000 and is assumed to increase at 7 per cent (compound) each year.
Taking a discount rate at 10 per cent per year, you are required to show
(a) benefits attributed (year on year) and
(b) the obligation in respect of this benefit (year on year)
For and employee who is expected to leave at the end of year 5
Following assumptions may be taken to solve this:
• There are no changes in actuarial assumptions.
• No additional adjustments are needed to reflect the probability that the employee may
leave the entity at an earlier or later date.
ATTRIBUTING BENEFIT TO PERIODS OF SERVICE
• An entity shall attribute benefit to periods of service under the plan’s benefit formula,
in determining the present value of its defined benefit obligations and the related
current service cost
• However, if an employee’s service in later years will lead to a materially higher level of
benefit than in earlier years, an entity shall attribute benefit on a straight-line basis
from:
(a) the date when service by the employee first leads to benefits under the plan
(whether or not the benefits are conditional on further service) until
(b) the date when further service by the employee will lead to no material amount of
further benefits under the plan, other than from further salary increases.
• The Projected Unit Credit Method requires an entity to attribute benefit to the current
period (in order to determine current service cost) and the current and prior periods (in
order to determine the present value of defined benefit obligations).
• Employee service gives rise to an obligation under a defined benefit plan even if the
benefits are conditional on future employment (in other words they are not vested).
• Employee service given the vesting date gives rise to a constructive obligation because,
at the end of each successive reporting period, the amount of future service that
an employee will have to render before becoming entitled to the benefit is reduced.
An entity considers the probability that some employees may not satisfy any vesting
requirements in measuring its defined benefit obligation.
116 ACCOUNTS
QUESTION 16
A plan pays a benefit of ` 150 for each year of service. The benefits vest after ten years
of service. Compute the benefit to be attributed each year?
SOLUTION:
1. A benefit of ` 150 is attributed to each year.
2. In each of the first ten years, the current service cost and the present value of the
obligation reflect the probability that the employee may not complete ten years of
service. This is because the benefits vest at a future date (i.e. after ten years of
service).
QUESTION 17
A plan pays a benefit of ` 150 for each year of service, excluding service before the age of
25. The benefits vest immediately. Compute the benefit to be attributed each year?
SOLUTION:
1. No benefit is attributed to the service before the age of 25 because service before
that date does not lead to benefits (conditional or unconditional).
2. A benefit of ` 150 is attributed to each subsequent year. There is no requirement to
reflect any probability of completion as the benefits vest immediately.
QUESTION 18
A plan pays a lump-sum retirement benefit of ` 4,000 to all employees who are still employed
at the age of 55 after twenty years of service, or who are still employed at the age of 65,
regardless of their length of service.
Category of Employee Description Benefit attributed per year
Employees who join • These employees will be in • For these employees, the
before the age of 35 service for 20 years at the entity attributes benefit
age of 55. Accordingly, the of ` 200 (` 4,000 divided by
service leads to benefits 20 years) each year from
at the age of 35 and are the age of 35 to the age of
conditional of further 55.
service.
• However, service beyond • The current service cost

the age of 55 leads to no and the present value
material amount of further of the obligation should
benefits (i.e. benefit will reflect the probability of
still be the same). an employee not completing
the necessary service
period.
Employees who join • These employees will not • For these employees, the
after the age of 35 be in service for 20 years entity attributes benefit
at the age of 55 and must of ` 4,000 ÷ (65 years
wait till the age of 65, – whatever age when
regardless of the years of employment started may be
service. 40, 45, 50…) to each year
• The service leads to of service from the start
benefits at the beginning until the age of 65.
of employment and service • The current service cost
beyond age 65 leads to no and the present value
material amount of further of the obligation should
benefits. reflect the probability of
an employee not completing
the necessary service
period.
QUESTION 19
Amra Pvt. Ltd. has a plan for its employees where it has decided to pay a lump-sum benefit
of ` 2,000 that will vest after ten years of service. However, that plan will provide no
further benefit for subsequent service.
Compute the benefit attributed for 10 years of service and for the period of service after
10 years?
SOLUTION:
1. In this case, as per the company’s plan, a benefit of ` 200 (` 2,000 ÷ 10 years) is
attributed to each of the first 10 years.
2. The current service cost in each of the first ten years reflects the probability that
the employee may not complete ten years of service. This is because the benefits vest
at a future date (i.e. after ten years of service).
No benefit is attributed to subsequent years.
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QUESTION 20
Sanat Pvt. Ltd. has a plan for the employees where employees are entitled to a benefit
of 5% of final salary for each year of service before the age of 55. Compute the benefit
attributed up to 55 years and after 55?
SOLUTION:
Benefit of 5% of estimated final salary is attributed to each year up to the age of 55. This
is the date when further service by the employee will lead to no material amount of further
benefits under the plan. No benefit is attributed to service after that age.
QUESTION 21
A post-employment medical plan reimburses 40 percent of an employee’s post-employment

medical costs if the employee leaves after more than ten and less than twenty years of
service and 50 per cent of those costs if the employee leaves after twenty or more years
of service. How will the benefit be attributed to the years of service?
SOLUTION:
1. Under the Plan’s Benefit Formula, the entity should attribute 4% of the present value
of the expected medical costs (40% ÷ 10 years) to each of the first ten years, and 1%
(10% ÷ 10 years) to each of the second ten years.
2. For employees expected to leave within 10 years, no benefit is attributed.
3. The Current Service Cost in each year reflects the probability that the employee may
not complete the necessary period of service to earn part or all of the benefits.
QUESTION 22
A post-employment medical plan reimburses 10 percent of an employee’s post-employment

medical costs if the employee leaves after more than ten and less than twenty years of
service and 50 per cent of those costs if the employee leaves after twenty or more years
of service.
How will the benefit be attributed to the years of service?
QUESTION 23
AKJ Ltd is a listed company engaged in the business of manufacturing of electronic

equipment. The company has various branch offices spread out across India and has 1,000
employees.
As per the statutory requirements, gratuity shall be payable to an employee on the

termination of his employment after he has rendered continuous service for not less than
five years -
(a) On his superannuation, or
(b) On his retirement or resignation, or
(c) On his death or disablement due to accident or disease.
The completion of continuous service of five years shall not be necessary where the
termination of the employment of any employee is due to death or disablement.
The amount payable is determined by a formula linked to number of years of service and
last drawn salary. The amount payable to an employee shall not exceed ` 10,00,000.
Compute the amount of employee benefit, if any, attributed to each year of service.
SOLUTION:
For those employees for whom the amount payable as per the formula does not exceed
` 10,00,000, over the expected period of service, the amount payable will be divided by the
expected period of service and the resulting amount will be attributed to each year of the
expected period of service, including the period before the stipulated period of 5 years.
QUESTION 24
A plan provides a monthly pension of 0.3% of final salary for each year of service. The
pension is payable from the age of 65. What is the current service cost?
SOLUTION:
Benefit equal to the present value, at the expected retirement date, of a monthly pension
of 0.3% of the estimated final salary payable from the expected retirement date until the
expected date of death is attributed to each year of service. The current service cost is
the present value of that benefit.
QUESTION 25
A plan pays a benefit of ` 140 for each year of service, excluding service before the age of
25. The benefits vest immediately. Compute the benefit to be attributed before the age of
25 and after 25?
SOLUTION:
No benefit is attributed to service before the age of 25 because service before that date
does not lead to benefits (conditional or unconditional). A benefit of ` 140 is attributed to
each subsequent year.
120 ACCOUNTS
QUESTION 26
B Pvt. Ltd. has a post-employment medical plan which will reimburse 20% of an employee’s
post-employment medical costs if the employee leaves after more than ten and less than
twenty years of service and 50% of those costs if the employee leaves after twenty or more
years of service. How would you measure the benefit to be attributed for the employee
service for the Iast 20 years, 10 and 20 years and within 10 years?
SOLUTION:
As per Ind AS 19, the benefit will be attributed till the period the employee service will lead
to no material amount of benefits. And service in later years will lead to a materially higher
level of benefit than in earlier years. Therefore, for employees expected to leave after
twenty or more years, the entity would attribute benefit on a straight-line basis. Service
beyond twenty years will lead to no material amount of further benefits. Therefore, the
benefit attributed to each of the first twenty years is 2.5% (i.e. 50% divided by 20) of the
present value of the expected medical costs.
For employees expected to leave between ten and twenty years, the benefit attributed to
each of the first ten years is 2% (20 % divided by 10) of the present value of the expected
medical costs. For these employees, no benefit is attributed to service between the end of
the tenth year and the estimated date of leaving.
For employees expected to leave within ten years, no benefit is attributed.
ACTUARIAL ASSUMPTIONS
• Actuarial assumptions are an entity’s best estimates of the variables that will determine
the ultimate cost of providing post-employment benefits.
• Actuarial assumptions shall be unbiased and mutually compatible.
• Actuarial assumptions are unbiased if they are neither imprudent nor excessively
conservative.
• Actuarial assumptions are mutually compatible if they reflect the economic relationships
between factors such as inflation, salary increment rate and discount rates.
ACTUARIAL ASSUMPTIONS COMPRISE:

(a) DEMOGRAPHIC ASSUMPTIONS about the future characteristics of current and
former employees (and their dependants) who are eligible for benefits. Demographic
assumptions deal with matters such as:
(i) mortality, both during and after employment;
(ii) rates of employee turnover, disability and early retirement;
(b) FINANCIAL ASSUMPTIONS, dealing with items such as:

(i) the discount rate;
(ii) future salary and benefit levels;
(iii) in the case of medical benefits, future medical costs, including claim handling
costs (i.e. the costs that will be incurred in processing and resolving claims,
including legal and adjuster’s fees); and
Actuarial Assumptions: Mortality and Discount Rate

1. Mortality Assumptions
Entity is required to determine its mortality assumptions by reference to its best
estimate of the mortality of plan members both during and after employment.
In order to estimate the ultimate cost of the benefit an entity shall takes into
consideration the expected changes in mortality, for example by modifying standard
mortality tables with estimates of mortality improvements.
2. Discount Rate Assumptions
 The rate which is used to discount post-employment benefit obligations (both
funded and unfunded) is determined by reference to market yields on government
bonds at the end of the reporting period.
 Subsidiaries, associates, joint ventures and branches domiciled outside India
shall discount post-employment benefit obligations arising on account of post-
employment benefit plans using the rate determined by reference to market
yields at the end of the reporting period on high quality corporate bonds.
 In case, such subsidiaries, associates, joint ventures and branches are domiciled
in countries where there is no deep market in such bonds, the market yields (at
the end of the reporting period) on government bonds of that country shall be
used.
 Interest cost is computed by multiplying the discount rate as determined at
the start of the period by the present value of the defined benefit obligation
throughout that period and taking account of any material changes in the obligation.
PAST SERVICE COST AND GAINS AND LOSSES ON SETTLEMENT
• When determining past service cost, or a gain or loss on settlement, an entity shall
remeasure the net defined benefit liability (asset) using the current fair value of plan
assets and current actuarial assumptions (including current market interest rates and
other current market prices) reflecting:
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 the benefits offered under the plan and the plan assets before the plan amendment,
curtailment or settlement; and
 the benefits offered under the plan and the plan assets after the plan amendment,
curtailment or settlement.
• An entity need not distinguish between past service cost resulting from a plan amendment,
past service cost resulting from a curtailment and a gain or loss on settlement if
these transactions occur together. In some cases, a plan amendment occurs before a
settlement, such as when an entity changes the benefits under the plan and settles the
amended benefits later. In those cases, an entity recognises past service cost before
any gain or loss on settlement.
PAST SERVICE COST
• Change in the present value of the defined benefit obligation resulting from a plan
amendment or curtailment is known as past service cost.
• An entity shall recognise past service cost as an expense at the earlier of the following
dates:
(a) when the plan amendment or curtailment occurs; and
(b) when the entity recognises related restructuring costs (refer Ind AS 37
Provisions, Contingent Liabilities and Contingent Assets) or termination benefits.
• Plan amendment happens when an entity introduces, or withdraws, a defined benefit plan
or changes the benefits payable under an existing defined benefit plan.
• Curtailment arises when an entity significantly reduces the number of employees covered
by a plan. A curtailment may arise from an isolated event, such as the closing of a plant,
discontinuance of an operation or termination or suspension of a plan.
• Past service cost may be either positive (when benefits are introduced or changed so
that the present value of the defined benefit obligation increases) or negative (when
benefits are withdrawn or changed so that the present value of the defined benefit
obligation decreases).
GAINS AND LOSSES ON SETTLEMENT
• A settlement occurs when an entity enters into a transaction that eliminates all further
legal or constructive obligation for part or all of the benefits provided under a defined
benefit plan (other than a payment of benefits to, or on behalf of, employees in
accordance with the terms of the plan and included in the actuarial assumptions).
For example, a one-off transfer of significant employer obligations under the plan to an
insurance company through the purchase of an insurance policy is a settlement; a lump
sum cash payment, under the terms of the plan, to plan participants in exchange for
their rights to receive specified post-employment benefits is not.
• The gain or loss on a settlement is the difference between:
(a) the present value of the defined benefit obligation being settled, as determined
on the date of settlement; and
(b) the settlement price, including any plan assets transferred and any payments
made directly by the entity in connection with the settlement.
• Gain or loss on the settlement of a defined benefit plan is recognised by the entity when
the settlement occurs.
FAIR VALUE OF PLAN ASSETS
• The fair value of any plan assets is deducted from the present value of the defined
benefit obligation in determining the deficit or surplus.
• Where plan assets include qualifying insurance policies that exactly match the amount
and timing of some or all of the benefits payable under the plan, the fair value of those
insurance policies is deemed to be the present value of the related obligations, 1.10.2
COMPONENTS OF DEFINED BENEFIT COST
• An entity is required to recognise the components of defined benefit cost, except to

the extent that another Ind AS (refer Ind AS 2 and Ind AS 16) requires or permits
their inclusion in the cost of an asset, as follows:
(a) service cost in profit or loss;
(b) net interest on the net defined benefit liability (asset) in profit or loss; and
(c) remeasurements of the net defined benefit liability (asset) in other comprehensive
income.
• Remeasurements of the net defined benefit liability (asset) recognised in other
comprehensive income shall not be reclassified to profit or loss in a subsequent period.
However, the entity may transfer those amounts recognised in other comprehensive
income within equity.
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REMEASUREMENTS OF THE NET DEFINED BENEFIT LIABILITY (ASSET)
• Remeasurements of the net defined benefit liability (asset) comprise:

(a) actuarial gains and losses;
(b) the return on plan assets, excluding amounts included in net interest on the net
defined benefit liability (asset); and
(c) any change in the effect of the asset ceiling, excluding amounts included in net
interest on the net defined benefit liability (asset).
• Actuarial gains and losses occur from increases or decreases in the present value of the
defined benefit obligation because of changes in actuarial assumptions and experience
adjustments. Following are the few causes of actuarial gains and losses:
(a) unexpectedly high or low rates of employee turnover, early retirement or mortality
or of increases in salaries, benefits (if the formal or constructive terms of a plan
provide for inflationary benefit increases) or medical costs;
(b) the effect of changes to assumptions concerning benefit payment options;
(c) the effect of changes in estimates of future employee turnover, early retirement
or mortality or of increases in salaries, benefits (if the formal or constructive
terms of a plan provide for inflationary benefit increases) or medical costs; and
(d) the effect of changes in the discount rate.
• Actuarial gains and losses does not include changes in the present value of the defined
benefit obligation because of the introduction, amendment, curtailment or settlement
of the defined benefit plan, or changes to the benefits payable under the defined
benefit plan. Rather such changes shall result in past service cost or gains or losses on
settlement.
• In measuring the return on plan assets, an entity deducts the costs of managing the plan
assets and any tax payable by the plan itself, other than tax included in the actuarial
assumptions used to measure the defined benefit obligation. Other administration costs
are not deducted from the return on plan assets.
QUESTION 27
Pratap Ltd. belongs to the ship-building industry. The company reviewed an Actuarial
Valuation for the first time for its pension scheme which revealed a surplus of ` 60 lakhs.
It wants to spread the same over the next 2 years by reducing the annual contribution to
` 20 lakhs instead of ` 50 lakhs.
The average remaining life of the employees is estimated to be 6 years. Advise the Company
in line with Ind AS 19.
SOLUTION:
1. Recognition: As per Ind AS 19, any Actuarial Gains and Losses should be recognized
as a remeasurement of the Net Defined Benefit Liability / (Asset) in “Other
Comprehensive Income”.
2. Measurement and Presentation: In the given case, the amount of surplus from
Pension Scheme of ` 60 lakhs is an Actuarial Gain and should be recognized as a “re-
measurement” in “Other Comprehensive Income”, and not to be adjusted from the
amount of annual contribution in future years.
3. Disclosure: The change relating to Actuarial Valuation for the Pension Scheme requires
disclosure under Ind AS 8. Disclosures required by Ind AS 19 should also be made in
the financial statements.
QUESTION 28
RKA Private Ltd is an old company established in 19XX. The company started with a very
small capital base and today it is one of the leading companies in India in its industry. The
company has an annual turnover of ` 11,000 crores and planning to get listed in the next
year.
The company has a large employee base. The company provided a defined benefit plan to its
employees. Following is the information relating to the balances of the fund’s assets and
liabilities as at 1st April, 20X1 and 31st March, 20X2.
` in lacs
Particulars 1st April, 20X1 31st March, 20X2
Present value of benefit obligation 1,400 1,580
Fair value of plan assets 1,140 1,275
For the financial year ended 31st March, 20X2, service cost was ` 55 lacs. The company
made a contribution of an amount of ` 111 lacs to the plan. No benefits were paid during the
year.
Consider a discount rate of 8%. You are required to -
(a) Compute the balance(s) of the company to be included its balance sheet as on 31st
March, 20X2 and amounts to be recognized in the statement of profit and loss and
other comprehensive income for the year ended 31st March, 20X2.
(b) Give the journal entries in respect of amount(s) to be recognized.
126 ACCOUNTS
QUESTION 29
OPQ Ltd is a listed company having its corporate office at Nagpur. The company has a
branch office at Chennai. The company has been operating in Indian market for the last 10
years.
The company operates a pension plan that provides a pension of 2.5% of the final salary for
each year of service. The benefits become vested after seven years of service.
On 1st April, 20X8, the company increased the pension to 3% of the final salary for each
year of service starting from 1st April, 20X1. On the date of the improvement, the present
value of the additional benefits for service from 1st April, 20X1 to 1 April 20X8 was as
follows:
• Employees with more than seven years’ service on 1 January 20X8 – ` 2,75,000
• Employees with less than 7 years of service – ` 2,21,000 (average 4 years to go). What
would be the accounting treatment in this case?
QUESTION 30
SA Pvt Ltd is engaged in the business of retail having 100 retail outlets across Northern
and Southern India. The company’s head office is located at Chennai.
SA Pvt Ltd is a subsidiary of SAG Ltd. SAG Ltd is listed on the National Stock Exchange
in India.
Following information is available for SA Pvt Ltd:
Plan Assets
At 1st April, 20X1, the fair value of plan assets was ` 10,000.
Contribution to the plan assets done on 31st March, 20X2 – ` 3,000
Amount paid on 31st March, 20X2 – ` 300
At 31st March, 20X2, the fair value of plan assets was ` 14,700
Actual return on plan assets – ` 2,000
Defined Benefit Obligation
At 1st April, 20X1, present value of the defined benefit obligation was ` 12,000.
At 31st March, 20X2, present value of the defined benefit obligation was ` 15,500.
Actuarial losses on the obligation for the year ended 31st March, 20X2 were ` 100.
Current Service Cost – ` 2,500
Benefit paid – ` 300
Discount rate used to calculate defined benefit liability - 10%.
As per Ind AS 19, please suggest if there is any amount based on the above-mentioned
information that would be taken to other comprehensive income (with workings). Also
compute net interest on the net defined benefit liability (asset).
QUESTION 31
A Ltd. prepares its financial statements to 31st March each year. It operates a defined
benefit retirement benefits plan on behalf of current and former employees. A Ltd.
receives advice from actuaries regarding contribution levels and overall liabilities of the
plan to pay benefits. On 1st April, 20X1, the actuaries advised that the present value of
the defined benefit obligation was ` 6,00,00,000. On the same date, the fair value of the
assets of the defined benefit plan was ` 5,20,00,000. On 1st April, 20X1, the annual market
yield on government bonds was 5%. During the year ended 31st March, 20X2, A Ltd. made
contributions of ` 70,00,000 into the plan and the plan paid out benefits of ` 42,00,000 to
retired members. Both these payments were made on 31st March, 20X2.
The actuaries advised that the current service cost for the year ended 31st March,
20X2 was ` 62,00,000. On 28th February, 20X2, the rules of the plan were amended
with retrospective effect. These amendments meant that the present value of the defined
benefit obligation was increased by ` 15,00,000 from that date.
During the year ended 31st March, 20X2, A Ltd. was in negotiation with employee
representatives regarding planned redundancies. The negotiations were completed shortly
before the year end and redundancy packages were agreed. The impact of these redundancies
was to reduce the present value of the defined benefit obligation by ` 80,00,000. Before
31st March, 20X2, A Ltd. made payments of ` 75,00,000 to the employees affected by the
redundancies in compensation for the curtailment of their benefits. These payments were
made out of the assets of the retirement benefits plan.
On 31st March, 20X2, the actuaries advised that the present value of the defined benefit
obligation was ` 6,80,00,000. On the same date, the fair value of the assets of the defined
benefit plan were ` 5,60,00,000.
Examine and present how the above event would be reported in the financial statements of
A Ltd. for the year ended 31st March, 20X2 as per Ind AS.
QUESTION 32
On 1 April 20X1, the fair value of the assets of XYZ Ltd’s defined benefit plan were valued
at ` 20,40,000 and the present value of the defined obligation was ` 21,25,000. On 31st
March,20X2 the plan received contributions from XYZ Ltd amounting to ` 4,25,000 and
paid out benefits of ` 2,55,000. The current service cost for the financial year ending 31
128 ACCOUNTS
March 20X2 is ` 5,10,000. An interest rate of 5% is to be applied to the plan assets and
obligations. The fair value of the plan’s assets at 31 March 20X2 was ` 23,80,000, and the
present value of the defined benefit obligation was ` 27,20,000. Provide a reconciliation from
the opening balance to the closing balance for Plan assets and Defined benefit obligation.
Also show how much amount should be recognised in the statement of profit and loss, other
comprehensive income and balance sheet?
BALANCE SHEET
• An entity shall recognise the net defined benefit liability (asset) in the balance sheet.
• When an entity has a surplus in a defined benefit plan, it shall measure the net defined
benefit asset at the lower of:
(a) the surplus in the defined benefit plan; and
(b) the asset ceiling, determined using the discount rate.
• A net defined benefit asset may arise where a defined benefit plan has been overfunded
or in certain cases where actuarial gains are arisen. An entity recognises a net defined
benefit asset in such cases because:
(a) the entity controls a resource, which is the ability to use the surplus to generate
future benefits;
(b) that control is a result of past events (contributions paid by the entity and service
rendered by the employee); and
(c) future economic benefits are available to the entity in the form of a reduction in
future contributions or a cash refund, either directly to the entity or indirectly
to another plan in deficit.
the surplus in the

defined benefit plan
Net Defined Measured at
Benefit Asset the lower of
the asset ceiling,
determined using
the discount rate
Recognized as an Asset in the balance sheet

QUESTION 33
How will the following information be presented in the Balance Sheet of Udyog Ltd.?
Particulars ` in lakhs
PV of Defined Benefit Obligations 3,500
Fair Value of Plan Assets 3,332
SOLUTION:
Less : Fair Value of Plan Assets (3,332)
Deficit to be treated as Net Defined Benefit Liability under Non- 168
current Liabilities as Provisions in the Balance Sheet
QUESTION 34
How will the following information be presented in the Balance Sheet of Udyog Ltd.?
Fair Value of Plan Assets 2,975
Asset Ceiling 175
SOLUTION:
Less: Fair Value of Plan Assets (2,975)
Surplus, to be treated as Net Defined Benefit Asset, 225
Asset Ceiling as per Ind AS 19 175
Least of above is Surplus to be treated as Net Defined Benefit Asset 175
under Balance Sheet
130 ACCOUNTS
PRESENTATION
• An asset relating to one plan will be offset against a liability relating to another plan
when, and only when, the entity:
(a) has a legally enforceable right to use a surplus in one plan to settle obligations
under the other plan; and
(b) there is an intention either to settle the obligations on a net basis, or to realise the
surplus in one plan and settle its obligation under the other plan simultaneously.
• The offsetting criteria are similar to those established for financial instruments in Ind
AS 32, Financial Instruments: Presentation.
Current/Non-current Distinction
This Standard does not specify whether an entity should distinguish current and non-
current portions of assets and liabilities arising from post-employment benefits.
IND AS 19 — THE LIMIT ON A DEFINED BENEFIT ASSET,

MINIMUM FUNDING REQUIREMENTS
AND THEIR INTERACTION
(1) Ind AS 19 limits the measurement of a defined benefit asset to the lower of the
surplus in the defined benefit plant and asset ceiling (i.e. the present value of economic
benefits available in the form of refunds from the plan or reductions in future
contributions to the plan). Questions have arisen about when refunds or reductions
in future contributions should be regarded as available, particularly when a minimum
funding requirement exists.
(2) Minimum funding requirements normally stipulate a minimum amount or level of
contributions that must be made to a plan over a given period. Therefore, a minimum
funding requirement may limit the ability of the entity to reduce future contributions
that must be made to a plan over a given period. Therefore, a minimum funding
requirement may limit the ability of the entity to reduce future contributions.
(3) Further, the limit on the measurement of a defined benefit asset may cause a minimum
funding requirement to be onerous. Normally, a requirement to make contributions to a
plan would not affect the measurement of the defined benefit asset or liability. This
is because the contributions, once paid, will become plan assets and so the additional
net liability is nil. However, a minimum funding requirement may give rise to a liability
if the required contributions will not be available to the entity once they have been
paid.
Scope
This Appendix applies to all post-employment defined benefits and other long-term employee
defined benefits. For the purpose of this Appendix, minimum funding requirements are any
requirements to fund a post-employment or other long-term defined benefit plan.
Issues
The issues addressed in this Appendix are:
(1) when refunds or reductions in future contributions should be regarded as available in
accordance with the definition of the asset ceiling.
(2) how a minimum funding requirement might affect the availability of reductions in
future contributions.
(3) when a minimum funding requirement might give rise to a liability.
Availability of a refund or reduction in future contributions
132 ACCOUNTS
(4) Availability of a refund or a reduction in future contributions shall be determined in

accordance with the terms and conditions of the plan and any statutory requirements
in the jurisdiction of the plan.
(5) An economic benefit is available in the form of a refund or a reduction in future
contributions if the entity can realise it at some point during the life of the plan or
when the plan liabilities are settled.
(6) The economic benefit available does not depend on how the entity intends to use the
surplus. An entity shall determine the maximum economic benefit that is available
from refunds, reductions in future contributions or a combination of both. An entity
shall not recognise economic benefits from a combination of refunds and reductions in
future contributions based on assumptions that are mutually exclusive.
(7) In accordance with Ind AS 1, the entity shall disclose information about the key
sources of estimation uncertainty at the end of the reporting period that have a
significant risk of causing a material adjustment to the carrying amount of the net
asset or liability recognised in the balance sheet. This might include disclosure of any
restrictions on the current realisability of the surplus or disclosure of the basis used
to determine the amount of the economic benefit available.
The economic benefit available as a refund

1. The right to a refund
 A refund is available to an entity only if the entity has an unconditional right to a
refund:
(a) during the life of the plan, without assuming that the plan liabilities must be
settled in order to obtain the refund (e.g., in some jurisdictions, the entity may
have a right to a refund during the life of the plan, irrespective of whether the
plan liabilities are settled); or
(b) assuming the gradual settlement of the plan liabilities over time until all members
have left the plan; or
(c) assuming the full settlement of the plan liabilities in a single event (i.e., as a plan
wind-up).
 An unconditional right to a refund can exist whatever the funding level of a plan at the
end of the reporting period.
 If the entity’s right to a refund of a surplus depends on the occurrence or non-
occurrence of one or more uncertain future events not wholly within its control, the
entity does not have an unconditional right and shall not recognise an asset.
2. Measurement of the economic benefit

 An entity shall measure the economic benefit available as a refund as the amount of
the surplus at the end of the reporting period (being the fair value of the plan assets
less the present value of the defined benefit obligation) that the entity has a right to
receive as a refund, less any associated costs.
For instance, if a refund would be subject to a tax other than income tax, an entity
shall measure the amount of the refund net of the tax.
 In measuring the amount of a refund available when the plan is wound up, an entity
shall include the costs to the plan of settling the plan liabilities and making the refund.
For example, an entity shall deduct professional fees if these are paid by the plan
rather than the entity, and the costs of any insurance premiums that may be required
to secure the liability on wind-up.
 If the amount of a refund is determined as the full amount or a proportion of the
surplus, rather than a fixed amount, an entity shall make no adjustment for the time
value of money, even if the refund is realisable only at a future date.
The economic benefit available as a contribution reduction

(8) The economic benefit available as a reduction in future contributions is the future
service cost to the entity for each period over the shorter of the expected life of the
plan and the expected life of the entity, if there is no minimum funding requirement
for contributions relating to future service. The future service cost to the entity
excludes amounts that will be borne by employees.
(9) An entity shall determine the future service costs using assumptions consistent with
those used to determine the defined benefit obligation and with the situation that
exists at the end of the reporting period. Therefore, an entity shall assume no change
to the benefits to be provided by a plan in the future can be assumed by the entity
until the plan is amended and shall assume a stable workforce in the future unless the
entity makes a reduction in the number of employees covered by the plan. In the latter
case, the assumption about the future workforce shall include the reduction.
The effect of a minimum funding requirement on the economic benefit available as a
reduction in future contributions
(10) An entity shall analyse any minimum funding requirement at a given date into
contributions that are required to cover
(a) any existing shortfall for past service on the minimum funding basis; and
(b) future service.
Contributions to cover any existing shortfall on the minimum funding basis in respect
of services already received do not affect future contributions for future service.
134 ACCOUNTS
They may give rise to a liability.

(11) If there is a minimum funding requirement for contributions relating to the future
service, the economic benefit available as a reduction in future contributions is the
sum of:
(a) any amount that reduces future minimum funding requirement contributions for
future service because the entity made a prepayment (i.e., paid the amount before
being required to do so); and
(b) the estimated future service cost in each period less the estimated minimum
funding requirement contributions that would be required for future service in
those periods if there were no prepayment as described in (a).
(12) An entity shall estimate the future minimum funding requirement contributions for
future service taking into account the effect of any existing surplus determined
using the minimum funding basis but excluding the prepayment. An entity shall use
assumptions consistent with the minimum funding basis and, for any factors not
specified by that basis, assumptions consistent with those used to determine the
defined benefit obligation and with the situation that exists at the end of the reporting
period. The estimate shall include any changes expected as a result of the entity
paying the minimum contributions when they are due. However, the estimate shall not
include the effect of expected changes in the terms and conditions of the minimum
funding basis that are not substantively enacted or contractually agreed at the end of
the reporting period.
(13) When an entity determines the amount, if the future minimum funding requirement
contributions for future service exceed the future service cost in any given period,
that excess reduces the amount of the economic benefit available as a reduction in
future contributions.
When a minimum funding requirement may give rise to a liability
(14) If an entity has an obligation under a minimum funding requirement to pay contributions
to cover an existing shortfall on the minimum funding basis in respect of services
already received, the entity shall determine whether the contributions payable will be
available as a refund or reduction in future contributions after they are paid into the
plan.
(15) To the extent that the contributions payable will not be available after they are
paid into the plan, the entity shall recognise a liability when the obligation arises.
The liability shall reduce the defined benefit asset or increase the defined benefit
liability so that no gain or loss is expected.
SECTION C: LONG-TERM EMPLOYEE BENEFITS
• Long-term employee benefits (other than post-employment benefits) are those employee
benefits which are not expected to be settled wholly before twelve months after the
end of the annual reporting period.
• Other long-term employee benefits include, for example:
(a) long-term paid absences such as long-service or sabbatical leave;
(b) jubilee or other long-service benefits;
(c) long-term disability benefits;
(d) profit-sharing and bonuses; and
(e) deferred remuneration.
• The measurement of other long-term employee benefits is not usually subject to the
same degree of uncertainty as the measurement of post-employment benefits.
A.RECOGNITION AND MEASUREMENT
• For other long-term employee benefits, an entity shall recognise the net total of the
following amounts in profit or loss, except to the extent that another Standard requires
or permits their inclusion in the cost of an asset:
(a) service cost;
(b) net interest on the net defined benefit liability (asset); and
(c) remeasurements of the net defined benefit liability (asset).
• One form of other long-term employee benefit is long-term disability benefit. If the
level of benefit depends on the length of service, an obligation arises when the service
is rendered.
Measurement of that obligation reflects the probability that payment will be required
and the length of time for which payment is expected to be made. If the level of benefit
is the same for any disabled employee regardless of years of service, the expected cost
of those benefits is recognised when an event occurs that causes a long-term disability.
Disclosure
Though this Standard does not require specific disclosures about other long-term employee
benefits, other Standards may require disclosures.
For example:
a. Where the expense resulting from such benefits is material and so would require
disclosure in accordance with Ind AS 1.
b. When required by Ind AS 24, an entity discloses information about other long-term
employee benefits for key management personnel.
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SECTION D: TERMINATION BENEFITS
• This Standard deals with termination benefits separately from other employee benefits
because the event which gives rise to an obligation is the termination of employment
rather than employee service.
• Termination benefits results from either:
(a) an entity’s decision to terminate the employment or
(b) an employee’s decision to accept an entity’s offer of benefits in exchange for
termination of employment.
• Termination benefits do not include employee benefits resulting from termination of
employment at the request of the employee without an entity’s offer, or as a result
of mandatory retirement requirements, because those benefits are post-employment
benefits.
• Some entities provide a lower level of benefit for termination of employment at the
request of the employee (in substance, a post-employment benefit) than for termination
of employment at the request of the entity. The difference between the benefit
provided for termination of employment at the request of the employee and a higher
benefit provided at the request of the entity is a termination benefit.
A. RECOGNITION
• An entity is required to recognise a liability and expense for termination benefits at the
earlier of the following dates:
(a) when the entity can no longer withdraw the offer of those benefits; and
(b) when the entity recognises costs for a restructuring which is within the scope of
Ind AS 37 and involves the payment of termination benefits.
For termination benefits payable as a result of an employee’s decision to accept an offer
of benefits in exchange for the termination of employment, the time when an entity can
no longer withdraw the offer of termination benefits is the earlier of:
(a) when the employee accepts the offer; and
(b) when a restriction (e.g. a legal, regulatory or contractual requirement or other
restriction) on the entity’s ability to withdraw the offer takes effect.
For termination benefits payable as a result of an entity’s decision to terminate an
employee’s employment, the entity can no longer withdraw the offer when the entity
has communicated to the affected employees a plan of termination meeting all of the
following criteria:
(a) Actions required to complete the plan indicate that it is unlikely that significant
changes to the plan will be made.
(b) The plan identifies the number of employees whose employment is to be terminated,
their job classifications or functions and their locations (but the plan need not
identify each individual employee) and the expected completion date.
B. MEASUREMENT
An entity shall measure termination benefits on initial recognition, and shall measure and
recognise subsequent changes, in accordance with the nature of the employee benefit,
provided that if the termination benefits are an enhancement to post-employment benefits,
the entity shall apply the requirements for post-employment benefits. Otherwise:
(a) If the termination benefits are expected to be settled wholly before twelve months
after the end of the annual reporting period in which the termination benefit is
recognised, the entity shall apply the requirements for short-term employee benefits.
(b) If the termination benefits are not expected to be settled wholly before twelve months
after the end of the annual reporting period, the entity shall apply the requirements
for other long-term employee benefits.
Because termination benefits are not provided in exchange for service, the concepts relating
to the attribution of the benefit to periods of service as discussed for defined benefit
plans are not relevant.
QUESTION 35: TERMINATION BENEFITS
As a result of a recent acquisition, an entity plans to close a factory in ten months and,
at that time, terminate the employment of all of the remaining employees at the factory.
Because the entity needs the expertise of the employees at the factory to complete some
contracts, it announces a plan of termination as follows.
Each employee who stays and renders service until the closure of the factory will receive
on the termination date a cash payment of ` 30,000. Employees leaving before closure of
the factory will receive ` 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity
expects 20 of them to leave before closure.
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IMPORTANT DEFINITIONS UNDER IND AS 19
DEFINITIONS OF EMPLOYEE BENEFITS
1. Employee Benefits : All forms of consideration given by an entity in exchange for

service rendered by employees or for the termination of employment.
2. Short-term Employee Benefits : Employee benefits (other than termination benefits)
that are expected to be settled wholly before twelve months after the end of the
annual reporting period in which the employees render the related service.
Example : Wages, salaries, paid annual leave.
3. Post-employment Benefits: Employee benefits (other than termination benefits and
short- term employee benefits) that are payable after the completion of employment.
Example : Pensions, lumpsum payments on retirement.
4. Other long-term employee benefits are all employee benefits other than short-term
employee benefits, post-employment benefits and termination benefits.
Example : Long-term paid absences such as long-service leave or sabbatical leave,
jubilee or other long-service benefits.
5. Termination benefits are employee benefits provided in exchange for the termination
of an employee’s employment as a result of either:
(a) an entity’s decision to terminate an employee’s employment before the normal
retirement date; or
(b) an employee’s decision to accept an offer of benefits in exchange for the
termination of employment
Example : VRS Compensation or Retrenchment Compensation
Expected to be settled wholly before twelve months

Short Term
after the end of the annual reporting period in which the
Types of Employee Benefits
Benefits
employees render the related service
Post Employee Payable after the completion of employment (other than

Benefits termination benefits and short-term benefits
Other Long Other than short-term, post-employment and

Term Benefits termination benefits
Termination Provided in exchange for the termination of an

Benefits employee’s employment
DEFINITIONS RELATING TO CLASSIFICATION OF PLANS
1. Post-employment Benefit Plans: These plans are formal or informal arrangements

under which an entity provides post-employment benefits for one or more employees.
Under these plans, the benefits are given to the employees after employment, like
gratuity, pension, provident fund etc.
Note: Defined contribution plans and defined benefit plans are two categories of post-
employment benefits plans.
2. Defined Contribution Plans: They are post-employment benefit plans under which
an entity pays fixed contributions into a separate entity (a fund) and will have no
legal or constructive obligation to pay further contributions if the fund does not hold
sufficient assets to pay all employee benefits relating to employee service in the
current and prior periods.
In these plans, the contribution is defined i.e. contribution is fixed and known to the
entity.
Example : Provident Fund contribution by the employer to the Employees’ Provident
Fund Organisation, Ministry of Labour & Employment, Government of India.
3. Defined Benefit Plans: Post-employment benefit plans other than defined contribution
plans.
Example: Gratuity.
4. Multi-employer Plans: Defined contribution plans (other than state plans) or defined
benefit plans (other than state plans) that:
(a) pool the assets contributed by various entities that are not under common control;
and
(b) use those assets to provide benefits to employees of more than one entity, on the
basis that contribution and benefit levels are determined without regard to the
identity of the entity that employs the employees.
DEFINITIONS RELATING TO THE NET DEFINED BENEFIT LIABILITY (ASSET)
1. Net defined benefit liability (asset): The deficit or surplus, adjusted for any effect
of limiting a net defined benefit asset to the asset ceiling.
2. Deficit or surplus:
(a) the present value of the defined benefit obligation less
(b) the fair value of plan assets (if any).
3. Asset ceiling: The present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions to the plan.
140 ACCOUNTS
4. Present Value of a Defined Benefit Obligation: Present value, without deducting any
plan assets, of expected future payments required to settle the obligation resulting
from employee service in the current and prior periods.
5. Plan assets comprise:
(a) assets held by a long-term employee benefit fund; and
(b) qualifying insurance policies.
6. Assets held by a long-term employee benefit fund: Assets (other than non-
transferable financial instruments issued by the reporting entity) that:
(a) are held by an entity (a fund) that is legally separate from the reporting entity
and exists solely to pay or fund employee benefits; and
(b) are available to be used only to pay or fund employee benefits, are not available to
the reporting entity’s own creditors (even in bankruptcy), and cannot be returned
to the reporting entity, unless either:
(i)
the remaining assets of the fund are sufficient to meet all the related
employee benefit obligations of the plan or the reporting entity; or
(ii) the assets are returned to the reporting entity to reimburse it for employee
benefits already paid.
7. Qualifying Insurance Policy: Insurance policy issued by an insurer that is not a related
party (as defined in Ind AS 24, Related Party Disclosures) of the reporting entity, if
the proceeds of the policy:
(a) can be used only to pay or fund employee benefits under a defined benefit plan;
and
(b) are not available to the reporting entity’s own creditors (even in bankruptcy) and
cannot be paid to the reporting entity, unless either:
(i) the proceeds represent surplus assets that are not needed for the policy to
meet all the related employee benefit obligations; or
(ii) the proceeds are returned to the reporting entity to reimburse it for employee
benefits already paid.
7. Fair Value: The price that would be received to sell an asset or paid to transfer a
date. (Ind AS 113, Fair Value Measurement.)
DEFINITIONS RELATING TO DEFINED BENEFIT COST
1. Service cost comprises:

(a) Current service cost, which is the increase in the present value of the defined
benefit obligation resulting from employee service in the current period;
(b) Past service cost, which is the change in the present value of the defined benefit
obligation for employee service in prior periods, resulting from a plan amendment
(the introduction or withdrawal of, or changes to, a defined benefit plan) or a
curtailment (a significant reduction by the entity in the number of employees
covered by a plan); and
(c) any gain or loss on settlement.
2. Net interest on the net defined benefit liability (asset): The change during the
period in the net defined benefit liability (asset) that arises from the passage of time.
3. Remeasurements of the net defined benefit liability (asset) comprise:
(a) actuarial gains and losses;
(b) the return on plan assets, excluding amounts included in net interest on the net
defined benefit liability (asset); and
(c) any change in the effect of the asset ceiling, excluding amounts included in net
interest on the net defined benefit liability (asset).
4. Actuarial gains and losses are changes in the present value of the defined benefit
obligation resulting from:
(a) experience adjustments (the effects of differences between the previous
actuarial assumptions and what has actually occurred); and
(b) the effects of changes in actuarial assumptions.
5. Return on plan assets: Interest, dividends and other income derived from the plan
assets, together with realised and unrealised gains or losses on the plan assets, less:
(a) any costs of managing plan assets; and
(b) any tax payable by the plan itself, other than tax included in the actuarial
assumptions used to measure the present value of the defined benefit obligation.
6. Settlement: A transaction that eliminates all further legal or constructive obligations
for part or all of the benefits provided under a defined benefit plan, other than a
payment of benefits to, or on behalf of, employees that is set out in the terms of the
plan and included in the actuarial assumptions.
142 ACCOUNTS
NOTES
IND AS 28: INVESTMENT IN ACCOCIATES & JOINT VENUTRUES 143
IND AS 28:
INVESTMENT IN ACCOCIATES & JOINT VENUTRUES
CONCEPT 1: INTRODUCTION
Ind AS 28, Investments in Associates and Joint Ventures,

(a) Prescribes the accounting for investments in associates and
(b) Sets out the requirements for the application of the equity method when accounting
for investments in associates and joint ventures.
It is important to note here that Ind AS 111, describes joint arrangements including joint
ventures and prescribes equity method for joint ventures. But here, in Ind AS 28, the
equity method is described for both Associate and Joint Ventures.
CONCEPT 2 : SCOPE
The Standard shall be applied by all entities that are investors with joint control of, or
significant influence over, an investee.
CONCEPT 3 : SIGNIFICANT INFLUENCE
The concept of ‘Significant influence’ signifies the close relationship between two entities
where one has the power to influence the decision making in the other entity. In today’s
business world, many companies do not have actual control over other companies but
hold significant ownership to influence the decision making in such companies. Many such
investments are in the form of joint ventures in which two or more companies form a new
entity to carry out a specified operating purpose.
For Example, Microsoft and NBC formed MSNBC, a cable channel and online site to go with
NBC’s broadcast network. Each partner owns 50 percent of the joint venture. For each
of these investments, the investors do not possess absolute control because they hold
less than a majority of the voting stock. Thus, the preparation of consolidated financial
statements is inappropriate. However, the large percentage of ownership indicates that
each investor possesses some ability to affect the investee’s decision-making process.
Definition
Significant influence is the power to participate in the financial and operating policy decisions
of the investee but is not control or joint control of those policies.
144 ACCOUNTS
Analysis
Holding 20% or More of the Voting Rights: If an entity holds, directly or indirectly
(e.g., through subsidiaries) 20 per cent or more of the voting power of the investee, it is
presumed
That the entity has significant influence, unless it can be clearly demonstrated that this is
not the case.
Holding Less than 20% of Voting rights: Also, in cases where the entity holds, directly
or indirectly (e.g., through subsidiaries) less than 20 per cent of the voting power of the
investee, it is presumed that the entity does not have significant influence, unless such
influence can be clearly demonstrated.
QUESTION NO 1
X Ltd. owns 20% of the voting rights in Y Ltd. and is entitled to appoint one director to the
board, which consist of five members. The remaining 80% of the voting rights are held by
two entities, each of which is entitled to appoint two directors.
A quorum of four directors and a majority of those present are required to make decisions.
The other shareholders frequently call board meeting at the short notice and make decisions
in the absence of X Ltd.’s representative. X Ltd has requested financial information from Y
Ltd, but this information has not been provided. X Ltd’s representative has attended board
meetings, but suggestion for items to be included on the agenda have been ignored and the
other directors oppose any suggestions made by X Ltd. Is Y Ltd an associate of X Ltd.?
SOLUTION:
Despite the fact that the X Ltd owns 20% of the voting rights and has representations
on the board, the existence of other shareholders holding a significant proportion of the
voting rights prevent X Ltd. from exerting significant influence. Whilst it appears that
X Ltd should have the power to participate in the financial and operating policy decision,
the other shareholders prevent X Ltd.’s efforts and stop X Ltd from actually having any
influence.
Since, significant influence requires participation in decision making process which X Ltd. has.
Therefore, X Ltd. has significant influence over Y Ltd. Hence, Y Ltd would be an associate
of X Ltd. Y Ltd is jointly controlled by the other two entities.
Whether an investor has significant influence over the investee is a matter of judgment
based on the nature of the relationship between the investor and the investee. Existence
of significant influence may be judged by the following factors.
a) Representation on the board of directors or equivalent governing body of the
investee;
QUESTION 2
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.?
SOLUTION:
Boho Ltd is an associate of Kuku Ltd as significant influence is demonstrated by the presence
of directors on the board and the relative voting rights at meetings.
It is presumed that entity has significant influence where it holds 20% or more of the voting
power of the investee, but it is not necessary to have 20% representation on the board to
demonstrate significant influence, as this will depend on all the facts and circumstances.
One board member may represent significant influence even if that board member has less
than 20% of the voting power. But for significant influence to exist it would be necessary to
show based on specific facts and circumstances that this is the case, as significant influence
would not be presumed.
b) Participation in policy – making processes, including participation in decisions about

dividends or other distributions;
Example:
X Ltd creates a separate legal entity in which it holds less than 20% of the voting interests
but however controls that entity through contracts that ensures that decisions-making
power and the distribution of profits and losses lies with X Ltd. In such cases the investor
is able to exercise significant influence over its investee.
Example:
Info Ltd owns 9% equity in Sync Ltd. However, it has the approval or veto rights over critical
decisions of compensation, hiring, termination, and other operating and capital spending
decisions of Sync Ltd. The non-controlling rights are so restrictive that it is appropriate to
infer that control rests with the Info Ltd for all major decisions.
c) Material transactions between the entity and its investee;
QUESTION 3
Q Ltd manufactures shoes for a leading retailer P Ltd. P Ltd provides all designs for the
shoes and participates in scheduling, timing and quantity of the production. The majority
(i.e. 90%) of Q Ltd.’s sales are made to the retailer, P Ltd. P Ltd. has 10% shareholding
in the Q Ltd. It acquired this interest many years ago at the start of their relationship.
Does significant influence exist?
146 ACCOUNTS
SOLUTION:
Q Ltd is highly dependent on the retailer for the continued existence of the business.
Despite having only a 10% interest in Q Ltd, P Ltd has significant influence.
QUESTION 4
X Ltd owns 15% of the voting rights of Y Ltd, and the remainder are widely dispersed among
the public.
X Ltd also is the only supplier of crucial raw materials to Y Ltd, further it provides certain
expertise guidance regarding the maintenance of Y Ltd’s factory.
Discuss the relationship between X Ltd and Y Ltd.
SOLUTION:
Y Ltd is effectively functioning because of the participation of X Ltd in the Y Ltd’s factory
despite having 15% interest in Y Ltd. X Ltd has significant influence.
d) Interchange of managerial personnel; or
QUESTION 5
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 provides 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 as well as to entity X’s. Analyse.
SOLUTION:
The secondment of the board member and a senior manager from entity X to entity Y gives
entity X, a range of power over a new production process and may evidence that entity X
has significant influence over entity Y. This assessment take into the account what are the
key financial and operating policies of entity Y and the influence this gives entity X over
those policies.
e) Provision of essential technical information.
QUESTION 6
Soul Ltd has 18% interest in God Ltd. Soul Ltd manufacture mobile telephone handsets
using technology developed by God Ltd. God Ltd licenses the technology to Soul Ltd and
updates the licence agreement for new technology on a regular basis. The handsets are
sold by Soul Ltd and represent substantially Soul Ltd’s entire sale. Analyse.
SOLUTION:
Soul Ltd is dependent on the technology that God Ltd supplies since a high proportion
of Soul Ltd’s sales are based on that technology. Therefore, Soul Ltd is likely to be an
associate of God Ltd because of the provision of essential technical informational.
CONCEPT 4: POTENTIAL VOTING RIGHTS
An investor may hold any instrument (such as share warrants, share call options, debt or
equity instruments) issued by an associate and terms of the instrument is that a holder will
get an equity rights on the expiry of the term i.e they are convertible into ordinary shares,
to give the entity additional voting power or to reduce another party’s voting power over
the financial and operating policies of another entity (i.e. potential voting rights). Only an
existing right will be considered for determining the Significant influence. Any potential
voting rights that will arise in future will not be considered while determining significant
influence.
It is worth nothing that a substantial or majority ownership by another investor does not
necessarily preclude an entity from having significant influence.
CONCEPT 5: EQUITY METHOD
a) On the date of acquisition:

Under the equity method, on initial recognition the investment in an associate or a
joint venture is recognised at cost.
Investment in Associate A/c Dr.
To Cash A/c
b) Recognising the share in Profit or loss:

Since the investor has the significant influence over the investee, the investor has
an interest in the performance of the investee. It can influence the dividend to
148 ACCOUNTS
be distributed irrespective of the actuals profits made by the investee. Here the
recognition of income based on profit distributed may not be a true measure of the
income earned by an investor on an investment in an associate or a joint venture.
The distributions made may bear little relation to the actual performance of the
associate or joint venture. Hence recognising actual profit or loss (irrespective of
the amount of dividend distributed) is more reflective of the actual value of the
investment.
(i) If Associate or joint ventures makes profit
Investment in Associate A/c Dr.
To share in Profit from Associate A/c
(ii) If Associate or joint venture makes losses.
Share in Losses from Associate A/c Dr.
To Investment in Associate A/c
(iii) Cash dividend received: Any distribution of dividend in the form of cash received
from the associate reduces the carrying amount of the investment.
Application of equity method

Investee Event Books of Investor
Income is earned Proportionate share of income is recognised by investor
Dividends distributed Investor’s share in dividends reduces the investment account.
QUESTION 7
Amar Ltd. acquires 40% share of Ram Ltd. On 1 April, 2011, the price paid is ` 10,00,000.
Ram Ltd has reported a profit of ` 2,00,000 and paid dividend of ` 1,00,000. Make
necessary journal entries in the books of Amar Ltd.
CONCEPT 6: APPLICATION OF EQUITY METHOD
The investor needs to apply equity method of accounting when it has joint control or
significant influence over the investee.
The rationale behind the application of the equity method is that in case of an associate
or a joint venture, an investor commences to gain the ability to influence the decision-
making process of an investee as the level of ownership rises. The investor, hence, has
the ability to exercise significant influence over operating and financial policies of an
investee even though the investor holds 50 percent or less of the voting rights. Clearly,
this is a subject of judgments and interpretations in practice. Also, it is important to
note that ‘significant influence’ is required to be present but there is no requirement
that any actual influence must have ever been applied.
However, the investor is exempt from the application of Equity Method under certain
circumstances.
Exemptions from applying the equity method
An entity need not apply the equity method to its investment in an associate or a
joint venture if the entity is a parent that is exempt from preparing consolidated
financial statements by the scope exception in paragraph 4(a) of Ind AS 110 or if all
the following apply:
(a) The entity is a wholly-owned subsidiary, or is a partially-owned subsidiary of another
entity and its other owners, including those not otherwise entitled to vote, have
been informed about, and do not object to, the entity not applying the equity
method.
(b) The entity’s debt or equity instruments are not traded in a public market (a
domestic or foreign stock exchange or an over-the-counter market, including local
and regional markets).
(c) The entity did not file, nor is it in the process of filing, its financial statements
with a securities commission or other regulatory organisation, for the purpose of
issuing any class of instruments in a public market.
(d) The ultimate or any intermediate parent of the entity produces consolidated
financial statements available for public use that comply with Ind AS.
When an investment in an associate or a joint venture is held by, or is held indirectly
through, an entity that is a venture capital organisation, or a mutual fund, unit trust and
similar entities including investment-linked insurance funds, the entity may elect to
measure investments in those associates and joint ventures at fair value through profit
or loss in accordance with Ind AS 109.
When an entity has an investment in an associate, a portion of which is held indirectly
through a venture capital organisation, or a mutual fund, unit trust and similar entities
including investment- linked insurance funds, the entity may elect to measure that portion
of the investment in the associate at fair value through profit or loss in accordance with
Ind AS 109 regardless of whether the venture capital organisation has significant influence
over that portion of the investment. If the entity makes that election, the entity shall
apply the equity method to any remaining portion of its investment in an associate that is
not held through a venture capital organisation.
150 ACCOUNTS
CONCEPT 7: DISCONTINUING OF EQUITY METHOD
The investor should discontinue the use of Equity Method from the date the significant
influence or joint control ceases.
CONCEPT 8: EQUITY METHOD PROCEDURES
While preparing the consolidated financial statements, an investor applies equity method
of accounting for investments in associates and joint ventures. It includes the aggregate
of the holdings in that associate or joint venture by the parent and its subsidiaries taken
together. The holdings of the group’s other associates or joint ventures are ignored for
this purpose.
When an associate or a joint venture has subsidiaries, associates or joint ventures, the
profit or loss, other comprehensive income and net assets taken into account in applying
the equity method are those recognised in the associate’s or joint venture’s financial
statements (including the associate’s or joint venture’s share of the profit or loss, other
comprehensive income and net assets of its associates and joint ventures), after any
adjustments necessary to give effect to uniform accounting policies.
In accounting, transactions between related companies are identified as either downstream
or upstream. Downstream transfers include investor’s sale of an item to investee. Conversely,
a downstream transfer means sales made by investee to investor. These two types of intra
entity transactions are examined separately.
Gains and losses resulting from ‘upstream’ and ‘downstream’ transactions between an
entity (including its consolidated subsidiaries) and its associate or joint venture are
recognised in the entity’s financial statements only to the extent of unrelated investors’
interests in the associate or joint venture. The investor’s share in the associate’s or
joint venture’s gains or losses resulting from these transactions is eliminated.
QUESTION 8
Assume that Babu Ltd owns a 40% share of Sahu Ltd and accounts for this investment
through the equity method. In 2011, Babu Ltd sells inventory to Sahu Ltd at a price of
50,000. This figure includes a gross profit of 30%.
By the end of 2011, Sahu Ltd has sold 40,000 of these goods to outside parties while
retaining 10,000 in inventory for sale during the subsequent year.
QUESTION 9 EQUITY METHOD ACCOUNTING
B Ltd acquired a 30% interest in D Ltd and achieved significant influence. The cost
of the investment was ` 2,50,000. The associate has net assets of ` 5,00,000 at the
date of acquisition. The fair value of those net assets is ` 6,00,000 as a fair value of
property, plant
& equipment is ` 1,00,000 higher than its book value. This property, plant & equipment has
a remaining useful life of 10 years.
After acquisition D Ltd recognize profit after tax of `1,00,000 and paid a dividend out of
these profits of ` 9,000. D Ltd has also recognised exchange losses of ` 20,000 directly in
other comprehensive income.
CONCEPT 9: IMPAIRMENT LOSSES
After application of the equity method, it is necessary to recognise any additional

impairment loss with respect to Investor’s net investment in the associate or joint
venture. There has to be substantial objective evidence of impairment as a result of one
or more events that occurred after the initial recognition of the net investment (a ‘loss
event’) and that loss event (or events) has an impact on the estimated future cash flows
from the net investment that can be reliably estimated. There may be combined multiple
events that may result in impairment. It is important to note that any losses expected
from future events, no matter how likely, are not recognized. Objective evidences may
include
(a) significant financial difficulty of the associate or joint venture;
(b) a breach of contract, such as a default or delinquency in payments by the associate
or joint venture;
(c) the entity, for economic or legal reasons relating to its associate’s or joint venture’s
financial difficulty, granting to the associate or joint venture a concession that the
entity would not otherwise consider;
(d) it becoming probable that the associate or joint venture will enter bankruptcy or
other financial reorganisation; or
(e) the disappearance of an active market for the net investment because of financial
difficulties of the associate or joint venture.
Example:
X Ltd, an associate of Y Ltd, disappears from the active market as its financial instruments
are no longer publicly traded. However, this is not evidence of impairment. It has to
supported by other evidences.
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Example:
There is a downgrade of an associate’s or joint venture’s credit rating. This, however, is not
an evidence of impairment, although it may be evidence of impairment when considered with
other available information.
Example:
There are significant changes with an adverse effect that have taken place in the
technological, market, economic or legal environment in which the associate or joint venture
operates, and indicates that the cost of the investment in the equity instrument may not be
recovered. A significant or prolonged decline in the fair value of an investment in an equity
instrument below its cost is also objective evidence of impairment.
Goodwill that forms part of the carrying amount of the net investment in an associate or
a joint venture is not separately recognised. Therefore, it is not tested for impairment
separately by applying the requirements for impairment testing goodwill in Ind AS
36, Impairment of Assets. Instead, the entire carrying amount of the investment is
tested for impairment in accordance with Ind AS 36 as a single asset, by comparing
its recoverable amount (higher of value in use and fair value less costs to sell) with
its carrying amount. Accordingly, any reversal of that impairment loss is recognised
in accordance with Ind AS 36 to the extent that the recoverable amount of the net
investment subsequently increases.
In determining the value in use of the net investment, an entity estimates:
(a) its share of the present value of the estimated future cash flows expected to be
generated by the associate or joint venture, including the cash flows from the
operations of the associate or joint venture and the proceeds from the ultimate
disposal of the investment;
or
(b) the present value of the estimated future cash flows expected to arise from
dividends to be received from the investment and from its ultimate disposal.
Using appropriate assumptions, both methods give the same result.
QUESTION NO 10
X Ltd. purchases 20% shares of Associates Ltd. for ` 200 lakhs as on 1.4.2015. On the date
of purchase, shareholders’ funds of Associate Ltd. was ` 900 lakhs.
31.3.2016 31.3.2017
Net profits of the Associates ` 100 lakhs (` 40 lakhs)
Other Comprehensive Income
(Net of deferred tax liability) ` 10 lakhs ` 10 lakhs
Dividend paid (2014-15 and 2015-16) ` 100 lakhs ` 100 lakhs
Show equity method accounting for the investment in associates and corresponding credits
to profit or loss and other comprehensive income of the investor.
QUESTION NO 11
[Adjustment difference in depreciation charge]

On 1.4.2015, X Ltd. acquired 20% equity interest in B Ltd. for ` 210 lakhs. Carrying amount
of net assets of B Ltd. is ` 800 lakhs and fair value ` 1000 lakhs. The difference arises out
of fair value of depreciable assets. The carrying amount of depreciable assets of B Ltd. `
400 lakhs, the fair value of which are determined at ` 600 lakhs for purpose of acquisition
of 20% stake by X Ltd.
During the year 2015-16, profit after tax of B Ltd. is ` 80 lakhs (which is arrived at after
charging depreciation of ` 35 lakhs based on the carrying amount).
Show equity method accounting of the associate.
QUESTION NO 12
[Downstream transaction with impairment loss]

As on 1.4.2015 and 31.3.2016, investment in associates of X Ltd. are-
(1) 20% of equity shares of A Ltd.
(2) 30% of equity shares of B Ltd.
Based on the following information, show equity method accounting for the purpose of
consolidated financial statements of X Ltd.:
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` in lakhs
A Ltd. B Ltd.
As on 1.4.2015
Cost of investments 200 650
Shareholders’ funds:
Share capital 100 100
General Reserve 800 2000
900 2100
Proportionate share in equity 180 630
Goodwill 20 20
Profit for the year 80 120
Unsold inventories purchased from X Ltd. 200
Total purchases 500

Cost of goods sold as per X Ltd. 400
Unsold inventories in the books of X Ltd. 100
Purchased from B Ltd.
Total purchases from B Ltd. 300

Cost of goods sold as per B Ltd. 270
QUESTION NO 13 [NON-MONETARY CONTRIBUTION]
On 1.4.2015, X Ltd. contributed non-monetary assets (Plant and equipment: carrying amount
` 100 lakhs, fair value ` 150 lakhs) to B Ltd. in exchange of 20% equity interest in B Ltd.
Proportionate share of equity interest as on the date of acquisition is ` 130 lakhs.
During the year 2015 -16, profit after tax of B Ltd. is ` 100 lakhs (which is arrived at after
charging depreciation of ` 20 lakhs on the PPE contributed by X Ltd.)
Show equity method accounting of the associate.
QUESTION 1: NO PARTICIPATION
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 presence of E
limited. 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?
SOLUTION:
Since E Ltd. is holding more than 20% of the voting power of the investee, it indicates
that E Ltd. might have significant over the investee. However, the other investors in the
investee prevent E Ltd. from participating in the financing and operating policy decisions
of the investee. Hence, in this case, E Ltd. is not in a position to have significant influence
over the investee.
QUESTION 2: 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?
SOLUTION:
In this case, though M Ltd. is holding less than 20% of the voting power of the investee,
M Ltd.’s consent is required to take decisions about taking borrowings which is one of
the relevant activities. Further, since the decisions about taking borrowing are not the
decisions that most significantly affect the returns of the investee, it cannot be said that
all the investors have joint control over the investee.
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Hence, it can be said that M Ltd. has significant influence over the investee due to power to
participate in decisions even if investment level is 10%.
QUESTION 3:
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.?
SOLUTION:
Since 90% of the output of XY Ltd. is procured by RS Ltd., XY Ltd. would be dependent on
RS Ltd. for the continuation of its business. Hence, even though RS Ltd. is holding only 15%
of the voting power of XY Ltd. it has significant influence over XY Ltd.
QUESTION 4:
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 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.?
SOLUTION:
Y Ltd. obtains essential technical information for the running of its business from R Ltd.
Hence R Ltd. has significant influence over Y Ltd. despite of holding only 10% of the equity
share capital of Y Ltd.
QUESTION 5: POTENTIAL VOTING RIGHTS
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?
SOLUTION:
Considering the potential voting rights, the entity can have more than 20% of the voting
power of the investee and hence it is presumed that the entity has significant influence
over the investee. The fact that the entity does not have financial ability to purchase
such additional voting power is not considered in such assessment (It should be noted that
under Ind AS 110, potential voting rights which an entity cannot exercise because of its
financial ability are not considered as substantive and hence not factored in the assessment.
However, under Ind AS 28, there is no such requirement given. Hence the potential voting
rights, even if they are not substantive as per Ind AS 110, are included in the assessment
of significant influence.)
QUESTION 6:
ACCOUNTING ENTRIES RELATED INVESTMENT IN ASSOCIATE

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.
QUESTION 7: 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?
SOLUTION:
The 15% interest which is held directly by MNO Ltd. should be measured as per equity
method of accounting. However, with respect to the 10% interest which is held through a
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mutual fund, MNO Ltd. can avail the exemption from applying the equity method to that
10% interest and instead measure that investment at fair value through profit or loss. To
summarise, the total interest of 25% in DEF Ltd. should be measured as follows:
• 15% interest held directly by MNO Ltd.: Measure as per equity method of accounting
• 10% interest held indirectly through a mutual fund: Measure as per equity method of
accounting or at fair value thorough profit or loss as per Ind AS 109
QUESTION 8: 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.
QUESTION 9:
Cumulative preference shares issued by associate

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.
QUESTION 10:
Share in the consolidated financial statements of associate

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:
Before
A’s consolidated financial statements
Assets ` Liabilities `
Investment in B 200 Equity 200
Total 200 Total 200
B’s consolidated financial statements
Assets ` Liabilities `
Assets (from C) 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- 100
controlling interest
Equity attributable to owners 1,100
Non-controlling interest 200
Total 1,300 Total 1,300
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?
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QUESTION 11:
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.
QUESTION 12:
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.
QUESTION 13:
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) Impairment loss / Entity’s share in

Year in fair value of (reversal) on long-term profit / (loss) of
preference shares as loan as per Ind AS 109 associate
per Ind AS 109
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.
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QUESTION 14:
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.
QUESTION 15:
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.
QUESTION 16 (ALREADY DISCUSSED IN RTP NOV 20…Q2 IN RTP)
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.
ANSWER
Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method:
` `
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net assets (35% of
` 90,00,000) 31,50,000
Share in fair valuation of XYZ Ltd.’s net assets
[35% of (` 1,10,00,000 – ` 90,00,000)] 7,00,000
Goodwill on investment in XYZ Ltd. (balancing figure) 9,00,000
Cost of investment 47,50,000
Profit during the year
Share in the profit reported by XYZ Ltd. (35% of
` 8,00,000) 2,80,000
Adjustment to reflect effect of fair valuation
[35% of (` 20,00,000/10 years)]
Share of profit in XYZ Ltd. recognised in income (70,000)

by Investor Ltd. 2,10,000
Long term equity investment
FVTOCI gain recognised in OCI (35% of ` 2,00,000) 70,000
Dividend received by Investor Ltd. during the year
[35% of ` 12,00,000]
(4,20,000)
Closing balance of Investor Ltd.’s investment in
XYZ Ltd. 46,10,000
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NOTES
IND AS 111: JOINT ARRANGEMENTS 165
IND AS 111: JOINT ARRANGEMENTS
QUESTION 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?
SOLUTION:
The arrangement is a joint arrangement since both the parties are bound by the contractual
arrangement and the decisions about relevant activities require unanimous consent of both
the parties.
QUESTION 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?
SOLUTION:
In this case, the parties have implicitly agreed that they have joint control of the
arrangement because decisions about the relevant activities cannot be made without both
parties agreeing.
QUESTION 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?
SOLUTION:
In this case, even though A can block any decision, it does not control the arrangement
because it needs the agreement of B. The terms of their contractual arrangement requiring
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at least 75% of the voting rights to make decisions about the relevant activities imply that
A Ltd. and B Ltd. have joint control of the arrangement because decisions about the relevant
activities of the arrangement cannot be made without both A Ltd. and B Ltd. agreeing.
QUESTION 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?
SOLUTION:
In this case, even though X Ltd. can block any decision, it does not control the arrangement
because it needs the agreement of either Y Ltd. or Z Ltd. In this question, X Ltd., Y Ltd. and
Z Ltd. collectively control the arrangement. However, there is more than one combination of
parties that can agree to reach 75% of the voting rights (i.e. either X Ltd. and Y Ltd. or X
Ltd. and Z Ltd.). In such a situation, to be a joint arrangement the contractual arrangement
between the parties would need to specify which combination of the parties is required to
agree unanimously to decisions about the relevant activities of the arrangement.
QUESTION 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?
SOLUTION:
A Ltd. and B Ltd. have joint control of the arrangement only if the contractual arrangement
specifies that decisions about the relevant activities of the arrangement require both A
Ltd. and B Ltd. agreeing.
The above case also highlight that it is not necessary that all the parties in an arrangement
should have joint control to form a joint arrangement. Some party or parties may be
participating in the joint arrangement but may not be having joint control of that joint
arrangement. That is the reason the word “or” has been used between the words “all” and
“group of parties” in the flowchart given earlier.
QUESTION 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.
Determine whether Electronics Ltd. is controlled by a single investor or is jointly controlled
by both the investors.
SOLUTION:
The decisions about relevant activities are required to be taken by majority of board of
directors. Hence, out of the 4 directors, at least 3 directors need to agree to pass any
decision. Accordingly, the directors appointed by any one investor cannot take the decisions
independently without the consent of at least one director appointed by other investor.
Hence, Electronics Ltd. is jointly controlled by both the investors. R Ltd. holding majority
of the voting rights is not relevant in this case since the voting rights do not given power
over the relevant activities of the investee.
QUESTION 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.
SOLUTION:
The decisions about relevant activities are required to be taken by majority of board of
directors. Hence, out of the 4 directors, at least 3 directors need to agree to pass any
decision. Accordingly, the directors appointed by any one investor cannot take the decisions
independently without the consent of at least one director appointed by other investor.
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However, the chairman of the board has right for a casting vote in case of a deadlock in
the board. Hence, M Ltd. has the ability to take decisions related to relevant activities
through 2 votes by directors and 1 casting vote by chairman of the board. Therefore, M
Ltd. individually has power over MN Software Ltd. and there is no joint control.
QUESTION 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.
SOLUTION:
The decisions about relevant activities are required to be taken by majority of board
of directors. Hence, out of the 5 directors, at least 3 directors need to agree to pass
any decision. Accordingly, the directors appointed by AB Ltd. can take the decisions
independently without the consent of any of the directors appointed by BC Ltd. Hence,
ABC Ltd. is not jointly controlled by both the investors. Equal voting rights held by both
the investors is not relevant in this case since the voting rights do not given power over the
relevant activities of the investee.
QUESTION 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.
SOLUTION:
The two parts of the land which are required to be managed by both the parties independently
on their own would not fall within the definition of a joint arrangement. However, the third
part of the land which is required to be managed by both the parties with unanimous decision
making would meet the definition of a joint arrangement.
QUESTION 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, the 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?
SOLUTION:
In this case, the investors should evaluate which of the decisions about relevant activities
can most significantly affect the returns of RS Ltd. If the decisions related to construction
of highway or operating the highway can affect the returns of the RS Ltd. most significantly
then the investor directing those decision has power over RS Ltd. and there is no joint
arrangement. However, if the decisions related to funding and capital structure can affect
the returns of the RS Ltd. most significantly then RS Ltd. is a joint arrangement between
entity R and entity S.
QUESTION 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?
170 ACCOUNTS
SOLUTION:
In this case, three investors have informally agreed to make unanimous decisions. These
three investors together also have majority voting rights in the entity. Hence, investor A,
B and C have joint control over the entity. The agreement between investor A, B and C need
not be formally documented as long as there is evidence of its existence in recent meetings
of the investors.
QUESTION 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?
SOLUTION:
Consent of F Ltd. is required only with respect to the fundamental changes in DEF Ltd.
Hence these are protective rights. The decisions about relevant activities are taken by D
Ltd. and E Ltd. Hence, F Ltd. is not a party with joint control of the arrangement.
QUESTION 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?
SOLUTION:
The arrangement is a joint arrangement since the contractual arrangement requires
decisions about relevant activities to be taken by unanimous consent of both the parties.
The right available with entity A to take decisions for resolution of disputes will not prevent
the arrangement from being a joint arrangement.
QUESTION 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 project.
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?
SOLUTION:
The arrangement is a joint operation since the arrangement is not structured through a
separate vehicle and each party has rights to the assets, and obligations for the liabilities
relating to their own part of work in the joint arrangement.
QUESTION 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?
SOLUTION:
The arrangement is a joint operation since the arrangement is not structured through a
separate vehicle.
QUESTION 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.
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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?
SOLUTION:
The legal form of the separate vehicle is a company. The legal form of the separate vehicle
causes the separate vehicle to be considered in its own right. Hence, it indicates that
the arrangement is a joint venture. In this case, the parties should further evaluate the
terms of contractual arrangements and other relevant facts and circumstance to conclude
whether the arrangement is a joint venture or a joint operation.
QUESTION 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?
SOLUTION:
In this case, the parties to the arrangement should evaluate whether the legal form creates
separation between the partners and the partnership firm. If the parties conclude that
they have rights in the assets and obligations for the liabilities relating to the partnership
firm then this would be a joint operation. If the assessment of legal form of the partnership
firm indicates that the firm is a joint operation then there is no need to evaluate any other
factors and it is concluded that the partnership firm is a joint operation.
QUESTION 18:
Assessing the terms of the contractual arrangement

Continuing with the QUESTION 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?
QUESTION 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:
• 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?
QUESTION 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 i) 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.
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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?
SOLUTION:
The manufacturing of Product X is not done through a separate vehicle and the assets used
to manufacture the product are jointly owned by both the parties. Hence, the manufacturing
activity is a joint operation.
The distribution of Product X is done through a separate vehicle i.e. ABCD Ltd. Further, AB
Ltd. and CD Ltd. do not have rights to the assets, and obligations for the liabilities, relating
to ABCD Ltd. Hence ABCD Ltd. is a joint venture.
QUESTION 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?
QUESTION 22:
Accounting of interest in joint operation

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 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 100 Building 1 240
obligation
Equity 140 Building 2 200
480 480
How should AB Ltd. record in its financial statements its rights and obligations in PQR?
QUESTION 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?
176 ACCOUNTS
QUESTION 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?
QUESTION 25
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 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.
ANSWER
As provided in Ind- AS 111 - Joint Arrangements - this is a joint arrangement because
two or more parties have joint control of the property under a contractual arrangement.
The arrangement will be regarded as a joint operation because Alpha Ltd. and Gama Ltd.
have rights to the assets and obligations for the liabilities of this joint arrangement. This
means that the company and the other investor will each recognise 50% of the cost of
constructing the asset in property, plant and equipment. The borrowing cost incurred on
constructing the property should under the principles of Ind AS 23 ‘Borrowing Costs’, be
included as part of the cost of the asset for the period of construction.
In this case, the relevant borrowing cost to be included is ` 50,00,000 (` 10,00,00,000 x
10% x 6/12).
The total cost of the asset is ` 40,50,00,000 (` 40,00,00,000 + ` 50,00,000)
` 20,25,00,000 crores is included in the property, plant and equipment of Alpha Ltd. and
the same amount in the property, plant and equipment of Gama Ltd.
The depreciation charge for the year ended 31 March 20X2 will therefore be ` 1,01,25,000
(` 40,50,00,000 x 1/20 x 6/12) ` 50,62,500 will be charged in the statement of profit or
loss of the company and the same amount in the statement of profit or loss of Gama Ltd.
The other costs relating to the arrangement in the current year totalling ` 54,00,000
(finance cost for the second half year of ` 50,00,000 plus maintenance costs of ` 4,00,000)
will be charged to the statement of profit or loss of Alpha Ltd. and Gama Ltd. in equal
proportions- ` 27,00,000 each.
178 ACCOUNTS
NOTES
IND AS 27: SEPARATE FINANCIAL STATEMENTS 179
IND AS 27:
SEPARATE FINANCIAL STATEMENTS
1. It is necessary to distinguish between a consolidated financial statements, a separate

financial statements and an individual financial statements.
a. An individual financial statement is prepared by an entity that does not have a
subsidiary, an associate or a joint venture’s interest in a joint venture.
b. Separate financial statements are statements of an investor where investments
in the subsidiary, joint venture and associate are accounted for at cost or in
accordance with Ind AS 109, Financial Instruments.
C. Consolidated financial statements are the financial statements of a group in
which the assets, liabilities, equity, income and cash flows of the parent and its
subsidiaries are presented as those of a single entity.
Note: Financial statements in which equity method is applied for investments in
joint ventures and associates, technically referred to as economic entity financial
statements, are also termed as consolidated financial statements.
2. Separate financial statements are presented in addition to:
a. Consolidated Financial Statements (prepared in case of a subsidiary or
subsidiaries);
or
b. Financial Statements in which invesments in associates and joint ventures are
accounted for using equity method.
Note: These financial statements are not separate financial statements.
3. Entity may present separate financial statements as its only financial statements if it
is:
a. Exempt from consolidation; or
b. Exempt from applying equity method; or
c. An investment entity and apply exception to consolidation for all of its subsidiaries.
Example:
Entity A Limited has a subsidiary, a joint venture and an associate. It is required to
prepare consolidated financial statements. In the consolidated financial statements, it will
consolidate:
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• The subsidiary as per full consolidation method.

• The associate as per equity method.
• Joint ventures are consolidated as per equity method in CFS whereas joint operations
are consolidated as per proportionate consolidation method in IFS
PREPARATION OF SEPARATE FINANCIAL STATEMENTS
1. Separate financial statements shall be prepared in accordance with all applicable Ind
AS except that it shall account for investments in subsidiaries, joint ventures and
associates either:
a. At cost: Account for in accordance with Ind AS 105. `Non-current Assets Held
for Sale and Discontinued Operations’ (if investment is classified as held for sale
then cost will be accounted for as per Ind AS; or
b. In accordance with Ind AS 109 ‘ Financial Instruments’.
2. The entity shall apply the same accounting for each category of investments.
“ For Example, an entity that has investments in subsidiaries, associates & joint
ventures can account for its investments in subsidiaries & associates at cost and
investments in joint ventures in accordance with Ind AS 109. However, if that entity
has investments in two associates, it cannot account investment in one associate as
cost & investment in other associate in accordance with Ind AS 109. It has to choose
either of the method for both the investments in associates.
3. An entity may be required to classify its investments in subsidiaries, joint ventures

and associates as held for sale ( or included in a disposal group that is classified as held
for sale) in accordance with Ind AS 105. In such a situation, when these investments
are accounted for at cost, they will henceforth be accounted for and measured as per
Ind AS 105. However the measurement of investments accounted as per Ind AS 109,
is not changed in such circumstances.
4. Exceptions:
a. Investments in associates and joint ventures could also be held by a venture
capital organization, mutual fund, unit trust, investment linked insurance funds or
similar entities. In accordance with paragraph 18 of Ind AS 28 ‘ Investments in
Associates and Joint Ventures’, these entities may elect to measure investments
in associates and joint ventures at fair value through profit or loss in accordance
IND AS 27: SEPARATE FINANCIAL STATEMENTS 181
with Ind AS 109 in its consolidated financial statement. In these circumstances,

the entity shall also measure those investments in associates or joint ventures
at fair value through profit or loss in accordance with Ind AS 109 in its separate
financial statements also.
b. An investment entity is not required to consolidate its subsidiaries or apply
Ind AS 103, Business Combinations, when it obtains control of another entity.
Instead it measures its investment in subsidiaries at fair value through profit
or loss in accordance with Ind AS 109 in its consolidated financial statements.
It is required to account for its investment in that ‘unconsolidated’ subsidiary
in its separate financial statements also at fair value through profit or loss in
accordance with Ind AS 109. It should be noted that an investment entity is
required to consolidate a subsidiary or apply Ind AS 103 when that subsidiary
provides services that relates to the investment activities of the investment
entity. In such a situation, the aforesaid requirement does not apply.
5. Measurement where parent reorganized the group:

a. A parent may reorganize the structure of its group by establishing a new entity
as its parent in a manner that satisfies the following criteria:
(i) New parent obtains control by issuing equity instruments in exchange of
existing equity instruments.
(ii) Assets & liabilities of new & original group are same immediately before and
after reorganization.
(iii) Owners have same absolute & relative interest in net assets of original group
and the new group, immediately before and after reorganization.
(iv) The new parent accounts for its investment in the original parent in its
separate financial statements,
b. In these circumstances, the new parent shall measure cost at the carrying amount
of its share of the equity items shown in the separate financial statements of the
original parent at the date of the reorganization.
c. Similarly, an entity that is not a parent might establish a new entity as its parent
in a manner that satisfies the criteria above. The above requirements apply equally
to such reorganizations.
182 ACCOUNTS
NOTES
IND AS 112: DISCLOSURES 183
IND AS 112: DISCLOSURES
IN SEPARATE FINANCIAL STATEMENTS
i. Disclosures will be as per all applicable Ind AS

ii. When parent elects not to prepare consolidated financial statements and prepares
separate financial statements:
a. Fact that financial statement is a separate financial statement
b. Exemption from consolidation used: entity have to disclose about exemption from
consolidation
c. Name & place of business (country of incorporation, if different) of entity those
CFS is produced for public use & where those CFS are obtainable: If entity
produce any CFS to pubic use those CFS are prepare as per Ind AS
d. List of significant investment in subsidiaries, JV & associates containing details
regarding investee
i. Name
ii. Principal place of business (country of incorporation, if different)
iii. Proportion of ownership interest held
e. Method used for accounting
iii. Parent (i.e. an investment entity) prepare separate financial statement as its only
financial statement:
a. Fact that financial statement is its only financial statement
b. Disclosures as per Ind AS 112
iv. Entity other than above:

a. Fact that financial statement is a separate financial statement
b. List of significant investment in subsidiaries, JV & associates containing details
regarding investee
i. Name
ii. Principal place of business (country of incorporation, if different)
iii. Proportion of ownership interest held
c. Method used for accounting
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i. The significant judgments and assumptions entity has made in determining:

a. Nature of its interest in another entity or arrangement;
b. Type of joint arrangement in which it has an invested;
c. That it meets the definition of an investment entity
ii. Information about its interests in:

a. subsidiaries
b. arrangements and associates
c. structured entities that are not controlled by the entity
iii. Investment entity status:

a. Change of status
b. Reason
c. Effect of change on financial statement:
i. Total fair value of subsidiaries ceases to be consolidated
ii. Total gain or loss
iii. Line item in Profit or loss
iv. Interest in subsidiaries:

a. Information that enable users to understand:
i. Composition of group
ii.
Interest that non controlling Interests have in group activities & cash
flows that are material including:
1. Name of subsidiary
2. Principal place of business (country of Incorporation if different)
3.
Proportion of ownership Interest (voting rights proportion, if
different)
4. Profit & Loss allocated
5. Accumulated Non controlling interest
6. Summarized financial information about the subsidiary
b. Information to enable user to evaluate:

i. Nature and extent of significant restrictions on its ability to access or use
assets, and settle liabilities, of the group including:
1. To transfer cash or other assets
2.
guarantees or other requirements or loans and advances being made or
repaid
3.
the nature and extent to which protective rights of non-controlling
interests can significantly restrict the entity right
4.
Carrying amount of assets & liabilities in CFS on which restriction
applies
ii.
Nature of and changes in, the risks associated with its interests in
consolidated structured entities including:
1. Terms of contractual arrangement-that require to provide financial
support
2. Events & circumstances that could expose to risk
3. Provided any financial support:
a. Type & amount of support
b. Reason of support
4.
Provided any support to previously unconsolidated structured entity,
result in controlling:
a. Reason of support
5. Intention of support or assist
iii. the consequences of changes in its ownership interest (no loss of control):
1. Schedule to show the effect of equity attributable
iv. the consequences of losing control of a subsidiary:

1. Gain or loss & line item in profit or loss
2. Gain or loss attributable to FV of investment in Subsidiary
c. Financial statement of subsidiary is of a different date:

i. End of reporting period date of the subsidiary
ii. Reason for using different date
186 ACCOUNTS
v. Interest In unconsolidated Subsidiaries (by investment entities): For each

unconsolidated subsidiaries
a. Subsidiary name
b. Principal place of business (country of incorporation, if different)
c. Proportion of ownership interest
d. Financial statement of subsidiary & its parent
e. Significant restriction on the ability of an unconsolidated subsidiary:
i. Transfer fund (in form of cash dividends)
ii. Repay loans & advances
f. Current commitments or intention to provide support or assistance
g. Provided any financial support:
i. Type & amount of support
ii. Reason of support
h. Provided any support to previously unconsolidated structured entity, result in
controlling:
i. Reason of support
i. Terms of contractual arrangement-that require to provide financial support
j. Events & circumstances that could expose to risk
vi. Interest in joint arrangements & associates:

a. For nature, extent & financial effect: (for material joint arrangement &
associates)
i. Name of joint arrangement or associate
ii. Nature of relationship
iii. Principal place of business (country of incorporation, if different)
iv. Proportion of ownership interest
v. Investment measured using Equity method or FV
vi. Summarized Financial information
vii. Investment valued using equity method-Then FV
viii. Financial information in aggregate for all individually immaterial:
i. Joint ventures
ii. Associates
ix. Significant restriction on the ability of joint ventures or associates:

i. Transfer fund (in form of cash dividends)
ii. Repay loans & advances
x. Financial statement used in applying equity method are of different a
i. Reporting period end date
ii. Reason of different date
xi. Unrecognized share of losses of JV or associate (stop recognizing loss when
applying equity method)
b. Risk associated:
i. Commitments
ii. Contingent liabilities incurred relating to interest in Joint ventures or
associates
vii. Interest in Unconsolidated structured entities:

a. Nature, extent: exposure of risk
b. Information to enable user to evaluate the nature of and changes in the risk
c. Qualitative & quantitative Information about unconsolidated structured entities
d. Information about sponsored entities:
i. How it has determined-which entity to sponsored
ii. Income from that entities
iii. Carrying amount of all assets transfer to those entities
e. Information in tabular format
f. Carrying amount of asset & liabilities of those entities, recongnised in financial &
line item in BS statement
g. Amount represent maximum loss & how it determined & if not determined then
reason
h. Comparison of above loss with carrying amount of assets & liabilities recongnised
i. Current intention to provide support or assistance
j. Provide any financial support:
i. Type & amount of support
ii. Reason of support
188 ACCOUNTS
viii. Summarized financial Information for subsidiaries, Joint ventures & associates:
a. Subsidiary that has non-controlling interest that are material:
i. Dividends paid
ii.
Financial information about asset, liability, profit or loss, cash flow (before
intercompany elimination)
b. Joint ventures and associate that are material:
i. Dividend received
ii. Financial information about asset, liability, profit or loss, cash flow
c. Joint Venture that are material:-
i. Cash & cash equivalent
ii. Current financial liability (excluding trade, trade payables, provisions)
iii.
Non Current financial liabilities (excluding trade, trade payables,
provisions)
iv. Depreciation & amortization
v. Interest income & expenses
vi. Income tax expenses
d. If entity uses equity method to account for Jv or associates interest:-
i.
Ind AS financial statement of JV or associates should be adjusted ( FV
adjustment)
ii. Reconciliation of adjustment
iii. But above disclosures are not required if:-
i. FV measured as per Ind AS 28;
ii. JV or associate does not prepare Ind AS financial statement
IND AS 101: FIRST –TIME ADOPTION OF IND AS 189
IND AS 101: FIRST –TIME ADOPTION OF IND AS
QUESTION 1
E Ltd. is required to first time adopt Indian Accounting Standards (Ind AS) from April 1,
2016 The management of E Ltd. has prepared its financial statements in accordance with
Ind AS and an explicit and unreserved statement of compliance with Ind AS has been
given. However, there is a disagreement on application of one Ind AS. Can such financial
statements of E Ltd. be treated as first Ind AS financial statements?
SOLUTION:
Ind AS 101 defines first Ind AS financial statements as “The first annual financial
statements in which an entity adopts Indian Accounting Standards (Ind AS), by an explicit
and unreserved statement of compliance with Ind AS.” In accordance with the above
definition, if an explicit and unreserved statement of compliance with Ind AS has been given
in the financial statements, even if the auditor’s report contains a qualification because of
disagreement on application of Indian Accounting standard (s), it would be considered that
E Ltd. has done the first time adoption of Ind AS. In such a case, exemptions given under
Ind AS 101 cannot be availed again. If, however, the unreserved statement of compliance
with Ind AS is not given in the financial statements, such financial statements would not be
considered to first Ind AS financial statements.
QUESTION NO 2
X Ltd. is required to adopt Ind AS from April 1, 20X1, with comparatives for one year, i.e.,
for 20X0-20X1. What will be its date of transition?
SOLUTION:
The date of transition for X Ltd. will be April 1, 20X0 being the beginning of the earliest
comparative period presented. To explain it further, X Ltd. is required to adopt an Ind AS
from April 1, 20X1, and it will give comparatives as per Ind AS for 20X0-20X1. Accordingly,
the beginning of the comparative period will be April, 20X0 which will be considered as date
of transition.
190 ACCOUNTS
QUESTION NO 3
X Ltd. was using cost model for its property, plant and equipment (tangible fixed assets)
till March 31, 20X1 under previous GAAP. On April 1, 20X0, i.e., the date of its transition
to Ind AS, it used fair values as the deemed cost in respect of its fixed assets. Whether
it will amount to a change in accounting policy?
SOLUTION:
Use of fair values on the date of transition will not tantamount to a change in accounting
policy. The fair values of the property, plant and equipment on the date on transition will be
considered as deemed cost without this being considered as a changes in accounting policy.
QUESTION NO 4
Ind AS requires allocation of losses to the non-controlling interest, which may ultimately
lead to a debit balance in non-controlling interests, even if there is no contract with the
non-controlling interest holders to contribute assets to the Company to fund the losses.
Whether this adjustment is required or permitted to be made retrospectively?
QUESTION NO 5
A Ltd. had made certain investments in B Ltd’s convertible debt instruments. The conversion
rights are substantive rights and would provide A Ltd. with a controlling stake over B Ltd. A
Ltd. has evaluated that B Ltd. would be treated as its subsidiary under Ind AS and, hence,
would require consolidation in its Ind AS consolidated financial statements. B Ltd. was not
considered as subsidiary, associate or a joint venture under previous GAAP. How should B
Ltd. be consolidated on transition to Ind AS assuming that A Ltd. has opted to avail the
exemption from retrospective restatement of past business combinations?
QUESTION NO 6
A Ltd. has a subsidiary B Ltd. On first time adoption of Ind AS by B Ltd., it availed the
optional exemption of not restating its past business combinations. However, A Ltd. in its
consolidated financial statements has decided to restate all its past business combinations.
Whether the amounts recorded by subsidiary need to be adjusted while preparing the
consolidated financial statements of A Ltd. considering that A Ltd. does not avail the
business combination exemption? Will the answer be different if the A Ltd. adopts Ind AS
after the B Ltd?
QUESTION NO 7
X Ltd. is a first time adopter of Ind AS. The date of transition is April 1, 20X1. It has given
200 stock options to its employees. Out of these, 75 options have vested on November 30,
20X0 and the remaining 125 will vest on November 30, 20X1. What are the options available
to X Ltd. at the date of transition?
SOLUTION:
Ind AS 101 provides that a first –time adopter is encouraged, but not required, to apply
Ind AS 102 on ‘Share-based Payment’ to equity instruments that vested before the date of
transition to Ind-AS. However, if a first time adopter elects to apply Ind AS 102 to such
equity instruments, it may do so only if the entity has disclose publicly the fair value of
those equity instruments, determined at the measurement date, as defined in Ind AS 102.
Having regard to the above, X Ltd. has the following options:

• For 75 options that vested before the date of transition:
(a) To apply Ind AS 102 and account for the same accordingly, provided it has
disclosed publicly the fair value of those equity instruments, determined at the
measurement date, as defined in Ind AS 102.
(b) Not to apply Ind AS102.
However, for all grants of equity instruments to which Ind AS 102 has not
been applied, i.e., equity instruments vested but not settled before date of
transition to Ind AS. X Ltd. would still need to disclose the information.
• For 125 options that will vest after the date of transition: X Ltd. will need to account
for the same as per Ind AS 102.
QUESTION NO 8
X Ltd. is the holding company of Y Ltd. X Ltd. is required to Ind AS from April 1, 2016. X
Ltd. wants to avail the optional exemption of using the previous GAAP carrying values in
respect of is property, plant and equipment whereas Y Ltd. wants to use fair value of its
property, plant and equipment as its deemed cost on the date of transition. Examine whether
X Ltd. can do so for its consolidated financial statement. Also, examine, whether different
entities in group can use different basis for arriving at deemed cost for property, plant and
equipment in their respective standalone financial statements
192 ACCOUNTS
QUESTION NO 9
For the purpose of deemed cost on the date of transition, an entity has the option of using
the carrying value as the deemed cost. In this context, suggest which carrying value is to
be considered as deemed cost: original cost or net book value? Also examine whether this
would have any impact on future depreciation charge?
SOLUTION:
For the purpose of deemed cost on the date of transition, if an entity uses the carrying value
as the deemed cost, then it should consider the net book value on the date of transition
as the deemed cost and not the original cost because carrying value here means net book
value. The future depreciation charge will be based on the net book value and the remaining
useful life on the date of transition. Further, as per the requirements of Ind AS 16, the
depreciation method, residual value and useful life need to be reviewed atleast annually. As
a result of this, the depreciation charge may or may not be the same as the depreciation
charge under the previous GAAP.
QUESTION NO 10
Revaluation under previous GAAP can be considered as deemed cost if the revaluation was,
at the date of the revaluation, broadly comparable to fair value or cost or depreciated
cost of assets in accordance with Ind AS, adjusted to reflect, e.g., changes in general
or specific price index. What is the acceptable time gap of such revaluation form the
date of transition? Can adjustments be made to take effects of events subsequent to
revaluation?
SOLUTION:
There are no specific guidelines in Ind AS 101 to indicate the acceptable time gap of such
revaluation form the date of transition. The management of an entity needs to exercise
judgement in this regard. However, generally, a period of 2-3 Years may be treated as an
acceptable time gap of such revaluation from the date of transition. In any case, adjustments
should be made to reflect the effect of material events subsequent to revaluation.
QUESTION NO 11
Y Ltd. is first time adopter of Ind AS. The date of transition is April 1, 2015. On the date
of transition, there is a long- term foreign currency monetary liability of ` 60 crores (US
$ 10 million converted at an exchange rate of US $ 1 = ` 60). The accumulated exchange
difference on the date of transition is nil since Y Ltd. was following AS 11 notified under the
Companies (Accounting Standards) Rules, 2006 and has not exercised the option provided
in paragraph 46/46A 0f AS 11. The Company wants to avail the option under paragraph 46A
of AS 11 prospectively or retrospectively on the date of transition to Ind AS. How should
it account for the translation differences in respect of this item under Ind AS 101?
SOLUTION:
Ind AS 101 provides that a first –time adopter may continue the policy adopted for accounting
for exchange difference arising from translation of long-term foreign currency monetary
items recognised in the financial statements for the period ending immediately before the
beginning of the first Ind AS financial reporting period as per the previous GAAP.
QUESTION NO 12
Y Ltd. is a first time adopter of Ind AS. The date of transition is April 1, 2015. On April 1,
2010, it obtained a 7 year US$ 1,00,000 loan. it has been exercising the option provided in
paragraph 46/46A of AS 11 and has been amortising the exchange differences in respect of
this loan over the balance period of such loan. On the date of transition, the company wants
to continue the same accounting policy with regard to amortising of exchange differences.
Whether the Company is permitted to do so?
SOLUTION:
Ind AS 101 provides that a first-time adopter may continue the policy adopted for accounting
for exchange differences arising from translation of long-term foreign currency monetary
items recognised in the financial statements for the period ending immediately before the
beginning of the first Ind AS financial reporting period as per the previous GAAP. In view of
the above, the Company can continue to follow the existing accounting policy of amortising
the exchange differences in respect of this loan over the balance period of such long term
liability.
QUESTION NO 13
A Ltd. acquired B Ltd. in a business combination transaction. A Ltd. agreed to pay certain
contingent consideration (liability classified) to B Ltd. As part of its investment in its
separate financial statements, A Ltd. did not recognise the said contingent consideration
(since it was not considered probable) A Ltd. considered the previous GAAP carrying amounts
of investments as its deemed cost on first –time adoption. In that case, does the carrying
amount of investment require to be adjusted for this transaction?
194 ACCOUNTS
SOLUTION:
In accordance with Ind AS 101, an entity has an option to treat the previous GAAP carrying
values, as at the date of transition, of investments in subsidiaries, associates and joint
ventures as its deemed cost on transition to Ind AS. If such an exemption is adopted, then
the carrying values of such investments are not adjusted. Accordingly, any adjustments in
relation to recognition of contingent consideration on first time adoption shall be made in
the statement of profit and loss.
QUESTION NO 14
On April 1, 2014, Sigma Ltd. issued 30,000 6% convertible debentures of face value of
` 100 per debenture at par. The debentures are redeemable at a premium of 10% on March
31, 2018 or these may be converted into ordinary shares at the option of the holder. The
interest rate for equivalent debentures without conversion rights would have been 10%
The date of transition to Ind AS is April 1,2016. Suggest haw should Sigma Ltd. account
for this compounds financial instrument on the date of transition. The present value of ` 1
receivable at the end of each year based on discount rates of 6% and 10% can be taken as:
End of year 6% 10%

1 0.94 0.91
2 0.89 0.83
3 0.84 0.75
4 0.79 0.68
SOLUTION:
Ind AS 32, Financial Instruments: Presentation, requires an entity to split a compound
financial instrument at inception into separate liability and equity components. If the liability
component is no longer outstanding, retrospective application of Ind AS 32 would involve
separating two portions of equity. The first portion is recognised in retained earnings and
represents the cumulative interest accreted on the liability component. The other portion
represents the original equity component. However, in accordance with this Ind AS, a first
time adopter need not separate these two portions if the liability component is no longer
outstanding at the date of transition to Ind AS. In the present case, since the liability is
outstanding on the date of transition, Sigma Ltd. will need to split the convertible debentures
into debt and equity portion on the date of transition. Accordingly, we will first measure
the liability component by discounting the contractually determined stream of future cash
flows (interest and principal ) to present value by using the discount rate of 10% p.a. (being
the market interest rate for similar debentures with no conversion option).
(`)
Interest payments p.a. on each debenture 6
Present Value (PV) of interest payment for years 1 to 4 (6x3.17) 19.02
(Note 1)
PV of principal repayment (including premium) 110x 0.68 (Note 2) 74.80
Total liability component 93.82
Total equity component (Balancing figure) 6.18
Face value of debentures 100.00
Equity component per debenture 6.18
Total equity component for 30,000 debentures 1,85,400
Total debt amount (30,000 x 93.82) 28,14,600
Thus, on the date of transition, the amount of ` 30,00,000 being the amount of debentures
will be split as under:
Debt ` 28,14,600
Equity ` 1,85,400
Note:
1. 3.17 is PV of Annuity Factor of ` 1 at a discount rate of 10% for 4 years.
2. On maturity, ` 110 will be paid (` 100 as principal payment + ` 10 as premium)
QUESTION NO 15
H Ltd. has following assets and liabilities as March 31, 2016 prepared in accordance with
previous GAAP.
Particulars Notes Amounts (`)
Fixed assets 1 1,34,50,000
Investments in S. Ltd. 2 48,00,000
Debtors 2,00,000
Advances for purchase of inventory 50,00,000
Inventory 8,00,000
196 ACCOUNTS
Cash 49,000
Total assets 2,42,99,000
VAT deferral loan 3 60,00,000
Creditors 30,00,000
Short term borrowing 8,00,000
Provisions 12,00,000
Total liabilities 1,10,00,000
Share capital 1,30,00,000
Reserves: 2,99,000
Cumulative translation difference 4 1,00,000
ESOP reserve 4 20,000
Retained earnings 1,79,000
Total equity 1,32,99,000
Total equity and liabilities 2,42,99,000
The following GAAP differences were identified by the Company on first-time adoption of
Ind AS with effect from April 1, 2016:
1. In relation to tangible fixed assets (property, plant and equipment), the following
adjustments were identified:
♦ Fixed assets comprise land held for capital appreciation purposes costing `
4,50,000 and was classified as investment property as per Ind AS 40.
♦ Exchange differences of ` 1,00,000 were capitalised to depreciable fixed assets
on which accumulated depreciation of ` 40,000 was recognised.
♦ There were no asset retirement obligations.
♦ The management intends to adopt deemed cost exemption for using the previous
GAAP carrying values as deemed cost as at the date of transition for PPE and
2. The Company had an investment in S Ltd. (subsidiary of H Ltd.) for ` 48,00,000 that
carried a fair value of ` 68,00,000 as at the transition date. The Company intends to
recognise the investment at its fair value as at the date of transition.
3. Financial instruments:
♦ VAT deferral loan ` 60,00,000:
The VAT deferral loan of ` 60,00,000 was obtained on March 31,2016, for setting
up a business in a backward region with a condition to created defined targets for
employment of local population of that region. The loan does not carry any interest
and is repayable in full at the end of 5 years. In accordance with Ind AS 109, the
discount factor on the loan is to be taken as 10% being the incremental borrowing
rate. Accordingly, the fair value of the loan as at March 31, 2016, is ` 37,25,528.
The entity chooses to exercise the option given in paragraph B11 of Ind AS 101,
i.e., the entity Accounting for Government Grants and Disclosure of Government
Assistance, retrospectively as required information had been obtained at the
time of initially accounting for VAT deferral loan
The retained earnings of the Company contained the following
♦ ESOP reserve of ` 20,000:
The Company had granted 1,000 options to employees out of which 800 have
already vested. The Company followed an intrinsic value method for recognition
of ESOP charge and recognised ` 12,000 towards the vested options and ` 8,000
over a period of time as ` ESOP charge and a corresponding reserve. If fair value
method had been followed in accordance with Ind AS 102, the corresponding
charge would have been ` 15,000 and ` 9,000 for the vested and unvested shares
respectively. The Company intends to avail the Ind AS 101 exemption for share-
based payments for not restating the ESOP charge as per previous GAAP for
vested options.
♦ Cumulative translation difference:
` 1,00,000 The Company had a non-integral foreign branch in accordance with AS
11 and had recognised a balance of ` 1,00,000 as part of reserves. On first-time
adoption of Ind AS, the Company intends to avail Ind 101 exemption of resetting
the cumulative translation difference to zero.
SOLUTION:
Adjustments for opening balance sheet as per Ind AS 101
1. Fixed assets: As the land for capital appreciation purposes qualifies as investment
property, such investment property should be reclassified from property, plant and
equipment (PPE) to investment property and presented separately; As the Company
has adopted the previous GAAP carrying values as deemed cost, all items of PPE and
investment property should be carried at its previous GAAP carrying values. As such,
the past capitalised exchange differences require no adjustment in this case.
198 ACCOUNTS
2. Investment in subsidiary: On first time adoption of Ind AS, a parent company has an
option to carry its investment in subsidiary at fair value as at the date of transition in
its separate financial statements. As such, the Company can recognise such investment
at a value of ` 68,00,000.
3. Financial instruments: As the VAT deferral loan is a financial liability under Ind AS
109, that liability should be recognised at its present value discount at an appropriate
discounting factor. Consequently, the VAT deferral loan should be recognised at
` 37,25,528 and the remaining ` 22,74,472 would be recognised as deferred
government grant.
4. ESOPs: Ind AS 101 provides an exemption of not restating the accounting as per the
.previous GAAP in accordance with Ind AS 102 for all options that have vested by
the transition date. Accordingly, out of 1000 ESOPs granted, the first-time adoption
exemption is available on 800 options that have already vested. As such, its accounting
need not be restated. However, the 200 options that are not vested as at the transition
date need to be restated in accordance with Ind AS 102. As such, the additional
impact of ` 1,000 (i.e., 9,000 less 8,000) would be recognised in the opening Ind AS
balance sheet.
5. Cumulative translation difference: As per paragraph D 12 of Ind AS 101, the first-

time adopter can avail an exemption regarding requirements of Ind AS 21 in context
of cumulative translation differences for all foreign operation are deemed to be zero
as at the transition date. In that case, the balance is transferred to retained earnings.
As such, the balance of ` 1,00,000 should be transferred to retained earnings
6. Retained earnings should be increased by ` 20,99,000 on account of the following:
`
Increase in fair value of investment in subsidiary (note 2) 20,00,000
Additional ESOP charge on unvested options (note 4) (1,000)
Transfer of cumulative translation difference balance to retained 1,00,000
(note 5)
After the above adjustments, the carrying values of assets and liabilities for the
purpose of opening Ind AS balance sheet of Company H should be as under:
Particular Notes Previous Adjustments Ind AS GAAP

Non- Current Assets
Fixed assets 1 1,34,50,000 (4,50,000) 1,30,00,000
Investment property 1 0 4,50,000 4,50,000
Investment in S Ltd. 2 48,00,000 20,00,000 68,00,000
Advances for purchase of 50,00,000 50,00,000
inventory
Current Assets
Debtors 2,00,000 2,00,000
Inventory 8,00,000 8,00,000
Cash 49,000 _______ 49,000
Total assets 2,42,99,000 20,00,000 2,62,99,000
Non-current Liabilities
Sales tax deferral loan 3 60,00,000 (22,74,472) 37,25,528
Deferred government grant 3 0 22,74,472 22,74,472
Current Liabilities
Creditors 30,00,000 30,00,000
Short term borrowing 8,00,000 8,00,000
Provisions 12,00,000 12,00,000
Total liabilities 1,10,00,000 1,10,00,000
Share capital 1,30,00,000 1,30,00,000
Reserves:
Cumulative translation 5 1,00,000 (1,00,000) 0
difference
ESOP reserve 4 20,000 1,000 21,000
Other reserves 6 1,79,000 20,99,000 22,78,000
Total equity 1,32,99,000 20,00,000 1,52,99,000
Total equity and liabilities 2,42,99,000 20,00,000 2,62,99,000
200 ACCOUNTS
TEST YOUR KNOWLEDGE
QUESTIONS
1. Company A intends to restate its past business combinations with effect with from
30 June 2010 (being a date prior to the transition date). If business combinations are
restated, whether certain other exemptions, such as the deemed cost exemption for
property, plant and equipment (PPE), can be adopted?
2. X Ltd. was using cost model for its property, plant and equipment till March 31, 2016
under previous GAAP. The Ind AS become applicable to the company for financial year
beginning April 1, 2016. On April 1, 2015, i.e., the date of its transition to Ind AS, it
used fair value as the deemed cost in respect of its property, plant and equipment. X
Ltd. wants to follow revaluation model as its accounting policy in respect of its property,
plant and equipment for the first annual Ind AS financial statements. Whether use of
fair values as deemed cost on the date of transition and use of revaluation model in
the first annual Ind AS financial statements would amount to a change in accounting
policy?
3. Y Ltd is a first time adopter of Ind AS. The date of transition is April 1, 2015. On
April 1, 2010, it obtained a 7 Year US $ 1,00,000 loan. It has been exercising the
option provided in Paragraph 46/46A of AS 11 and has been amortising the exchange
difference in respect of this loan over the balance period of such loan. On the date
of transition to Ind AS, Y Ltd. wants to discontinue the accounting policy as per the
previous GAAP and follow the requirements of Ind AS 21, The Effects of Changes in
Foreign Exchange Rates with respect to recognition of foreign exchange differences.
Whether the Company is permitted to do so?
4. A company has chosen to elect the deemed cost exemption in accordance with Ind
AS 101. However, it does not wish to continue with is existing policy of capitalizing
exchange fluctuation on loan term foreign currency monetary items to fixed assets
i.e. it does not want to elect the exemption available as per Ind AS 101. In such a case,
how would the company be required to adjust the foreign exchange fluctuation already
capitalised to the cost of property, plant and equipment under previous GAAP?
NEWLY ADDED QUESTIONS IN SM IN IND AS 101
QUESTION 1
Government of India provides loans to MSMEs at a below-market rate of interest to fund

the set-up of a new manufacturing facility.
Company A’s date of transition to Ind AS is 1 April 20X5.
In 20X2, Company A had received a loan of ` 1 crore at a below-market rate of interest
from the government. Under Indian GAAP, Company A accounted for the loan as equity and
the carrying amount was ` 1 crore at the date of transition. The amount repayable at 31
March 20X9 will be ` 1.25 crore.
The loan meets the definition of a financial liability in accordance with Ind AS 32. Company
A therefore reclassifies it from equity to liability. It also uses the previous GAAP carrying
amount of the loan at the date of transition as the carrying amount of the loan in the opening
Ind AS balance sheet. It calculates the annual effective interest rate (EIR) starting 1
April 20X5 as below:
EIR = Amount / Principal(1/t) i.e. 1.25/1(1/4) i.e. 5.74%. approx.
Show the table of interest at IRR and carrying amount at the end of each year.
SOLUTION:
During the next 4 years, the interest expense charged to statement of profit and loss
shall be:
Year ended Opening amortised Interest expense Closing amortised

cost (`) for the year (`) @ cost (`)
5.74% P.a. approx.
31 March 20X6 1,00,00,000 5,73,713 1,05,73,713
31 March 20X7 1,05,73,713 6,06,627 1,11,80,340
31 March 20X8 1,11,80,340 6,41,430 1,18,21,770
31 March 20X9 1,18,21,770 6,78,230 1,25,00,000

202 ACCOUNTS
QUESTION 2
(MTP OCT 2020…Q.4….ALREDAY DISCUSSED IN MTP VIDEO)

Shaurya Limited is the company having its registered and corporate office at New Delhi.
60% of Shaurya Limited’s shares are held by the Government of India and rest by other
investors.
This is the first time that Shaurya limited would be applying Ind AS for the preparation of
its financials for the current financial year 2019-2020. Following balance sheet is prepared
as per earlier GAAP as at the beginning of the preceding period along with the additional
information:
Balance Sheet as at 31 March 2018
(All figures are in ’000, unless otherwise specified)
Particulars Amount

(1) Shareholders’ Funds
(a) Share Capital 10,00,000
(b) Reserves & Surplus 25,00,000
(2) Non-Current Liabilities
(a) Long Term Borrowings 4,50,000
(b) Long Term Provisions 3,50,000
(c) Deferred tax liabilities 3,50,000
(3) Current Liabilities
(a) Trade Payables 22,00,000
(b) Other Current Liabilities 4,50,000
(c) Short Term Provisions 12,00,000
TOTAL 85,00,000
ASSETS
(1) Non-Current Assets
(a) Property, Plant & Equipment (net) 20,00,000
(b) Intangible assets 2,00,000
(c) Goodwill 1,00,000
(d) Non-current Investments 5,00,000
(e) Long Term Loans and Advances 1,50,000

(f) Other Non-Current Assets 2,00,000
(2) Current Assets
(a) Current Investments 18,00,000
(b) Inventories 12,50,000
(c) Trade Receivables 9,00,000
(d) Cash and Bank Balances 10,00,000
(e) Other Current Assets 4,00,000
TOTAL 85,00,000
Additional Information (All figures are in ’000) :

1. Other current liabilities include ` 3,90,000 liabilities to be paid in cash such as expense
payable, salary payable etc. and ` 60,000 are statutory government dues.
2. Long term loans and advances include ` 40,000 loan and the remaining amount consists
Advance to staff of ` 1,10,000.
3. Other non-current assets of ` 2,00,000 consists Capital advances to suppliers.
4. Other current assets include ` 3,50,000 current assets receivable in cash and Prepaid
expenses of ` 50,000.
5. Short term provisions include Dividend payable of ` 2,00,000. The dividend payable
had been as a result of board meeting wherein the declaration of dividend for financial
year 2017-2018 was made. However, it is subject to approval of shareholders in the
annual general meeting.
Chief financial officer of Shaurya Limited has also presented the following information
against corresponding relevant items in the balance sheet:
a) Property, Plant & Equipment consists a class of assets as office buildings whose carrying
amount is ` 10,00,000. However, the fair value of said office building as on the date of
transition is estimated to be ` 15,00,000. Company wants to follow revaluation model
as its accounting policy in respect of its property, plant and equipment for the first
annual Ind AS financial statements.
b) The fair value of Intangible assets as on the date of transition is estimated to be
` 2,50,000. However, the management is reluctant to incorporate the fair value
changes in books of account.
c) Shaurya Ltd. had acquired 80% shares in a company, Excel private limited few years
ago thereby acquiring the control upon it at that time. Shaurya Ltd. recognised goodwill
204 ACCOUNTS
as per erstwhile accounting standards by accounting the excess of consideration paid

over the net assets acquired at the date of acquisition. Fair value exercise was not
done at the time of acquisition.
d) Trade receivables include an amount of ` 20,000 as provision for doubtful debts
measured in accordance with previous GAAP. Now as per latest estimates using
hindsights, the provision needs to be revised to ` 25,000.
e) Company had given a loan of ` 1,00,000 to an entity for the term of 10 years six years
ago. Transaction costs were incurred separately for this loan. The loan carries an
interest rate of 7%. The principal amount is to be repaid in equal installments over the
period of ten years at the year end. Interest is also payable at each year end. The fair
value of loan as on the date of transition is ` 50,000 as against the carrying amount
of loan which at present amounts to ` 40,000. However, Ind AS 109 mandates to
recognise the interest income as per effective interest method after the adjustment
of transaction costs. Management says it is tedious task in the given case to apply the
effective interest rate changes with retrospective effect and hence is reluctant to
apply the same retrospectively in its first time adoption.
f) In the long-term borrowings, ` 4,50,000 of component is due towards the State
Government. Interest is payable on the government loan at 4%, however the prevailing
rate in the market at present is 8%. The fair market value of loan stands at ` 4,20,000
as on the relevant date.
g) Under Previous GAAP, the mutual funds were measured at cost or market value,
whichever is lower. Under Ind AS, the Company has designated these investments at
fair value through profit or loss. The value of mutual funds as per previous GAAP is `
2,00,000 as included in ‘current investment’. However, the fair value of mutual funds
as on the date of transition is ` 2,30,000.
h) Ignore separate calculation of deferred tax on above adjustments. Assume the net
deferred tax income to be ` 50,000 on account of Ind AS transition adjustments.
Requirements:
- Prepare transition date balance sheet of Shaurya Limited as per Indian Accounting
Standards
- Show necessary explanation for each of the items presented by chief financial officer
in the form of notes, which may or may not require the adjustment as on the date of
transition.
QUESTION 3
(RTP MAY 2019…Q11…ALREADY DISCUSSED IN RTP VIDEO)

XYZ Pvt. Ltd. is a company registered under the Companies Act, 2013 following Accounting
Standards notified under Companies (Accounting Standards) Rules, 2006. The Company has
decided to voluntarily adopt Ind AS w.e.f 1st April, 20X2 with a transition date of 1st April,
20X1.
The Company has one Wholly Owned Subsidiary and one Joint Venture which are into
manufacturing of automobile spare parts.
The consolidated financial statements of the Company under Indian GAAP are as under:
Consolidated Financial Statements
(` in Lakhs)
Particulars 31.03.20X2 31.03.20X1

Shareholder’s Funds
Reserves & Surplus 16,547 16.597
Long Term Borrowings 1,000 1.000
Long Term Provisions 1,101 691
Other Long-Term Liabilities 5,202 5,904
Current Liabilities
Trade Payables 9,905 8.455
Short Term Provisions 500 475
Total 42,208 41,075
Non-Current Assets
Property Plant & Equipment 21,488 22,288
Goodwill on Consolidation of subsidiary and JV 1,507 1,507
Investment Property 5,245 5,245
Long Term Loans & Advances 6,350 6,350
Current Assets
Investments 1,263 3,763
Other Current Assets 1,554 104
Total 42,208 41,075
206 ACCOUNTS
The Company has entered into a joint arrangement by acquiring 50% of the equity shares of
ABC Pvt. Ltd. Presently, the same has been accounted as per the proportionate consolidated
method. The proportionate share of assets and liabilities of ABC Pvt. Ltd. included in the
consolidated financial statement of XYZ Pvt. Ltd. is as under:
Particulars ` in Lakhs
Property, Plant & Equipment 1,200

Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Trade Payables 75
Short Term Provisions 35
The Investment is in the nature of Joint Venture as per Ind AS 111.

The Company has approached you to advice and suggest the accounting adjustments which
are required to be made in the opening Balance Sheet as on 1st April, 20 X1.
QUESTION 4 (RTP NOV 2019….Q.14)
Mathur India Private Limited has to present its first financials under Ind AS for the year
ended 31st March, 20X3. The transition date is 1st April, 20X1.
The following adjustments were made upon transition to Ind AS:
(a) The Company opted to fair value its land as on the date on transition.
The fair value of the land as on 1st April, 20X1 was ` 10 crores. The carrying amount
as on 1st April, 20X1 under the existing GAAP was ` 4.5 crores.
(b) The Company has recognised a provision for proposed dividend of ` 60 lacs and related
dividend distribution tax of ` 18 lacs during the year ended 31st March, 20X1. It was
written back as on opening balance sheet date.
(c) The Company fair values its investments in equity shares on the date of transition. The
increase on account of fair valuation of shares is ` 75 lacs.
(d) The Company has an Equity Share Capital of ` 80 crores and Redeemable Preference
Share Capital of ` 25 crores.
(e) The reserves and surplus as on 1st April, 20X1 before transition to Ind AS was ` 95
crores representing ` 40 crores of general reserve and ` 5 crores of capital reserve
acquired out of business combination and balance is surplus in the Retained Earnings.
(f) The company identified that the preference shares were in nature of financial
liabilities.
What is the balance of total equity (Equity and other equity) as on 1st April, 20X1 after
transition to Ind AS? Show reconciliation between total equity as per AS (Accounting
Standards) and as per Ind AS to be presented in the opening balance sheet as on 1st April,
20X1.
Ignore deferred tax impact.
QUESTION 5
ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the previous
GAAP, the contributions received by ABC Ltd. from the government (which holds 100%
shareholding in ABC Ltd.) which is in the nature of promoters’ contribution have been
recognised in capital reserve and treated as part of shareholders’ funds in accordance with
the provisions of AS 12, Accounting for Government Grants.
State whether the accounting treatment of the grants in the nature of promoters’
contribution as per AS 12 is also permitted under Ind AS 20 Accounting for Government
Grants and Disclosure of Government Assistance. If not, then what will be the accounting
treatment of such grants recognised in capital reserve as per previous GAAP on the date
of transition to Ind AS.
QUESTION 6
A Ltd acquired B Ltd. in a business combination transaction. A Ltd. agreed to pay certain
contingent consideration (liability classified ) to B Ltd. As part of its investment in its
separate financial statements, A Ltd did not recognise the said contingent consideration
(since it was not considered probable) A Ltd. considered the previous GAAP carrying amounts
of investment as its deemed cost on first time adoption. Ind that case, does the carrying
amount of investment required to be adjusted for this transaction?
SOLUTION:
In accordance with Ind AS 101, an entity has an option to treat the previous GAAP carrying
values, as at the date of transition, of investments in subsidiaries, associated and joint
ventures as its deemed cost on transition to Ind AS. If such an exemption is adopted, then
the carrying values of such investments are not adjusted. Accordingly, any adjustments in
relation to recognition of contingent consideration on first time adoption shall be made in
the statement of profit and loss.
208 ACCOUNTS
QUESTION 7
Company B is a foreign subsidiary of Company A and has adopted IFRS as issued by IASB as
its primary GAAP for its local financial reporting purposes. Company B prepares its financial
statements as per Accounting Standards specified under Section 133 of the Companies
Act, 2013 read with Rule 7 of the Companies (Accounts) Rules, 2014 for the purpose of
consolidation with Company A. On transition of Company A to Ind-AS, what would be the
previous GAAP of the foreign subsidiary Company B for its financial statements prepared
for consolidation with Company A?
IND AS 12: INCOME TAXES 209

INCOME TAXES
There was a time in India, few decades back when the concept of zero income tax entities
was prevalent. Due to various income tax benefits, these companies had no current tax
liability for any income tax that was payable based on that year’s accounting profit. Thus,
No provision of income tax was created. Profit after tax used to be equal to profit before
tax. But from accounting perspective, this was not a correct reflection of results quite a
few of these tax benefits were primarily accelerated benefits.
For example, depreciation was deductible in taxation on written down value method (WDV)
whereas in the books of accounts, entities could claim depreciation on straight line method
(SLM) AS everybody knows that under WDV method, in initial years depreciation charge is
greater than depreciation under SLM. This resulted into accounting profits but no taxable
profits. But over the useful life of the asset, depreciation under both methods is equal.
In later years, depreciation charge under SLM would be higher than in depreciation under
WDV. Therefore, in later years, in such a situation, the taxable profits will be higher than
the book profits. This will require a higher tax provision in books when compared to the
accounting profits of that year. Basically, this differential will due to non-provision of tax
liability in an earlier year.
EXAMPLE 1:
An entity has acquired an asset for ` 10,000. The depreciation rate as per income tax is
40% on WDV basis. In books of account, entity claims depreciation on equivalent SLM basis
of 16.21% the entity has accounting and taxable profits of ` 20,000 from year 1 to year 4,
inclusive, before any allowance of depreciation in either case.
The tax rate is 30%. Assuming no concept of deferred tax, the provision for current tax
would be computed as under:
Year 1 2 3 4
Cost of the asset 10,000 10,000 10,000 10,000
Depreciation rate –WDV 40% 40% 40% 40%
Depreciation amount – WDV 4,000 2,400 1,440 864
Taxable profits before depreciation 20,000 20,000 20,000 20,000
Less: Depreciation (4,000) (2,400) (1,440) (864)
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Taxable profits after depreciation 16,000 17,600 18,560 19,136

Tax rate 30% 30% 30% 30%
Tax amount 4,800 5,280 5,568 5,741
However, in the books of accounts, the situation will be as under ;
Year 1 2 3 4
(a) Cost of the asset 10,000 10,000 10,000 10,000
(b) Depreciation rate –SLM 16.21% 16.21% 16.21% 16.21%
(c) Depreciation amount -SLM 1.621 1,621 1,621 1,621
(d) Accounting profit before depreciation 20,000 20,000 20,000 20,000
(e) Less: Depreciation (1,621) (1,621) (1,621) (1,621)
(f) Accounting profits after depreciation 18,379 18,379 18,379 18,379
(g) Tax amount –as above 4,800 5,280 5,568 5,741
(h) Effective tax rate = (g)/(f) 26.12% 28.73% 30.30% 31.24%
(i) Tax provision @ 30% tax rate {30%*(f)} 5,514 5,514 5,514 5,514
Thus, from the above two tables, for an accountant the tax should be ` 5,514 in all cases
as per the accounting profit. The results are distorted. You will observe that in year 3, in
books, the amount of tax provision is higher by ` 54 (5,568- 5,514) and in year 4, it is higher
by ` 227 (5,741-5,514). This is so because in year 1 & 2, these figures are lower by ` 714
(5,514 - 4,800) ` 234 (5,514 -5,280). Thus, the liability that was incurred in year 1 & 2 is
paid year 3 onwards However, no provision of the differential (` 714 in year 1& 2 ` 234 in
year2) is made.
The provision of differential should have been made by the entity following there major
accounting concepts and convention of periodicity, matching and accrual. The entity has
merely deferred the payment of tax to subsequent year. This Understanding and appreciation
of situation gave rise to the concept of deferred tax liabilities or deferred tax assets.
In earlier years, deferred tax was recognised based on concepts of timing differences
and permanent differences based on differences in accounting profits and taxable profits
known as income tax liability method. This concept stands revised with this Accounting
Standard which recognised deferred tax based on temporary differences that arises due
to difference in the carrying value of an item of asset or liability as per books of accounts
with the carrying value of that item as per income tax provisions, known as tax based. This
method is known as balance sheet approach.
This Accounting standard though titled as ‘income taxes’ primarily deals with deferred tax
though guidance is provided on current tax.
Differences
Temporary Other than Temporary

Differences differences
Taxable Temporary Deductible Temporary

Cannot be
Difference (Results in Deference (Results in
reversed
DTL) DTA)
• Items of current tax or defer tax recognized in profit and loss are subject to two
exceptions:
1. An item of current tax or defer tax pertaining to other comprehensive income
should be recognized in other comprehensive income
2. An item of current tax or defer tax pertaining to direct equity should be
recognized in direct equity
Tax Accounting
Transactions and Events Transactions and Events

recognised Outside Profit recognised in profit in
and Loss Loss
Related Tax effects Related Tax Effect Related tax effects

recognised in other recognised in Statement also recognised in
comprehensive Income of Changes in Equity profit or Loss
212 ACCOUNTS
DEFINITIONS
Having understood, the basic concepts of current tax and deferred tax, the following
definitions needs to be appreciated:
(a) Accounting profit is profit or loss for a period before deducting tax expense.
(b) Taxable profit (tax loss) is profit (loss) for a period, computed as per the income tax
act, upon which income taxes are payable (recoverable).
(c) Tax expense (tax income) is the aggregate amount included in the determination of
profit or loss for the period in respect of current tax and deferred tax.
(d) Current tax is the amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.
(e) Deferred tax liabilities are the amounts of income taxes payable in future periods in
respect of taxable temporary differences.
(f) Deferred tax assets are the amount of income taxes recoverable in future periods in
respect of:
♦ Deductible temporary differences;
♦ The carry forward of unused tax losses; and
♦ The carry forward of unused tax credits.
(g) Temporary differences are differences between the carrying amounts of an assets
or liability in the balance sheet and its tax base.
(h) Temporary differences may be either:
♦ Taxable temporary differences, which are temporary differences that will result
in taxable amounts in determining taxable profit (tax loss) of future periods when
the carrying amount of the asset or liability is recovered or settled; or
♦ Deductible temporary differences, which are temporary differences that will
result in amount that are deductible in determining taxable profit (tax loss) of
future periods when the carrying amount of the asset or liability is recovered or
settled.
(i) The tax base of an asset or liability is the carrying amount to that asset or liability
for tax purposes.
To facilitate, easy understanding, this chapter has been divided as under:

(a) Part A: Tax Expense
(b) Part B: Current Tax, its recognition Measurement and Presentation
(c) Part C: Deferred tax, its Recognition, Measurement and presentation
(d) Part D: practical Application
(e) Part E: Disclosures
PART A: TAX EXPENSE (TAX INCOME)
• Tax expense or tax income is the aggregate amount include in the determination of
profit or loss for the period in respect of current of tax and deferred tax.
• The following needs to be appreciated:
(a)
Tax expense could be positive or negative. Thus, there could be a tax income.
(b)
Tax expense is the aggregate of:
♦ Current tax; and
♦ Deferred tax.
PART B: CURRENT TAX
Current tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable
profit (tax loss) for a period.
Recognition
(a) Current tax liability

♦ Current tax for current and prior periods shall, to the extent unpaid, be recognised
as a liability.
♦ The exact liability of current tax crystallizes only on preparation and finalization
of financial statements at the end of the reporting period.
♦ Any excess of this liability over the prepaid taxes (advance tax) and withhold
taxes (TDS) is to be treated as current liability. This liability may be for the
current reporting period or may relate to earlier reporting periods.
(b) Current tax assets
♦ If the amount already paid in respect of current and prior periods exceeds the
amount due for those periods, the excess shall be recognised as an asset.
♦ Further, wherever tax loss of a reporting period could be carried backwards, the
entity is eligible as per tax laws to a benefit. The entity recognises this benefit
as an asset in the period in which the tax loss occurs because it is probable that
the benefit will flow to the entity and the benefit can be reliably measured.
214 ACCOUNTS
Example
An entity has An entity has paid a tax in the previous year on a profit of
` 5, 00,000 and suffered a loss in the current year of ` 6, 00,000. Such loss
` 6, 00,000 can be adjusted against the loss to the extent of ` 5, 00,000 and
the entity will create tax asset to that extent. It is called carry backward of
losses.
♦ Thus, the benefit relating to a tax loss that can be carried back to recover
current tax of a previous period shall be recognised as an asset.
PART C: DEFERRED TAX, ITS RECOGNITION,

MEASUREMENT AND PRESENTAITON
The following steps should be followed in the recognition, measurement and presentation of
deferred tax liabilities or assets:
Step 1: Compute carrying amounts of assets and liabilities
Step 2: Compute tax base
Step 3: Compute temporary differences
Step 4: Classify temporary differences into either:
♦ Taxable temporary difference
♦ Deductible temporary difference
Temporary Differences
Deferred Tax Assets Deferred Tax Liabilities
In respect of In respect of In respect of In respect

Deductible carry forward Carry forward of Taxable
Temporary of unused tax of Unused tax Temporary
Differences losses Credit losses Differences
Hitherto, In India entities have been determining deferred tax based on Accounting standard
(AS) 22, accounting for Taxes on Income, as notified in companies (Accounting Standards)
Rules, 2006. The concept there is of timing difference; and permanent difference’. Based
upon the nature of difference, deferred tax liabilities or assets are recognised. The Ind
AS 12 is based on the concept of temporary difference. As per Ind AS 12, there are only
temporary differences, no permanent differences and timing differences are a component
of temporary differences. The concept of temporary differences’ is core of this Ind AS
The term temporary difference is defined as the difference between the carrying amount
of an asset or liability in the balance sheet and its tax base.
Example
An entity has an item of plant and machinery acquired on the first day of the reporting
period for ` 1, 00,000. It depreciates it @ 20% p. a on SLM basis. The carrying amount in
balance sheet is ` 80,000. the taxation laws require depreciation @ 30% on WDV basis,
The tax base at the end of the reporting period is ` 70,000. the temporary difference
is ` 10, 000 (` 80,000 - ` 70,000)
The contention in favor of temporary difference is that at the end of the day, all differences
between the carrying amount and tax base of an asset or liability will reverse. At most
the entity may be able to delay the timing of reversal but the difference will ultimately
reversed, therefore the term ‘temporary difference ‘is used. The cumulative impact is
zero’.
Example
An entity acquires an asset on the first day of reporting period for ` 120 with a useful
life of 6 years and no residual value .it depreciate the asset on SLM basis. The tax rate
is 30%. The tax depreciation is as assumed in the computation below.
The following computations are perfromed.

Financial Statements
Year 1 2 3 4 5 6
Gross Block 120 120 120 120 120 120
Cumulative Depreciation 20 40 60 80 100 120
Carrying Amount 100 80 60 40 20 0
Tax Computation
Year 1 2 3 4 5 6
Tax base brought forward 120 30 20 13 8 3
Depreciation charge (assumed) 90 10 7 5 5 3
Tax base carried forward 30 20 13 8 3 0
216 ACCOUNTS
Temporary Difference
Year 1 2 3 4 5 6
Carrying Amount 100 80 60 40 20 0
Tax base carried forward 30 20 13 8 3 0
Temporary difference 70 60 47 32 17 0
Cumulative impact +70 -10 -13 -15 -15 -17
+70 -70
Movement in Balance Sheet
Year 1 2 3 4 5 6
Temporary difference @ 30% 70 60 47 32 17 0
Deferred tax liability 21 18 14 10 5 0

Movement in provision +21 -3 -4 -4 -5 -5
cumulative +21 -21
Based on the above discussions, a matrix as under may be drawn:
For Assets For Liabilities

If carrying amount > tax base TaxableTemporary Difference Deductible Temporary
Deferred Tax Liability Difference
Deferred Tax Asset
If carrying amount < tax base Deductible Temporary Taxable Temporary
Difference Difference
Deferred Tax Asset Deferred Tax Liability
If carrying amount = tax base No temporary difference No temporary difference
Further examples of Taxable temporary differences:

• Transactions that affect profit or loss
Example
Interest revenue is received in arrears and is included in accounting profit on a time
apportionment basis but is included in taxable profit on a cash basis
Example
Revenue from the sale of goods is included in accounting profit when goods are delivered
but is included in taxable profit when cash is collected.
In this case, there is also a deductible temporary difference associated with any related
inventory.
Example
Depreciation of an asset is accelerated for tax purpose.
Example
Development costs have been capitalised and will be amortised to the statement of profit
and loss but were deducted in determining taxable profit in the period in which they were
incurred.
Example
Prepaid expenses have already been deducted on a cash basis in determining the taxable
profit of the current or previous periods.
• Transactions that affect the balance sheet
Example
Depreciation of an asset is not deductible for tax purposes and no deduction will be
available for tax purposes when the asset is sold of scrapped.
Example
A borrower records a loan at the proceeds received (Which equal the amount due at
maturity), less transaction costs. Subsequently, the carrying amount of the loan is
increased by amortisation of the transaction costs to accounting profit. The transaction
costs were deducted for tax purposes in the period when the loan was first recognised
Example
A loan payable was measured on initial recognition at the amount of the net proceeds, net
of transaction costs, The transaction costs are amortised to accounting profit over the
life of the loan,. Those transaction costs are not deductible in determining the taxable
profit of future, current of prior periods.
218 ACCOUNTS
Example
The liability component of a compound financial instrument (for example a convertible
bond) is measured at discount to the amount repayable on maturity (see Ind AS 32,
Financial instruments: presentation). The discount is not deductible in determining
taxable profit (tax loss).
• Fair value adjustments and revaluation
Example
Financial assets are carried at fair value which exceeds cost but no equivalent adjustment
is made for tax purposes.
Example
An entity revalues property, plant and equipment (Under the revaluation model treatment
in Ind AS 16, property, plant and Equipment) but no equivalent adjustment is made for
tax purposes.
• Business combinations and consolidation
Example
The carrying amount of an asset is increased to fair value in a business combination and
no equivalent adjustment is made for tax purposes.
Example
Reductions in the carrying amount of goodwill are not deductible in determining taxable
profit and the cost of the goodwill would not be deductible on disposal of the business.
Example
Unrealized losses resulting from intragroup transactions are eliminated by inclusion in
the carrying amount of inventory of property, plant and equipment.
Example
Retained earnings of subsidiaries, branches, associates and joint ventures are included
in consolidated retained earnings, but income taxes will be payable if the profits are
distributed to the reporting parent.
Example
Investment in foreign subsidiaries, branches or associates or interests in foreign joint
ventures are affected by changes in foreign exchange rate.
Example
The non-monetary assets and liabilities of an entity are measured in its functional
currency but the taxable profit or tax loss is determined in different currency.
Further examples of deductible temporary differences:

Transactions that affect profit of loss
Example
Retirement benefit costs are deducted in determining accounting profit as service is
provided by the employee, but are not deducted in determining taxable profit until
the entity pays either retirement benefits or contributions to a fund. (note: similar
deductible temporary differences arise where other expenses. Such as gratuity and leave
encashment or interest, are deductible on a cash basis in determining taxable profit.)
Example
Accumulated depreciation of an asset in the financial statements is greater than the
cumulative depreciation allowed up to the end of the reporting period for tax purposes.
Example
The cost of inventories sold before the end of the reporting period is deducted in
determining accounting profit when goods or services are delivered but is deducted in
determining taxable profit when cash is collected. (it may be noted. There is also a taxable
temporary difference associated with the related trade receivable.)
Example
The net realisable value of an item of inventory, or the recoverable amount of an item
of property, plant or equipment, is less than the previous carrying amount and an entity
therefore reduces the carrying amount of the asset, but that reduction is ignored for
tax purposes until the asset is sold.
Example
Preliminary expenses (or organization or other start up costs) are recognised as an expense
in determining accounting profit but are not permitted as a deduction in determining
taxable profit until a later period.
220 ACCOUNTS
Example
Income is deferred in the balance sheet but has already been included in taxable profit
in current or prior periods.
Example
A government grants which is included in the balance sheet as deferred income will not
be taxable in future periods.
• Fair value adjustments and revaluation
Example
Financial assets are carried at fair which is less than cost, but no equivalent adjustment
is made for tax purposes.
• Business combinations and consolidation
Example
A liability is recognised at its fair value in a business combination, but none of the related
expense is deducted in determining taxable profit until a later period.
Example
Unrealised profits resulting from intragroup transactions are eliminated from the
carrying amount of assets, such as inventory or property, plant or equipment, but no
equivalent adjustment is made for tax purposes.
Example
Investments in foreign subsidiaries branches or associates or interests in foreign joint
ventures are affected by changes in foreign exchange rates.
Example
The non-monetary assets and liabilities of an entity are measured in its functional
currency but the taxable profit or tax loss is determined in a different currency.
Deferred tax arising from a business Combination
(a) As discussed above, temporary differences may arise in a business combination. In

accordance with Ind AS 103, an entity recognises any resulting deferred tax assets
(to the extent that they meet the recognition criteria) or deferred tax liabilities as
identifiable assets and liabilities at the acquisition date. Consequently, those deferred
tax assets and deferred tax liabilities affect the amount of goodwill or the bargain
purchase gain the entity recognises. However, in accordance with this Ind AS, in
certain circumstances, an entity does not recognise deferred tax liabilities arising
from the initial recognition of goodwill.
(b) As a result of a business combination, the probability of realising a pre-acquisition

deferred tax asset of the acquirer could change. An acquirer may consider it probable
that it will recover its own deferred tax asset that was not recognised before the
business combination for example, the acquirer may be able to utilise the benefit of
its unused tax losses against the future taxable profit of the acquiree. Alternatively,
as a result of the business combination it might no longer be probable that future
taxable profit will allow the deferred tax asset to be recovered. In such cases, the
acquirer recognises a change in the deferred tax asset in the period of the business
combination but does not include it as part of the accounting for the business
combination. Therefore, the acquirer does not take it into account in measuring the
goodwill or bargain purchase gain it recognises in the business combination.
(c) The potential benefit of the acquiree’s income tax loss carry forward or other deferred
tax assets might not satisfy the criteria for separate recognition when a business
combination is initially accounted for but might be realised subsequently. An entity
shall recognise acquired deferred tax benefits that it realises after the business
combination as follows:
♦ Acquired deferred tax benefits recognised within the measurement period that
result from new information about facts and circumstances that existed at the
acquisition date shall be applied to reduce the carrying amount of any goodwill
related to that acquisition. If the carrying amount of that goodwill is Zero, any
remaining deferred tax benefits shall be recognised in other comprehensive
income and accumulated in equity as capital reserve or recognises directly in
capital reserve, depending on whether paragraph 34 or paragraph 36A of Ind AS
103 would have applied had the measurement period adjustments been known on
the date of acquisition itself.
♦ All other acquired deferred tax benefits realised shall be recognised in profit or
loss (or, if this Standard so requires, outside profit or loss).
222 ACCOUNTS
QUESTION 1
An entity has a deductible temporary difference of ` 50,000. It has no taxable temporary

differences against which it can be offset. The entity is also not anticipating any future
profits. However, it can implement a tax planning strategy which can generate profit up to
` 60,000. The cost of implementing this tax planning strategy is ` 12,000. The tax rate is
30%. compute the deferred tax asset that should be recognised.
QUESTION NO 2
A Limited recognises interest income in its books on accrual basis. However, for income tax
purposes the method is ‘cash basis’. On December 31, 20X1, it has interest receivable of
` 10,000 and the tax rate was 25% On February 28, 20X1, the finance bill is introduced in
the legislation that changes the tax rate to 30%. The finance bill is enacted as Act on May
21, 20X2. Discuss the treatment of deferred tax in case tax reporting date of A Limited’s
financial statement is December 31, 20X1 and these are approved for issued on May 31,
20X2.
QUESTION NO 3
An asset which cost ` 150 has a carrying amount of ` 100. Cumulative depreciation for tax
purposes is ` 90 and the tax rate is 25% Calculate the tax base.
QUESTION NO 4
A company had purchased an asset at ` 1, 00,000. Estimated useful life of the asset is
5 years and depreciation rate is 20%. (Depreciation rate for tax purposes is 25%. The
operating profit is ` 1,00,000 for all the 5 years. Tax rate is 30% for the next 5 years.
Calculate the book value as per financial and tax purposes and then DTL.
QUESTION NO 5
A Ltd. Acquired B Ltd. the following assets and liabilities are acquired in a business
combination.
` 000’s
Fair value Carrying amount Temporary

Plant and Equipment 250 260 (10)
Inventory 120 125 (5)

Debtors 200 210 (10)
570 595 (25)
9% Debentures (100) (100)
470 495
Consideration paid 500 500 __
Calculate Deferred Tax Asset.
QUESTION NO 6
XYZ Ltd. proposes to issue 1000 shares to its 200 employees under ESOP. (Vesting condition:
continuous employment for 3 years). 10% labour turnover is observed and value of option is
` 40. Calculate Deferred Tax Asset. What is if the entity gets a deduction of ` 19,00,000
(say as per tax law share based payment is measured differently) instead of ` 17,49,600 ?
QUESTION NO 7
B Limited is a newly incorporated entity. Its first financial period ends on March 31, 20X1.
As on the said date, the following temporary differences exist:
(a) Taxable temporary differences relating to accelerated depreciation of ` 9,000. These
are expected to reverse equally over next 3 years.
(b) Deductible temporary differences of ` 4,000 expected to reverse equally over next
4 years.
It is expected that B Limited will continue to make losses for next 5 years. Tax rate is 30%
Losses can be carried forward but not backwards.
Discuss the treatment of deferred tax as on March 31, 20X1.
224 ACCOUNTS
QUESTION NO 8
A company ABC Limited prepares its accounts annually on 31st March. On 1ST April 2001 it
purchases a machine at a cost of Rs. 1,50,000. The machine has a useful life of three years
and an expected scrap value of Zero. Although it is eligible for a 100% first year depreciation
allowance for the tax purposes, the straight line method is considered appropriate for
accounting purposes. ABC Limited has profits before depreciation and taxes of Rs. 2,00,000
each year and the corporate tax rate is 40per cent each year.
QUESTION NO 9
In above illustration, the corporate tax rate has been assumed to be same in each of the
three years. If the rate of tax is assumed 40%, 35% and 38% respectively, compute the
amount of deferred tax liability?
QUESTION NO 10
A company ABC Limited prepares its accounts annually on 31st March. The company has
incurred a loss of Rs.1,00,000 in the year 2001 and made profits of Rs.50,000 and 60,000 in
year 2002 and 2003 respectively. It is assumed that under the tax laws, loss can be carried
forward for 8 years and tax rate is 40% and at the end of year 2001. It was virtually
certain, supported by convincing evidence, that the company would have sufficient taxable
income in the future years against which unabsorbed depreciation and carry forward of
losses can be set off. It is also assumed that there is no difference between taxable
income and accounting income except that set off of loss is allowed in years 2002 and 2003
for tax purpose.
QUESTION NO 11
Liverpool Limited has three financial statement elements for year ended 31.03.2001, the
book value and tax basis value is given below:-
Book value tax value

Equipment 2,00,000 1,20,000
Prepaid insurance 75,000 Nil
Warranty liability 50,000 Nil
Calculate the deferred tax asset/liability. Tax rate is 40%.

EXTRA QUESTIONS ON IND AS 12
QUESTION 12
The directors of H wish to recognise a material deferred tax asset in relation to ` 250 Cr
of unused trading losses which have accumulated as at 31st March 20X1. H has budgeted
profits for ` 80 Cr for the year ended 31st March 20X2. The directors have forecast that
profits will grow by 20% each year thereafter. However, the improvement in trading results
may occur after the next couple of years to come at the position of breakeven. The market
is currently depressed and sales orders are at a lower level for the first quarter of 20X2
than they were for the same period in any of the previous five years. H operates under a
tax jurisdiction which allows for trading losses to be only carried forward for a maximum
of two years.
Analyse whether a deferred tax asset can be recognized in the financial statements of H
for the year ended 31st March 20X1?
QUESTION 13
On 1st April 20X1, S Ltd. leased a machine over a 5 year period. The present value of
lease liability is ` 120 Cr (discount rate of 8%) and is recognized as lease liability and
corresponding Right of Use (RoU) Asset on the same date. The RoU Asset is depreciated
under straight line method over the 5 years. The annual lease rentals are ` 30 Cr payable
starting 31st March 20X2. The tax law permits tax deduction on the basis of payment of
rent.
Assuming tax rate of 30%, you are required to explain the deferred tax consequences for
the above transaction for the year ended 31st March 20X2.
QUESTION 14
On 1 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 1 April 20X1 can be used for this purpose. On 1 April 20X1, the market value of a
B Ltd. share was ` 2.00
On 1 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 1 April 20X1.
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The following matters emerged:

– Property having a carrying value of ` 15 Cr at 1 April 20X1 had an estimated market
value of ` 18 Cr at that date.
– Plant and equipment having a carrying value of ` 1 Cr at 1 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.
QUESTION 15
On 1st April 20X1, P Ltd. had granted 1 Cr share options worth ` 4 Cr subject to a two-year
vesting period. The income tax law permits a tax deduction at the exercise date of the
intrinsic value of the options. The intrinsic value of the options at 31st March 20X2 was
` 1.60 Cr and at 31st March 20X3 was ` 4.60 Cr. The increase in the fair value of the
options on 31st March 20X3 was not foreseeable at 31st March 20X2. The options were
exercised at 31st March 20X3.
Give the accounting for the above transaction for deferred tax for period ending 31st
March, 20X2 and 31st March, 20X3. Assume that there are sufficient taxable profits
available in future against any deferred tax assets. Tax rate of 30% is applicable to P Ltd.
QUESTION 16
A’s Ltd. profit before tax according to Ind AS for Year 20X1-20X2 is ` 100 thousand
and taxable profit for year 20X1-20X2 is ` 104 thousand. The difference between these
amounts arose as follows:
1. On 1st February, 20X2, it acquired a machine for ` 120 thousand. Depreciation is
charged on the machine on a monthly basis for accounting purpose. Under the tax law,
the machine will be depreciated for 6 months. The machine’s useful life is 10 years
according to Ind AS as well as for tax purposes.
2. In the year 20X1-20X2, expenses of ` 8 thousand were incurred for charitable
donations. These are not deductible for tax purposes.
Prepare necessary entries as at 31st March 20X2, taking current and deferred tax into
account. The tax rate is 25%. Also prepare the tax reconciliation in absolute numbers as
well as the tax rate reconciliation.
QUESTION 17
A Ltd prepares financial statements to 31 March each year. The rate of income tax applicable
to A Ltd is 20%. The following information relates to transactions, assets and liabilities of
A Ltd during the year ended 31 March 20X2:
(i) A Ltd has a 40% shareholding in L Ltd. A Ltd purchased this shareholding for ` 45
Cr. The shareholding gives A Ltd significant influence over L Ltd but not control and
therefore A Ltd. accounts for its interest in L Ltd using the equity method. The equity
method carrying value of A Ltd’s investment in L Ltd was ` 70 Cr on 31 March 20X1
and ` 75 Cr on 31 March 20X2. In the tax jurisdiction in which A Ltd operates, profits
recognised under the equity method are taxed if and when they are distributed as a
dividend or the relevant investment is disposed of.
(ii) A Ltd. measures its head office building using the revaluation model. The building is
revalued every year on 31 March. On 31 March 20X1, carrying value of the building
(after revaluation) was ` 40 Cr and its tax base was ` 22 Cr. During the year ended
31 March 20X2, A Ltd charged depreciation in its statement of profit or loss of
` 2 Cr and claimed a tax deduction for tax depreciation of ` 1.25 Cr. On 31 March
20X2, the building was revalued to ` 45 Cr. In the tax jurisdiction in which A Ltd
operates, revaluation of property, plant and equipment does not affect taxable income
at the time of revaluation.
Basis the above information, you are required to compute:

(a) The deferred tax liability of A Ltd at 31 March 20X2
(b) The charge or credit to both profit or loss and other comprehensive income relating
to deferred tax for the year ended 31 March 20X2
QUESTION 18
K Ltd prepares consolidated financial statements to 31st March each year. During the year
ended 31st March 20X2, K Ltd entered into the following transactions:
(a) On 1st April 20X1, K Ltd purchased an equity investment for ` 2,00,000. The investment
was designated as fair value through other comprehensive income. On 31st March
20X2, the fair value of the investment was ` 2,40,000. In the tax jurisdiction in which
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K Ltd operates, unrealised gains and losses arising on the revaluation of investments
of this nature are not taxable unless the investment is sold. K Ltd has no intention of
selling the investment in the foreseeable future.
(b) On 1st August 20X1, K Ltd sold products to A Ltd, a wholly owned subsidiary operating
in the same tax jurisdiction as K Ltd, for ` 80,000. The goods had cost to K Ltd for `
64,000. By 31st March 20X2, A Ltd had sold 40% of these goods, selling the remaining
during next year.
(c) On 31st October 20X1, K Ltd received ` 2,00,000 from a customer. This payment was
in respect of services to be provided by K Ltd from 1st November 20X1 to 31st July
20X2. K Ltd recognised revenue of ` 1,20,000 in respect of this transaction in the
year ended 31st March 20X2 and will recognise the remainder in the year ended 31st
March 20X3. Under the tax jurisdiction in which K Ltd operates, ` 2,00,000 received
on 31st October 20X1 was included in the taxable profits of K Ltd for the year ended
31st March 20X2.
Explain and show how the tax consequences (current and deferred) of the three transactions
would be reported in its statement of profit or loss and other comprehensive income for
the year ended 31st March 20X2. Assume tax rate to be 25%.
QUESTION 19
On 1st April 20X1, ABC Ltd acquired 100% shares of XYZ Ltd for ` 4,373 crore. By 31st
March, 20X5, XYZ Ltd had made profits of ` 5 crore, which remain undistributed. Based on
the tax legislation in India, the tax base investment in XYZ Ltd is its original cost. Assume
the dividend distribution tax rate applicable is 15%. Show deferred tax treatment.
QUESTION 20
ABC Ltd. acquired 50% of the shares in PQR Ltd. on 1st January, 20X1 for ` 1000 crore.
By 31st March, 20X5 PQR Ltd. had made profits of ` 50 crore (ABC Ltd.’s share), which
remained undistributed. Based on the tax legislation in India, the tax base of the investment
in PQR Ltd. is its original cost. Assume the dividend distribution tax rate applicable is 15%.
Show deferred tax treatment.
QUESTION 21
X Ltd. prepares consolidated financial statements to 31st March each year. During the year
ended 31st March 2018, the following events affected the tax position of the group:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of `
30,00,000. Y Ltd. is unable to utilise this loss against previous tax liabilities. Income-
tax Act does not allow Y Ltd. to transfer the tax loss to other group companies.
However, it allows Y Ltd. to carry the loss forward and utilise it against company’s
future taxable profits. The directors of X Ltd. do not consider that Y Ltd. will make
taxable profits in the foreseeable future.
(ii) Just before 31st March, 2018, X Ltd. committed itself to closing a division after the
year end, making a number of employees redundant. Therefore, X Ltd. recognised a
provision for closure costs of ` 20,00,000 in its statement of financial position as at
31st March, 2018. Income-tax Act allows tax deductions for closure costs only when
the closure actually takes place. In the year ended 31st March 2019, X Ltd. expects to
make taxable profits which are well in excess of ` 20,00,000. On 31st March, 2018, X
Ltd. had taxable temporary differences from other sources which were greater than
` 20,00,000.
(iii) During the year ended 31st March, 2017, X Ltd. capitalised development costs which
satisfied the criteria in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount
capitalised was ` 16,00,000. The development project began to generate economic
benefits for X Ltd. from 1st January, 2018. The directors of X Ltd. estimated that
the project would generate economic benefits for five years from that date. The
development expenditure was fully deductible against taxable profits for the year
ended 31st March, 2018.
(iv) On 1st April, 2017, X Ltd. borrowed ` 1,00,00,000. The cost to X Ltd. of arranging
the borrowing was ` 2,00,000 and this cost qualified for a tax deduction on 1st April,
2017. The loan was for a three-year period. No interest was payable on the loan but
the amount repayable on 31st March, 2020 will be ` 1,30,43,800. This equates to an
effective annual interest rate of 10%. As per the Income-tax Act, a further tax
deduction of ` 30,43,800 will be claimable when the loan is repaid on 31st March,
2020.
Explain and show how each of these events would affect the deferred tax assets / liabilities
in the consolidated balance sheet of X Ltd. group at 31st March, 2018 as per Ind AS.
Assume the rate of corporate income tax is 20%.
QUESTION 22
(RTP MAY 2019…..Q2….ALREADY DISCUSSED IN RTP VIDEO)

PQR Ltd., a manufacturing company, prepares consolidated financial statements to 31st
March each year. During the year ended 31st March, 2018, the following events affected
the tax position of the group:
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 QPR Ltd., a wholly owned subsidiary of PQR Ltd., incurred a loss adjusted for tax
purposes of ` 30,00,000. QPR Ltd. is unable to utilise this loss against previous tax
liabilities. Income-tax Act does not allow QPR Ltd. to transfer the tax loss to other
group companies. However, it allows QPR Ltd. to carry the loss forward and utilise it
against company’s future taxable profits. The directors of PQR Ltd. do not consider
that QPR Ltd. will make taxable profits in the foreseeable future.
 During the year ended 31st March, 2018, PQR Ltd. capitalised development costs
which satisfied the criteria as per Ind AS 38 ‘Intangible Assets’. The total amount
capitalised was ` 16,00,000. The development project began to generate economic
benefits for PQR Ltd. from 1st January, 2018. The directors of PQR Ltd. estimated
that the project would generate economic benefits for five years from that date. The
development expenditure was fully deductible against taxable profits for the year
ended 31st March, 2018.
 On 1st April, 2017, PQR Ltd. borrowed ` 1,00,00,000. The cost to PQR Ltd. of arranging
the borrowing was ` 2,00,000 and this cost qualified for a tax deduction on 1st April
2017. The loan was for a three-year period. No interest was payable on the loan but
the amount repayable on 31st March 2020 will be ` 1,30,43,800. This equates to an
effective annual interest rate of 10%. As per the Income-tax Act, a further tax
deduction of ` 30,43,800 will be claimable when the loan is repaid on 31st March,
2020.
Explain and show how each of these events would affect the deferred tax assets / liabilities
in the consolidated balance sheet of PQR Ltd. group at 31st March, 2018 as per Ind AS. The
rate of corporate income tax is 30%.
QUESTION 23
(RTP NOV 2019….Q19….ALREADY DISCUSSED IN RTP VIDEO)

An entity is finalising its financial statements for the year ended 31st March, 20X2. Before
31st March, 20X2, the government announced that the tax rate was to be amended from
40 per cent to 45 per cent of taxable profit from 30th June, 20X2.
The legislation to amend the tax rate has not yet been approved by the legislature. However,
the government has a significant majority and it is usual, in the tax jurisdiction concerned,
to regard an announcement of a change in the tax rate as having the substantive effect of
actual enactment (i.e. it is substantively enacted).
After performing the income tax calculations at the rate of 40 per cent, the entity has the
following deferred tax asset and deferred tax liability balances:
Deferred tax asset ` 80,000

Deferred tax liability ` 60,000
Of the deferred tax asset balance, ` 28,000 related to a temporary difference. This
deferred tax asset had previously been recognised in OCI and accumulated in equity as a
revaluation surplus.
The entity reviewed the carrying amount of the asset in accordance with para 56 of Ind AS
12 and determined that it was probable that sufficient taxable profit to allow utilisation of
the deferred tax asset would be available in the future.
Show the revised amount of Deferred tax asset & Deferred tax liability and present the
necessary journal entries.
QUESTION 24
(TAX BENEFITS ON INDEXATION OF ASSETS TO BE SOLD IN NEAR FUTURE)

(1) Cost of acquired land 1,00,000
(2) Index rate per annum 10% p.a.
(3) Land will be held for 2 years
(4) Tax rate 30%
Calculate deferred tax due to indexation of asset. What will be your answer if the given
Asset will be held for long term purpose and sale is not expected in near future.
QUESTION 25
(DTL ON GOODWILL IN BUSINESS COMBINATION IF TAX BASE IS NIL)

A limited acquired B limited for 1,00,000. The net assets of B limited are to be assumed
65,000. Assume Tax base of goodwill is zero. Tax rate 30%. Show the entry at the time of
business combination including deferred tax on goodwill.
QUESTION 26
(RECONCILIATION STATEMENT)
An entity has made an accounting profit of ` 1,00,000. The tax rate is 30%. In computing
the accounting profit, a penalty of ` 10,000 has been considered which is not tax deductible.
There are no other tax impacts. In this case, the taxable profits are ` 1,10,000 (` 1,00,000
+ ` 10,000) and tax expense @ 30% is ` 33,000. Show reconciliation statement.
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QUESTION 27
(RECONCILIATION IN DIFFERENT TAX JURISDICTION)

In 20X2, an entity has accounting profit in its own jurisdiction (country A) of ` 1,500 (20X1:
` 2,000) and in country B of ` 1,500 (20X1: ` 500). The tax rate is 30% in country A and
20% in country B. In country A, expenses of ` 100 (20X1: ` 200) are not deductible for tax
purposes.
On 1 January 2020, entity H acquired 100% share capital of entity S for ` 15,00,000.
The book values and the fair values of the identifiable assets and liabilities of entity S at
the date of acquisition are set out below, together with their tax bases in entity S’s tax
jurisdictions. Any goodwill arising on the acquisition is not deductible for tax purposes.
The tax rates in entity H’s and entity S’s jurisdictions are 30% and 40% respectively.
Acquisitions Book values Tax base Fair values

`’000 `’000 `’000
Land and buildings 600 500 700
Property, plant and equipment 250 200 270
Inventory 100 100 80
Accounts receivable 150 150 150
Cash and cash equivalents 130 130 130
Accounts payable (160) (160) (160)
Retirement benefit obligations (100) - (100)
You are required to calculate the deferred tax arising on acquisition of Entity S. Also
calculate the Goodwill arising on acquisition.
ANSWER
Calculation of Net assets acquired (excluding the effect of deferred tax liability):
Net assets acquired Tax base Fair values

`’000 `’000
Land and buildings 500 700
Property, plant and equipment 200 270
Inventory 100 80
Accounts receivable 150 150
Total assets 1,080 1,330
Accounts payable (160) (160)
Retirement benefit obligations - (100)
Net assets before deferred tax liability 920 1,070
Calculation of deferred tax arising on acquisition of entity S and goodwill
`’000 `’000
Fair values of S’s identifiable assets and liabilities 1,070
(excluding deferred tax)
Less: Tax base (920)
Temporary difference arising on acquisition 150
Net deferred tax liability arising on acquisition of 60
entity S (` 150,000 @ 40%)
Purchase consideration 1,500
Less: Fair values of entity S’s identifiable assets and 1,070
liabilities (excluding deferred tax)
Deferred tax liability (60) (1,010)
Goodwill arising on acquisition 490
Note: Since, the tax base of the goodwill is nil, taxable temporary difference of `
4,90,000 arises on goodwill. However, no deferred tax is recognised on the goodwill. The
deferred tax on other temporary differences arising on acquisition is provided at 40%
and not 30%, because taxes will be payable or recoverable in entity S’s tax jurisdictions
when the temporary differences will be reversed.
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SELF READING EXAMPLES GIVEN IN STUDY MATERIAL
EXAMPLE 1
Entity X acquired an intangible asset (a license) for ` 10 Cr that has a life of five years. The
asset will be solely recovered through use. No tax deductions can be claimed, as the license
is amortised or as when the license expires. No tax deductions are available on disposal.
Trading profits from using the license will be taxed at 30%.
The tax base of the asset is nil, because the cost of the intangible asset is not deductible for
tax purposes (either in use or on disposal). A temporary difference of ` 10 Cr arises; prima
facie a deferred tax liability of ` 3 Cr should be recognized on this amount. However, no
deferred tax is recognised on the asset’s initial recognition. This is because the temporary
difference did not arise from a business combination and did not affect accounting or
taxable profit at the time of the recognition.
The asset will have a carrying amount of ` 8 Cr at the end of year 1. The entity will pay
tax of ` 2.40 Cr through recovery of the asset by earning taxable amounts of ` 8 Cr. The
deferred tax liability is not recognised, because it arises from initial recognition of an
asset. Similarly, no deferred tax is recognised in later periods.
EXAMPLE 2
As at 31st March, 20X1, an entity has both taxable temporary differences and deductible
temporary difference with the following reversal pattern. Deductible temporary differences
cannot be carried forward.
Particulars Year (` )
1 2 3
Taxable temporary difference
Opening balance 10,000 5,000 2,000
Recognized in taxable income 5,000 3,000 2,000
Closing balance 5,000 2,000 -

Deductible temporary difference
Opening balance 8,000 4,000 -
Recognized in taxable income 4,000 4,000 -
Closing balance 4,000 - -
Statement of taxable income
Taxable temporary difference 5,000 3,000 2,000
Deductible temporary difference 4,000 4,000 -
The entity can recognize deferred tax assets for the deductible temporary differences up
to ` 7,000 (` 4,000 for year 1 & ` 3,000 for year 2) as a taxable temporary difference of
that amount is available.
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NOTES
IND AS 113: FAIR VALUE MEASUREMENT 237

FAIR VALUE MEASUREMENT
WHAT IS FAIR VALUE?
Normally assets and liabilities are being exchanged between parties at their agreed terms
and conditions based on the prices which might be related to the entity or event based or
in other words which is not at arm’s length prices. To define Fair Values one has to ensure
that the values reflect all assumptions/adjustments to change from transaction specific/
entity specific to normal transaction which is common for all interested parties.
In other word, it is a market based value rather than an specific prices and this price should
be received to sell an asset or paid to transfer a liability in a normal transaction (e.g. other
than any stressed sale etc). Fair Value in an exit price and not a price at which an Asset/
liability sells/ purchases otherwise.
OBJECTIVE
• Defines fair value

• Sets out in a single Ind AS a framework for measuring fair value; and
• Requires disclosures about fair value measurements
Fair value is a market-based measurement, not an entity-specific measurement.

The objective of a fair value measurement is-
• To estimate the price
• At which an orderly transaction to sell the asset or to transfer the liability would take
place
• Between market participants
• At the measurement date
• Under current market conditions
(i.e., an exit price at the measurement date from the perspective of a market participant
that holds the asset or owes the liability).
When a price for an identical asset or liability is not observable, an entity measures fair
value using another valuation technique that:
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• Maximises the use of relevant observable inputs and

• Minimises the use of unobservable inputs.
Because fair value is a market-based measurement, it is measured using the assumptions
that market participants would use when pricing the asset or liability, including assumptions
about risk. As a result, an entity’s intention to hold an asset or to settle or otherwise fulfill
a liability is not relevant when measuring fair value.
The definition of fair value focuses on assets and liabilities because they are a primary
subject of accounting measurement. In addition, this Ind AS shall be applied to an entity’s
own equity instruments measured at fair value.
What is not covered?
Standard specifically describes the below exceptions which are not covered by the
Accounting Standard and hence one has to look at the respective standard itself to identify
the process to calculate Fair Values of the items of the standard. The scope exclusion will
be applied on below-
Measurement and Disclosure exclusion
(a) share-based payment transaction within the scope of Ind AS 102, Share based
payment;
(b) leasing transaction within the scope of Ind AS 17, Leases; and
(c) measurements that have some similarities to fair value but are not fair value, such as
net realisable value in Ind AS 2, Inventories, or value in use in Ind AS 36, Impairment
of Assets.
Disclosure exclusion
(a) plan assets measured at fair value in accordance with Ind AS 19, Employee Benefits;
(b) assets for which recoverable amount is fair value less costs of disposal in accordance
with Ind AS 36.
DEFINITION
This Ind AS defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
Fair value
The price that would be In an orderly Between market At the
to sell an asset or paid to transaction participants measurement
transfer a liability date
Let us understand some of the major that terms that have been used in the definition of
Fair Value in order to arrive at Fair Values of an Asset or Liability-
The restrictions could be entity specific an asset/ liability specific hence all such
restrictions which are asset/liability specific & being Transfer to the buyer as it is, then
will be considered while calculating fair value. In contract, if the restrictions are entity
specific then it will not be considered.
To consider in Fair Value
Entity specific restrictions NO
Asset/liability specific restrictions YES
Example: Entity Specific restrictions
An entity is having a land which has a restriction to develop into a commercial house because
of restricted business objective in which currently it operates. The entity wants to sell
the land and there would not be any restriction for a buyer of the land to develop a
commercial house. Since this restriction is entity specific, hence it will not be considered
while calculating fair value of the land.
Example
A manufacturing company is having certain securities which have been pledged with a bank
and restricted to sell it for next 2 years. The restriction is entity specific and hence will
not considered while calculating fair value of the security as other market participant will
not consider this restriction which is purely an entity specific,
Example: Asset/Liability specific restrictions
A car has been bought for private use and there is a restriction of not to use the car for
any commercial purposes. Commercial vehicle is having more fair value than private vehicle.
since the restriction to use the vehicle is asset specific and market participant will also
consider the asset specific restrictions while calculating fair values for such asset and
hence this condition will be considered while evaluating fair value of the car.
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UNIT OF ACCOUNT
An Asset or Liability
is aggregated or For recognition
disaggregated
Unit of Account
An Asset or a Liability
is aggregated or For Measurement
disaggregated
Whether the asset or liability is a stand-alone asset or liability, a group of assets, a group of
liabilities or a group of assets and liabilities of recognition or disclosure purposes depends
on its unit of account.
The unit of account for the asset or liability shall be determine in accordance with the Ind
AS that requires or permits the fair value measurement, except as provided in this Ind. AS.
This essentially defines the level of aggregation or disaggregation while calculating Fair
Values of the Assets/Liabilities.
Example
An Entity having certain securities which are quoted at market and these are recognised
at fair value in the Balance Sheet. Quoted prices at individual level will be used in order
to find Fair Values of these Investments. Example In order to evaluate fair values of
assets to identify impairment as per Ind-As 36- Impairment of Assets which requires to
measure such Fair Value at Cash generating units, hence group of assets will used in order
to find values for the requirement of such Standard.
THE TRANSACTION
A fair value measurement assumes that the asset or liability is exchanged in an orderly
transaction between market/ participants to sell the asset or transfer the liability at the
measurement date under current market conditions.
A fair value measurement assumes that the transaction to sell the asset or transfer the
liability takes place either:
(a) in the principal market for the asset or liability; or
(b) in the absence of a principal market, in the most advantageous market for the asset
or liability.
There could be different principal markets of different reporting entities even belongs
to the same group. The principal market/most advantageous market would separately be
evaluated for different assets/ liabilities under the fair valuation requirements.
Principal market
Market which is normally the place in which the assets/ liabilities are being transacted with
highest volume with high level of activities comparing with any other market available for
similar transactions.
Example
Share of a company which is listed at BSE and NYSE has different closing prices at the
year and. The price at BSE has greatest volume and activity whereas at NYSE it is less in
terms of volume transacted in the period. Sicne BSE has got highest volume and significant
level of activity comparing to other market although the closing price is higher at NYSE,
the closing price at BSE would be taken.
Most advantageous market
• This is the market which either maximises the amount that would be received when an
entity sells an asset or minimise the amount that is to be paid while transferring the
liability.
• In the absence of principal market, this market is used for Fair Valuation of the Assets/
Liabilities. In many cases Principal market & most advantageous market will be same.
• The market will be assessed based on net proceeds from the sale which will deduct
expenses associated with such sale in most advantageous market.
Example
Diamond (a commodity ) has got a domestic market where the prices are lesser comparing
to the price available for export of similar diamonds. The Government has a policy to cap
the export of Diamond, maximum upto 10% of total output by any such manufacturer. The
normal activities of diamond are being done at domestic market only i.e., 90% and balance
10% only can be sold via export. The highest level of activities with highest volume is
being done at domestic market. Hence, principal market for diamond would be domestic
market. Export prices are more than the prices in the principal market and it would give
highest return comparing to the domestic market. Therefore, the export market would be
considered as most advantageous market. However, if principal market is available, then its
prices would be used for fair valuation of assets/liabilities.
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MARKET PARTICIPNRTS
An entity shall measure the fair value of an asset of a liability using the assumptions the
market participants would use when pricing the asset or liability, assuming that market
participants act in their economic best interest.
What are market participants?
The parties which eventually transact the asset/liabilities either in principal market or
most advantageous market in their vest economic interest i.e.,
• They should be independent and not a related party. However, if related parties have
done similar transaction on arm’s length price, then it can be between related parties as
well.
• The parties should not be under any stress or force to enter into these transactions
• All parties should have reasonable and sufficient information about the same.
Example
A land has legal restriction to use it for commercial purposes in nest 10 years irrespective
of its holder. The fair value of the land will include this restriction about its usage because
it is an asset related restriction and any buyer will need to take over with similar restriction
to use the land for next 10 years. Now to evaluate its fair value, one has to consider the
restriction based on the assumptions which normally would be taking into account by its
market participants, mentioned as below
a) Whether the restriction is commonly imposed on each type of land?
b) How useful it will be after the end of 10 Years?
c) Whether there is any alternative use which may be considered normally by participant
for similar kind of deals?
d) How liquid the sale of land will be with such restrictions?
e) comparing the Price with similar kind of land without restrictions to arrive at its fair
values.
THE PRICE
Fair value is the price would be received to sell an asset or paid to transfer a liability in
an orderly transaction in the principal (or most advantageous) market at the measurement
date under current market conditions (i.e. an exit price) regardless of whether that piece
is directly observable or estimated using another valuation technique.
A fair value is being assessed based or principal and if principal market is not available then
based on the most advantageous market.
Transaction cost
Principal (or most advantageous) market is where significant level of transactions and
activities takes place and it eventually covers/considers all such transaction costs. Hence,
it would not be appropriate to consider any transaction cost further while assessing fair
vales from such principal markets.
Note: Transaction costs do not include transport costs.
Transport cost
If location is a characteristic of the asset (as might be the case, for example, for a
commodity), the price in the principal (or most advantageous) market shall be adjusted for
the costs, if any, that would be incurred to transport the asset from its current location
to that market.
It would be considered, if in case it is an inherent part of the Assets/Liability so transacted
e.g. commodity.
Principal market Most advantageous market

Transaction Cost NO YES
Transport cost YES YES
Example
An entity sells certain commodity which are available actively at location A and which is
considered to be its principal market (being significant value of transactions and activities
takes place). However, fair value of the commodity is required to be assessed for location B
which is far from location A and requires a transport cost of INR 100. Since the transport
cost is not a transaction cost and it is not specific to any transaction but is inherent cost
which requires to be incurred while bringing such commodity from location B, it will be
considered while evaluating fair value from the principal market.
VALUATION TECHNIQUES
An entity shall use valuation techniques that are appropriate in the circumstances and for
which sufficient data are available to measure fair value, maximising the use of relevant
observable inputs and minimising the use of unobservable inputs.
It is pertinent to note that the overall objective to use any valuation approach or technique
is in accordance with all relevant date available related to the Asset/liability which could
untilise all directly observable inputs.
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Note: It is worth to be noted that in case of availability of Quoted prices which are being
used in an active market, there is no need to consider any valuation approach further.
The standard requires and allows using one or combination of more-than one approach to
measure any fair value which corroborates all inputs available related to such asset/liability.
Selecting an appropriate approach is matter of judgment and based on the available inputs
related to the asset/liability.
Example
An unquoted investment would require being Fair Valued which can be done either taking
similar entity quoted prices with appropriate adjustments or a valuation of business using
DCF of some other techniques. This would purely be dependent upon the available inputs and
approach relevant for the Asset/liability.
Appropriate in the Maximsing the use of

circumstances relevant observable inputs
Valuation And
Techniques For which sufficient data
are available to measure Minimising the use of
Fair value unobservable inputs
Ind AS 113 specifies following three approaches to measure fair values:
Cost Approach
Market Approach Valuation Income Approach

techniquesApproach
1. MARKET APPROACH: The market approach uses prices and other relevant information
generated by market transaction involving identical or comparable (i.e similar) assets,
liabilities or a group of assets and liabilities, such as a business.
For example, valuation techniques consistent with the market approach often use
market multiples derived from a set of comparables. Multiples might in ranges with
a different multiple for each comparable. The selection of the appropriate multiple
within the range requires judgement, considering qualitative and quantitative factors
specific to the measurement.
Quoted prices are indicative values of any business if it exchanges in an active market.
However, in the absence of such quoted prices, it is relevant to value the business
based on market values and do some adjustment relevant to the assets/liabilities.
Standard specifies a valuation technique called “Matrix pricing” which is normally
used to value debt securities. This technique relates the securities with some similar
benchmarked securities. including coupons, Credit ratings etc, to derive at fair value
of the debt.
Example
An entity does not have any security which is quoted in an active market, however its
price to earnings ratio is being used to corroborate its enterprise value with certain
adjustment relevant to the business e.g., there are some specific restrictions to use
certain assets for some specific period being in a specialised industry.
2. INCOME APPROACH: The income approach converts future amounts (e.g., cash flow
or income and expenses) to a single current (i.e., discounted) amount. When the income
approach is used, the fair value measurement reflects current market expectations
about those future amounts.
It is a present value of all future earnings from an entity whose fair values are being
evaluated or in other words all future cash flows to be discounted at current date to
get fair value of the asset/liability.
Assumption to the future cash flows and an appropriate discount rate would be based
on the other market participant’s views. Related risks and uncertainty would reaure to
be considered and would be taken into either in cash flow or discount rate.
Standard defines the below techniques which may be considered while using income
approach
a) Present value techniques
b) Option pricing models e.g., Black-Scholes Merton models or binomial models,
c) The multi period excess earing method.
Example
An Entity has estimated its next year earing (cash flow) based on certain probability
which can be mentioned below
year Possible Cash Probability Probability weighted

flow (INR) cash flows
1 700 20% 140%
2 800 40% 320
3 900 40% 360
246 ACCOUNTS
Total expected Cash F Low 820

Risk free rate 6%
Present value of Cash flow (1 year) 820/(1.06)= INR 773.58
3. COST APPROACH: This method describes how much cost is required to replace
existing asset/liability in order to make it in a working condition. All related costs
will be its fair value. It actually considers replacement cost of the asset/liability for
which we need to find fair value.
INPUTS TO VALUATION TECHNIQUES
(NOT COVERED IN CLASS: PLS DO SELF READING HERE)

Valuation techniques used to measure fair value shall maximise the use of relevant observable
inputs and minimise the use of unobservable inputs.
It has widely been mentioned that observable inputs should be used to evaluate fair value
of an asset/liability and we should minimise using any unobservable inputs.
Standard describes the below instances where observable inputs are being used in case of
certain Financial instruments:
Markets Prices observable Rationale Ind AS 113

(by nature) compliant
Exchange markets Closing prices Readily available Yes
Dealer Market Bid & Ask Prices Readily available than Yes
Closing prices
Brokered Marked Buy & Sell order Broker knows better Yes
Matching, commercial Prices from both buy &
And residential Sell side
markets
Principal to Negotiated prices with Little information Yes
Principal Markets no intermediary available in market
FAIR VALUE HIERARHY
In order to establish comparability and consistency in fair value measurement, Ind AS 113
has made some hierarchy to define the level of inputs for fair value. The hierarchy is purely
based on the level of inputs available for the specific Asset /liability for which the fair
value is to be measured.
Some significant notes about the fair value hierarchy
• The hierarchy has been categorised in 3 levels which are based on the level of inputs
that are being used to find out such fair values. There could be a situation where more
than one level of fair value is being used, hence standard provide a guidance which states
that in case of using more than one level of input, the entire class of asset/liability will
be defined by its level which has significance on overall basis,
Note: significance has not been defined anywhere and could be a matter of judgement.
• Standard defines the valuation techniques that could be used to evaluate fair values of
Assets/liabilities and its level of hierarchy will be depending upon the level of inputs
that have been used while using such valuation techniques.
• If an observable input requires an adjustment using an unobservable input and that
adjustment results in a significantly higher or lower fair value measurement, the resulting
measurement would be categorised within Level 3 of the fair value hierarchy.
Example
If a market participant would take into account the effect of a restriction on the sale of
an asset when estimating the price for the asset, an entity would adjust the quoted piece
to reflect the effect of that restriction. If that quoted price is a Level 2 input and the
adjustment is an unobservable input that is significant to the entire measurement, the
measurement would be categorised within Level 3 of the fair value hierarchy.
Level 1 Inputs
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the entity can access at the measurement date.
A quoted price in an active market provides the most reliable evidence of fair value and
shall be used without adjustment to measure fair value whenever available.
A Level 1 input will be available for many financial assets and financial liabilities, some
of which might be exchanged in multiple active markets (e.g., on different exchanges).
Therefore, the emphasis within Level 1 is on determining both of the following:
248 ACCOUNTS
The principal market for the asset or liability or, in the absence of a principal market,
the most advantageous market for the asset or liability
Whether the entity can enter into a transaction for the asset or liability at the price in
that market at the measurement date
Example
An entity is holding investment which is quoted in BSE, India and NYSE, USA. However,
significant activities are being done at BSE only. The fair value of the investment would
be referenced to the quoted price at BSE India (which is Level 1 fair value- Direct quoted
price with no adjustments).
Level 2 Inputs
Level 2 inputs are inputs other than quoted price included within Level 1 that are observable
for the asset or liability, either directly or indirectly.
If the asset or liability has a specified (contractual) term, a Level 2 input must be observable
for substantially the full term of the asset or liability. Level 2 Inputs include the following:
(a) quoted prices for similar asset or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not
active.
(c) inputs other than quoted prices that are observable for the asset or liability for
example
(i) interest rates and yield curves observable at commonly quoted intervals;
(ii) implied volatilities; and
(iii) credit spreads.
(iv) market-corroborated inputs.
Example
Receive-fixed, pay-variable interest rate swap based on a yield curve denominated in a

foreign currency. It requires rate of swap which is of 11 years. However, normally the
rates are available only for the maximum period of 10 years. The rate for 11 years’ can
be established using extrapolation or some other technique which is based on 10 years
available rates of swap. The fair value of 11 years so derived would be level w fair value.
Example
An entity has an investment in another entity which has no active market. However, some
similar investment is being traded in an active market. Now, the fair valuation can be
done based on either the price based on the market which is not active or similar traded
investment in an active market. This would be considered as level 2 inputs.
Level 3 inputs
Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be
used to measure fair value to the extent that relevant observable inputs are not available,
thereby allowing for situations in which there is little, if any, market activity for the
asset or liability at the measurement date. However, the fair value measurement objective
remains the same, i.e., an exit price at the measurement date from the perspective of a
market participant that holds the asset or owes the liability, Therefore, unobservable
inputs shall reflect the assumptions that market participant would use when pricing the
asset or liability, including assumptions about risk.
Assumptions about risk include the risk inherent in a particular valuation technique used
to measure fair value (such as a pricing model) and the risk inherent in the inputs to the
valuation technique. A measurement that does not include an adjustment for risk would not
represent a fair value measurement if market participants would include one when pricing
the asset or liability.
For example- It might be necessary to include a risk adjustment when there is significant
measurement uncertainty (e.g., when there has been a significant decrease in the volume
or level of activity when compared with normal market activity for the asset or liability,
or similar assets or liabilities, and the entity has determined that the transaction price or
quoted price does not represent fair value).
Example: interest rate swap
An adjustment to a mid-market consensus (non-binding) price for the swap is being developed
using data that are not directly observable and cannot otherwise be corroborated by
observable market date. This would be level 3 Fair value input.
Example: Cash-generating unit
A Level 3 input would be a financial forecast (e.g., of cash flows or profit or loss) development
using the entity’s own data, if there is no reasonably available information that indicates
usage of different assumptions by participants.
250 ACCOUNTS
QUESTION 1
An asset is sold 2 different active markets (a market in which transaction for the asset or
liability takes palace with sufficient frequency and volume to provide pricing information on
an ongoing basis) at different prices.
An entity enters into transactions in both markets and can access the price in those markets
for the asset at the measurement date.
In Market A:
The price that would be received is 26, transaction costs in that market are 3 and the costs
to transport the asset to that market are 2 (i.e., the net amount that would be received is
21.)
In Market B:
The price that would be received is 25, transaction costs in that market are 1 and the costs
to transport the asset to that market are 2 (i.e., the net amount that would be received in
Market B is 22).
QUESTION 2
Company J acquires and land in a business combination. The land is currently developed
for industrial use as a factory site. Although the land’s current use is presumed to be its
highest and best use unless market or other factors suggest a different use, Company J
considers the fact that nearby sites have recently been developed for residential use as
high –rise apartment buildings.
On the basis of that development and recent zoning and other changes to facilitate that
development, company J determines that the land currently used as a factory site could
be developed as a residential site (e.g., for high-rise apartment buildings) and that market
participants would take into account the potential to develop the site for residential use
when pricing the land.
QUESTION 3
ABC Ltd. acquired 5% equity shares of XYZ Ltd. for ` 10 crore in the year 20X1-X2 The
company is in process of preparing the financial statements for the year 20X2-X3 and is
assessing the fair value at subsequent measurement of the investment made in XYZ Ltd.
Based on the observable input, the ABC Ltd. identified a similar nature of transaction
in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for ` 60 crore. The price of
such transaction was determined on the basis of Comparable Companies Method (CCM)-
Enterprise Value (EV) / EBITDA which was 8. For the current year, the EBITDA of XYZ Ltd.
is ` 40 crore. At the time of acquisition, the valuation was determined after considering 5%
of liquidity discount and 5% of non-controlling stake discount. What will be the fair value
of ABC Ltd.‘s investment in XYZ Ltd. as on the balance sheet date?
SOLUTION:
Determination of Enterprise Value of XYZ Ltd.
Particulars ` In crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320
Determination of subsequent Measurement of XYZ Ltd.
Enterprise Value of XYZ Ltd. 320
ABC Ltd. S share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & non-controlling stake discount (5%5% =10%) (1.6)
Fair value of ABC Ltd.’ s investment in XYZ Ltd. 14.4
QUESTION 4
UK Ltd. is in the process of acquisition of shares of PT Ltd. as part of business reorganization

plan. The projected free cash flow of PT Ltd. for the next 5 years are as follows:
(` In crore)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
The weightage average cost of capital of PT Ltd. is 11% the total debt as on measurement
date is ` 1,465 crore and the surplus cash & cash equivalent is ` 106.14 crore.
The total numbers of shares of PT Ltd. as on the measurement date is 8,52,84,223 shares.
Determine value per share of PT Ltd.as per Income Approach.
252 ACCOUNTS
SOLUTION:
Determination of equity value of PT Ltd.
(` In crore)
Particulars Year 1 Year 2 Year 3 Year 4 Year 5

Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
Discount rate 0.9009 0.8116 0.7312 0.6587 0.5935
Free Cash Flow available 168.56 152.26 89.06 177.19 2,518.69
to the firm
Total of all years 3,105.76
Less: Debt (1,465)
Add: Cash & Cash equivalent 106.14
Equity Value of PT Ltd. 1,746.90
No. of Shares 85,284,223.0
Per Share Value 204.83
QUESTION 5
You are a senior consultant of your firm and are in process of determining the valuation of
KK Ltd. You have determined the valuation of the company by two approaches i.e. Market
Approach and income approach and selected the highest as the final value. However, based
upon the discussion with your partner you have been requested to assign equal weights to
both the approaches and determine a fair value of shares of KK Ltd. the details of the KK
Ltd. are as follow:
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9
Surplus cash & cash equivalent 106.14
Fair value of surplus assets and Liabilities 312.4
Number of shares of KK Ltd. 312.4
Determine the Equity value of KK Ltd. as on the Measurement date on the Basis of above
details.
SOLUTION:
Equity Valuation of KK Ltd.
Particulars Weights (` In crore)

As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
Enterprise Valuation based on weights 4,251.7
(5268.2 x 50%) + (3235.2 x 50%)
Less: Debt obligation as on measurement date (1465.9)
Add: surplus cash & cash equivalent 106.14
Add: Fair value of surplus assets and liabilities 312.40
Enterprise value of KK Ltd. 3204.33
No. of shares 85,284,223
Value per share 375.72
254 ACCOUNTS
EXTRA QUESTIONS ON IND AS 113:

FAIR VALUE MEASUREMENT
QUESTION 1
Discount Rate assessment to measure present value:

Investment 1 is a contractual right to receive ` 800 in 1 year. There is an established market
for comparable assets, and information about those assets, including price information, is
available. Of those comparable assets :
(a) Investment 2 is a contractual right to receive ` 1,200 in 1 year and has a market price
of ` 1,083.
(b) Investment 3 is a contractual right to receive ` 700 in 2 years and has a market price
of ` 566.
All three assets are comparable with respect to risk (that is, dispersion of possible payoffs
and credit).
You are required to measure the fair value of Asset 1 basis above information.
QUESTION 2
Comment on the following by quoting references from appropriate Ind AS.

(i) DS Limited holds some vacant land for which the use is not yet determined. The land is
situated in a prominent area of the city where lot of commercial complexes are coming
up and there is no legal restriction to convert the land into a commercial land.
The company is not interested in developing the land to a commercial complex as it is
not its business objective. Currently the land has been let out as a parking lot for the
commercial complexes around.
The Company has classified the above property as investment properly. It has
approached you, an expert in valuation, to obtain fair value of the land for the purpose
of disclosure under Ind AS.
On what basis will the land be fair valued under Ind AS ?
(ii) DS Limited holds equity shares of a private company. In order to determine the fair
value of the shares, the company used discounted cash flow method as there were no
similar shares available in the market.
Under which level of fair value hierarchy will the above inputs be classified ?
What will be your answer if the quoted price of similar companies were available and can be
used for fair valuation of the shares?
QUESTION 3 (RTP NOV 2021…..ALREADY DISCUSSED IN RTP VIDEOS)
On 1st January, 20X1, A Ltd assumes a decommissioning liability in a business combination.

The reporting entity is legally required to dismantle and remove an offshore oil platform
at the end of its useful life, which is estimated to be 10 years. The following information
is relevant:
If A Ltd was contractually allowed to transfer its decommissioning liability to a market
participant, it concludes that a market participant would use all of the following inputs,
probability weighted as appropriate, when estimating the price it would expect to receive:
a. Labour costs
Labour costs are developed based on current marketplace wages, adjusted for
expectations of future wage increases, required to hire contractors to dismantle
and remove offshore oil platforms. A Ltd. assigns probability to a range of cash flow
estimates as follows:
Cash Flow Estimates: 100 Cr 125 Cr 175 Cr

Probability: 25% 50% 25%
b. Allocation of overhead costs:

Assigned at 80% of labour cost
c. The compensation that a market participant would require for undertaking the
activity and for assuming the risk associated with the obligation to dismantle and
remove the asset. Such compensation includes both of the following:
i. Profit on labour and overhead costs:
A profit mark-up of 20% is consistent with the rate that a market participant
would require as compensation for undertaking the activity
ii. The risk that the actual cash outflows might differ from those expected,
excluding inflation:
A Ltd. estimates the amount of that premium to be 5% of the expected cash
flows. The expected cash flows are ‘real cash flows’ / ‘cash flows in terms of
monetary value today’.
d. Effect of inflation on estimated costs and profits
A Ltd. assumes a rate of inflation of 4 percent over the 10-year period based on
available market data.
e. Time value of money, represented by the risk-free rate: 5%
f. Non-performance risk relating to the risk that Entity A will not fulfill the obligation,
including A Ltd.’s own credit risk: 3.5%
256 ACCOUNTS
A Ltd, concludes that its assumptions would be used by market participants. In addition,
A Ltd. does not adjust its fair value measurement for the existence of a restriction
preventing it from transferring the liability.
You are required to calculate the fair value of the asset retirement obligation.
ANSWER
Amount
(In Cr)
Expected Labour Cost (Refer W.N.) 131.25
Allocated Overheads (80% x 131.25 Cr) 105.00
Profit markup on Cost (131.25 + 105) x 20% 47.25
Total Expected Cash Flows before inflation 283.50
Inflation factor for next 10 years (4%) (1.04)10 =1.4802
Expected cash flows adjusted for inflation 283.50 x 1.4802 419.65
Risk adjustment - uncertainty relating to cash (5% x 419.64) 20.98

flows
Total Expected Cash Flows (419.65+20.98) 440.63
Discount rate to be considered = risk-free

rate + entity’s non-performance risk 5% + 3.5% 8.5%
Expected present value at 8.5% for 10 years (440.63 / (1.08510)) 194.97
Working Note:
Expected labour cost:
Cash Flows Estimates Probability Expected Cash Flows
100 Cr 25% 25 Cr
125 Cr 50% 62.50 Cr
175 Cr 25% 43.75 Cr
Total 131.25 Cr
QUESTION 4 (RTP NOV 2021…..ALREADY DISCUSSED IN RTP VIDEO)
(i) Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company
XYZ has a total share capital of 5,000 shares with nominal value of ` 10. Entity XYZ’s
after-tax maintainable profits are estimated at ` 70,000 per year. An appropriate
price/earnings ratio determined from published industry data is 15 (before lack of
marketability adjustment). Entity A’s management estimates that the discount for the
lack of marketability of company XYZ’s shares and restrictions on their transfer is
20%. Entity A values its holding in company XYZ’s shares based on earnings. Determine
the fair value of Entity A’s investment in XYZ’s shares.
(ii) Based on the facts given in the aforementioned part (i), assume that, Entity A estimates
the fair value of the shares it owns in company XYZ using a net asset valuation technique.
The fair value of company XYZ’s net assets including those recognised in its balance
sheet and those that are not recognised is ` 8,50,000. Determine the fair value of
Entity A’s investment in XYZ’s shares.
ANSWER
(i) An earnings-based valuation of Entity A’s holding of shares in company XYZ could
be calculated as follows:
Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) ` 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) ` 8,40,000
Value of a share of XYZ = ` 8,40,000 ÷ 5,000 shares = ` 168

The fair value of Entity A’s investment in XYZ’s shares is estimated at ` 42,000
(that is, 250 shares × ` 168 per share).
(ii) Share price = ` 8,50,000 ÷ 5,000 shares = ` 170 per share.
The fair value of Entity A’s investment in XYZ shares is estimated to be ` 42,500 (250
shares × ` 170 per share).
258 ACCOUNTS
NOTES
ANALYSIS OF FINANCIAL STATEMENTS 259
ANALYSIS OF FINANCIAL STATEMENTS

CASE STUDIES BASED ON IND AS
CASE STUDY 1
On April 1, 20X1, Pluto Ltd. has advance a loan for ` 10 lakhs to one of its employees for
an interest rate at 4% per annum (market rate 10%) 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 accountant of the company has recognised the staff loan in the balance sheet equivalent
to the amount disbursed i.e. ` 10 lakhs. The interest income for the period is recognised at
the contracted rate in the Statement of Profit and Loss by the company i.e. ` 40,000 (` 10
lakhs x 4%).
Required:
Analyse whether the above accounting treatment made by the accountant is in compliance
with the Ind AS. If not, advise the correct treatment alongwith working for the same.
SOLUTION:
Paragraph 8 of Ind AS 19 states that:
“Employee Benefits are all forms of consideration given by an entity in exchange for service
rendered by employees or for the termination of employment”.
The Accountant of Pluto Ltd. has recognised the staff loan in the balance sheet at ` 10 lakhs
being the amount disbursed and ` 40,000 as interest income for the period is recognised
at the contracted rate in the statement of profit and loss which is not correct and not in
accordance with Ind AS 19, Ind AS 32 and Ind AS 109.
Accordingly, the staff advance being a financial asset shall be initially measured at the fair
value and subsequently at the amortised cost. The interest income is calculated by using
the effective interest method. The difference between the amount lent and fair value is
charged as Employee benefit expense in statement of profit and loss.
260 ACCOUNTS
(a) Calculation of Fair Value of the Loan
Year Cash Inflow Discounting Factor (10%) Present Value

1 2,40,000 0.909 2,18,160
2 2,32,000 0.826 1,91,632
3 2,24,000 0.751 1,68,224
4 2,16,000 0.683 1,47,528
5 2,08,000 0.621 1,29,168
Total 8,54,712
Staff loan should be initially recorded at ` 8,54,712.

(b) Employee Benefit Expense
Loan Amount – Fair Value of the loan = ` 10,00,000 – ` 8,54,712 = ` 1,45,288
` 1,45,288 shall be charged as Employee Benefit expense in Statement of Profit and
Loss on SLM basis over the period.
Amortisation table:
Year Opening balance of Interest (10%) Repayment Closing balance of

Staff Advance Staff Advance
(a) (b)= (ax10%) (c) (d)= a+b-c
1 8,54,712 85,471 2,40,000 7,00,183
2 7,00,183 70,018 2,32,000 5,38,201
3 5,38201 53,820 2,24,000 3,68,021
4 3,68,021 36,802 2,16,000 1,88,823
5 1,88,823 19,177 (b.f) 2,08,000 Nil
Balance Sheet extracts showing the presentation of staff loan as at 31st March 20X2
Ind AS compliant Division II of Sch III needs to be referred for presentation requirement
in Balance Sheet on Ind AS.
Assets
Non-current Assets
Financial Assets
I Loan 5,38,201
Current Assets
Financial Assets
I Loans (7,00,183 - 5,38,201) 1,61,982
CASE STUDY 2
Pluto Ltd. has purchased a manufacturing plant for ` 6 lakhs on 1 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 to sell.
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 31 March 20X4 was ` 4 lakhs and ` 3.5 lakhs respectively.
The accountant has performed the following working:
INR
Carrying amount on initial classification as held for sale 6,00,000
Less: Accumulated dep (6,00,000/ 10 Years)* 2.5 years (1,50,000)
Fair Value less cost to sell as on 31 March 20X3 4,00,000
The value will be lower of the above two 4,00,000
Balance Sheet extracts as on 31 March 20X4
Assets
Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000
262 ACCOUNTS
Required:
with the Ind AS. If not, advise the correct treatment alongwith working for the same.
SOLUTION:
“An entity shall not classify as held for sale a non-current asset (or disposal group) that is
to be abandoned. This is because its carrying amount will be recovered principally through
continuing use.”
“Depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated.”
Going by the guidance given above,
The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it at the
fair value less cost to sell. Also, the depreciation has not been charged thereon since the
date of classification as held for sale which is not correct and not in accordance with Ind
AS 105 and Ind AS 16.
Accordingly, the manufacturing plant should be treated as abandoned asset rather as held
for sale because its carrying amount will be principally recovered through continuous use.
Pluto Ltd. shall not stop charging depreciation or treat the plant as held for sale because
its carrying amount will be recovered principally through continuing use to the end of their
economic life.
The working of the same for presenting in the balance sheet is given as below:
Calculation of carrying amount as on 31 March 20X4

Purchase Price of Plant 6,00,000
Less: Accumulated depreciation (6,00,000/ 10 Years)* 3 Years (1,80,000)
4,20,000
Balance Sheet extracts as on 31 March 20X4
Assets
Non-Current Assets
Property, Plant and Equipment 4,20,000
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:
INR lakhs
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Required:
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 April 1, 20X1, Sun Ltd. has acquired 100% shares of Earth Ltd. for ` 30 lakhs. Sun Ltd.
has 3 cash-generating units A, B and C with fair value of Rs 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.
Required:
Analyse whether the view adopted by the CFO of Sun Ltd is in compliance of the Ind AS.
If not, advise the correct treatment in accordance with relevant Ind AS
264 ACCOUNTS
SOLUTION:
The above treatment needs to be examined in the light of the provisions given in Ind AS
36: Impairment of Assets.
Para 9 of Ind AS 36
Impairment of Assets’ states that “An entity shall assess at the end of each reporting
period whether there is any indication that an asset may be impaired. If any such indication
exists, the entity shall estimate the recoverable amount of the asset.”
Further, paragraph 10(b) of Ind AS 36 states that:
“Irrespective of whether there is any indication of impairment, an entity shall also test
goodwill acquired in a business combination for impairment annually”.
Sun Ltd has not tested any CGU on account of not having any indication of impairment is
partially correct i.e. in respect of CGU A and B but not for CGU C. Hence the treatment
made by the Company is not in accordance with Ind AS 36.
Accordingly, impairment testing in respect of CGU A and B are not required since there
are no indications of impairment. However, Sun Ltd shall test CGU C irrespective of any
indication of impairment annually as the goodwill acquired on business combination is fully
allocated to CGU ‘C’.
CASE STUDY 5
Venus Ltd. is a multinational entity that owns three properties. All three properties were
purchased on April 1, 20X1. The details of purchase price and market values of the properties
are given as follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out

Purchase Price 15,000 10,000 12,000
Market value 31.03.20X2 16,000 11,000 13,500
Life 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 of Indian Accounting Standards (Ind AS). If not, advise the
correct treatment alongwith working for the same.
SOLUTION:
The above issue needs to be examined in the umbrella of the provisions given in Ind AS 1
‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and Equipment’ in relation
to property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and equipment’;
(b) applied different accounting policies to Property ‘1’ and ‘2’;
(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment Property.
These accounting treatment is neither correct nor in accordance with provision of Ind AS
1, Ind AS 16 and Ind AS 40.
Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate
these properties irrespective of that, their fair value exceeds the carrying amount. The
revaluation gain shall be recognised in other comprehensive income and accumulated in
equity under the heading of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified
as Investment Property and only cost model is permitted for subsequent measurement.
However, Venus ltd. is required to disclose the fair value of the property in the Notes
to Accounts. Also the property ‘3’ shall be presented as separate line item as Investment
Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation
of these three properties in the balance sheet is as follows:
266 ACCOUNTS
Case 1:
Venus Ltd. has applied the Cost Model to an entire class of property, plant and equipment.
Balance sheet extracts as at 31st March 20X2
INR
Assets
Non-current Assets
Property, Plant and Equipment
Property ‘1’ 13,500

Property ‘2’ 9,000 22,500
Investment properties
Case 2:
Venus Ltd. has applied the Revaluation Model to an entire class of property,
plant and equipment.
Balance sheet extracts as at 31st March 20X2
INR
Assets
Non-current Assets
Property, Plant and Equipment
Property ‘2’ 11,000 27,000
Investment Properties
Other Equity
Revaluation Reserve
Property ‘2’ 2,000 4,500
The revaluation reserve should be routed through Other Comprehensive Income

(subsequently not reclassified to Profit and Loss) in Statement of Profit and Loss and Shown
as a separate column in Statement of Changes in Equity.
CASE STUDY 6
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.
Required:
of the Ind AS. If not, advise the correct treatment along with working for the same.
SOLUTION:
The above treatment needs to be examined in the light of the provisions given in Ind AS 37
‘Provisions, Contingent Liabilities and Contingent Assets’ and Ind AS 10 ‘Events After the
Reporting Period’.
As per given facts, the potential payment of damages to the customer is an obligation arising
out of a past event which can be reliably estimated. Therefore, following the provision of
Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ – a provision is required.
The provision should be for the best estimate of the expenditure required to settle the
obligation at 31 March 20X2 which comes to ` 7.5 lakhs (` 10 lakhs * 75%).
Further, following the principles of Ind AS 10 ‘Events After the Reporting Period’ evidence
of the settlement amount is an adjusting event. Therefore, the amount of provision created
shall be increased to ` 12 lakhs and accordingly be recognised as a current liability.
268 ACCOUNTS
CASE STUDY 7
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.
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.
Required:
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.
SOLUTION:
As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41
Agriculture shall be applicable to this company.
“If a government grant related to a biological asset measured at its fair value less costs
to sell is conditional, including when a government grant requires an entity not to engage in
specified agricultural activity, an entity shall recognise the government grant in profit or
loss when, and only when, the conditions attaching to the government grant are met”.
Understanding of the given facts, The Company has recognised the proportionate grant for
Rs 2 lakhs in Statement of Profit and Loss before the conditions attaching to government
grant are met which is not correct and nor in accordance with provision of Ind AS 41
‘Agriculture’.
Accordingly, the accounting treatment of government grant received by the Mercury Ltd.
is governed by the provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for
Government Grants and Disclosure of Government Assistance’.
Government grant for ` 10 lakhs shall be recognised in profit or loss when, and only when,
the conditions attaching to the government grant are met i.e. after the expiry of specified
period of five years of continuing engagement in the plantation of eucalyptus tree.
Balance Sheet extracts showing the presentation of

Government Grant as on 31st March 20X2
INR
Liabilities
Other Non-Current Liabilities
Government Grants 10,00,000
CASE STUDY 8
Mercury Ltd. has sold goods to Mars Ltd. at a consideration of ` 10 lakhs, the receipt of
which receivable in three equal installments of ` 3,33,333 over a two year period (receipts
on 1st April 20X1, 31st March 20X2 and 31st March 20X3).
The company is offering a discount of 5 % (i.e. ` 50,000) if payment is made in full at the
time of sale. The sale agreement reflects an implicit interest rate of 5.36% p.a.
The total consideration to be received from such sale is at ` 10 Lakhs and hence, the
management has recognised the revenue from sale of goods for ` 10 lakhs. Further, the
management is of the view that there is no difference in this aspect between Indian GAAP
and Ind AS.
Required:
of the Ind AS. If not, advise the correct treatment along with working for the same.
CASE STUDY 9
(RTP NOV 2020: Q1…………ALREADY DISCUSSED THERE)
Deepak started a new company Softbharti Pvt. Ltd. with Iktara Ltd. wherein investment of
55% is done by Iktara Ltd. and rest by Deepak. Voting powers are to be given as per the
proportionate share of capital contribution. The new company formed was the subsidiary
of Iktara ltd. with two directors, and Deepak eventually becomes one of the directors
of company. A consultant was hired and he charged ` 30,000 for the incorporation of
company and to do other necessary statuary registrations. ` 30,000 is to be charged as an
expense in the books after incorporation of company. The company, Softbharti Pvt. Ltd.
was incorporated on 1st April 20X1.
270 ACCOUNTS
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
(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
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.
272 ACCOUNTS
(iii) Current tax is calculated at 30% on PBT - ` 3,55,000 without doing any adjustments
related to Income tax. The correct current tax after doing necessary adjustments of
allowances / disallowances related to Income tax comes to ` 1,25,700.
(iv) 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.
(v) There are ‘Government statuary dues’ amounting to ` 15,000 which are grouped under
‘other current liabilities’.
(vi) The capital advances amounting to ` 50,000 are grouped under ‘Other non-current
assets’.
(vii) Other current assets of ` 51,000 comprise Interest receivable from trade receivables.
(viii) 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.
(ix) 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 10
Mumbai Challengers Ltd., a listed entity, is a sports organization owning several cricket and
hockey teams. The issues below pertain to the reporting period ending 31st March 20X2.
(a) Owning 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 taken any 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 31st 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 31st 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, 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, net of 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 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.
274 ACCOUNTS
CASE STUDY 11
(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 inforce, 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% 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.
CASE STUDY 12
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
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 17,33,480
Deferred tax assets 2,54,150
Current assets
Trade receivables 7,25,000
Financial assets
Investments 55,000
Other financial assets 2,17,370
Cash and cash equivalents 1,16,950
TOTAL ASSETS 1,27,00,000
Equity share capital 10,00,000
Other Equity 25,00,150
Deferred tax liability
4,74,850
Borrowings
64,00,000
Long term provisions 5,24,436
Current liabilities
276 ACCOUNTS
Other financial liabilities 2,00,564

Trade payables 6,69,180
Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,27,00,000
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 ` 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
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 for employees
Factory premises 20,01,600 The construction was started on 31st March
20X2 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 available for use.
5. The composition of ‘other current financial assets’ is as follows:

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 and
the 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 in financials.
278 ACCOUNTS
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.
ANSWER
Balance Sheet of Master Creator Private Limited
as at 31st March, 20X2
Particulars Working/ Note (`)

reference
ASSETS
Non-current assets
Property, plant and equipment 1 49,87,750
Capital work-in-progress 2 20,01,600
investment Property 3 15,48,150
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 4 17,33,480
Current assets
Financial assets
Investments (55,000 + 5,000) 5 60,000
Trade receivables 6 7,25,000
Cash and cash equivalents 7 1,16,950
Other financial assets 8 1,27,370
Other current assets (Prepaid expenses) 8 90,000
TOTAL ASSETS 1,24,50,850
Equity
Equity share capital A 10,00,000

Other equity B 28,44,606
8% Convertible loan 11 60,60,544
Long term provisions 5,24,436
Deferred tax liability 12 2,20,700
Current liabilities
Trade payables 13 6,69,180
Other financial liabilities 14 1,19,299
Other current liabilities (TDS payable) 15 81,265
Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,24,50,850
Statement of changes in equity

For the year ended 31st March, 20X2
A. Equity Share Capital
Balance (`)
As at 31st March, 20X1 10,00,000
Changes in equity share capital during the year -
As at 31st March, 20X2 10,00,000
B. Other Equity
Retained Equity Total (`)

Earnings (`) component
of Compound
Financial
Instrument (`)
As at 31st March, 20X1 21,25,975 - 21,25,975
280 ACCOUNTS
Total comprehensive income for

the year (25,00,150 + 5,000 - 2,93,671 - 2,93,671
85,504- 21,25,975)
Issue of compound financial
instrument during the year - 4,24,960 4,24,960
As at 31st March, 20X2 24,19,646 4,24,960 28,44,606
Disclosure forming part of Financial Statements:

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance
Sheet date. (Note 9)
Notes/ Workings: (for adjustments/ explanations)
1. Property, plant and equipment are tangible items that: (a) are held for use in the
production or supply of goods or services, for rental to others, or for administrative
purposes; and (b) are expected to be used during more than one period. Therefore,
the items of PPE are Buildings (` 37,50,250) and Vehicles (` 12,37,500), since those
assets are held for administrative purposes.
2. Property, plant and equipment which are not ready for intended use as on the date
of Balance Sheet are disclosed as “Capital work-in-progress”. It would be classified
from PPE to Capital work-in-progress.
3. Investment property is property (land or a building—or part of a building—or both)
held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for
capital appreciation or both, rather than for:
(a)
use in the production or supply of goods or services or for administrative
purposes; or
(b)
sale in the ordinary course of business.
Therefore, Land held for capital appreciation should be classified as Investment
property rather than PPE.
4. Assets for which the future economic benefit is the receipt of goods or services,
rather than the right to receive cash or another financial asset, are not financial
assets.
5. Current investments here are held for the purpose of trading. Hence, it is a financial
asset classified as FVTPL. Any gain in its fair value will be recognised through profit
or loss. Hence, ` 5,000 (60,000 – 55,000) increase in fair value of financial asset
will be recognised in profit and loss.
6. A contractual right to receive cash or another financial asset from another entity
is a financial asset. Trade receivables is a financial asset in this case and hence
should be reclassified.
7. Cash is a financial asset. Hence it should be reclassified.
8. Other current financial assets:
Interest accrued on bank deposits 57,720
Royalty receivable from dealers 69,650
Total 1,27,370
Prepaid expenses does not result into receipt of any cash or financial asset. However,
it results into future goods or services. Hence, it is not a financial asset.
9 As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared
after the reporting period but before the financial statements are approved for
issue, the dividends are not recognized as a liability at the end of the reporting
period because no obligation exists at that time. Such dividends are disclosed in the
notes in accordance with Ind AS 1, Presentation of Financial Statements.
10 ‘Other Equity’ cannot be shown under ‘Non-current liabilities’. Accordingly, it is
reclassified under ‘Equity’.
11 There are both ‘equity’ and ‘debt’ features in the instrument. An obligation to pay
cash i.e. interest at 8% per annum and a redemption amount will be treated as
‘financial liability’ while option to convert the loan into equity shares is the equity
element in the instrument. Therefore, convertible loan is a compound financial
instrument.
Calculation of debt and equity component and amount to be recognised in the books:
S. No Year Interest Discounting Amount

amount @ 8% factor @ 10%
Year 1 20X2 5,12,000 0.91 4,65,920
Year 2 20X3 5,12,000 0.83 4,24,960
Year 3 20X4 5,12,000 0.75 3,84,000
Year 4 20X5 69,12,000 0.68 47,00,160
Amount to be recognised as a liability 59,75,040

282 ACCOUNTS
Initial proceeds (64,00,000)
Amount to be recognised as equity 4,24,960
* In year 4, the loan note will be redeemed; therefore, the cash outflow would be
` 69,12,000 (` 64,00,000 + ` 5,12,000).
Presentation in the Financial Statements:
In Statement of Profit and Loss for the year ended on 31 March 20X2
Finance cost to be recognised in the Statement of Profit and Loss ` 5,97,504

(59,75,040 x 10%)
Less: Already charged to the Statement of Profit and Loss (` 5,12,000)
Additional finance charge required to be recognised in the Statement

of Profit and Loss ` 85,504
In Balance Sheet as at 31 March 20X2

Equity
Other Equity (8% convertible loan) 4,24,960
Non-current liability
Financial liability [8% convertible loan – [(59,75,040+ 5,97,504– 60,60,544

5,12,000)]
12. Since entity has the intention to set off deferred tax asset against deferred tax
liability and the entity has a legally enforceable right to set off taxes, hence their
balance on net basis should be shown as:
Deferred tax liability 4,74,850
Deferred tax asset (2,54,150)
Deferred tax liability (net) 2,20,700
13. A liability that is a contractual obligation to deliver cash or another financial asset
to another entity is a financial liability. Trade payables is a financial liability in this
case.
14 ‘Other current financial liabilities’:

Wages payable 21,890
Salary payable 61,845
Interest accrued on trade payables 35,564
Total 1,19,299
15 Liabilities for which there is no contractual obligation to deliver cash or other

financial asset to another entity, are not financial liabilities. Hence, TDS payable
should be reclassified from ‘Other current financial liabilities’ to ‘Other current
liabilities’ since it is not a contractual obligation.
CASE STUDY 13
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 fair value 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.
284 ACCOUNTS
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.
ANSWER
1. Assessment of Preliminary Impact Assessment of Transition to Ind AS on Him
Limited’s Financial Statements
Issue 1: Fair value as deemed cost for property plant and equipment:
Accounting Standards Ind AS Impact on Company’s financial

(Erstwhile IGAAP) statements
As per AS 10, Ind AS 101 allows The company has decided to adopt
entity to
Property, Plant elect to measure fair value as deemed cost in this
and Equipment is Property, Plant and case. Since fair value exceeds
recognised at cost Equipment on the book value, so the book value
less depreciation. transition date at its should be brought up to fair
fair value or previous value. The resulting impact of
GAAP carrying value fair valuation of land ` 3,00,000
(book value) as deemed should be adjusted in other
cost. equity.
Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Property Plant and Equipment Dr. 3,00,000
To Revaluation Surplus (OCI- Other Equity) 3,00,000
Issue 2: Fair valuation of Financial Assets:
Accounting Standards Ind AS Impact on Company’s financial

(Erstwhile IGAAP) statements
As per Accounting On transition, All financial assets (other than

Standard, investments financial assets Investment in subsidiaries,
are measured at lower including associates and JVs’ which are
of cost and fair value. investments are recorded at cost) are initially
measured at fair recognized at fair value.
values except The subsequent measurement
for investments of such assets are based on its
in subsidiaries, categorization either Fair Value
associates and through Profit & Loss (FVTPL) or Fair
JVs’ which are Value through Other Comprehensive
recorded at cost. Income (FVTOCI) or at Amortised
Cost based on business model
assessment and contractual cash
flow characteristics.
Since investment in mutual fund
are designated at FVTPL, increase
of ` 1,00,000 in mutual funds
fairvalue would increase the value
of investments with corresponding
increase to Retained Earnings.

Investment in mutual funds Dr. 1,00,000
To Retained earnings 1,00,000
286 ACCOUNTS
Issue 3: Borrowings - Processing fees/transaction cost:
Accounting Standards Ind AS Impact on Company’s

(Erstwhile IGAAP) financial statements
As per AS, such As per Ind AS, such Fair value as on the
expenditure is expenditure is amortised date of transition is `
charged to Profit over the period of the loan. 1,80,000 as against its
and loss account or book value of ` 2,00,000.
Ind AS 101 states that if it
capitalised as the case Accordingly, the
is impracticable for an entity
may be difference of `20,000
to apply retrospectively the
is adjusted through
effective interest method
retained earnings.
in Ind AS 109, the fair value
of the financial asset or the
financial liability at the date
of transition to Ind AS shall
be the new gross carrying
amount of that financial asset
or the new amortised cost of
that financial liability.

Borrowings / Loan payable Dr. 20,000
To Retained earnings 20,000
Issue 4: Proposed dividend:
Accounting Ind AS Impact on Company’s financial

Standards statements
(Erstwhile IGAAP)
As per AS, As per Ind Since dividend should be deducted from
provision for AS, liability retained earnings during the year when
proposed divided for proposed it has been declared and approved.
is made in the dividend is Therefore, the provision declared for
year when it has recognised in the preceding year should be reversed (to
been declared and year in which it rectify the wrong entry). Retained
approved. has been declared earnings would increase proportionately
and approved. due to such adjustment

Provisions Dr. 30,000
To Retained earnings 30,000
Issue 5 : Intangible assets:
Accounting Standards Ind AS Impact on

(Erstwhile IGAAP) Company’s financial
statements
The useful life of an The useful life of an intangible Consequently, there
intangible asset cannot asset like brand/trademark would be no impact
be indefinite under can be indefinite. Not required as on the date of
IGAAP principles. The to be amortised and only tested transition since
Company amortised for impairment. company intends
brand/trademark on a Company can avail the to use the carrying
straight line basis over exemption given in Ind AS 101 amount instead of
maximum of 10 years as as on the date of transition to book value at the
per AS 26. use the carrying value as per date of transition.
previous GAAP.
Issue 6: Deferred tax
Accounting Standards Ind AS Impact on Company’s

(Erstwhile IGAAP) financial statements
As per AS, deferred taxes As per Ind AS, deferred On date of transition
are accounted as per income taxes are accounted as per to Ind AS, deferred
statement approach. balance sheet approach. tax liability would be
increased by ` 25,000.

Retained earnings Dr. 25,000
To Deferred tax liability 25,000
288 ACCOUNTS
NOTES
FINANCIAL INSTRUMENTS
1
UNIT 1 : INTRODUCTION TO FINANCIAL INSTRUMENTS:

FINANCIAL ASSETS, FINANCIAL LIABILITIES & EQUITY
QUESTION 1 Trade receivables (Classification of financial assets)

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. Company does not have a policy of selling its debtors
and holds them to collect contractual cash flows. Evaluate the financial instruments.
Solution
In the above case, the trade receivable recorded in books represents contractual cash flows that are
solely payments of principal (and interest if paid beyond credit period.) Further, Company‘s business
model in to collect contractual cash flows.
Hence, this meets the definition of financial assets carried at amortised cost.
QUESTION 2 Deposits (Classification of financial assets)

Z Ltd. (the ‘Company’) makes sale of goods to customers on credit. Goods are carried in large
containers of delivery to the dealers’ destinations. All dealers are required to deposit a fixed amount
of 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?
Solution
In this case, deposits are receivable in cash at the end of contract period between the dealer and the
company. These deposits represent cash flows that are solely payments of principal and interest.
Moreover, these deposits normally cannot be Hold. Hence, They meet the definition of financial asset
carried at amortized cost.
QUESTION 3 Perpetual debt instruments (Classification)
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 assumers a contractual obligation to make a stream of future interest payments having the
issuer assumes a contractual obligation to make a stream of future interest payments having a fair
value (present value) of CU 1,000 on initial recognition. Evaluate the financial instruments in the hands
of both the holder and the issuer.
2
Solution
 For the Holder – right to receive cash in future – classifies to be a financial asset
 For the Issuer – contractual obligation to pay cash in future – classifies to be a financial liability.
QUESTION 4 Creditors for sale or goods (classification of financial liability)

A Ltd. (the ‘Company’) makes purchase of steel for its consumption in normal course of business. The
purchase terms provide for payments of goods at 30 days credit an interest payable. @ 12% per annum
for any delays beyond the credit period. Analyse the nature of this financial instrument.
Solution
A Ltd. has entered into a contractual arrangement for purchase of goods at a fixed consideration
payable to the creditor. A contractual arrangement that provides for payment in fixed amount of cash
to another entity meets the definition of financial liability.
QUESTION 5 Contract for on unfavorable conditions (financial liability)

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 5th
year and consequently, a rescheduling of the payment scheduled 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.
Does the above instrument meet definition of financial liability? Please explain.
Analyse the differential amount to be exchanged for one –time settlement.
Solution
A ltd. has entered into an arrangement wherein against the borrowing, A Ltd. has contractual
obligation to make stream of payments (including interest and principal.) this meets definition of
financial liability.
Let’s computer the amount required to be settled and any differential arising upon one time
settlement at end of 6th year_
Loan principal amount = 10,00,000
♦ Amount payable at the end of 6th year = 12, 54,400 [10, 00,000 * 1.12* 1.12 (interest
for 5th & 6th year in default plus principal amount)
♦ One time settlement = INR 13,00,000
♦ Additional amount payable = 45,600
The above represents a contractual obligation to pay cash against settlement of a financial liability
under conditions that are unfavourable to A Ltd. (owing to additional amount payable in comparison to
3
amount that would have been paid without one time settlement.) Hence, the rescheduled arrangement
meets definition of ‘financial liability’.
QUESTION 6 Settlement in variable number of shares (Definition of equity instrument)
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 shares (to determine total number
of equity shares to be issued) shall be determined based on the marked price of the shares of Target
Ltd. at a future date, upon settlement of the contract. Evaluate this under definition of financial
instrument.
Solution
In the above scenario, target Ltd. is under an obligation to issue variable number of equity shares
equal to a total consideration of 10,00,000. Hence, equity shares are used as currency for purpose of
settlement of an amount payable by Target Ltd. since this is variable number of shares to be issued
in a non-derivative contract for fixed amount of cash, it tantamount to use of equity shares as
‘currency’ and hence, this contract meets definition of financial liability in books of target Ltd.
This can be better understood better when we understand the definition of Equity Instrument.
QUESTION 7 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
divided on equity shares. Analyse the nature of this instrument.
Solution
In the above case, two main characteristics of the preference shares are:
(a) Preference shares carry dividend, which is payable only when Company declares dividend on
equity shares
(b) Preference share are irredeemable.
Analyzing the definition of equity, an instrument meets definition of equity if;

(a) It contains no contractual obligation to pay cash; and
(b) Where an instrument shall be settled in own equity instruments, its, a non-derivative contract
that will be settled only by issue of fixed number of shares or a derivative contract that will be
settled by issue of fixed number of shares for a fixed amount of cash.
In the above instrument, there is no contractual obligation on the company to pay cash since-
(a) Face value is not redeemable (except in case of liquidation); and
(b) Dividend is payable only if company declares dividend on equity shares. Since dividend on equity
shares is discretionary and the Company can choose not to pay, Company has an unconditional
right to avoid payment of cash on preference shares also.
Hence, preference shares meet definition of equity instrument.
4
QUESTION 8 Non-derivative contract to be settled in own equity instruments

(Definition of equity instruments)
A Ltd. invest 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 yea` Such CCPS carry dividend
@ 12% per annum, payable only declared at the discretion of B Ltd. Evaluate this under definition of
financial instrument.
Solution
B Ltd. has issued CCPS Which provide for-
(a) Conversion into fixed number of equity shares, i.e., one equity share for every CCPS
(b) Non-cumulative dividends.
Applying the definition of ‘equity’ under Ind As 32-
(a) There is no contractual obligation to deliver cash or other financial asset. Dividends are payable
only when declared and hence, at the discretion of the issuer- B Ltd., thereby resulting in no
contractual obligation over B Ltd.
(b) Conversion is into a fixed number of equity shares.
Hence, it, meets definition of equity instrument and shall be classified as such in books of b
Ltd.
QUESTION 9 (Definition of 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?
Solution
Applying definition of equity under Ind AS 32, a derivative contract that be settled by exchange of
fixed number of equity shares of fixed amount of cash meets definition of equity instrument. The
above contract is to be settled by issue of fixed number of own equity instruments by A Ltd. hence,
meets definition of equity instrument.
QUESTION 10 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.
5
Solution
This instrument provides for mandatory fixed dividend payments and redemption by the issuer for a fixed
amount at a fixed future date. Since there is a contractual obligation to deliver cash (for both dividends
and repayment of principal) to the preference shareholder that cannot be avoided, the instrument is a
financial liability in its entirety.
QUESTION 11 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.
Solution
This instrument has two components – (1) mandatory redemption by the issuer for a fixed amount at
a fixed future date, and (2) interest payable at the discretion of the issuer.
The first component is a contractual obligation to deliver cash (for repayment of principal with or
without premium, as per terms) to the debenture holder that cannot be avoided. This component of
the instrument is a financial liability.
QUESTION 12 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.
Solution
This instrument has two components – (1) mandatory interest by the issuer for a fixed amount at a
fixed future date, and (2) perpetual nature of the principal amount.
The first component is a contractual obligation to deliver cash (for payment of interest) to the lender
that cannot be avoided. This component of the instrument is a financial liability.
QUESTION 13 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?
6
Solution
Lack of access to foreign currency or the need to obtain approval for payment from a regulatory
authority, does not Lead the entity's contractual obligation or the holder's contractual right under
the instrument.
QUESTION 14 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.
Solution
Such preference shares are financial liability because the entity can avoid a transfer of cash or
another financial asset only by settling the non-financial obligation.
QUESTION 15 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 share in the residual assets on liquidation.
Examine the nature of the financial instrument.
Solution
The cap of ` 10,000,000 means that Class B shares do not have entitlement to a pro rata share of the
residual assets of the entity on liquidation. They cannot therefore be classified as equity.
QUESTION 16 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.
Solution
The shares cannot qualify for equity classification in their entirety as in addition to the put option
there is also a contractual obligation to settle the instrument in variable number of entity’s own equity
instruments.
7
QUESTION 17 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.
Solution
This contract is an equity instrument because changes in the fair value of equity shares arising from
market related factors do not affect the amount of cash or other financial assets to be paid or
received, or the number of equity instruments to be received or delivered.
QUESTION 18 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.
Solution
As the contract will be settled by delivery of fixed number of instruments for a variable amount of
cash, it is a financial liability.
QUESTION 19 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. 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.
Solution
Such arrangements will not meet the condition for classification as “equity instrument” since the contract will be
settled by delivery of fixed number of Acquirer Ltd.’s own equity instruments against a variable amount of cash i.e.
market value of Target Ltd.’s equity shares.
Such a contract will likely result in a derivative liability or asset for both the parties.
8
QUESTION 20 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 share of VT Ltd. for each preference share held Conversion upto 31
December 20X1: 2 equity share of VT Ltd. for each preference share held. Examine whether the
Solution
The convertible preference shares can be classified as “equity instrument” in the books of the issuer, VT Ltd. The
conversion ratio doesn’t change corresponding to any underlying variable, it only varies in response to passage of time
which is a certain event and hence fixed.
QUESTION 21Conversion 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.
Solution
The convertible preference shares can be classified as “equity instrument” in the books of the issuer,
RT Ltd. The variability in the conversion ratio is only to protect the rights of the holder of convertible
instrument vis-à-vis other equity shareholde`
The conversion was always intended to be in a fixed ratio and hence the holder is exposed to the
change in equity value. The variability is brought in to maintain holder’s exposure in line with other
holde`
QUESTION 22 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.
9
Solution
The convertible preference shares will be classified as “financial liability” in the books of the issuer, BG Ltd. The
variability in the conversion ratio underwrites the return on preference shares and not just protects the rights of
convertible instrument holders vis-à-vis equity shareholde`
QUESTION 23 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.
Solution
The convertible preference shares will be classified as “financial liability” in the books of the issuer,
AG Ltd. The variability in the conversion ratio underwrites the return on preference shares to an
extent and also restricts that return.
QUESTION 24 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.
Solution
The issuer has the ability to convert the debentures into a fixed number of its own shares at any
time. The issuer, therefore, has the ability to avoid making a cash payment or settling the debentures
in a variable number of its own shares. Therefore, such a financial instrument is likely to be classified
as equity.
However, it must be noted that mere existence of a right to avoid payment of cash is not conclusive.
The instrument is to be accounted for as per its substance and hence it needs to be seen whether the
conversion option is substantive.
In this particular situation, the issuer will need to determine whether it is favourable to exercise the conversion
option or redemption option. In case of latter, the instrument will be classified as
a financial liability (a hybrid instrument, whose measurement is dealt with in a subsequent section).
Practical situations do arise wherein the issuer has an option or obligation to issue own equity
instruments only in particular circumstances i.e. the instrument is contingently convertible.
10
QUESTION 25 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
Solution
In this case the four events can be viewed as discrete because the achievement of each one of these
can occur independently of the other (as they relate to different periods). The arrangement can
therefore be considered to be economically equivalent to four separate contracts. The price per share
and the amount of shares to be issued is fixed in each of these discrete periods, with each event
relating to a different year and therefore a separate risk. The “fixed for fixed” test is therefore
met.
The instrument is therefore classified as “equity instrument”.
QUESTION 26 Investment manager’ 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 token amount in units of X. Such units rank last for the repayment in the event of liquidation.
Accordingly, they constitute the most subordinated class of instruments. Examine the nature the
financial instruments.
SOLUTION
Resultantly, the units held by other unit holders are classified as financial liability as they are not
the most subordinate class of instruments- they are entitled to pro rate share of net assets on
liquidation, and their claim has a priority over claims of Y. But, units held by Y can be classified as
equity instruments.
QUESTION 27 DIFFERENTIAL VOTING RIGHTS
T motors limited has issued puttable ordinary shares “A” 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.
11
SOLUTION
A puttable shares can not be classified as equity because these shares do not have identical features
which the most subordinated class have.
QUESTION 28 OTHER CONTRACTUAL OBLIGATION TO PUTTABLE SHARES
S ltd. Has issued a class of puttable ordinary shares to T limited besides the put option (which is
consistent with other class of ordinary shares), T limited is also entitled to convert the class of
ordinary shares held by it into equity instruments of S limited whose number will vary as per the
market value of S limited. Examine whether the financial instrument will be classified as equity.
SOLUTION
The shares can not qualify for equity classification in their entirety as in addition to the put option
there is also a contractual obligation to settle the instrument in variable number of entity’ own equity
instruments.
QUESTION 29 CONTRACT BETWEEN COMPANY AND PUTTABLE INSTRUMENT HOLDER
P limited has issued puttable ordinary shares of Q limited. Q limited has also entered into an asset
management contract with P limited whereby Q limited is entitled to 50% of profit of P limited. Normal
commercial terms for the 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.
SOLUTION
The puttable ordinary shares can not qualify for equity classification as (a) in addition to the put
option, there is another contract between the issuer and holder of puttable instrument whose cash
flow are based substantially on profit or loss of issuer, (b) whose contractual terms are not similar to
a contract between a non instrument holder and issuer (c) it has the effect of substantially restricting
return on puttable ordinary shares.
QUESTION 30 CONVERSION RATIO CHANGES UNDER INTER DEPENDENT SCENARIOS
On 1 January 20x1, RHT limited subscribes to convertible preference shares of RDT limited. The
Preference shares are convertible as below:
Convertible 1:1: if another strategic investor invests at an enterprise valuation of USD 100 million
Convertible 1.5:1 : if another strategic investor invests USD 150 million
Convertible 2:1 : if another strategic investor invests USD 200 million
Examine the nature of financial instrument.

12
SOLUTION
The given instrument should be classified as financial liability because there are variable number of
shares and these are not varying due to time factor but due to other facto`
QUESTION NO 31
A Company has issued 9% mandatorily redeemable preference shares with mandatory fixed dividends.
Evaluate whether such preference shares are an equity instrument or a financial liability to the issuer
entity?
Solution
In determining whether a mandatorily redeemable preference share is a financial liability or an

equity instrument, it is necessary to examine the particular contractual rights attaching to the
instrument’s principal and return components.
The Instrument in the question provides for mandatory periodic fixed dividend payments and
mandatory redemption by the issuer for a fixed amount at a fixed future date. Since there is a
contractual obligation to deliver cash (for both dividends and repayment of principal to the
shareholder that cannot be avoided, the instrument is a financial liability in its entirely.
QUESTION NO 32
An entity issues a non-redeemable callable bond with a fixed 8% coupon. The coupon can be deferred
in perpetuity at the issuer’s option. The issuer has a history of paying the coupon each year and the
current bond price is predicated on the holders expectation that the coupon will continue to be paid
each year. In addition the stated policy of the issuer is that the coupon will be paid each year, which
has been publicly communicated. Evaluate?
Solution
Although there is NO pressure on the issuer to pay the coupon, to maintain the bond price, and a
constructive obligation to pay the coupon, there is no contractual obligation to do so. Therefore the
bond is classified as an equity instrument.
QUESTION NO 33
A zero coupon bond is an instrument where no interest is payable during the instrument’s life and that
is normally issued at a deep discount to the value at which it will be redeemed Evaluate?
Solution
Although there are no mandatory periodic interest payments, the instruments provides for mandatory
redemption by the issuer for a determinable amount at a fixed or determinable future date. Since
there is a contractual obligation to deliver cash for the value at which the bond will be redeemed, the
instrument is classified as a financial liability.
13
UNIT 2 :COMPOUND FINANCIAL INSTRUMENT
QUESTION 34 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.
Solution
This instrument has two components – (1) mandatory redemption by the issuer for a fixed amount at a fixed
future date, and (2) interest payable at the discretion of the issuer.
The first component is a contractual obligation to deliver cash (for repayment of principal with or
without premium, as per terms) to the debenture holder that cannot be avoided. This component of
the instrument is a financial liability.
The other component, discretionary interest is an equity feature because issuer can avoid payment of
cash or another financial asset in this respect.
Therefore, this instrument is concluded to be a compound financial instrument.

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.
Solution
This instrument has two components – (1) mandatory interest by the issuer for a fixed amount at a
fixed future date, and (2) perpetual nature of the principal amount.
The first component is a contractual obligation to deliver cash (for payment of interest) to the lender that
cannot be avoided. This component of the instrument is a financial liability.
The other component, perpetual principal, is an equity feature because issuer is not required to pay
cash or another financial asset in this respect.
Therefore, this instrument is concluded to be a compound financial instrument.

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
Solution
The values of the liability and equity components are calculated as follows:
Present value of interest payable in perpetuity (` 96,000 discounted at 12%) = ` 800,000
Therefore, equity component = fair value of compound instrument, say, ` 1,200,000 less financial
liability component i.e. ` 800,000 = ` 400,000.
In subsequent years, the profit and loss account is charged with interest of 12% on the debt
instrument.
QUESTION 37 Optionally convertible redeemable preference shares

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 yea` If the option is not exercised by the holder, the preference
shares are redeemed at the end of 3 yea` The preference shares carry a fixed coupon of 6% p.a. 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.
Solution
Present value of principal payable at the end of 3 years (` 10 lakhs discounted at 9% for 3 years) = `
772,183
Present value of interest payable in arrears for 3 years (` 60,000 discounted at 9% for each of 3
years) = ` 151,878
Total financial liability = ` 924,061
Therefore, equity component = fair value of compound instrument, say, ` 1,000,000 less financial
liability component i.e. ` 924,061 = ` 75,939.
In subsequent years, the profit and loss account is charged with interest of 9% on the debt
instrument.
QUESTION 38 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 yea` If the option is not exercised by the holder, the preference shares are redeemed
at the end of 3 yea` The preference shares carry a coupon of RBI base rate plus 1% p.a.
The prevailing market rate for similar preference shares, without the conversion feature or issuer’s redemption
option, is RBI base rate plus 4% p.a. On the date of contract, RBI base rate is 9% p.a.
Calculate the value of the liability and equity components.

Solution
Present value of principal payable at the end of 3 years (` 10 lakhs discounted at 13% for 3 years) = `
6,93,050
15
Present value of interest payable in arrears for 3 years (` 100,000 discounted at 13% for each of 3
years) = ` 2,36,115
The liability component = Present value of principal + Present value of Interest
= ` 6,93,050 + ` 2,36,115 = ` 9,29,165
Equity Component = ` 10,00,000 – ` 9,29,165 = ` 70,835
QUESTION 39 OPTIONALLY CONVERTIBLE PREFERENCE SHARES (Q.34 CONTINUED)
The amortization schedule has been set out as follows:
Dates Cash Flows Interest at Liability Equity

IRR
1.7.X1 10,00,000 - 9,24,061 75,939
30.6.X2 (60,000) 83,165 9,47,226 75,939
30.6.X3 (60,000) 85,250 9,72,476 75,939
306.X4 (10,60,000) 87,524 - 75,939
The holder has an option of early redemption at 11,00,000 and on 30.6.X3 holder exercised
this option. Show the adjustments in liability and equity component assuming market rate
5% on redemption date.
QUESTION NO 40
On 1 April, 2015, Delta Ltd., issued ` 30,00,000, 6% convertible debentures of face value of ` 100
per debenture at par. The debentures are redeemable at a premium of 10% on 31.03.2019 or these
may be converted into ordinary shares at the option of the holder, the interest rate for equivalent
debentures without conversion rights would have been 10%.
Being compound financial instrument, you are required to separate equity and debt portion as on
01.04.15.
QUESTION NO 41
K Ltd. issued 5,00,000, 6% Convertible Debentures of `10 each on the 1st April, 2015. The debentures
are due for redemption on 31st March, 2019 at a premium of 10% convertible into equity shares to the
extent of 50% and the balance to be settled in cash to the debenture holde` The interest rate on
equivalent debentures without conversion rights was 10%. You are required to separate the debt &
equity components at the time of the issue and show the accounting entry in the company’s books at
initial recognition.
The following Present Values of ` 1 at 6% and at 10% are supplied to you.
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
16
QUESTION NO 42
Adventure Limited issued 10,000, 9% Convertible Debentures of `100 each at par at the beginning of
the year. The Debentures are of 6 years term. The interest will be paid half yearly. The debenture-
holders have the option to get 50% of the Debentures converted into 2 Ordinary Shares at the end
of 3rd year. The Debenture holders who do not opt for conversion will be paid 50% of their Face Value
at the end of the year 3. The balance non-convertible portion will be repaid at 10% premium ate the
end of term of the Debentures. At the time of issue, the prevailing market interest rate for similar
Debt without Convertibility Option is 10%.
Present Value of Annually is as under:
Period 1-3 4-5 7-12
Annuity factor @ 10% 2.487 1.868 2.459
Annuity factor @ 5% 2.723 2.353 3.787
Present Value of ` 1 at the end of 3 yeas at 10% and 5% is 0.565 and 0.747 respectively. Present Value
of ` 1 at the end of 6 years at 10% and 5% is 0.317 and 0.557 respectively.
Compute the Liability Component in this compound financial instruments.
Solution:
1 Computation of Fair Value of Liability Component: PV of Cash Flows from debentures discounted at
market rate of 10%.
(a) Year 1 to 3 = Half yearly cash flow of 4.5 (i.e. ` 100 x 9% = 6/12)
(b) End of year 3 = 50% redemption = ` 50
(c) Year 4 to Year 6 = Half Yearly Cash Flow of 2.25 (i.e. 50 x 9% x 6/12).
(d) End of Year 6 =Balance + 10% Premium = 50 + 5 = ` 55
Half Year Cash Flow HYDF @ 5% DCF
1 4.50 0.9524 4.29
2 4.50 0.9070 4.08
3 4.50 0.8638 3.89
4 4.50 0.8227 3.70
5 4.50 0.7835 3.53
6 54.50 0.7462 40.67
7 2.25 0.7107 1.60
8 2.25 0.6768 1.52
9 2.25 0.6446 1.45

17
10 2.25 0.6139 1.38
11 2.25 0.5847 1.32
12 57.25 0.5568 31.88
99.30
18
UNIT 3: CLASSIFICATION OF FINANCIAL ASSETS & MEASUREMENTS

PART A
PROBLEMS ON BUSINESS MODEL (DEBT INVESTMENTS)
QUESTION 43
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.
Solution
The business model of the company is to collect contractual cash flows and not realization from sale
of financial assets.
QUESTION 44
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 realising 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.
Solution
The objective of the entity's business model is to hold the financial assets in order to collect the
contractual cash flows. The same analysis would apply even if the entity does not expect to receive all
of the contractual cash flows (eg some of the financial assets are credit impaired at initial
recognition).
QUESTION 45
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.
19
Solution
Entity’s B objective is to collect contractual cash flows from trade receivables and therefore, trade
receivables meet the business model test for the purpose of classifying the financial assets at
amortized cost.
QUESTION 46
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
derecognized by the securitization vehicle.
Solution
The entity originating loans to customers has the objective of realizing contractual cash flows on the
loan portfolio only through sale to securitization vehicle. However, the consolidated group originates
loans with the objective of holding them to collect the contractual cash flows.
- Hence, the consolidated financial statements provide for a business model with the objective of
collecting contractual cash flows by holding to maturity.
- And in separate financial statements of the entity originating loans to customers, business model
is to collect cash flows through sale only.
QUESTION 47
An entity anticipates capital expenditure in a few yea` 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
portfolio.
SOLUTION
The objective of the business model is achieved by both collecting contractual cash flows and selling
financial assets. The entity will make decisions on an ongoing basis about whether collecting
contractual cash flows or selling financial assets will maximize the return on the portfolio until the
need arises for the invested cash.
In contrast, consider an entity that anticipates a cash outflow in five years to fund capital expenditure
and invests excess cash in short term financial assets. When the investments mature, the entity
reinvests the cash in new short term financial assets. The entity maintains this strategy until the
funds needed, at which time the entity uses the proceeds from the maturing financial assets to fund
the capital expenditure. Only sales that are insignificant in value occur before maturity (unless there
20
is an credit risk). The objective of this contrasting business model is to hold financial assets to collect
contractual cash flows.
QUESTION 48
A financial institution holds financial assets to meet liquidity needs in a stress case scenario (eg, a run
on the bank 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 interest revenue earned and credit losses realized.
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 realized 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.
SOLUTION
The objective of the entity’ business model is to hold the financial assets to collect contractual cash
flows. The analysis would not change-
(a) If during a previous stress case scenario the entity had sales that were significant in value in
order to meet its liquidity needs or
(b) Recurring sales activity that is insignificant in value is not inconsistent with holding financial
assets to collect contractual cash flows or
(c) If the entity is required by its regulator to routinely sell financial assets to demonstrate that
the assets are liquid, and the value of the assets sold is significant, the entity’ business model
is not to hold financial assets to collect contractual cash flows. Whether a third party imposes
the requirement to sell financial assets, or that activity is at the entity’ discretion is not
relevant to the analysis.
In contrast, if an entity holds financial assets to meet its everyday liquidity needs and meeting that
objective involves frequent sales that are significant in value, the objective of the entity’s business
model is not to hold the financial assets to collect contractual cash flows.
QUESTION 49
Instrument A is a bond with a stated maturity date Payments of principal and interest on the principal
amount outstanding are linked to and 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
21
SOLUTION
The contractual cash flows are solely payments of principal and interest on the principal amount
outstanding. Linking payments of principal and interest on the principal amount outstanding to an
unleveraged inflation index resets the time value of money to a current level. In other words, the
interest rate on the instrument reflects real interest Thus, the interest amounts are consideration
for the time value of money on the principal amount outstanding.
However, if the interest payments were indexed to another variable such as the debtor’s performance
(eg the debtor’s net income) or an equity index, the contractual cash flows are not payments of
principal and interest on the principal amount outstanding (unless the indexing to the debtor’s
performance results in an adjustment that only compensates the holder for changes in the credit risk
of the instrument, such that contractual cash flows are solely payments of principal and interest).
That is because the contractual cash flows reflect a return that is inconsistent with a basic lending
arrangement.
QUESTION 50
Instrument F is a bond that is convertible into a fixed number of equity instruments of the issuer.
Analyse the nature of cash flows.
SOLUTION
The holder would analyse the convertible bond in its entirely. The contractual cash flows are not
payments of principal and interest on the principal amount outstanding because they reflect a return
that is inconsistent with a basic lending arrangement; ie the return is linked to the value of the equity
of the issuer.
QUESTION 51
Instrument D is loan with recourse and is secured by collateral. Does the collateral affect the nature
of contractual cash flows?
Solution
The fact that a loan is collateralised (since with recourse) does not in itself affect the analysis of
whether the contractual cash flows are solely payments of principal and interest on the principal
amount outstanding. The collateral is only a security to recover does.
QUESTION 52
Instrument G is a loan that pays an inverse floating interest rate (i.e the interest rate has an inverse
relationship to market inters rates) Analyse the nature of cash flows.
22
Solution
Here, interest on the instrument has an inverse relationship to the market rate of interest. Hence, it
is unlike a basic, lending arrangement which normally comprise of interest payable on any funds lent,
as consideration for the time value of money, credit risk and profit margin normally existing in such
arrangements. This arrangement with an inverse floating interest rate provides the lender with a
return which may be higher or lower to the market rate of interest and hence, is not necessarily a
consideration for the time value of money on the principal amount outstanding.
Thus, these do not represent contractual cash flows that are slowly payments principal; and interest
on the principal amount outstanding.
23
PART B
PRACTICAL QUESTIONS ON MEASUREMENT OF FINANCIAL

ASSETS UNDER AMORTISATION METHOD
QUESTION NO 53 (AT MARKET TERMS: AMORTISED METHOD)

A Company lends ` 100 Lacs to another company @ 12% p.a. interest on 1.4.2015.
It incurs ` 40,000 incremental cost for documentation.
Loan tenure = 5 years with interest charged annually.
Pass necessary Journal entries for initial recognition. Assume interest rate is based on market rate
of interest.
QUESTION NO 54 (OFF MARKET TERMS: AMORTISED COST)
XYZ Ltd. grants loans to its employees at 4% amounting to ` 10,00,000 at the beginning of 2015-16.
The principal amount is repaid over a period of 5 years whereas the accumulated interest computed
on reducing balance at simple interest is collected in 2 equal annual instalments after collection of the
principal amount.
Assume the benchmark interest rate is 8%.
Show the accounting entries on 1.4.2015 and 31.3.2016.
QUESTION NO 55 (STAFF WELFARE: OFF MARKET TERMS UNDER AMORTISATION METHOD)
As point of staff welfare measures. Y Co. Ltd. has contracted to lend to its employees sums of money
at 5 percent per annum rate of interest. The amounts lent are to be repaid alongwith the interest in
five equal annual instalments. The market rate of interest is 10 per cent per annum.
Y lent ` 16,00,000 to its employees on 1st January, 2015.
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 31st December, 2015 for the transaction and also calculate
the value of the loan initially to be recognized and the amortized cost for all the subsequent yea`
For Purposes of calculation, the following discount factors at interest rate of 10 percent may be
adopted At the end of year.
1 .909
2 .827
3 .751
4 .683
5 .620
24
QUESTION NO 56 (SIMILAR TO Q.53) (HOME WORK)
A Company lends `10 Lacs to another company @ 12% p.a. interest on 1.4.2017.
It incurs `4,000 incremental costs for documentation.
Loan tenure = 5 years with interest charged annually.
Pass necessary Journal entries when Financial Asset is accounted as Amortised Cost. Assume that
interest rate is based on market rate of interest.
Solution
Dates Particulars Amount (`) Amount (`)
1/4/2017 Loan A/c. Dr. 10,00,000
To Bank 10,00,000
1/4/2017 Loan Processing Expenses A/c. Dr. 4,000
To Bank A/c. 4,000
1/4/2017 Loan A/c. Dr. 4,000
To Loan Processing Exp. A/c. 4,000
QUESTION NO 57 (AMORTISED METHOD: OFF MARKET TERMS)
Lovely Limited has advanced Staff Loan of ` 50 Lakhs to its Employees on 1st July 2014 at a
concessional rate of 6% per annum, to be repaid in 5 semi-annual installments along with interest
thereon. The prevailing rate is 8% per annum.
Find out the value at which the Loan should initially be recognsied and its amortization till closure
thereof. Also give necessary journal entries with appropriate narration for financial year 2014-2015.
The Discounted Values at 8% and 4% are as under:-
Period 1 2 3 4 5
8% 0.9259 0.8573 0.7938 0.7350 0.6806
4% 0.9615 0.9246 0.8890 0.8548 0.8219

25
Solution
Computation of Initial Recognition Amount of Loan to Employees (Amount in `)
Cost Inflow Total PVF at Present

4% Value
Period Principal Interest at 6%
Jul to Dec. 10,00,000 50,00,000x 6% x ½ 11,50,000 0.9615 11,05,725

2014 Yr = 1,50,000
Jan to Jun 10,00,000 40,00,000x6% x ½ 11,20,000 0.9246 10,35,552

2015 Yr = 1,20,000
Jul to Dec. 10,00,000 30,00,000 x 6% x ½ 10,90,000 0.8890 9,69,010

2015 Yr. = 90,000
Jan to Jun 10,00,000 20,00,000 x 6% x ½ 10,60,000 0.8548 9,06,088

2016 yr. =60,000
Jul to Dec. 10,00,000 10,00,000 x 6% x ½ 10,30,000 0.8219 8,46,557

2016 yr =30,000
Present Value or Fair Value at Initial Recognition 48,62,932
Note: Discounting is at 8% p.a. (or) 4% for the 6 Months period.
Computation of Amortised Cost of Loan to Employees (Amount in `)
Period Amortised Interest to Repayment Amoritsed Cost

Cost be (including (Closing Balance)
(Opening recognized at Interest)
Balance) 8%
(1) (2) (3) ((4)=(1)+(2) – (3)
Jul to Dec. 2014 48,62,932 1,94,517 11,50,000 39,07,449
Jan to Jun 2015 39,07,449 1,56,298 11,20,000 29,43,747
Jul to Dec. 2015 29,43,747 1,17,750 10,90,000 19,71,497
Jan to Jun 2016 19,71,497 78,860 10,60,000 9,90,357
Jul to Dec. 2016 9,90,347 (Bal.fig.) 10,30,000 NIl

39,643
26
1. Journal Entries for first half year (regarding Loan to Employees)

S.No. Particulars Dr.(`) Cr. (`)
1. Staff Loan A/c. Dr. 48,62,932
Prepaid staff cost Dr. 1,37,068
To Bank A/c. 50,00,000
(Being the disbursement of Loans to Staff)
2. Staff Loan A/c. Dr. 1,94,517
To Interest on Staff Loan A/c. 194,517
(Being Interest charged at market rate of 8% on

the Loan, for first 6 months period)
3. Bank A/c. Dr. 11,50,000
To Staff Loan A/c. 11,50,000
(Being amount received on repayment)
4. Interest on Staff Loan A/c. Dr. 1,94,517
To Profit & Loss A/c. 1,94,517
(Being transfer to bal. in Staff Loan Int. A/c. to

P&L)
NOTE: PREPAID STAFF COST WILL BE AMORTISED OVER THE PERIOD OF 2.5 YEARS ON
SLM BASIS.
QUESTION 58 (INITIAL RECOGNITION: AT MARKET TERMS) AMORTISATION METHOD
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 yea`
Compute the fair value upon initial recognition of the loan in books of ABC BANK LIMITED and how
will loan processing fee be accounted?
27
SOLUTION
The loans from ABC Bank carry interest@ 10% and 12% for 5 year term and 3 year term
respectively. Additionally, there is a processing fee payable @ 1% on the principal amount on
date of transaction. It is assumed that ABC Bank charges all customers in a similar manner
and hence, this is representative of the market rate of interest.
Amortised cost is computed by discounting all future cash flows at market rate of interest.
Further, any transaction fees that are an integral part of the transaction are adjusted in the
effective interest rate and recognised over the term of the instrument.
Hence, loan processing fees shall be reduced from the principal amount to arrive the value on
day 1 upon initial recognition.
Fair value (5 year term loan) = 10,00,000 – 10,000 (1%*10,00,000) = 9,90,000 Fair
value
(3 year term loan) = 8,00,000 – 8,000 (1%*8,00,000) = 7,92,000.
Now, effective interest rate shall be higher than the interest rate of 10% and 12% on 5 year
loan and 3 year loan respectively, so that the processing fees gets recognised as interest over
the respective term of loans.
QUESTION 59 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.
Solution
In the above case, lessee (ie, customers leasing the containers) make interest free deposits, which
are refundable at the end of 3 year Now, this money if it was to lent to a third party would fetch
interest @ 7% per annum.
Hence, discounting all future cash flows (ie, ` 10,000)

Fair value on initial recognition = 10,000/ (1+0.07)3 = 8,163. Differential on day 1 =
10,000 – 8,163 = 1,837
Difference can be recognised as ‘’prepaid lease rent’. Prepaid rent shall be

charged off to profit or loss in a straight lined manner as ‘lease rent’.
QUESTION 60(AMORTISED METHOD: AT OFF MARKET TERMS)
A Ltd has made a security deposit whose details are described below. Make necessary journal entries
for accounting of the deposit. Assume market interest rate for a deposit for similar period to be
12% per annum.
28
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%
Security deposit (A) 10,00,000
Present value factor at the 5th year 0.567427
QUESTION NO 61 (AMORTISATION METHOD: OFF MARKET TERMS)
A Ltd issued redeemable preference shares to a Holding Company – Z Ltd. The terms of the instrument
have been summarised 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: 10,00,00,000
Dividend rate 0.0001%
Market rate of interest 12.00% per annum
Present value factor 0.56743

29
QUESTION NO 62
Wheel Co. Limited has a policy of providing subsidized loans to its employees for the purpose of buying or building
houses. Mr. X, who’s executive assistant to the CEO of Wheel Co. Limited, took a loan from the Company on the
following terms:
Principal amount: 1,000,000

Interest rate: 4% for the first 400,000 and 7% for the next 600,000
Start date: 1 January 20X1
Tenure: 5 years
Pre-payment: Full or partial pre-payment at the option of the employee
The principal amount of loan shall be recovered in 5 equal annual instalments and will be first applied to
7% interest bearing principal
The accrued interest shall be paid on an annual basis
Mr. X must remain in service till the term of the loan ends
The market rate of a comparable loan available to Mr. X, is 12% per annum.
Following table shows the contractually expected cash flows from the loan given to Mr. X:
(amount in `)
Inflows
Date Outflows Principal Interest Interest Principal

income 7% income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 200,000 28,000 16,000 600,000
31-Dec-20X3 200,000 14,000 16,000 400,000
31-Dec-20X4 200,000 - 16,000 200,000
31-Dec-20X5 200,000 - 8,000 -

30
Mr. S, pre-pays ` 200,000 on 31 December 20X2, reducing the outstanding principal as at that date to `
400,000.
Following table shows the actual cash flows from the loan given to Mr. X, considering the
pre-payment event on 31 December

20X2: (amount in `)
Inflows
Date Outflows Principal Interest Interest Principal

income 7% income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 400,000 28,000 16,000 400,000
16.215
31-Dec-20X3 200,000 - 16,000 200,000
31-Dec-20X4 200,000 - 8,000 -
31-Dec-20X5 - - - -
PASS JOURNAL ENTRIES

31

ASSETS UNDER EQUITY INSTRUMENTS (NORMAL)
QUESTION 63 (Financial Asset Accounted as FVTPL)
A Company invested in Equity shares of another entity on 15th March for `10,000. Transaction Cost =
` 200 (not included in ` 10,000).
For value on Balance Sheet date i.e. 31st March 2015 = ` 12,000 Pass necessary Journal Entries.
QUESTION 64 (Financial Asset Accounting as FVTOCI)

A Company invested in Equity Shares of another entity on 15th March for `10,000. Transaction Cost =
` 200 (not included in `10,000). Fair Value on Balance Sheet date i.e. 31st March 2015 = ` 12,000 Pass
necessary Journal entries.
QUESTION 65
A Company invested in Equity shares of another entity on 15th March for `20,000 Transaction Cost =
` 400 (not included in ` 20,000).
Fair Value on Balance sheet date i.e. 31st March 2017 = ` 24,000 Pass necessary Journal Entries when
Financial Asset is accounted as FVTPL.
Solution
15/3/2017 Investment A/c. Dr. 20,000
Transaction Cost A/c. Dr. 400
To Bank 20,400
31/3/2017 Investment A/c. Dr. 4,000
To Fair value Gain A/c. 4,000
31/3/2017 P&L A/c. Dr. 400
To Transaction Cost A/c. 400
31/3/2017 Fair Value Gain A/c. Dr. 4,000
To P&L A/c. 4,000

32
QUESTION NO 66
A Company invested in Equity Shares of another entity on 15th March for `50,000. Transaction Cost =
` 1,000 (not included in `50,000). Fair Value on Balance Sheet i.e. 31st March 2017 = ` 60,000 Pass
necessary Journal entries when Financial Asset is accounted as FVTOCI.
Solution
15/3/2017 Investment A/c. Dr. 51,000
To Bank 51,000
31/3/2017 Investment A/c. Dr. 9,000
To Fair value Gain A/c. 9,000
31/3/2017 Fair value gain Dr. 9,000
To Fair value Reserve OCI 9,000
QUESTION 67 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.
Pass necessary journal entries. Analyse the measurement principle and pass necessary journal entries.
QUESTION 68: 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.
33

ASSETS UNDER EQUITY INSTRUMENTS (HELD FOR
TRADING)
QUESTION 69
Let us say on 30th March 2015 an entity enters into an agreement to purchase a Financial Asset for
`100 which is the Fair Value on that date.
On Balance Sheet date i.e. 31/3/2015 the Fair Value is 102 and on Settlement date i.e. 2/4/2015 Fair
Value is 103.
Pass necessary Journal entries on trade date and settlement date when the asset acquired is measured
at
(a) Amortised cost
(b) FVTPL
(c) FVTOCI
QUESTION 70
On 30th March 2015 an entity enters into an agreement to purchase a Financial Asset for `1,000 which
is the Fair Value on that date.
On Balance Sheet date i.e. 31/3/2017 the Fair Value is ` 1,020 and on Settlement date i.e. 2/4/2017
Fair Value is ` 1,030.
Pass necessary Journal entries on trade date and settlement date when the asset acquired is measured
at
(a) Amortised cost
(b) FVTPL
(c) FVTOCI
Solution
Case (a) (i) Financial Asset at Amortised Cost – Trade Date Accounting
Dates Journal Entry Amount (`) Amount (`)

30.3.2017 Financial Asset Dr. 1,000
To Payables 1,000
31.3.2017 No Entry
2.4.2017 Payables Dr. 1,000
To Cash 1,000
34
(Ii) Financial Asset at Amortised Cost – Settlement Date Accounting
30.3.2017 No Entry
31.3.2017 No Entry
To Cash 1,000
Case (b) (i) Financial Asset at FVTPL – Trade Date Accounting
To Payables 1,000
31.3.2017 Financial Asset Dr. 20
To P&L 20
2.4.2017 Financial Asset 10
To P&L 10
Payables Dr. 1,000
To Cash 1,000
(ii) Financial Asset a FVTPL – Settlement Date Accounting

30.3.2017 No Entry
31.3.2017 Fair Value changes Dr. 20

To P&L 20
Fair value Change Dr. 10
2.4.2017 To P&L 10
Financial Asset Dr. 1,030
To Cash 1,000
To Fair Value Change 30
35
Case (c) (i) Financial Asset at FVTOCI – Trade Date Accounting
To Payables 1,000
To OCI 20
To OCI 10
Payables Dr. 1,000
To Cash 1,000
(iii) Financial Asst at FVTOCI – Settlement Date Accounting
30.3.2017 No Entry
31.3.2017 Fair Value changes Dr. 20
To OCI 20
Fair value Change Dr. 10
2.4.2017 To OCI 10
Financial Asset Dr. 1,030
To Cash 1,000
To Fair Value Change 30

36
QUESTION 71 (SELF READING)
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. traded on a stock exchange. Regular way delivery is two
days. Assess the forward contract.
Solution
In this case, the forward contract is not a regular way transaction and hence must be accounted for
as a derivative i.e. between the date of entering into the contract to the date of delivery. All fair
value changes are recognised in profit or loss.
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.
SOLUTION
In this case, the option contract is regular way transaction as the settlement of the option is governed
by regulation or convention in the marketplace for options.
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 ` 10.5
lakhs. 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.
37
SOLUTION
Journal Entries in the Buyer’s Books
Trade date accounting
Dr. / Cr. Particulars Amortised cast Fair value Fair value

through P&L through OCI
1 January 20X1
Dr. Financial asset 10,00,000 10,00,000 10,00,000
Cr. Financial liability (to (10,00,000) (10,00,000) (10,00,000)
pay)
4 January 20X1
Dr. Financial asset - 50,000 50,000
Dr. Financial liability (to 10,00,000 10,00,000 10,00,000
pay)
Cr. Profit or loss - (50,000) -
Cr. Other comprehensive - - (50,000)
income
Cr. Cash (10,00,000) (10,00,000) (10,00,000)
Settlement date accounting
Dr. /Cr. Particulars Amortised cost Fair value Fair value

through P&L through OCI
4 January 20x1
Dr. Financial asset 10,00,000 10,50,000 10,50,000
Cr. Profit or loss - (50,000) -
Cr. Other comprehensive - - (50,000)
income
Cr. Cash (10,00,000) (10,00,000) (10,00,000)
The above mentioned accounting principles apply only to financial assets and Ind AS 109 does not
contain any such principles for financial liabilities.
38
UNIT 4: CLASSIFICATION & MEASUREMENTS OF

FINANCIAL LIABILITIES
QUESTION NO 74
A Limited issues INR 1 crore convertible bonds on 1 July 20X1. The bonds have a life of
eight years and a face value of INR 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 yea` 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) Identify the present value of the bonds, and allocating the difference between the
present value and the issue price to the equity component, provide the appropriate
accounting entries.
(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 option elect to convert the
options to ordinary shares at the end of the third year.
QUESTION NO 75
ABC Company issued 10,000 compulsory cumulative convertible preference shares

(COCPS) 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 form the date of allotment. When the CCCPS are issued, the prevailing
market interest rate for similar debt without conversion options is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the proceeds.
Key terms:
Date of Allotment 01-Apr 20X1

Date of Conversion 01-Apr-20X1
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 rate of return on amortized part due to 15.86%
transaction cost
39
QUESTION NO 76 (CHANGE IN MARKET RATE OF INTEREST)

ABC Ltd. issued Debentures amounting to ` 100 Lacs.
As per the terms of the issue it has been agreed to issue equity shares amounting to `150
Lacs to redeem the debentures at the end of 3rd year.
Assume comparable market yield is 10% for year 0 and 1, and 10.5% for Year 2 end.
Show accounting entries.
QUESTION 77
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. Comment?
Solution
Due to involvement of market risk in interest rate in financial asset and financial liability,
both should be considered under FVPL MODEL. If interest can be varied due to market
conditions then we cannot opt for amortization method.
QUESTION NO 78
You are required to –
(i) Identify Equity and Liability Components,
(ii) Compute Bond Liability at the end of each year, and
Number of Convertible Bonds 5,000 Bonds issued at the beginning of year 1

Value of Bonds ` 500 per Bond
Period of Bonds 3 Years Validity
Interest Rate on the Bond 9% p.a. Payable Annually
Proceed Received ` 25 Lakhs
Conversion At the Bond Holders’ discretion,
conversion into 125 Shares
for each Bond of `500
Prevailing Market Rate 11% p.a. for Bonds issued without
conversion option.
Present value Factor for 11% 0.900, 0.8121, 0.731 (for One year two
years and three years respectively)
40
SOLUTION:
1. Computation of Fair value of Liability Component
This is measured using the Interest Rteof11% for Non-Convertible Debt as the Benchmark
Discount Rate, as under:-
Nature Year Outflow Discount Factor at11% PV of Outflow
Annual Interest (`2 2,25,000 (0.900+0.812+ 0.731) 5,49,675

Lakhs x
1 to3 2.443
9%)
Principal 3 25,00,000 18,27,500
repayment at
Maturity
Fair value of 23,77,175
Liability
2. Initial Recognition of Compound Financial Instrument (9% convertible

Debentures)
Fair value of the Compound Instrument as a whole = Nominal value= ` 25,00,000

5,000x`500
23,77,175
Less: Fair Value of Liability Component as computed above.
Equity Component ` 1,22,175
3. Bond Liability at the end of each year by Amortised method
Particulars Year 1 Year 2 Year 3
Beginning 23,77,175 23,13,664 24,54,167
Add: Notional 2,61,489 2,65,503 2,70,833

Interest @ 11%
26,38,664 26,79,167 27,25,000
Less: Interest paid 2,25,000 2,25,000 2,25,000

@ 9%
23,13,664 24,54,167 25,00,000
Note: Rounding off adjustments made to 11% interest in year 3.

41
QUESTION 79 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
Repayment of loan starts from 30-

Sept-20X1
Description of repayment (To be paid half yearly)
Installment amount `2,500
Interest rate 12.00% (IRR 16.6%)
Interest charge Interest to be charged quarterly
Upfront fees ` 500
How would loan be accounted in books of A Ltd?
QUESTION 80 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?
Solution
In the above case, creditors for purchase of steel shall be carried at amortised cost,
ie, fair value of amount payable upon initial recognition plus interest (if payment is
delayed). Here, fair value upon initial recognition shall be the price per tonne, since
the transaction is at market terms between two knowledgeable parties in an arms-
length transaction and hence, the transaction price is representative of fair value.
42 FINANCIAL INSTRUMENTS
UNIT 5:DERIVATIVES & EMBEDDED DERIVATIVES
QUESTION 81: 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.
Solution
The initial net investment in the interest rate swap is significantly less than the notional amount on
which the variable payments under the variable leg will be calculated. The contract requires an initial
net investment that is smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors, such as a variable rate bond.
Therefore, the contract fulfils the condition 'no initial net investment or an initial net investment
that is smaller than would be required for other types of contracts that would be expected to have a
similar response to changes in market factors'.
Even though Entity S has no future performance obligation, the ultimate settlement of the contract is at a future
date and the value of the contract changes in response to changes in the LIBOR index. Accordingly, the contract is
regarded as a derivative contract.
QUESTION 82: 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.
FINANCIAL INSTRUMENTS 43
Analyse.
Solution
In effect, this contract results in an initial net investment of ` 36 crores which yields a cash
inflow of ` 10 crores every year, for five year By discharging the obligation to pay variable
interest rate payments, Entity S in effect provides a loan to Counterparty C.
Therefore, all else being equal, the initial investment in the contract should equal that of
other financial instruments that consist of fixed annuities. Thus, the initial net investment in
the pay-variable, receive-fixed interest rate swap is equal to the investment required in a
non-derivative contract that has a similar response to changes in market conditions.
For this reason, the instrument fails the condition 'no initial net investment or an initial net investment
that is smaller than would be required for other types of contracts that would be expected to have a
similar response to changes in market factors'. Therefore, the contract is not accounted for as a derivative
contract.
QUESTION 83: 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.
Solution
Purchase of 1 million shares for current market price is likely to have the same response to changes in market
factors as the contract mentioned above. Accordingly, the prepaid forward contract does not meet the initial
net investment criterion of a derivative instrument.
QUESTION 84: EMBEDDED DERIVATIVES
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 (INR) and of A&A is Dirhams.
The obligation to settle the contract in US Dollars has been evaluated to be an embedded derivative
which is not closely related to the host purchase contract.
Exchange rates:
1. Spot rate on 1 January 20X1: USD 1 = INR 60
2. Six-month forward rate on 1 January 20X1: USD 1 = INR 65
3. Spot rate on 30 June 20X1: USD 1 = INR 66
Analyse
QUESTION NO 85
On 1st January 20X1, Sam Co. Ltd. agreed to purchase USD ($) 20,000 from JT Bank in future on 31st
December 20X1 for a rate equal to ` 68 per USD. Sam Co. Ltd did not pay any amount upon entering
into the contract. Sam Co 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 market 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
Sport rate of USD on 31ST December 20X1 - ` 66per USD
QUESTION NO 86
Entity A (an INR functional currency entity ) enters into a USD 1,00,000 sale contract on 1 January
20X1 with Entity B (an INR functional currency entity ) to sell equipment on 30 June 20X1.
Sport rate on 1 January 20X1 INR/USD 45

Spot rate on 31 March 20X1 : INR/USD 57
Three months forward rate on 31 March 20X1: INR/USD 45
Six month forward rate on 1 January 20X1 INR/USD 55
Spot rate on 30 June 20X1 : INR/USD 60
Let’s assume that 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.
QUESTION NO 87
On 1st January 20X1, Sam Co. Ltd. entered into a written put option for USD ($) 20,000 With JT
Corp to settled in future on 31st December 20X1 for a rate equal to `
equal to ` 68 per USD at the option of JT Corp. Sam co. Ltd. did not receive any amount upon entering
into contract. Sam Co 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 date of actual purchase of USD.
For the purposes of accounting, please use the following information representing market 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 30 the June September 20X1- ` NIL
Spot rate of USD on 31st December 20x1 - ` 66 per USD

46
UNIT 6: RECLASSIFICATION & IMPAIRMENT OF FINANCIAL ASSETS
QUESTION 88 (AMORTISED COST TO FVOCI)
Bonds for ` 1,00,000 reclassified as FVOCI. Fair value on reclassification is ` 90,000. Pass the
required journal entry.
SOLUTION
Particulars Amount Amount
Bonds at FVOCI Dr. 90,000
OCI (Loss on reclassification) Dr. 10,000
To Bonds at amortised cost 1,00,000
QUESTION 89 (FVTPL TO AMORTISED COST)
Bonds for ` 100,000 reclassified as Amortised cost. Fair value on reclassification is ` 90,000. Pass
the required journal entry.
SOLUTION
Bonds at Amortised cost Dr. 90,000
Loss on reclassification Dr. 10,000
To Bonds at FVTPL 1,00,000
QUESTION 90 (FVTPL TO FVOCI)
Bonds for ` 100,000 reclassified as FVOCI. Fair value on reclassification is ` 90,000. Pass the
required journal entry.
SOLUTION
47
Loss on reclassification
(OCI) Dr. 10,000
To Bonds at FVTPL 1,00,000
QUESTION 91 (FVOCI TO AMORTISED COST)
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.
Solution
To OCI - Loss on
reclassification 10,000
[Being loss recognized in OCI now reversed

prior
to reclassification]
Bonds (Amortised cost) Dr. 100,000
To Bonds at FVOCI 100,000
[Being bonds reclassified from FVOCI

to
Amortised cost]
48
QUESTION 92 (FVOCI TO FVPL)
Bonds reclassified as FVTPL. Fair value on reclassification is ` 90,000. Accumulated OCI till date
of reclassification is 10,000 Pass the required journal entry.
Solution
P&L - Loss on reclassification Dr. 10,000

To OCI - Loss on
reclassification 10,000
Bonds at FVTPL Dr. 90,000
To Bonds at FVOCI 90,000
QUESTION 93 Life time expected credit losses (provision matrix for short term receivables)
Company M, a manufacturer, has a portfolio of trade receivables of CU30 million in 20X1 and 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 18. 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:
49
1–30 31–60 61–90 More than 90

Current days days days days
past due past due past due past due
Default
rate 0.3% 1.6% 3.6% 6.6% 10.6%
Determine the expected credit losses for the portfolio
Solution
To determine the expected credit losses for the portfolio, Company M uses a provision matrix. The
provision matrix is based on its historical observed default rates over the expected life of the trade
receivables and is adjusted for forward-looking estimates. At every reporting date the historical
observed default rates are updated and changes in the forward-looking estimates are analysed. In
this case it is forecast that economic conditions will deteriorate over the next year.
On that basis, Company M estimates the following provision matrix:
31–60 61–90 More than 90

Current 1–30 days days days days
past due past due past due past due
Default
rate 0.3% 1.6% 3.6% 6.6% 10.6%
50
The trade receivables from the large number of small customers amount to CU 30 million and are
measured using the provision matrix.
Lifetime expected
Gross carrying amount credit
loss allowance
(Gross carrying amount
x lifetime expected
credit loss rate)
Current CU 15,000,000 CU 45,000
1–30 days past due CU 7,500,000 CU 120,000
More than 90 days past due CU 1,000,000 CU 106,000
CU 30,000,000 CU 580,000
QUESTION 94 (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
51
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.
Solution
At reporting date, no change in 12- month PoD and entity assesses that there is no significant increase
in credit risk since initial recognition – therefore lifetime ECL is not required to be recognised.
Particulars Details
Loan ` 1,000,000 (A)
LGD 25% (B)
PoD – 12 months 0.5% (C)
Loss allowance (for 12-months

ECL) ` 1,250 (A*B*C)
52
UNIT 7: HEDGE ACCOUNTING
QUESTION 95
On 1 January 20X1 , Company D issuers a three-year 5.5% fixed rate bond USD 15 million at par. D’s
functional currency is sterling. As part of its risk management policy, D decides to eliminate the
exposure arising from movements in the US dollar/GBP exchange rates on the principal amount of the
bond for three yea` G enters into a foreign currency forward contract to buy USD 15 million and sell
GBP 9,835,389 at December 20X3.
D designates and documents the forward contract as the hedging instrument in a cash flow hedge of
the variability in cash flows arising from the repayment of the principal amount of the bond due to
movement s in forward US dollar/sterling exchange rates.
D states in its hedge documentation that it will use the hypothetical derivative method to assess hedge
effectiveness. G identifies the hypothetical derivative as a forward contract under which it sells USD
15 million and purchases GBP 9,835,389 At 31 December 20X3 (the repayment date of the bond). The
hypothetical foreign currency forward contract has a fair value of zero at 1 January 20X1. The sport
and the forward exchange rates and the fair value of the foreign currency forward contract are as
follows:
Date Spot rate FWD rate FV OF forward FWD points
1-Jan 20X1 0.6213 0.6557 - 0.0344 USD 15,000,000
31-Dec-20X1 0.5585 0.5858 (957,205) 0.0273 Forward points 516,000
31-Dec-20X2 0.5209 0.528 (1,833,346) 0.0071
30-Dec-20X3 0.5825 0.5825 (1,097,789)
QUESTION 96
The company has taken an external commercial borrowing of $1 million. The term of the loan is 3 yea`
The Company also bought a foreign currency swap to hedge the foreign currency risk The Company
paid premium of ` 1 million to purchase the swap with exercise INR/USD price of 53. Other details
are given below:
Date Spot Forward End of Q1 Spot Forward End of Sport Forward
Of Loan Price rate Price Rate Q2 Price rate
USD to INR rate 31-Dec-20x1 50 53 31-Mar 20X2 52 56 30-Jun- 20X2 55 60

53
MTM values of derivative contract
31-Dec-20x1 10,00,000
31-Mar -20X2
25,00,000
30-Jun-20X2 65,00,000
Record journal entries if Company was to don hedge accounting and if the Company did not opt for
hedge accounting. Assume hedge is effective for this purpose.
54
UNIT 8: DERECOGNITION OF FINANCIAL LIABILITIES
QUESTION NO 97
On 1 January 20X0, XYZ Ltd. issues 10 year bonds for ` 10,00,000, bearing interest at 10%
(payable annually on 31st December each year). The bonds are redeemable on 31 December 20X9
for ` 10,00,000. No costs or fees are incurred. The effective interest rate is therefore 10%. On
1 January 20X5 (i.e. after 5 years) XYZ Ltd. and the bondholders agree to a modification in
accordance with which:
• the term is extended to 31 December 2011;
• Interest payments are reduced to 5% p.a.;
• the bonds are redeemable on 31 December 20Y1 for ` 15,00,000; and
• legal and other fees of ` 1,00,000 are incurred.
XYZ Ltd. determines that the market interest rate on 1 January 20X5 for borrowings on
similar terms is 11%.
QUESTION NO 98
On 1 January 20X0, XYZ Ltd. issues 10 year bonds for ` 1,000,000, bearing interest at
10% (payable annually on 31st December each year). The bonds are redeemable on 31
December
20X9 for ` 1,000,000. No costs or fees are incurred. The effective interest rate is
therefore 10%. On 1 January 20X5 (i.e. after 5 years) XYZ Ltd. and the bondholders
agree to a modification in accordance with which:
no further interest payments are made
the bonds are redeemed on the original due date (31 December 20X9) for ` 1,600,000;
LEGAL fees will be 50,000 on the date of modification
NEW IRR 10.99%
QUESTION NO 99
JK Ltd. has an outstanding unsecured loan of ` 90 crores to a bank. The effective interest rate
(EIR) of this loan is 10%. Owing to financial difficulties, JK Ltd. is unable to service the debt and
approaches the bank for a settlement.
The bank offers the following terms which are accepted by JK Ltd.:
55
• 2/3rd of the debt is unsustainable and hence will be converted into 70% equity interest in
JK Ltd. The fair value of net assets of JK Ltd. is ` 80 crores.
• 1/3rd of the debt is sustainable and the bank agrees to certain moratorium period and
decrease in interest rate in initial periods. The present value of cash flows as per these revised
terms calculated using original EIR is ` 25 crores. The fair value of the cash flows as per these
revised terms is ` 28 crores.
QUESTION NO 100
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 on 31 December 20X
56
UNIT 9: DERECOGNITION OF FINANCIAL ASSETS

QUESTION 101 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 participatory 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 and 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.
Solution
If the three conditions are met, the proportion sold is derecognised, provided the entity has
transferred substantially all the risks and rewards of ownership. Thus, Entity A would report a loan
asset of ` 10 crores and derecognise ` 90 crores.
QUESTION NO 102
Entity X (the transferor) holds a portfolio of receivables with a carrying value of `1,00,000. It
enters into a factoring arrangement with entity Y (the transferee) under which it transfers the
portfolio to entity Y in exchange for ` 90,000 of cash.
Entity Y will service the loans after their transfer and debtors will pay amounts due directly to entity
Y. Entity X has no obligations whatsoever to repay any sums received from the factor and has no
rights to any additional sums regardless of the timing or the level of collection from the underlying
debts. Evaluate.
Solution
Entity X derecognizes the entire portfolio. The difference between the carrying value of `1,00,000
and cash received of `90,000 (i.e. `10,000 is recognised immediately as a financing cost in profit or
loss.
57
QUESTION 103
ST limited assigns its trade receivables to AT limited. The carrying amount of the receivables is
10,00,000. The consideration received in exchange of this arrangement is 9,00,000. Customers have
been instructed to deposit the amounts directly in to a bank account of AT limited. AT limited has no
recourse to ST limited in case of any shortfalls in collections.
State whether the derecognition principles will be applied or not.
SOLUTION
ST limited will derecognize the financial asset and recognizes 1,00,000 the difference between
consideration and carrying amount as an expense in the statement of profit and loss account.
QUESTION 104: 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 asset that are similar and of
equal fair value to the transferred asset at the repurchase date.
State whether the derecognition principles will applied or not

Solution
In each of these scenarios, the transferred financial asset is not derecognised because the transferor
retains substantially all the risks and rewards of ownership.
QUESTION 105 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.
Solution
In the first scenario, the transferred asset does not qualify for derecognition because the transferor
has retained substantially all the risk and rewards of ownership. However, in the second scenario, the
transferor has transferred substantially all the risks and rewards of ownership.
58
QUESTION 106 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 is 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
Solution
In the first scenario, the transferred asset does not qualify for derecognition because the transferor
has retained substantially all the risks and rewards of ownership. However in the second scenario, the
transferor has transferred substantially all the risk and rewards of ownership.
In the third scenario, the asset is derecognised. This is because the entity (i) has neither retained
not transferred substantially all the risk and rewards of ownership, and (ii) has not retained control.
QUESTION 107A : 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 B 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 dash flows from short-terms
receivables.
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 and losses of
up to ` 15 crores are considered reasonably possible. The guarantee is estimated to have a fair value
of ` 0.5 crores. Comment.
QUESTION 107B: Debt factoring with recourse – associated liability

Continuing illustration 12A, the associated liability is recognised at ` 5.5 crores, as below:
i. the guarantee amount (i.e. ` 5 Crores) plus
ii. the fair value of the guarantee (i.e. ` 0.5 crores). Comment
QUESTION 107C: Debt factoring with recourse – gain or loss on derecognition

Pass the necessary Journal Entry
59

QUESTION 108 MAY 2018 EXAMINATION
S Limited issued redeemable preference shares to its Holding Company – H Limited. The terms of the
instrument have been summarized below. Analyse the given situation, applying the guidance in Ind AS
109 ‘Financial Instrument’, and account for this in the books of H Limited.
Nature Non- cumulative redeemable preference shares

Repayment Redeemable after 3 years
Date of Allotment 1st April 2015
Date of Repayment 31st March 2018
Total period 3 Years
Value of Preference Shares issued 5,00,00,000
Dividend Rate 0.0001% Per Annum
Market rate of interest 12% Per Annum
Present value factor 0.7118
ANSWER
(A) 1. Analysis of the financial instrument issued by S Ltd. to its holding company H Ltd.
Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair value upon
initial recognition. Fair value is normally the transaction price. However, sometimes certain type
of instruments may be exchanged at off market terms (ie, different from market terms for a
similar instrument if exchanged between market participants).
For example, a long-term loan or receivable that carries no interest while similar instruments if
exchanged between market participants carry interest, then fair value for such loan receivable
will be lower from its transaction price owing to the loss of interest that the holder bears. In
such cases where part of the consideration given or received is for something other than
financial instrument, an entity shall measure the fair value or the financial instrument.
In the above case, since S Ltd has issued preference shares to its Holding Company- H Ltd, the
relationship between the parties indicates that the difference in transaction price and fair value
is akin to investment make by H Ltd. in its subsidiary. This can further be substantiated by the
nominal rate of dividend i.e. 0.000 1% mentioned in the terms of the instrument issued.
COMPUTATIONS ON INITIAL RECOGNITION

`
Transaction value of the Redeemable preference shares 5,00,00,000
Less: Present value of loan component @ 12% (5,00,00,000 x.7118) (3,55,90,000)
Investment in subsidiary 1,44,10,000

60
Subsequently, such preference shares shall be carried at amortised cost at each reporting date
as follows:
Year Date Opening Balance Interest @12% Closing balance
1st April, 2015 3,55,90,000 - 3,55,90,000
1 31st March, 2016 3,55,90,000 42,70,800 3,98,60,800
2 31st March , 2017 3,98,60,800 47,83,296 4,46,44,096
3 31st March, 2018 4,46,44,096 53,55,904* 5,00,00,000
• ` 4,46,44,096 x 12% = ` 53, 57,292 The difference of ` 1,388 (` 53,57,292 – ` 53,55,904) is due
to approximation in present value factor.
2. IN THE BOOKS OF H LTD.

JOURNAL ENTRIES TO BE DONE AT EVERY REPORTING DATE
Date Particulars Amount Amount
1st April Investment (Equity portion) Dr. 1,44,10,000

2015 Redeemable Preference Shares Dr. 3,55,90,000
To Bank
(Being initial recognition of transaction 5,00,00,000
recorded
31st March, Redeemable Preference Shares Dr. 42,70,800
2016 To Interest income
(Being interest income on loan component 42,70,800
recognized)
st
31 March Redeemable Preference Shares Dr. 47,83,296
2017 To Interest income 47,83,296
(Being interest income on loan component
recognized)
st
31 March, Redeemable Preference Shares Dr. 53,55,904
2018 To Interest income 53,55,904
(Being interest income on loan component
recognized)
st
31 March, Bank Dr. 5,00,00,000
2018 To Redeemable Preference Shares 5,00,00,000
(Being settlement of transaction done at the end
of the third year)
61

On 1st January 2017, Expo Limited agreed to purchase USD ($) 40, 000 from E & I Bank in future on
31st December 2017 for a rate equal to ` 65 per USD. Expo Limited did no pay any amount upon entering
into the contract. Expo Limited is a listed company in India and prepares its financial statements on a
quarterly basis.
Using the definition of derivative included in Ind AS 109 and 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 purchases of USD.
For the purpose of accounting, use the following information representing market to market fair value
of forward contracts at each reporting date:
As at 31st March, 2017 ` (50,000)
th
As at 30 June, 2017 ` (30,000)
th
As at 30 September, 2017 ` 24,000
Spot rate of USD on 31st December, 2017 ` 62 per USD
ANSWER
(B) Assessment of the arrangement using the definition of derivative included under Ind AS
109.
Derivative is a financial instrument or other contract within the scope of this Standard with all
three of the following Characteristics:
(a) Its value changes in response to the change in foreign exchange rate (emphasis laid)
(b) it requires no initial net investment or an initial net investment in smaller than would be
required for other types of contracts with similar response to changes in market factors.
(c) It is settled at a future date.
Upon evaluation of contract in question, on the basis of the definition of derivative, it is
noted that the contract meets the definition of a derivative as follows:
(a) The value of the contract to purchase USD at a fixed price changes in response to changes
in foreign exchange rate.
(b) The initial amount paid to enter into contract is zero. A contract which would give the holder
a similar response to foreign exchange rate changes would have required an investment of
USD 40,000 on inception.
(c) The contract is settled in future
The derivative is forward exchange contract.
As per Ind AS 109, Derivatives are measured at fair value upon initial recognition and are
subsequently measured at fair value through profit and loss.
62
ACCOUNTING IN EACH QUARTER

(i) Accounting on 1st January 2017
As there was no consideration paid and without evidence to the contrary the fair value of the
contract on the date of inception is considered to be zero. Accordingly, no accounting entries
shall be recorded on the date of entering into the contract.
(ii) Accounting on 31st March 2017
Profit and loss A/c Dr. 50,000

To derivative financial liability 50,000
(Being mark to market loss on forward contract recorded)
(iii) Accounting on 30th June 2017

Derivative financial liability A/c Dr. 20,000

To Profit and Loss A/c 20,000
(Being partial reversal of mark to market loss on forward contract
recorded)
(iv) Accounting on 30th September 2017

Derivative financial liability A/c Dr. 30,000

Derivative financial asset A/c Dr. 24,000
To Profit and Loss A/c 54,000
(Being gain on mark to market of forward contract booked as
derivative financial asset and reversal of derivative financial
liability)
(v) Accounting on 31st December 2017

The settlement of the derivative forward contract by actual purchase of USD 40,000
Cash (USD) Account) USD 40,000x ` 62) Dr. 24,80,000

Profit and loss A/c Dr. 1,44,000
To Cash (USD 40,000 x ` 65) 26,00,000
To Derivative financial asset A/c 24,000
(Being loss on settlement of forward contract booked on actual
purchase of USD)
63
QUESTION 110 NOVEMBER 2018 EXAMINATION

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 a below market rate of interest Ind AS 109 requires that a financial
asset of financial liability 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
book of NAV Ltd.
Present value factors at 12%
Year 1 2 3 4 5
PVR 0.892 0.797 0.712 0.636 0.567
ANSWER
Since the loan is granted to OLD Ltd at 10% i.e below market rate of 12% It will be considered as loan
given at off market terms. Hence the fair value of the transaction will be lower from its transaction
price & not the transaction price
Calculation of fair value

Year Future cash flow Discounting factor @12% Present value (in lakh)
(in lakh)
1 12 0.892 10.704
2 12 0.797 9.564
3 12 0.712 8.544
4 12 0.636 7.632
5 120+12=132 0.567 74.844
111.288
The Fair value of the transaction be ` 111. 288 Lakh.

Since fair value is based on level 1 input or valuation technique that uses only date from observable
markets, difference between fair value and transaction price will be recognized in Profit and Loss as
fair value loss i.e. ` 120 lakh – ` 111.288 lakh = ` 8.712 lakh
Note: One many also calculate the above fair value by the way of annuity on interest amount rather
than separate calculation.

Veer Limited issued convertible bonds of ` 75,00,000 on 1st April, 2018. The bonds have a life of five
years and a face value of ` 20 each, and they offer interest payable at the end of each financial year
at a rate of 4.5 per cent annum. The bonds are issued at their face value and each bond can be
converted into one ordinary share in Veer Ltd at any time in the next five years. Companies of a similar
risk profile have recently issued debt at 6 percent per annum with similar terms but without the option
of conversion.
64
You are required to:

(i) Provide the appropriate accounting entries for initial recognition as per the relevant Ind AS in
the books of the company.
(ii) Calculate the stream of interest expenses across the five years of the life of the bonds,
(iii) Provide the accounting entries if the holders of the bonds elect to convert the bonds to ordinary
shares at the end of the fourth year.
ANSWER
Present value of bonds at the market rate of debt
Present value of principal to be received in 5 years discounted at 6%
(75,00,000 x 0.747) = 56,02,500
Present value of interest stream discounted at 6% for 5 Year

(3,37,500 x 4.212) = 14,21,550
Total present value = 70,24,050
Equity component = 4,75,950
Total face value of convertible bonds = 75,00,000
(i) Journal Entries
Dr. Amount Cr. Amount

(`) (`)
1st April, 2018

Cash Dr. 75,00,000
To Convertible bonds (liability) 70,24,050
To Convertible bonds (equity component) 4,75,950
(Being entity to record the convertible bonds and the recognition
of the liability and equity components)
31st March, 2019

Interest expense Dr. 4,21,443
To Cash 3,37,500
To Convertible bonds (liability) 83,943
(Being entity to record the interest expense)
(ii) The stream of interest expense in summarised below, where interest for a given year is calculated
by multiplying the present value of the liability at the beginning of the period by the market rate
of interest, this is being 6 per cent.
65
Date Payment Interest Increase Total bond liability (e

expense at 6% in bond of previous year + d)
(e of previous liability
year x 6%) (c-b)
(a) (b) (c) (d) (e)
1st April, 2018 70,24,050

31st March, 2019 3,37,500 4,21,443 83,943 71,07,993
st
31 March, 2020 3,37,500 4,26,480 88,980 71,96,973
st
31 March, 2021 3,37,500 4,31,818 94,318 72,91,291
st
31 March,2022 3,37,500 4,37,477 99,977 73,91,268
st
31 March, 2023 3,37,500 4,46,232 1,08,732 75,00,000
• Difference is due to rounding off.

(iii) If the holders of the bond elect to convert the bonds to ordinary shares at the end of the
fourth year (after receiving their interest payments), the entries in the fourth year would be;
Dr. (`) Cr. (`)
31st March ,2022

Interest expense A/c Dr. 4,37,477
To Cash A/c 3,37,500
To Convertible bonds (liability) A/c 99,977
(Being entity to record interest expense for the period)
31st March, 2022
Convertible bonds (liability) A/c Dr. 73,91,268
Convertible bonds (equity component) A/c Dr. 4,75,950
To Ordinary share capital A/c 78,67,218
(Being entry to record the conversion of bonds into ordinary
shares of Veer Limited).

Perfect Ltd. issued 50,000 Compulsory Cumulative Convertible preference Shares (CCCPS) as on 1st
April, 2017 @ `180 each. The rate of dividend is 10% payable at the end of every year. The preference
Shares are convertible into 12,500 equity shares (Face value ` 10 each) 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 option is 15% per annum.
Transaction cost on the date of issuance is 2% of the value of the proceeds. Effective interest rate
is 15.86% (Round off the figures to the nearest multiple of Rupee)
66
Discounting Factor @ 15%

Year 1 2 3 4 5
Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4971
You are required to compute 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.
ANSWER
This is a compound financial instrument with two components- liability representing present value of
future cash outflows and balance represents equity component.
Total proceeds = 50,000 Shares x ` 180 each = ` 90,00,000
Dividend @ 10% = ` 9,00,000
a. Computation of Liability & Equity Component

Date Particulars Cash Flow Discount Net present
Factor Value
01-Apr-2017 0 1 0.00
31-Mar-2018 Dividend 9,00,000 0.8696 7,82,640

31-Mar-2019 Dividend 9,00,000 0.7561 6,80,490
31-Mar-2020 Dividend 9,00,000 0.6575 5,91,750
31-Mar-2021 Dividend 9,00,000 0.5718 5,14,620
31-Mar-2022 Dividend 9,00,000 0.4971 4,47,390
Total Liability 30,16,890
Component
Total Proceeds 90,00,000
Total Equity Component
(Bal fig) 59,83,110
a. Allocation of transaction costs

Particulars Amount Allocation Net Amount
a b a-b
Liability Component 30,16,890 60,338 29,56,552
Equity Component 59,83,110 1,19,662 58,63,448
Total Proceeds 90,00,000 1,80,000 88,20,000
a. Accounting for liability at amortised cost
- Initial accounting = Present value of cash outflows less transaction costs
- Subsequent accounting = At amortised cost, ie initial fair value adjusted for interest and
repayments of the liability.
67
Opening Interest @ Cash Flow Closing

Financial 15.86% (Dividend Financial
Liability A B payment) C Liability A+B-C
01-Apr-2017 29,56,552 29,56,552
31-Mar-2018 29,56,552 4,68,909 9,00,000 25,25,461
31-Mar-2019 25,25,461 4,00,538 9,00,000 20,25,999
31-Mar-2020 20,25,999 3,21,323 9,00,000 14,47,322
31-Mar-2021 14,47,322 2,29,545 9,00,000 7,76,867
31-Mar-2022 7,76,867 1,23,133* 9,00,000 -
• Difference of ` 78 (adjusted in the interest value of 31st March, 2022) is due to

approximation of figures in the earlier years.
d. Journal Entries to be recorded for entire term of arrangement are as follows:
Date Particulars Debit ` Credit `
01-Apr- Bank A/c Dr. 88,20,000
2017 To Preference Shares A/c 29,56,552
To Equity Component of Preference 58,63,448
shares A/c
(Being compulsorily convertible preference
shares issued. The same are divided into
equity component and liability component as
per the calculation)
31-Mar- Preference shares A/c Dr 9,00,000
2018 To Bank A/c 9,00,000
(Being dividend at the coupon rate of
10% paid to the shareholders)
31-Mar- Finance cost A/c Dr 4,68,909
(Being interest as per EIR method recorded)
31-Mar- Preference shares A/c Dr. 9,00,000

2019 To Bank A/c 9,00,000
31-Mar- Finance cost A/c DR. 4,00,538
2020 To Bank A/c 9,00,000
68
31-Mar- Finance cost A/c Dr. 3,21,323

2021 To Bank A/c 9,00,000
31-Mar- Finance cost A/c Dr. 2,29,545
31-Mar- Preference shares A/c 9,00,000

2022 To Bank A/c 9,00,000
31-Mar- Finance cost A/c 1,23,133
Equity Component of Preference shares

31-Mar- A/c Dr. 58,63,448
2022
To Equity Share Capital A/c
To Securities Premium A/c 1,25,000
(Being preference shares converted in equity 57,38,448
shares and remaining equity component is
recognised as securities premium)
Vedika Ltd. issued 80,000 8% convertible debentures of ` 100 each on 1st April, 2015. The
debentures are due for redemption on 31st March, 2019 at a premium of 20%, 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 right was 12%. The conversion to equity
qualifies as fixed for fixed.
You are required to separate the debt and equity components at the time of issue and show the
accounting entries in Vedika Ltd.'s books at initial recognition only. The following present values of
Rupee 1 at 8% and 12% are provided for a period of 5 years.
Interest rate Year 1 Year 2 Year 3 Year 4 Years 5

8% 0.923 0.853 0.789 0.731 0.677
12% 0.887 0.788 0.701 0.625 0.557
69
ANSWER
Computation of debt component of convertible debentures on 1 st April, 2015

Present value of principal amount repayable after 4 years
(A) 80,00,000 x 50% x 120% x 0.625 (12% discount factor) 30,00,000

(B) Present value of interest [8,00,000 x 80% x 3.001] (4 years cumulative 10%
discount factor)
Total present value of debt component (A) + (B) 19,20,640
Issue proceeds from convertible debentures 49,20,640
Value of equity component 80,00,000
30,79,360
Journal entry at initial recognition
Particulars Dr. Amount Cr. Amount

(`) (`)
Bank A/c Dr. 80,00,000
To 8% Debentures A/c (liability component) 49,20,640
To 8% Debentures A/c (equity component) 30,79,360
(Being disbursement recorded at fair value)
Note: The question has been solved on the basis of the discounting factors given in the question.
QUESTION 114 NOVEMBER 2019 EXAMS
Make necessary journal entries for accounting of the security deposit made by Admire Ltd., whose
details are described below. Assume market interest rate for a deposit for similar period to be
12% per annum.
Particulars Details
Date of Security Deposit (Starting Date) 1st April, 2014
Date of Security Deposit (Finishing Date) 31st March, 2019
Description Lease
Total Lease Period 5 years
Discount rate 12%
Present value factor at the 5th year 0.567427
70
ANSWER
The above security deposit is an interest free deposit redeemable at the end of lease term for `
20,00,000. Hence, this involves collection of contractual cash flows and shall be accounted at
amortised cost.
Upon initial measurement
Particulars Details
Total lease period (Years) 5
Discount rate 12.00%
Present value annuity factor 0.567427
Present value of deposit at beginning (B) 11,34,854
Prepaid lease payment at beginning (A-B) 8,65,146
Journal entry at initial recognition

Security deposit A/c Dr. 11,34,854
Prepaid lease expenses A/c Dr. 8,65,146
To Bank A/c 20,00,000

Subsequently, every annual reporting year, interest income shall be accrued @ 12% per annum
and prepaid expenses shall be amortised on straight line basis over the lease term.
Following table shows the amortisation of security deposit based on discount rate:
Year Opening Interest @ Closing balance

balance 12% (A) = (A) + (B)
(A) (B)
1 11,34,854 1,36,183 12,71,037
2 12,71,037 1,52,524 14,23,561
3 14,23,561 1,70,827 15,94,388
4 15,94,388 1,91,327 17,85,715
5 17,85,315 2,14,685* 20,00,000
*Difference is due to approximation.
71
Journal entries for Year 1-5 For – Year 1

To Interest income 1,36,183
Lease expense (8,65,146 / 5 years) Dr. 1,73,029
To Prepaid lease expenses 1,73,029
For – Year 2

For – Year 3

For – Year 4

For – Year 5

Journal entry for realisation of security deposit at the end of 5th year

Bank A/c Dr. 20,00,000
20,00,000
QUESTION 115 (ALREADY DISCUSSED IN RTP MAY 21..Q15 IN RTP)
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
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.
ANSWER
1 April 20X1
A financial guarantee contract is initially recognised at fair value. The fair value of the
guarantee will be the present value of the difference between the net contractual cash
flows required under the loan, and the net contractual cash flows that would have been
required without the guarantee.
Particulars Year 1 Year 2 Year 3 Total

(`) (`) (`) (`)
Cash flows based on interest rate 1,10,000 1,10,000 1,10,000 3,30,000
of 11% (A)
Cash flows based on interest rate 80,000 80,000 80,000 2,40,000
of 8% (B)
Interest rate differential (A-B) 30,000 30,000 30,000 90,000
Discount factor @ 11% 0.901 0.812 0.731
Interest rate differential 27,030 24,360 21,930 73,320
discounted at 11%
Fair value of financial guarantee
contract (at inception) 73,320
Journal Entry
Investment in subsidiary Dr. 73,320
To Financial guarantee (liability) 73,320
(Being financial guarantee initially recorded)
31 March 20X2
Subsequently at the end of the reporting period, financial guarantee is measured at the
higher of:
- the amount of loss allowance; and
- the amount initially recognised less cumulative amortization, where appropriate.
At 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in
to recover any amount from Moon Limited. The 12-month expected credit losses are
therefore Rs.10,000 (Rs.10,00,000 x 1%).
The initial amount recognised less amortisation is ` 51,385 (` 73,320 + ` 8,065 (interest
accrued based on EIR)) – ` 30,000 (benefit of the guarantee in year 1) Refer table below.
The unwound amount is recognised as income in the books of Sun Limited, being the
benefit derived by Moon Limited not defaulting on the loan during the period.
Year Opening balance EIR @ 11% Benefits Closing

provided balance
` ` `
1 73,320 8,065 (30,000) 51,385
2 51,385 5,652 (30,000) 27,037
3 27,037 2,963* (30,000) -
* Difference is due to approximation

The carrying amount of the financial guarantee liability after amortisation is therefore
` 51,385, which is higher than the 12-month expected credit losses of ` 10,000. The
liability is therefore adjusted to ` 51,385 (the higher of the two amounts) as follows:
Financial guarantee (liability) Dr. 21,935
To Profit or loss 21,935
(Being financial guarantee subsequently adjusted)
31 March 20X3
At 31 March 20X3, there is 3% probability that Moon Limited will default on the loan in
to recover any amount from Moon Limited. The 12-month expected credit losses are
therefore ` 30.000 (` 10,00,000 x 3%).
The initial amount recognised less accumulated amortisation is ` 27,037, which is lower
than the 12-month expected credit losses (`30,000). The liability is therefore adjusted
to ` 30,000 (the higher of the two amounts) as follows:
Financial guarantee (liability) Dr. 21,385*
To Profit or loss (Note) 21,385
(Being financial guarantee subsequently adjusted)
* The carrying amount at the end of 31 March 20X2 = ` 51,385 less 12-month expected
credit losses of ` 30,000.

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IND AS-2: VALUATION OF INVENTORIES 1

IND AS-2: VALUATION OF INVENTORIES

• This standard is applicable to all inventories except:

CONCEPT 3: RELEVANT DEFINITIONS

1) Inventories are assets:

(b) in the process of production for such sale; or (Work in progress)

2) Inventories encompass of:

CONCEPT 4: MEASUREMENT OF INVENTORIES

Cost Net realisable value

Other cost to bring inventory to present location and condition

Import duties and other taxes

Transport, handing and

Other cost to bring inventory to present location and condition

Less trade discounts, rebates and other similar items

Other direct costs

Overheads (fixed and variable production overheads)

inventories are not measured above cost.

EXAMPLE 1: COST OF INVENTORY

CONCEPT 6: COST OF INVENTORIES OF SERVICE PROVIDER

CONCEPT 7: COST OF AGRICULTURAL PRODUCE

CONCEPT 8: TECHNIQUES FOR THE MEASUREMENT OF COST

Measurement • Retail method

EXAMPLE 2: MEASUREMENT TECHNIQUES OF COST

CONCEPT 9: INVENTORY ORDINARILY NOT INTERCHANGEABLE

CONCEPT 10: INVENTORY ORDINARILY INTERCHANGEABLE

Specific identification of Other items

Date Particular Unit Cost p.u. Total Cost

FIFO inventory 31.03.20X2 350@ 14= 4,900

CONCEPT 11: NET REALISABLE VALUE

Writing inventories down to net realisable value

CONCEPT 12: REVERSALS OF WRITE-DOWNS

Item Cost Net Realisable Value

Determine the value of Inventories:

Item by item basis :

Common classifications of inventories are as follows:

SIGNIFICANT DIFFERENCES IN IND AS VIS-À-VIS AS2

It also deals with the

Item Unit Amount Output Closing Stock

Fixed Production overhead = Rs. 20,00,000 p.a.

Items Historical cost Net realizable value

What will be the value of closing Stock?

QUESTION NO 16 (VALUATION OF WIP)

SOLVED QUESTIONS FOR SELF PRACTICE

Particulars Amount (Rs.)

2. Computation of Effective Cost per kg.

3. Valuation of Inventory and Abnormal Loss

Particulars Rs. Treatment

(b) Cost of Abnormal Loss 29,160 Shown in Income Statement

(c) Cost of Closing Stock 3,07,800 Shown in Balance Sheet

QUESTION NO 22 (INTEREST ON BANK OVERDRAFT)

1. Closing Stock (in Units) : 10 (-) 6 + 20 (-)14 = 10 units.

1. Value of Inventory as on June 30:

Value of Inventory s on June 30 19,42,500

2. Cost of Goods Sold:

Cost of Goods Sold 39,22,500

3. Profit/Loss for June:

QUESTION NO 26 (RETAIL VALUE WITH WEIGHTED AVERAGE)

Particulars At Retail Price At cost

Value of Closing Inventory at Retail = Opening Stock + Purchases (-) Sales

Value of Closing Inventory at Cost = Retail values Less Margin of 18.18%

4. Considering actual costs till date Rs.530 + additional expected cost