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Final Course
Study Material
(Modules 1 to 5)

Paper 1

Financial Reporting
Module – 1
(Relevant for May, 2025 examination and onwards)

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This Study Material has been prepared by the faculty of the Board of Studies. The objective of the
Study Material is to provide teaching material to the students to enable them to obtain knowledge
in the subject. In case students need any clarification or have any suggestion for further
improvement of the material contained herein, they may write to the Joint Director, Board of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the Study Material has not been specifically discussed by the Council of the
Institute or any of its committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Basic draft of this publication was prepared by CA. (Dr.) Rashmi Goel

Edition : November, 2024

Committee/Department : Board of Studies

E-mail : bosnoida@icai.in

Website : www.icai.org

Price : ` /- (For All Modules)

ISBN No. : 978-93-48313-35-5

Published by : The Publication & CDS Directorate on behalf of

The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)

Printed by :

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BEFORE WE BEGIN …

The role of a chartered accountant is evolving continually to assume newer responsibilities in a

dynamic environment. There has been a notable shift towards strategic decision making and
entrepreneurial roles that add value beyond traditional accounting and auditing. The causative
factors for the change include globalisation leading to increase in cross border transactions and
consequent business complexities, significant developments in information and technology and
financial scams underlining the need for a stringent regulatory set up. These factors necessitate
an increase in the competence level of chartered accountants to bridge the gap in competence
acquired and competence expected from stakeholders. Towards this end, the scheme of
education and training is being continuously reviewed so that it is in sync with the requisites of
the dynamic global business environment; the competence requirements are being stepped up
to enable aspiring chartered accountants to acquire the requisite professional competence to
take on new roles.

Concurrent Practical Training along with academic education: Key to achieving the
desired level of Professional Competence

Under the Revised Scheme of Education and Training, at the Final Level, you are expected to
apply the professional knowledge acquired through academic education and the practical
exposure gained during articleship training in addressing issues and solving practical problems.
The integrated process of learning through academic education and practical training should
also help you inculcate the requisite technical competence, professional skills and professional
values, ethics and attitudes necessary for achieving the desired level of professional
competence.

Indian Accounting Standards (Ind AS): High Standards of Financial Reporting

Consistent, comparable and understandable financial reporting is essential to develop a robust

economy. High standards of financial reporting underpin the trust investors place in financial
and non-financial information. Thus, the case for a single set of globally accepted accounting
standards has prompted many countries to pursue convergence of our national accounting
standards (I GAAP) with IFRS.

The Government of India in consultation with the ICAI decided to converge and not to adopt
IFRS issued by the IASB. The decision of convergence rather than adoption was taken after the

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detailed analysis of IFRS requirements and extensive discussion with various stakeholders.
Accordingly, while formulating IFRS-converged Indian Accounting Standards (Ind AS), efforts
have been made to keep these Standards, as far as possible, in line with the corresponding
IAS/IFRS and departures have been made where considered absolutely essential. These
changes have been made considering various factors, such as, various terminology related
changes have been made to make it consistent with the terminology used in law, e.g.,
‘statement of profit and loss’ in place of ‘statement of comprehensive income’ and ‘balance
sheet’ in place of ‘statement of financial position’. Certain changes have been made considering
the economic environment of the country, which is different as compared to the economic
environment presumed to be in existence by IFRS.

Thereafter, the Ministry of Corporate Affairs (MCA) had notified IFRS-converged Indian
Accounting Standards (Ind AS) as Companies (Indian Accounting Standards) Rules, 2015 vide
Notification dated February 16, 2015 and also the roadmap for the applicability of Ind AS for
certain class of companies from financial year 2016-17. With the financial year 2016-17, the era
of implementation of Ind AS in India had begun for the listed and unlisted companies as per the
MCA roadmap for implementation of Ind AS. The MCA has also laid down roadmap for
implementation of Ind AS for NBFCs. These developments are a significant step in achieving
international benchmarks of financial reporting.

Ind AS, at the Final level, involves understanding, application and analysing of the concepts and
testing of the same. The nitty-gritties of this new standard coupled with its inherent dynamism,
makes the learning, understanding and application of the standards in problem solving very
interesting and challenging.

Know your Syllabus

Accounts being the core competence areas of chartered accountants, at Final level, the syllabus
of Financial Reporting covers Indian Accounting Standards alongwith Ethics and Technology
integrated with the profession and accounting. However, for understanding the coverage of
syllabus, it is important to read the Study Material as the content therein has been developed
keeping in mind the extent of coverage of various topics in commensuration with 100 marks
allotted to the paper. Certain Ind AS / portion of Ind AS are excluded from the study material,
keeping in view the relevancy of the content in the Indian scenario and also to avoid the volume
of the study material.

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For understanding the coverage of syllabus, it is important to read the Study Material along with
the reference to Study Guidelines. The Study Guidelines specify the topic-wise exclusions from
the syllabus.

Know your Study Material

Efforts have been made to present the multifaceted Ind AS in a lucid manner. The Study
Material carries 17 chapters. Care has been taken to present the chapters in a logical sequence
to facilitate easy understanding by the students. Ind AS have been grouped under various
categories to make you understand the areas of relevancy and application of Ind AS. The
chapters have been numbered based on those categories and Ind AS falling in the same
category are included in that chapter. Therefore, certain chapters on Ind AS, contain several
units each unit dedicated to one Ind AS. However, for bare text of Indian Accounting standards,
students are advised to refer the notified Indian Accounting Standards uploaded on the website
at the link https://www.icai.org/post.html?post_id=15365

The various chapters/units of this subject have been structured uniformly and comprise of the
following components:

Components About the component

of each
Chapter

1. Learning Learning outcomes which you need to demonstrate after learning

Outcomes each topic have been detailed in the first page of each chapter/unit.
Demonstration of these learning outcomes will help you to achieve
the desired level of technical competence.

2. Chapter / Unit As the name suggests, the flow chart/table/diagram given at the
Overview beginning of each chapter will give a broad outline of the contents
covered in the chapter.

3. Content Ind AS have been explained by following a systematic approach of

first discussing the objective, then the scope of the pronouncement
and then extracting the underlying concepts. The concepts and
provisions of Ind AS are explained in student-friendly manner with
the aid of examples / illustrations / diagrams / flow charts.
Diagrams and flow charts will help you understand and retain the

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concept / provision learnt in a better manner. Examples and

illustrations will help you understand the application of
concepts/provisions.

Later, in the topics of Ind AS, the significant differences vis-à-vis AS

has also been incorporated so that students appreciate and
recapitulate their learning done at Intermediate level.

These value additions will, thus, help you develop conceptual clarity
and get a good grasp of the topic.

4. Illustrations Illustrations would help the students to understand the application of

involving concepts / provisions of Indian Accounting Standards. In effect, it
conceptual would test understanding of concepts / provisions as well as ability
understanding to apply the concepts / provisions learnt in solving problems and
addressing issues.

5. Summary of The summary of each Ind AS has been linked through a QR Code in
Ind AS the respective chapter/unit dedicated to that Ind AS. The QR Code
has been given at the end of the chapter discussion i.e. before ‘Test
Your Knowledge’ section

6. Test Your Questions

Knowledge
This section comprises of variety of questions which will help you to
apply what you have learnt in problem solving, and, thus, sharpen
your application skills. In effect, it will test your understanding of
concepts as well as your ability to apply the concepts learnt in
solving problems and addressing issues.

Answers

After you work out the problems / questions given under the section
“Test Your Knowledge”, you can verify your answers with the
answers given under this section. This way you can self-assess
your level of understanding of the concepts of a chapter.

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Two new features have been added at the end of each Module of Financial Reporting namely
‘Practice Questions’ and ‘Ind AS Puzzlers: Test Your Accounting Acumen’. Under the title
there is a crossword puzzle

Practice To strengthen problem-solving skills and improve speed and accuracy, the
Questions Board of Studies has introduced the new feature at the end of each module
– chapter-wise practice questions. You are encouraged to attempt these
questions after completing all the chapters/units, as this will help you all to
reinforce your understanding, retention, and recall of the concepts learned.
Solving these questions will not only enhance your exam readiness by
improving time management but will also boost your confidence in tackling
diverse problems effectively.

Crossword After going through the chapters of a Module, you can test your Ind AS
Puzzle acumen by solving a crossword puzzle. The crossword puzzle has been
given at the end of every module with respect to the chapters dealt with in
that module. These crossword puzzles will be a fun for you to solve by
going through the clues, recall the concepts and review your understanding
and knowledge acquired. You are advised to solve the puzzle earnestly
after going through the chapters of the Module thoroughly.

Answer of the Ind AS Crossword puzzle is again linked through a QR

Code. You can scan the QR Code to match your filled crossword with the
answer given therein.

Though all efforts have been taken in developing this Study Material, the possibilities of errors /
omissions cannot be ruled out. You may bring such errors / omissions, if any, to our notice so
that the necessary corrective action can be taken.

We hope that the student-friendly features in the Study Material makes your learning process
more enjoyable, enriches your knowledge and sharpens your application skills.

Happy Reading and Best Wishes!

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SYLLABUS
PAPER – 1: FINANCIAL REPORTING
(One paper – Three hours – 100 Marks)

Objectives:
(a) To acquire the ability to integrate and solve problems in practical scenarios on Indian
Accounting Standards (Ind AS) for deciding the appropriate accounting treatment and
formulating suitable accounting policies.
(b) To gain the prowess to recognize and apply disclosure requirements specified in Indian
Accounting Standards (Ind AS) while preparing and presenting the financial statements.
(c) To develop the expertise to prepare financial statements of group entities which includes
subsidiaries, associates and joint arrangements based on Indian Accounting Standards
(Ind AS).
(d) To develop understanding of certain Accounting Standards and solve problems in
practical scenarios where treatment is different in both the standards.

Contents:
1. Introduction to General Purpose Financial Statements as per Indian Accounting
Standard (Ind AS)

2. Conceptual Framework for Financial Reporting under Indian Accounting Standards

(Ind AS)
3. Application of Ind AS with reference to General Purpose Financial Statements
(i) Ind AS on Presentation of Items in the Financial Statements
(ii) Ind AS on Measurement based on Accounting Policies
(iii) Ind AS on Income Statement

(iv) Ind AS on Assets and Liabilities of the Financial Statements

(v) Ind AS on Items impacting the Financial Statements
(vi) Ind AS on Disclosures in the Financial Statements

(vii) Other Ind AS

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(viii) Ind AS on Financial Instruments (it includes Ind AS 32, Ind AS 109, Ind AS 107)
4. Ind AS on Group Accounting
5. First time adoption of Indian Accounting Standards (Ind AS 101)
6. Analysis of financial statements (as per Ind AS)
7. Ethics with Accounting Concepts
Identify and explain the key ethical issues
8. Technology and Accounting
Evolution of Accounting in the technological environment
Notes:
1. Discussion on AS 7, AS 9, AS 19 and AS 22 will be given along with corresponding Ind
AS 115, Ind AS 116 and Ind AS 12.

2. If either a new Ind AS or Announcements and Limited Revisions to Ind AS are issued or
the earlier one is withdrawn or new Ind AS, Announcements and Limited Revisions to
Ind AS are issued in place of existing Ind AS, the syllabus will accordingly include /
exclude such new developments in the place of the existing ones with effect from the
date to be notified as decided by the Institute.
3. The specific inclusions / exclusions in any topic covered in the syllabus will be affected
every year by way of Study Guidelines.

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SIGNIFICANT CHANGES

Significant changes in this Module 1 vis-à-vis Module 1 of April, 2023

edition of the Study Material
(The amendments made in the respective chapters / units have been highlighted in bold and
italics for easy reference except newly added illustrations)

Chapter/ Chapter name (Ind AS) Details

Unit

1 Introduction to Indian Accounting Test Your Knowledge Question 1 has been

Standards (Ind AS) newly added

2 Conceptual Framework for Financial Test Your Knowledge Question 2 has been
Reporting under Indian Accounting newly added
Standards (Ind AS)

3 Unit 1 Ind AS 1 “Presentation of Financial Questions 6, 7, 8, and 9 from the "Test Your
Statements” Knowledge" section have been relocated to the
"Practice Questions" section as Questions 1, 2,
3, and 4, respectively. Additionally, two new
questions numbered 5 and 6, have been
introduced under the "Practice Questions"
section.

3 Unit 2 Ind AS 34 “Interim Financial Questions 5 and 6 from the "Test Your
Reporting” Knowledge" section have been relocated to the
"Practice Questions" section as Questions 1
and 2, respectively. Additionally, two new
questions numbered 3 and 4, have been
introduced under the "Practice Questions"
section.

3 Unit 3 Ind AS 7 “Statement of Cash Flows” Questions 6, 7 and 8 from the "Test Your
Knowledge" section have been relocated to the
"Practice Questions" section as Questions 1, 2

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and 3 respectively. Additionally, three new

questions numbered 4, 5 and 6, have been
introduced under the "Practice Questions"
section

4 Unit 1 Ind AS 8 “Accounting Policies, Questions 6 ,7 ,8 ,9 ,10 and 11 from the "Test
Changes in Accounting Estimates Your Knowledge" section have been relocated
and Errors” to the "Practice Questions" section as
Questions 1, 2, 3, 4, 5 and 6 respectively.
Additionally, one new question numbered 7 has
been introduced under the "Practice Questions"
section

4 Unit 2 Ind AS 10 “Events after the Questions 6, 7, 8, 9 and 10 from the "Test Your
Reporting Period” Knowledge" section have been relocated to the
"Practice Questions" section as Questions 1, 2,
3, 4 and 5 respectively. Additionally, two new
questions numbered 6 and 7 have been
introduced under the "Practice Questions"
section.

4 Unit 3 Ind AS 113 “Fair Value Questions 5, 6, 7 and 8 from the "Test Your
Measurement” Knowledge" section have been relocated to the
"Practice Questions" section as Questions 1, 2,
3 and 4 respectively..

5 Ind AS 115 “Revenue from This chapter has been moved to Module 4 of
Contracts with Customers” the Study Material as Chapter 9. Consequently,
the chapters thereafter have been renumbered
accordingly.

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CONTENTS

MODULE – 1
Chapter 1: Introduction to Indian Accounting Standards
Chapter 2: Conceptual Framework for Financial Reporting under Indian Accounting
Standards (Ind AS)
Chapter 3: Ind AS on Presentation of Items in the Financial Statements
Unit 1: Ind AS 1 “Presentation of Financial Statements”
Unit 2: Ind AS 34 “Interim Financial Reporting”
Unit 3: Ind AS 7 “Statement of Cash Flows”
Chapter 4: Ind AS on Measurement based on Accounting Policies
Unit 1: Ind AS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”
Unit 2: Ind AS 10 “Events after the Reporting Period”
Unit 3: Ind AS 113 “Fair Value Measurement”
Annexure: Division II of Schedule III to the Companies Act, 2013
Practice Questions
Ind AS Puzzlers: Test Your Accounting Acumen
MODULE – 2
Chapter 5: Ind AS on Assets of the Financial Statements
Unit 1: Ind AS 2 “Inventories”
Unit 2: Ind AS 16 “Property, Plant and Equipment”
Unit 3: Ind AS 23 “Borrowing Costs”
Unit 4: Ind AS 36 “Impairment of Assets”
Unit 5: Ind AS 38 “Intangible Assets”
Unit 6: Ind AS 40 “Investment Property”

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Unit 7: Ind AS 105 “Non-current Assets Held for Sale and Discontinued Operations”
Unit 8: Ind AS 116 “Leases”
Practice Questions
Ind AS Puzzlers: Test Your Accounting Acumen
MODULE – 3
Chapter 6: Ind AS on Liabilities of the Financial Statements
Unit 1: Ind AS 19 “Employee Benefits”
Unit 2: Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets”
Chapter 7: Ind AS on Items impacting the Financial Statements
Unit 1: Ind AS 12 “Income Taxes”
Unit 2: Ind AS 21 “The Effects of Changes in Foreign Exchange Rates”
Chapter 8: Ind AS on Disclosures in the Financial Statements
Unit 1: Ind AS 24 “Related Party Disclosures”
Unit 2: Ind AS 33 “Earnings per Share”
Unit 3: Ind AS 108 “Operating Segments”
Practice Questions
Ind AS Puzzlers: Test Your Accounting Acumen
MODULE – 4
Chapter 9: Ind AS 115 “Revenue from Contracts with Customers”
Chapter 10: Other Indian Accounting Standards
Unit 1: Ind AS 41 “Agriculture”
Unit 2: Ind AS 20 “Accounting for Government Grants and Disclosure of Government
Assistance”
Unit 3: Ind AS 102 “Share Based Payment”
Chapter 11: Accounting and Reporting of Financial Instruments
Unit 1: Financial Instruments: Scope and Definitions
Unit 2: Classification and Measurement of Financial Assets and Financial Liabilities
Unit 3: Financial Instruments: Equity and Financial Liabilities
Unit 4 : Derivatives and Embedded Derivatives

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Unit 5: Recognition and Derecognition of Financial Instruments

Unit 6: Hedge Accounting
Unit 7: Disclosures
Comprehensive Illustrations
Practice Questions
Ind AS Puzzlers: Test Your Accounting Acumen
MODULE – 5
Chapter 12: Ind AS 103 “Business Combinations”
Chapter 13: Consolidated and Separate Financial Statements of Group Entities
Unit 1 : Introduction to Consolidated and Separate Financial Statements
Unit 2 : Important Definitions
Unit 3 : Consolidated Financial Statements
Unit 4 : Ind AS 110: Consolidation Procedure for Subsidiaries
Unit 5 : Ind AS 111: Joint Arrangements
Unit 6 : Ind AS 28: Investment in Associates & Joint Ventures
Unit 7 : Ind AS 27: Separate Financial Statements
Unit 8 : Disclosures
Chapter 14: Ind AS 101 “First-time Adoption of Indian Accounting Standards”
Chapter 15: Analysis of Financial Statements
Chapter 16: Professional and Ethical Duty of a Chartered Accountant
Chapter 17: Accounting and Technology
Practice Questions
Ind AS Puzzlers: Test Your Accounting Acumen

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DETAILED CONTENTS: MODULE – 1

CHAPTER 1: INTRODUCTION TO INDIAN ACCOUNTING STANDARDS

Learning Outcomes ................................................................................................................... 1.1
Chapter Overview ..................................................................................................................... 1.2
Contents:
1. Introduction ................................................................................................................. 1.3
2. Indian Scenario prior to introduction of Ind AS in India .................................................. 1.4
3. Limitations of Accounting Standards ............................................................................ 1.7
4. Emergence of Global Accounting Standards ................................................................. 1.7
5. Need for Global Accounting standards in India ............................................................. 1.9
6. Benefits of Global Accounting Standards ................................................................... 1.10
7. Convergence vs Adoption of IFRS .............................................................................. 1.11
8. Process of development and finalisation of Indian Accounting Standards ................... 1.12
9. Transition from AS to Ind AS ...................................................................................... 1.13
9.1 About Indian Accounting Standards ............................................................... 1.14
9.2 How Ind AS have been numbered? ............................................................... 1.16
9.3 How Ind AS have been structured? ............................................................... 1.17
10. Roadmap for applicability of Ind AS ............................................................................ 1.19
10.1 For Listed Entities ......................................................................................... 1.19
10.2 Ind AS Roadmap for Non -Banking Financial Companies (NBFC) .................. 1.28
10.3 Ind AS Roadmap for Banking and Insurance Companies .............................. 1.32
10.4 Ind AS Roadmap for Mutual Funds ................................................................ 1.32
11. Ind AS relevant Statutory Provisions .......................................................................... 1.33
11.1 Relevant Sections referring to Ind AS in the Companies Act, 2013
and Rules ..................................................................................................... 1.33
11.2 Relevant SEBI Rules and Regulations ........................................................... 1.34
12. Format of Division II to Schedule III to the Companies Act – Structure ........................ 1.35

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12.1 Introduction .................................................................................................. 1.35

12.2 Applicability .................................................................................................. 1.36
13. Guidance Note on Division II to Schedule III to the Companies Act, 2013 .................... 1.36
Summary ............................................................................................................................... 1.43
Test Your Knowledge……………………………………………………………………………………. 1.44

CHAPTER 2: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER INDIAN

ACCOUNTING STANDARDS (IND AS)
Learning Outcomes ................................................................................................................... 2.1
Chapter Overview ..................................................................................................................... 2.2
Contents:
Unit 1 : Introduction ................................................................................................................ 2.4
Unit 2 : Objective of General Purpose Financial Reporting ................................................... 2.6
2.1 Objectives and usefulness of general -purpose financial reporting................................. 2.6
2.2 Limitations of general-purpose financial reporting ......................................................... 2.7
2.3 Information provided by general purpose financial reports ............................................. 2.7
2.3.1 Economic resources and claims ...................................................................... 2.8
2.3.2 Changes in economic resources and claims .................................................... 2.8
Unit 3 : Qualitative Characteristics of Useful Financial Information ................................... 2.10
3.1 Qualitative characteristics of useful financial information ............................................. 2.10
3.1.1 Relevance .................................................................................................... 2.10
3.1.2 Faithful representation .................................................................................. 2.11
3.1.3 Applying the fundamental qualitative characteristics ...................................... 2.12
3.1.4 Enhancing qualitative characteristics ............................................................. 2.13
3.1.5 Applying the enhancing qualitative characteristics ......................................... 2.14
3.2 The cost constraint on useful financial information ...................................................... 2.15
Unit 4 : Financial Statements and the Reporting Entity ....................................................... 2.16
4.1 Objective and scope of financial statements ............................................................... 2.16

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4.1.1 Reporting period ........................................................................................... 2.17

4.1.2 Perspective adopted in financial statements .................................................. 2.17
4.1.3 Going concern assumption ............................................................................ 2.17
4.2 The reporting entity .................................................................................................... 2.18
4.2.1 Consolidated and unconsolidated financial statements .................................. 2.18
Unit 5 : The Elements of Financial Statements .................................................................... 2.20
5.1 Link between information in general purpose financial reports as per conceptual
framework and elements of financial statements ......................................................... 2.20
5.2 Definition of an asset ................................................................................................. 2.21
5.2.1 Right ............................................................................................................ 2.21
5.2.2 Potential to produce economic benefits ......................................................... 2.23
5.2.3 Control ......................................................................................................... 2.24
5.3 Definition of a liability ................................................................................................. 2.26
5.3.1 Obligation ..................................................................................................... 2.26
5.3.2 Transfer of an economic resource ................................................................. 2.27
5.3.3 Present obligation as a result of past events .................................................. 2.28
5.4 Aspects which are common to assets and liabilities .................................................... 2.29
5.4.1 Unit of account ............................................................................................. 2.29
5.4.2 Executory contracts ...................................................................................... 2.30
5.4.3 Substance of contractual rights and contractual obligations ........................... 2.30
5.5 Definition of equity ..................................................................................................... 2.31
5.6 Definition of income and expenses ............................................................................. 2.31
Unit 6 : Recognition and Derecognition ............................................................................... 2.32
6.1 The recognition process ............................................................................................. 2.32
6.2 Recognition criteria .................................................................................................... 2.33
6.2.1 Relevance .................................................................................................... 2.34
6.2.2 Faithful representation .................................................................................. 2.36
6.3 Derecognition ............................................................................................................ 2.38

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Unit 7 : Measurement ............................................................................................................ 2.40

7.1 Measurement bases of an asset or a liability .............................................................. 2.40
7.1.1 Historical cost ............................................................................................... 2.41
7.1.2 Current value ................................................................................................ 2.42
7.2 Information provided by particular measurement bases ............................................... 2.44
7.2.1 Assets .......................................................................................................... 2.44
7.2.2 Liabilities ...................................................................................................... 2.46
7.3 Factors to consider when selecting a measurement basis for initial
recognition and subsequent measurement of an asset or a liability ............................. 2.48
7.3.1 Relevance .................................................................................................... 2.49
7.3.2 Faithful representation .................................................................................. 2.50
7.3.3 Implications of enhancing qualitative characteristics for
the selection of measurement basis .............................................................. 2.57
7.4 Factors specific to initial measurement of an asset or a liability ................................... 2.57
7.4.1 Transactions on market terms ....................................................................... 2.58
7.4.2 Transactions not on market terms (or off-market transactions) ....................... 2.58
7.5 More than one measurement basis ............................................................................. 2.59
7.6 Measurement of equity ............................................................................................... 2.60
Unit 8 : Presentation and Disclosure .................................................................................... 2.62
8.1 Presentation and disclosure objectives and principles ................................................. 2.62
8.2 Classification ............................................................................................................. 2.62
8.2.1 Classification of assets and liabilities............................................................. 2.63
8.2.2 Offsetting ...................................................................................................... 2.63
8.2.3 Classification of equity .................................................................................. 2.63
8.2.4 Classification of income and expenses .......................................................... 2.63
8.2.5 Profit or loss and other comprehensive income .............................................. 2.64
8.3 Aggregation ............................................................................................................... 2.64

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Unit 9: Concepts of Capital and Capital Maintenance ........................................................ 2.67

9.1 Concepts of capital .................................................................................................... 2.67
9.2 Concepts of capital maintenance and the determination of profit ................................. 2.67
9.3 Capital maintenance adjustments ............................................................................... 2.68
Test Your Knowledge ............................................................................................................ 2.71
Question ................................................................................................................................. 2.71
Answer ................................................................................................................................. 2.72

CHAPTER-3: IND AS ON PRESENTATION OF ITEMS IN THE FINANCIAL STATEMENTS

Unit 1: Indian Accounting Standard 1: Presentation of Financial Statements ...................... 3.1
Learning Outcomes ................................................................................................................... 3.1
Unit Overview ........................................................................................................................... 3.2
Contents:
1.1 Introduction ................................................................................................................. 3.3
1.2 Objective ..................................................................................................................... 3.3
1.3 Scope .......................................................................................................................... 3.3
1.4 Definitions ................................................................................................................... 3.4
1.5 Purpose of financial statements.................................................................................... 3.7
1.6 Complete set of financial statements ............................................................................ 3.8
1.7 General features of financial statements ..................................................................... 3.10
1.7.1 Presentation of True and Fair View and compliance with Ind AS .................... 3.10
1.7.2 Going concern .............................................................................................. 3.14
1.7.3 Accrual basis of accounting ........................................................................... 3.17
1.7.4 Materiality and aggregation ........................................................................... 3.17
1.7.5 Offsetting ...................................................................................................... 3.18
1.7.6 Frequency of reporting .................................................................................. 3.20
1.7.7 Comparative information ............................................................................... 3.20
1.7.8 Consistency of presentation .......................................................................... 3.23

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1.8 Structure and content ................................................................................................. 3.23

1.8.1 Identification of Financial Statements ............................................................ 3.23
1.8.2 Balance sheet ............................................................................................... 3.24
1.8.3 Statement of profit and loss........................................................................... 3.42
1.8.4 Statement of changes in equity ..................................................................... 3.50
1.8.5 Statement of cash flows ................................................................................ 3.52
1.8.6 Notes ........................................................................................................... 3.52
1.9 Significant differences in Ind AS 1 vis-à-vis AS 1 ........................................................ 3.62
1.10 Carve out in Ind AS 1 from IAS 1 ................................................................................ 3.66
Shortcut to Ind AS Wisdom .................................................................................................. 3.67
Test Your Knowledge ............................................................................................................ 3.67
Questions ............................................................................................................................... 3.67
Answers ................................................................................................................................. 3.69
Unit 2: Indian Accounting Standard 34: Interim Financial Reporting .................................. 3.72
Learning Outcomes ................................................................................................................. 3.72
Unit Overview ......................................................................................................................... 3.73
Contents:
2.1 Introduction ............................................................................................................... 3.74
2.2 Objective ................................................................................................................... 3.74
2.3 Scope ........................................................................................................................ 3.74
2.4 Definitions ................................................................................................................. 3.75
2.5 Contents of an interim financial report ........................................................................ 3.75
2.5.1 Form and content of interim financial report ................................................... 3.76
2.5.2 Significant events and transactions ............................................................... 3.76
2.5.3 Other disclosures .......................................................................................... 3.78
2.5.4 Periods for which interim financial statements are
required to be presented ............................................................................... 3.80
2.5.5 Materiality ..................................................................................................... 3.82

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2.6 Disclosure in annual financial statements ................................................................... 3.82

2.7 Recognition and measurement ................................................................................... 3.82
2.8 Restatement of previously reported interim periods..................................................... 3.92
2.9 Interim financial reporting and impairment .................................................................. 3.93
2.10 Significant differences in Ind AS 34 vis-à-vis AS 25 .................................................... 3.94
Shortcut to Ind AS Wisdom .................................................................................................. 3.97
Test Your Knowledge ............................................................................................................ 3.97
Questions ............................................................................................................................... 3.97
Answers ................................................................................................................................. 3.98
Unit 3: Indian Accounting Standard 7: Statement of Cash Flows ...................................... 3.101
Learning Outcomes ............................................................................................................... 3.101
Unit Overview ....................................................................................................................... 3.102
Contents:
3.1 Introduction ............................................................................................................. 3.103
3.2 Meaning of statement of cash flows .......................................................................... 3.103
3.3 Objective ................................................................................................................. 3.105
3.3.1 To provide information about historical changes in cash
and cash equivalents .................................................................................. 3.105
3.3.2 To assess the ability to generate cash and cash equivalents ........................ 3.105
3.3.3 To understand the timing and certainty of their generation ........................... 3.105
3.4 Benefits of cash flow information .............................................................................. 3.106
3.4.1 Provides information enabling evaluation of changes in net
assets and financial structure (Liquidity and solvency) ................................ 3.106
3.4.2 Assesses the ability to manage the cash ..................................................... 3.106
3.4.3 Assess and compare the present value of future cash flows ......................... 3.106
3.4.4 Compares the efficiency of different entities ................................................ 3.106
3.5 Scope ...................................................................................................................... 3.107
3.6 Definitions ............................................................................................................... 3.107
3.7 Cash and Cash Equivalents ..................................................................................... 3.108

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3.8 Presentation of Statement of cash flows ................................................................... 3.109

3.8.1 Operating activities ..................................................................................... 3.110
3.8.2 Investing activities ...................................................................................... 3.113
3.8.3 Financing activities ..................................................................................... 3.115
3.9 Reporting cash flows from operating activities .......................................................... 3.118
3.10 Reporting cash flows from investing and financing activities ...................................... 3.122
3.11 Reporting cash flows on a net basis ......................................................................... 3.123
3.12 Foreign currency cash flows ..................................................................................... 3.124
3.12.1 Treatment of Foreign Exchange differences arising from
unsettled transactions relating to operating activities ................................... 3.124
3.13 Interest and dividends .............................................................................................. 3.126
3.14 Taxes on income ..................................................................................................... 3.127
3.15 Investments in subsidiaries, associates and joint ventures ........................................ 3.129
3.16 Changes in ownerships interests in subsidiaries and other businesses ...................... 3.129
3.16.1 Classification of cash flows as investing activity ........................................... 3.129
3.16.2 Classification of cash flows as financing activity .......................................... 3.130
3.17 Non-cash transactions ............................................................................................. 3.132
3.17.1 Changes in liabilities arising from financing activities ................................... 3.132
3.18 Components of cash and cash equivalents .............................................................. 3.133
3.19 Other disclosures ..................................................................................................... 3.135
3.20 Extracts of financial statements of listed entity .......................................................... 3.143
3.21 Significant differences in Ind AS 7 vis-à-vis AS 3 ...................................................... 3.146
Quick Recap .................................................................................................................. 3.149
Shortcut to Ind AS Wisdom ................................................................................................ 3.150
Test Your Knowledge .......................................................................................................... 3.150
Questions ............................................................................................................................. 3.150
Answers ............................................................................................................................... 3.154

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CHAPTER 4: IND AS ON MEASURMENT BASED ON ACCOUNTING POLICIES

Unit 1 : Indian Accounting Standard 8: Accounting Policies, Changes in
Accounting Estimates and Errors .............................................................................. 4.1
Learning Outcomes ................................................................................................................... 4.1
Unit Overview ........................................................................................................................... 4.2
Contents:
1.1 Introduction ................................................................................................................. 4.3
1.2 Objective ..................................................................................................................... 4.3
1.2.1 To prescribe the criteria for selecting and changing
accounting policies ......................................................................................... 4.3
1.2.2 To prescribe the accounting treatment and disclosure
of changes in accounting policies .................................................................... 4.4
1.2.3 To prescribe the accounting treatment and disclosure of
changes in accounting estimates ..................................................................... 4.4
1.2.4 To prescribe the accounting treatment and disclosure
of corrections of errors .................................................................................... 4.4
1.2.5 To provide better base of inter-firm and intra-firm comparison .......................... 4.5
1.3 Scope .......................................................................................................................... 4.5
1.4 Definitions ................................................................................................................... 4.6
1.5 Accounting policies ...................................................................................................... 4.8
1.5.1 Selection and application of accounting policies .............................................. 4.8
1.5.2 Is it Compulsory to follow the accounting policies?........................................... 4.9
1.5.3 How to select and apply an accounting policy when specific Ind AS
is not available on the particular transaction/condition/ event? ......................... 4.9
1.5.4 Consistency of accounting policies ................................................................ 4.12
1.5.5 Changes in accounting policies .................................................................... 4.13
1.5.6 Disclosure regarding the Changes in Accounting Policies .............................. 4.25
1.6 Change in accounting estimates ................................................................................. 4.28
1.6.1 Meaning ...................................................................................................... 4.28
1.6.2 Can changes in estimates be related to prior periods? ................................... 4.29

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1.6.3 Change in the basis of measurement – Whether a change

in accounting policy or change in estimate? ................................................... 4.29
1.6.4 Accounting treatment for applying changes in accounting estimates ............... 4.30
1.6.5 Disclosure of changes in estimates ............................................................... 4.32
1.7 Errors ........................................................................................................................ 4.33
1.7.1 Meaning ....................................................................................................... 4.33
1.7.2 Common types of errors ................................................................................ 4.33
1.7.3 Treatment of errors ....................................................................................... 4.34
1.7.4 Limitations on retrospective restatement ....................................................... 4.38
1.8 Disclosure of prior period errors ................................................................................. 4.39
1.9 Impracticability in respect of retrospective application
and retrospective restatement .................................................................................... 4.40
1.10 Significant differences in Ind AS 8 and AS 5 ............................................................... 4.41
Shortcut to Ind AS Wisdom .................................................................................................. 4.45
Test Your Knowledge ............................................................................................................ 4.45
Questions ............................................................................................................................... 4.45
Answers ................................................................................................................................. 4.47
Unit 2 : Ind AS 10: “Events after the Reporting Period” ...................................................... 4.49
Learning Outcomes ................................................................................................................. 4.49
Unit Overview ......................................................................................................................... 4.50
Contents:
2.1 Introduction ............................................................................................................... 4.51
2.2 Objective ................................................................................................................... 4.51
2.3 Scope ........................................................................................................................ 4.52
2.4 Definitions and explanations ...................................................................................... 4.53
2.4.1 Events after the Reporting Period .................................................................. 4.53
2.4.2 Approval of Financial Statements .................................................................. 4.53

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2.4.3 When date of approval is after the public announcement of

some other financial information .................................................................... 4.55
2.4.4 Should the company report only unfavourable events? .................................. 4.57
2.5 Type of Events........................................................................................................... 4.57
2.6 Recognition and measurement of adjusting events ..................................................... 4.58
2.7 Accounting treatment and disclosure of Non-adjusting events after
the reporting period .................................................................................................... 4.64
2.8 Special cases ............................................................................................................ 4.65
2.8.1 Long-term Loan Arrangements ...................................................................... 4.65
2.8.2 Going concern .............................................................................................. 4.66
2.9 Dividends .................................................................................................................. 4.68
2.10 Disclosure required under Ind AS 10 .......................................................................... 4.70
2.10.1 Date of approval for issue ............................................................................ 4.70
2.10.2 Updating disclosure about conditions at the end of the reporting
period .......................................................................................................... 4.70
2.10.3 Disclosure of Non-adjusting events after the reporting period ........................ 4.71
2.11 Distribution of non cash assets to owners ................................................................... 4.73
2.11.1 Applicability .................................................................................................. 4.74
2.11.2 Non-applicability ........................................................................................... 4.74
2.11.3 Issues addressed by Appendix A to Ind AS 10 ............................................... 4.75
2.11.4 Accounting principles enunciated by Appendix A to Ind AS 10 ......................... 4.75
2.12 Extracts of financial statements of listed entity ............................................................ 4.77
2.13 Significant differences between Ind AS 10 and AS 4 .................................................. 4.77
2.14 Carve out in Ind AS 10 from IAS 10 ........................................................................... 4.79
Shortcut to Ind AS Wisdom .................................................................................................. 4.80
Test Your Knowledge ............................................................................................................ 4.80
Questions ............................................................................................................................... 4.80
Answers ................................................................................................................................. 4.81

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xxvi

Unit 3- Indian Accounting Standard 113 : Fair Value Measurement .................................... 4.83
Learning Outcomes ................................................................................................................. 4.83
Unit Overview ......................................................................................................................... 4.84
Contents:
3.1 What is fair value? ..................................................................................................... 4.84
3.2 Objective ................................................................................................................... 4.85
3.3 Scope ........................................................................................................................ 4.86
3.3.1 What is not covered? .................................................................................... 4.87
3.4 Definition ................................................................................................................... 4.87
3.5 Asset or liability specific fair value .............................................................................. 4.88
3.6 Unit of Account .......................................................................................................... 4.89
3.7 The transaction .......................................................................................................... 4.90
3.7.1 Principal market ............................................................................................ 4.91
3.7.2 Most advantageous market ........................................................................... 4.91
3.8 Market participants .................................................................................................... 4.92
3.8.1 What are market participants? ....................................................................... 4.92
3.9 The price ................................................................................................................... 4.93
3.9.1 Transaction cost ........................................................................................... 4.94
3.9.2 Transport cost .............................................................................................. 4.94
3.10 Applying fair value rules on non-financial assets ......................................................... 4.95
3.10.1 Highest and best use .................................................................................... 4.95
3.10.2 Valuation premise ......................................................................................... 4.97
3.11 Applying fair value rules to liabilities and an entity’s own equity instruments ................ 4.98
3.11.1 When liability and equity instruments are held by
other parties as assets .................................................................................. 4.99
3.11.2 When liability and equity Instruments are not held by other
parties as assets .......................................................................................... 4.99
3.12 Applying fair value rules to financial asset & financial liability
with offsetting position in market risk or counterparty risk .......................................... 4.100

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xxvii

3.13 Fair value at initial recognition .................................................................................. 4.101

3.14 Valuation techniques ................................................................................................ 4.102
3.15 Inputs to valuation techniques .................................................................................. 4.106
3.15.1 Level 1 Inputs ............................................................................................. 4.107
3.15.2 Level 2 Inputs ............................................................................................ 4.109
3.15.3 Level 3 Inputs ............................................................................................ 4.110
3.16 Disclosures .............................................................................................................. 4.111
3.17 Extracts of financial statements of listed entity .......................................................... 4.113
Shortcut to Ind AS Wisdom ................................................................................................ 4.115
Test Your Knowledge .......................................................................................................... 4.115
Questions ............................................................................................................................. 4.115
Answers ............................................................................................................................... 4.117

ANNEXURE: DIVISION II OF SCHEDULE III TO THE COMPANIES ACT, 2013 ............. A.1 – A.40

PRACTICE QUESTIONS ......................................................................................... PQ.1 – PQ.49

Ind AS Puzzlers: Test Your Accounting Acumen ............................................................. (1)-(4)

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CHAPTER 1

INTRODUCTION TO INDIAN
ACCOUNTING STANDARDS
LEARNING OUTCOMES
After studying this chapter, you will be able to:
 Appreciate the concept of Accounting Standards
 Grasp the Indian scenario prior to Ind AS and the need of time leading to emergence
of global accounting standards
 Acknowledge the benefits of global accounting standards
 Distinguish between convergence and adoption of global accounting standards
 Discuss about Ind AS transition in India and benefits thereof
 Recognise the process of development and finalisation of Ind AS (IASB to ICAI to
MCA)
 Describe India’s roadmap for applicability of Ind AS for listed and unlisted entities,
NBFCs, banking and insurance sector
 Illustrate the salient features of Ind AS like numbering, flow and structure
 Tabulate the important statutory provisions under the Companies Act and SEBI
regulations involving Ind AS
 Identify the format of balance sheet, statement of changes in equity, profit and loss
and significant notes related to them as given in Division II to Schedule III to the
Companies Act, 2013
 Analyse key takeaways from guidance note on Division II to Schedule III to the
Companies Act, 2013
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1.2 2.2 FINANCIAL REPORTING

CHAPTER OVERVIEW

Introduction

Indian Scenario prior to introduction of Ind AS in India

Limitations of AS
Emergence of Global Standards
Need for Global standard in India
Benefits of Global Accounting Standards
Convergence vs Adoption of IFRS
Introduction to Process of development and finalisation of Ind AS
Indian
Accounting
Transition from AS to Ind AS About Indian Accounting Standards
Standards
How Ind AS has been numbered
How Ind AS has been structured
Roadmap for applicability of For listed entities
Ind AS
Ind AS Roadmap for Non -Banking
Financial Companies (NBFC)
Ind AS Roadmap for Banking and
Insurance Companies
Ind AS Roadmap for Mutual Funds

Ind AS relevant Statutory Relevant Sections referring Ind AS in

Provisions the Companies Act, 2013 and Rules
Relevant SEBI Rules and
Regulations
Format of Division II to Schedule Part I - Format of Balance Sheet and
III to the Companies Act - Statement of Changes in Equity
Structure
Part II – Statement of Profit and Loss

Guidance Note on Division II to Schedule III to the Companies Act, 2013

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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.3 1.3

1. INTRODUCTION
A set of financial statements are a key tool of communication about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of
stakeholders in making economic decisions. Accounting Standards is an essential building block
in the financial reporting world. These Accounting Standards provide principles and rules that
must be followed to ensure accuracy, consistency and comparability of financial statements.
These accounting guidelines also ensure that financial statements should be understandable,
relevant, reliable and comparable.
Accounting Standards are a set of documents that lay down the principles covering various
aspects, such as, recognition, measurement, presentation & disclosure of accounting transaction
in the financial statements. Objective of accounting standards is to standardize the diverse
accounting policies & practices with a view to eliminate the non-comparability of financial
statements to the extent possible and also to enhance the reliability to the financial statements.
Accounting standards play a very significant role in enabling the stakeholders to get the reliable
and comparable accounting data and investors to make more informed economic decisions.
The Accounting Standards Board (ASB) of the Institute of Chartered Accountants of India (The
ICAI), since its establishment way back in 1977, has been involved in the formulation of
Accounting Standards and standard setting process of the country. ASB has been relentlessly
working to ensure that the world’s fastest growing emerging economy of India is equipped with
high quality Accounting Standards (AS) comparable to the best in the world. The ICAI also issued
Accounting Standards which are applicable to the entities other than companies and are aligned
with Accounting Standards notified by the Ministry of Corporate Affairs (MCA) with certain
differences.
ASB is an Accounting Standards-Setting arm of the ICAI, which formulates Accounting Standards
through a process that is robust, comprehensive, and inclusive with a view to assisting the Council
of the ICAI in evolving and establishing Accounting Standards to discharge its role of national
standard-setter. Once the ASB finalises the draft of AS post incorporating the public comments
on exposure draft, ASB recommends such approved draft of AS to National Financial Reporting
Authority (NFRA) 1 and then Government of India, through MCA notifies AS or Ind-AS for corporate
entities under Companies Act and ICAI issues AS for non-corporate entities.

1 NFRA was constituted under the Companies Act, 2013 which replaced National Advisory Committee On
Accounting Standards (NACAS) which was constituted under Companies Act, 1956.
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1.4 2.4 FINANCIAL REPORTING

2. INDIAN SCENARIO PRIOR TO INTRODUCTION OF

IND AS IN INDIA
Prior to introduction of Indian Accounting Standards (Ind AS) which are Accounting Standards
duly converged with International Financial Reporting Standards (IFRS), ASB has issued various
AS to deal with various reporting matters. As on February 2002, ICAI has issued 27 AS, the list
thereof with their respective applicability is as under 2. These AS are applicable to
(a) companies other than those following Ind AS,
(b) SMCs and also
(c) non-corporate entities.
AS Name of AS Applicable Applicable Applicable to Non-Corporate Entities 4
No. to all to Small Level Level Level III Level IV
Companies and I II
Other than Medium
those Sized
following Companies
Ind AS (SMCs) 3
1 Disclosure of Yes Yes Yes Yes Yes Yes
Accounting
Policies
2 Valuation of Yes Yes Yes Yes Yes Yes
Inventories
(Revised)
3 Cash Flow Yes Yes Yes NA NA NA
Statement
4 Contingencies Yes Yes Yes Yes Yes Yes
and Events
occurring after
the Balance

2 This table should be read in conjunction of Appendix 1 to Compendium of Accounting Standards (as on
1 st February, 2022)
3 SMCs are defined under Notification dated 23 rd June, 2021, issued by the Ministry of Corporate Affairs,

Government of India
4 Criteria for classification of Non-company Entities as decided by the Institute of Chartered Accountants

of India should be referred back from Appendix 1 to Compendium of Accounting Standards (as on
1 st February, 2022)
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.5 1.5

Sheet Date
(Revised
2016)
5 Net Profit or Yes Yes Yes Yes Yes Yes
Loss for the
Period, Prior
Period Items
and Changes
in Accounting
Policies
7 Construction Yes Yes Yes Yes Yes Yes
Contracts
9 Revenue Yes Yes Yes Yes Yes Yes
Recognition
10 Property, Plant Yes Yes Yes Yes Yes (with Yes (with
and Equipment disclosure disclosure
(Revised) exemption) exemption)
11 The Effects of Yes Yes Yes Yes Yes (with Yes (with
Changes in disclosure disclosure
Foreign exemption) exemption)
Exchange
Rates
12 Accounting for Yes Yes Yes Yes Yes Yes
Government
Grants
13 Accounting for Yes Yes Yes Yes Yes Yes (with
Investments disclosure
(Revised) exemption)
14 Accounting for Yes Yes Yes Yes Yes NA
Amalgamation
(Revised)
15 Employee No Applicable Yes Yes (With certain exemptions)
Benefits with some
exemptions
16 Borrowing Yes Yes Yes Yes Yes Yes
Costs
17 Segment No No Yes No No No
Reporting
18 Related Party Yes Yes Yes No No
Disclosure
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1.6 2.6 FINANCIAL REPORTING

19 Leases No Applicable Yes Yes (with disclosure exemption)

with some
exemptions
20 Earnings per No Applicable Yes No No No
share with some
exemptions
21 Consolidated Yes Yes Yes No No No
Financial
Statements
(Revised)
22 Accounting for Yes Yes Yes Yes Yes Yes (only
Taxes on related to
Income current tax
provisions)
23 Accounting for Yes Yes Yes No No No
Investments in
Associates in
Consolidated
Financial
Statements
24 Discontinuing Yes Yes Yes Yes No No
Operations
25 Interim No Applicable Yes No No No
Financial with some
Reporting exemptions
26 Intangible Yes Yes Yes Yes Yes Yes (with
Assets disclosure
exemption)
27 Financial Yes Yes Yes No No No
Reporting of
Interests in
Joint Ventures
28 Impairment of No Applicable Yes Yes (with NA
Assets with some disclosure
exemptions exemption)
29 Provisions, No Applicable Yes Yes (with disclosure exemption)
Contingent with some
Liabilities and exemptions
Contingent
Assets
(Revised)
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.7 1.7

3. LIMITATIONS OF ACCOUNTING STANDARDS

With the increasing flow of foreign funds, following were few of the rising complexities which were
not explicitly and comprehensive dealt by AS and it was needed to have guidance around the same
to witness consistent accounting treatments by entities.
a) Capital being raised in the form of complex financial instruments like optionally convertible/
compulsorily convertible shares / debentures etc.
b) Various derivative instruments embedded in the foreign currency bonds/equity instruments,
commodity derivatives etc.
c) Group restructuring, business acquisitions, mergers, demergers, slump sale etc.
d) Complex revenue arrangements and business models with innovating emerging digital
economy
e) Diverse stock-based compensation with innovative remuneration models for C-suite
f) Complex tax provisions and impact thereof in determination of current and deferred tax
g) Different ways to provide shareholders’ return and various modes of shareholder’s
investments in kind in the event of group reorganisation.
Further, a need was felt to have comprehensive disclosures in the financial statements so as to
enable the investors to have a complete overview of business background, risks involved and other
important aspects. The disclosure requirements in ASs are limited and the need was felt to improve
those disclosures especially about aspects like revenue, related party transactions, segment
reporting, business combinations etc. so as to improve the quality of financial reporting and enable
investors to take an informed decision.

4. EMERGENCE OF GLOBAL ACCOUNTING STANDARDS

In 1973, International Accounting Standards Committee (IASC) was formed through an agreement
made by professional accountancy bodies from Canada, Australia, France, Germany, Japan,
Mexico, the Netherlands, the UK and Ireland, and the United States of America. The main goal of
the committee was to harmonize different financial reporting practices. The standard setting board
of the IASC was known as the IASC Board. The IASC Board promoted various standards,
conceptual Framework, which was directly adopted by many countries and many national accounting
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1.8 2.8 FINANCIAL REPORTING

standards setters were referring to the same to govern the standard setting process in their
countries.

Nearly after 25 years of its operations, IASC felt a need to change its structure in order to effectively
converge national accounting standards to lead to one set of Global Accounting Standards. As a
result, International Accounting Standards Board (IASB) was formed on 1st July 2000. It was further
decided that it would operate under a new International Accounting Standards Committee
Foundation (IASCF, now known as IFRS Foundation). IASB members are responsible for the
development and publication of International Financial Accounting Standards (IFRS). For IFRS to
be truly global standards, consistent application and interpretation is required. The Interpretations
Committee assists the IASB in improving financial reporting through timely assessment, discussion
and resolution of financial reporting issues identified within the IFRS framework.
As early as 1989 the International Organisation of Securities Commissions (IOSCO), the world’s
primary forum for co–operation among securities regulators, prepared a paper noting that cross
border security offerings would be facilitated by the development of internationally accepted
standards. For preparers, greater comparability in financial reporting with their global peers had
obvious attractions. In May 2000 IOSCO announced that it had completed its assessment of
30 accounting standards of the International Accounting Standards Committee (IASC 2000
standards). As a result, the IOSCO Presidents’ Committee recommended that its members permit
incoming multinational issuers to use the 30 IASC 2000 standards to prepare their financial
statements for cross-border offerings and listings, as supplemented by reconciliation, disclosure and
interpretation where necessary to address substantive outstanding issues at a national or regional
level.
On 19 th July 2002, a regulation was passed by the European Parliament and the European Council
of Ministers requiring the adoption of IFRS. As a result of the Regulation, all EU listed companies
were required to prepare their financial statements following IFRS from 2005. This has led to
IFRS being considered as one of the major unified GAAP in the world.

So with this, two prominent and widely adopted accounting standards have emerged:
1) Accounting Standards set up by US Financial Accounting Standards Board (FASB) (widely
known as “US GAAP”) and
2) International Financial Reporting Standards (IFRS)
The "Group of 20" (G20) is made up of the finance ministers and central bank governors of 19
countries and the European Union: Argentina, Australia, Brazil, Canada, China, France, Germany,
India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea,
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.9 1.9

Turkey, United Kingdom and United States of America. The G20 meets regularly to discuss
matters of common interest. As a result of the global financial crisis, the G20 began to explore
ways to improve the global financial system, including regulations related to financial reporting
and institutions. The G20 has for sometime called for the global convergence of accounting
standards and has supported the IASB-FASB convergence process.
The joint convergence project was launched in 2002 by the International Accounting Standards
Board (IASB) and US Financial Accounting Standards Board (FASB). The objective of this project
is to eliminate a variety of differences between International Financial Reporting Standards and
US GAAP. The project, which is being done jointly by FASB and IASB, grew out of an agreement
reached by the two boards in October 2002 (the 'Norwalk Agreement'). The scope of the overall
IASB-FASB convergence project has evolved over time and is currently under progress.
So, IFRS is now, together with US GAAP, one of the two globally recognised financial reporting
frameworks. Although the goal of a single set of high–quality global accounting standards has not
been fulfilled, as per IASB research, presently, 168 jurisdictions require the use of IFRS
Accounting Standards for all or most publicly listed companies.

5. NEED FOR GLOBAL ACCOUNTING STANDARDS IN

INDIA
Modern economies rely on cross-border transactions and the free flow of international capital.
Investors seek diversification and investment opportunities across the world, while companies
raise capital, undertake transactions or have international operations and subsidiaries in multiple
countries.
In the past, such cross-border activities were complicated to be followed by Indian Companies
due to increased compliance costs of maintaining multiple sets of financial books following varied
national accounting standards. This reworking of accounting requirements often added cost,
complexity and ultimately risk both to companies preparing financial statements and investors and
others using those financial statements to make economic decisions.

Applying local accounting standards led to a totally different basis for amounts appearing in
financial statements. Solving this complexity involved studying the details of national accounting
standards, because even a small difference in requirements could have a major impact on a
company’s reported financial performance and financial position — for example, a company may
recognise profits under one set of national accounting standards and losses under another. For
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1.102.10 FINANCIAL REPORTING

e.g.: A company has made non-current investments in equity instruments and there is a temporary
decline in the value of investments. As per AS, it may be required to report the investment at cost
but may have to fair value the same as per IFRS. Hence this may lead to recognizing losses as
per IFRS.
With this emerging need to move AS to comparable Global Standards and also considering the
limitations of AS to deal with emerging business transactions and structure, need to revamp
current AS was felt inevitably. International investors were apprehensive to rely on the financial
information of Indian Companies due to their limited understanding of accounting framework in
India and often sought companies to produce such financial information under IFRS.
Considering above, India made a commitment towards the convergence of Indian accounting
standards with IFRS at the G20 summit in 2009.

6. BENEFITS OF GLOBAL ACCOUNTING STANDARDS

Global Accounting Standards address above challenges by providing a high-quality,
internationally recognised set of accounting standards that bring transparency, accountability and
efficiency to financial markets around the world. Global Standards bring transparency by
enhancing the international comparability and quality of financial information, enabling investors
and other market participants to make informed economic decisions.
Further, Global Standards strengthen accountability by reducing the information gap between the
providers of capital and the people to whom they have entrusted their money. As a source of
globally comparable information, Global Accounting Standards are also of vital importance to
regulators around the world.
Global Accounting Standards also contribute to economic efficiency by helping investors to identify
opportunities and risks across the world, thus improving capital allocation. For businesses, the
use of a single, trusted accounting language lowers the cost of capital and reduces international
reporting costs. This also resulted into increased investment in jurisdictions adopting IFRS. Also
for a Company which has operations in multiple countries, it became easy for them to consolidate
their operations, track operational key performance indicators, and reduce the number of different
reporting systems.
These advantages of global standards have been accepted by various jurisdictions, resulting into
many countries following the path of adoption or convergency with IFRS with minimal carve outs.
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.11 1.11

7. CONVERGENCE VS ADOPTION OF IFRS

In common parlance, many users refer Convergence to IFRS and Adoption of IFRS
interchangeably. However, there exists a significant difference between the two

Adoption of IFRS, in simple terms, means that the Country applying IFRS would be implementing
IFRS in the same manner as issued by the IASB and would be 100% compliant with the guidelines
issued by IASB.

The dictionary definition of Convergence states that “to move towards each other or meet at the
same point from different directions”. Hence convergence with IFRS means the national
accounting standards setter would work with IASB to develop high quality Accounting Standards
over the time. Hence the national accounting standard setter is said to have “Converged with
IFRS” if it has adopted IFRS with some exceptions, and work with IASB towards those exceptions
to reach at a point wherein there are no differences left.

An entity is required to apply IFRS 1 First–time Adoption of International Financial Reporting

Standards – when it first asserts compliance with IFRS. The IASB has, therefore, established
unambiguously the principle that full application of its standards and related interpretations is
necessary for an entity to be able to assert that its financial statements comply with IFRS (as
issued by the IASB). Consequently, it is necessary for countries that align their national standards
with IFRS to require the application of IFRS 1 so that entities reporting under those standards can
assert compliance with IFRS. In addition, an entity that applies IFRS as amended by a local
authority cannot assert compliance with IFRS.

It is merely impossible for IASB to consider the individual factors of each country. Hence, such
countries decide to converge to IFRS with limited exceptions. These exceptions are regularly
looked upon and in order to meet at a point where no exceptions are left.
Countries like Canada, Bahrain, Cambodia etc have adopted IFRS while countries like India,
China, Hongkong etc have converged with IFRS.
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1.122.12 FINANCIAL REPORTING

8. PROCESS OF DEVELOPMENT AND FINALISATION OF

INDIAN ACCOUNTING STANDARDS
As discussed above, accounting standards in India are formulated by the ASB of ICAI. The central
government prescribes the standards of accounting, or any addendum thereto, as recommended
by the ICAI, in consultation with and after examination of the recommendations made by the
NFRA. The Ministry of Corporate Affairs (MCA) notifies the standards under the Companies Act
by publishing them in the Gazette of India. Notified standards are authoritative under Indian law.
It may be noted that IFRS are being issued / revised by the IASB from time to time. As a part of
convergence with IFRS, the Ind AS may be issued/revised corresponding to the IFRS.
Accordingly, whenever IASB issues any new IFRS or update the current one, ASB of ICAI
considers the convergence thereof under Ind AS. While doing so ASB provides considerations to
local regulatory landscape, business practices, tax and other relevant provisions to develop
exposure draft with proposed carve in or carve out from IFRS.
The Ind-AS setting process can be briefly outlined as follows:
♦ Consideration of preliminary draft prepared (with requisite carve in and carve out) by ASB
and revision thereof, as need be.
♦ Circulation of Draft Ind AS to the Council members of ICAI and specified outside bodies
such as MCA, Securities and Exchange Board of India (SEBI), Comptroller and Auditor
General of India (C&AG), Central Board of Direct Taxes (CBDT) etc.
♦ Meeting with the representative of the specified outside bodies to ascertain their views on
the Draft Ind AS

♦ Finalisation of Exposure Draft of Ind AS and its issuance for inviting public comments
♦ Consideration of comments received on the Exposure Draft and finalisation of Ind AS by
ASB for submission to the Council of ICAI for its consideration and approval for issuance.

♦ Consideration of the final draft of proposed Ind AS by the Council of the ICAI, and if found
necessary, modification of the draft in consultation with the ASB
♦ Final draft Ind AS to be submitted to NFRA with ICAI recommendations for notification
♦ NFRAs reviews and provides inputs, if any, to ICAI before finalising. Post that, MCA notifies
the Ind AS under Companies Act for Companies to follow with announcement of
applicability date.
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.13 1.13

To summarise,
Consideration of
IASB issues new IFRS Issue of Exposure comments received on
or updates the existing Draft for Public the Exposure Draft
one Comments and finalisation of final
draft

Deliberation and Incorporation of

Final draft sumbission
consideration of draft Comments from
to NFRA with
Ind AS in line with Council and outside
recommendations
IFRS by ASB bodies

Circulation of Draft Ind Meeting with the

AS to the Council representative of the NFRA (MCA) notifies
members of ICAI and specified outside Ind AS under
specified outside bodies to ascertain Companies Act
bodies their views

9. TRANSITION FROM AS TO IND AS

India made a commitment towards the convergence of Indian accounting standards with IFRS at
the G20 summit in 2009. In line with this, MCA issued a roadmap for implementation of Ind AS
converged with IFRS beginning April 2011. However, this plan was suspended due to unresolved
tax and other issues. In the presentation of the Union Budget 2014–15, the Honourable Minister
for Finance, Corporate Affairs and Information and Broadcasting proposed the adoption of Ind AS.
The Minister clarified that the respective regulators will separately notify the date of
implementation for banks and insurance companies. Also, standards for tax computation would
be notified separately. In accordance with the Budget statement, the MCA has notified the
Companies (Indian Accounting Standards) Rules 2015 vide its G.S.R dated 16 th February 2015.
Accordingly, it has notified 39 Ind AS and has laid down Ind AS transition roadmap for companies
and non-banking finance companies excluding banking companies and insurance companies.
The implementation of Indian Accounting Standards (Ind AS) converged with International
Financial Reporting Standards (IFRS) by Indian Companies is a monumental step in the
accounting history of India. It was possible due to the relentless and collective efforts of regulators
and accounting professionals of this large growing economy aspiring to be economic superpower
in the coming decades. ICAI believes that Ind AS implementation has provided better insights
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1.142.14 FINANCIAL REPORTING

into the financial affairs of the companies and Ind AS based financial statements reflect the
underlying economics of the transactions/events in a transparent and unbiased manner. It has
also improved the comparability and benchmarking of the financials of Indian Companies with
Global Peers, thereby improving the accessibility of Indian Companies to Global Capital Markets.
IFRS convergence is an ongoing initiative, and the process of issuing IFRS is dynamic. The IASB
issues new/revised IFRS on a regular basis. To avoid significant changes in Ind AS for a period
post its transition in India, it was decided to keep the applicability date of some of the IFRS earlier
than its applicability date announced by IASB.

Example 1
IFRS 15 Revenue from Contracts with Customers is effective for annual periods beginning on or
after 1st January 2017, while in India Ind AS 115 was applicable from 1 st April 2018. Hence, it
wasn’t implemented in advance of IFRS 15. Another example is that of IFRS 16 Leases, which
was issued in 2016 and made effective for annual reporting periods beginning on or after
1 st January 2019, while in India Ind AS 116 was applicable from 1st April 2019.

9.1 About Indian Accounting Standards

Ind AS are the IFRS converged standards. Similar to IFRS they are principles-based standards,
but substantially different from Indian GAAP. Ind AS is not the same as IFRS. It is a separate
accounting framework based on IFRS as created by the MCA and has certain carve-outs to
accommodate Indian business nuances.

As on date, 39 Ind AS are notified by Ministry of Corporate Affairs, which are as under:

IND AS Description

Ind AS 101 First-time Adoption of Indian Accounting Standard

Ind AS 102 Share-based Payment

Ind AS 103 Business Combinations

Ind AS 105 Non-current Assets Held for Sale and Discontinued Operations

Ind AS 106 Exploration for and Evaluation of Mineral Resources

Ind AS 107 Financial Instruments: Disclosures

Ind AS 108 Operating Segments

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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.15 1.15

Ind AS 109 Financial Instruments

Ind AS 110 Consolidated Financial Statements

Ind AS 111 Joint Arrangements

Ind AS 112 Disclosure of Interests in Other Entities

Ind AS 113 Fair Value Measurement

Ind AS 114 Regulatory Deferral Accounts

Ind AS 115 Revenue from Contracts with Customers

Ind AS 116 Leases

Ind AS 117 Insurance Contracts

Ind AS 1 Presentation of Financial Statements

Ind AS 2 Inventories

Ind AS 7 Statement of Cash Flows

Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Ind AS 10 Events after the Reporting Period

Ind AS 12 Income Taxes

Ind AS 16 Property, Plant and Equipment

Ind AS 19 Employee Benefits

Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance

Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Ind AS 23 Borrowing Costs

Ind AS 24 Related Party Disclosures

Ind AS 27 Separate Financial Statements

Ind AS 28 Investments in Associates and Joint Ventures

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1.162.16 FINANCIAL REPORTING

Ind AS 29 Financial Reporting in Hyperinflationary Economies

Ind AS 32 Financial Instruments: Presentation

Ind AS 33 Earnings per Share

Ind AS 34 Interim Financial Reporting

Ind AS 36 Impairment of Assets

Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets

Ind AS 38 Intangible Assets

Ind AS 40 Investment Property

Ind AS 41 Agriculture

9.2 How Ind AS have been numbered?

Ind AS are numbered in a similar manner as compared to IFRS. So in order to understand how
Ind AS are numbered, it is important to understand how IFRS are numbered. Ind AS differ from
the IFRS, as they contain certain carve outs and carve ins for making them contextually relevant
to the Indian economic and legal environment.
International Accounting Standard Committee (IASC) was formed in 1973 and its main objective
was to harmonize different financial reporting practices. It continued issuing standards under
heading “International Accounting standards” (IAS) and they were numbered chronologically from
1. Eg: IAS 1, IAS 2 etc. Till 2000, it had notified 41 IAS (some of them are now repealed or
omitted). Post incorporation of IASB on 1 st July 2000., standards issued are known as IFRS and
a new numerical series was started i.e. IFRS 1, IFRS 2 etc
In Indian context, numbers for IAS are retained. For e.g.: For IAS 1 – Presentation of Financial
Statements, corresponding standard in Ind AS is Ind AS 1 – Presentation of Financial statements.
For IFRS, a new series starting after 100 was used. For e.g.: For IFRS 1 – First time adoption of
International Financial Reporting Standards, corresponding Ind AS is Ind AS 101 - First time
adoption of Indian Accounting Standards.
Further, IFRS Interpretations Committee (IFRIC) is the interpretative body of the IASB. Its main
work is to address application issues and suggest official IFRS Interpretations, which are
eventually approved by the IASB. These interpretations are titled ‘IFRIC’ and numbered as IFRIC
1,2 etc. Interpretations issued before 2003 were titled ‘SIC’ and some of them are still in force
today. IFRIC and SICs are included in Ind AS as part of Appendix in relevant Ind AS.
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.17 1.17

♦ Total reporting standards required as on 1.11.2024 under IFRS are 41. However, IFRS 18
and IFRS 19 have also been issued which will be required by 1st January, 2027. While total
reporting standards issued and effective in India under Ind AS are 39. IAS 26 Accounting
and Reporting by Retirement Benefit Plans has yet not notified in India as Ind AS. IAS 39
contains only part relating to hedge accounting which is still valid globally as continuation
of this part is permitted globally. But in India, only Ind AS 109 corresponding to IFRS 9
hedge accounting is permitted, hence the part of IAS 39 is not relevant, and no equivalent
Ind AS exists in India.

♦ Total interpretations under IFRS (IFRIC + SIC) are 20. Total interpretation included under
Ind AS (Appendix to relevant standards) are 18. IFRIC 2 – Members’ Shares in Co-
operative Entities and Similar Instruments and SIC -7 Introduction of the Euro are neither
included under Ind AS nor notified. However, Appendix C to Ind AS 103 – Business
Combinations was developed and additionally included in India for which no corresponding
IFRIC or SIC is available.

9.3 How Ind AS have been structured?

Ind AS have followed the structure of IFRS and IAS and have not changed the same. Ind AS
retained the paragraph numbers of IFRS and IAS too to allow readers to refer back similar
guidance under IFRS and IAS while also appreciating the carve out and carve in. For ex. If
Ind AS do not contain corresponding paragraph of IFRS, the same number had been kept blank
with a note mentioned referring to Appendix – Comparison with IFRS.
Ind AS have following components and they are generally structured as follows:
1. Objective – What is the main purpose for which the Ind AS is formed is mentioned in this
heading. On a bird’s eye view, it mentions the issues dealt by it and what objective it seeks
to achieve from laying the principles in it.

Example 2
Following is Ind AS 2’s objective:
“The objective of this Standard is to prescribe the accounting treatment for inventories. A
primary issue in accounting for inventories is the amount of cost to be recognised as an
asset and carried forward until the related revenues are recognised. This Standard deals
with the determination of cost and its subsequent recognition as an expense, including any
write-down to net realisable value. It also provides guidance on the cost formulas that are
used to assign costs to inventories.”
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1.182.18 FINANCIAL REPORTING

2. Scope – What the standard intends to cover in its ambit is mentioned in the scope heading.
In many cases, it defines specifically what it intends not to cover. For e.g.: Para 2 of
Ind AS 2 states that it applies to all inventories except financial instruments and biological
assets related to agricultural activity and agricultural produce at the point of harvest.
3. Definitions – It includes definitions of various terms used in the standards. For standards
which are converged from International Accounting standards, definition is a part of
structure while for standards which are converged from International Financial Reporting
standards (Ind AS 101 onwards), the definitions are included in appendices.

4. Content of the Standard – This includes the main principles of the standard. It generally
contains principle of recognition, measurement, subsequent measurement along with any
other standard specific contents grouped in appropriate headings.
5. Disclosure – This section covers what qualitative / quantitative information required to be
disclosed in financial statements pertaining to the matter covered in the standard.
Wherever applicable, it also contains how a particular asset / liability / income / expense
should be presented in financial statements.
6. Transitional provisions and effective date –For any Ind AS notified, it mentions effective
date and transitional provisions from which it would be applicable. Under Ind AS,
transitional provisions are mentioned mainly at two places. Firstly, it is broadly mentioned
in Ind AS 101 - First-time Adoption of Indian Accounting Standard and secondly in the
individual Ind AS wherever applicable. The transitional provisions mentioned in Ind AS 101
are applicable to first time adopter of Ind AS. The transitional provisions mentioned in
individual standards are applicable to entities that have already applied Ind AS. In many
standards, transitional provisions and effective date are mentioned in Appendices
7. Appendices – As and where applicable, the Ind AS also has appendices which are integral
part of the standard. They mainly consist of:
a. Explanation on industry specific issues which require detailed guidance. For e.g.:
Appendix to Ind AS 16 contains treatment of stripping costs in the production phase
of a surface mine
b. Application Guidance – These are mainly in standards which are converged from
International Financial Reporting Standards (Ind AS 101 and onwards). It contains
detailed guidance in applying the principles mentioned in the standard
c. Defined terms – It mentions definition of terms mentioned in the standard
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.19 1.19

d. References to matters contained in other Ind AS - It lists the appendix which is a

part of another Indian Accounting Standard and makes reference to the particular
standard.
e. Comparison with IFRS – Differences with IFRS are explained in this section
f. IFRIC and SIC applicable and relevant for the respective Ind AS
In each Ind AS, certain texts are highlighted in bold while certain are in plain. The text in
bold mentions the principle while the text in plain mentions its application guidance / other
explanation. Paragraphs set in bold type and plain type, have equal authority. In
Ind AS 101, principles are numbered in chronological order while detailed explanation or
guidance applicable to these principles are included in the respective Appendices, as
applicable.

10. ROADMAP FOR APPLICABILITY OF IND AS

MCA has notified the Companies (Indian Accounting Standards) Rules, 2015 vide its G.S.R dated
16 February 2015. Accordingly, it has notified 39 Ind AS and has laid down an Ind AS transition
roadmap for companies and non- banking finance companies excluding banking companies and
insurance companies. MCA has proposed phase-wise approach for mandatory transition to
Ind AS.

10.1 For Listed Entities

Phase I
As per the Companies (Indian Accounting Standards) Rules, 2015, following companies were
covered under Phase I for accounting periods beginning on or after 1st April 2016, with the
comparatives for the periods ending on 31 st March 2016:
a. companies whose equity or debt securities are listed or are in the process of being listed
on any stock exchange in India or outside India and having net worth of rupees five hundred
crore or more;
b. companies other than those covered by sub-clause (a) above and having net worth of
rupees five hundred crore or more;
c. holding, subsidiary, joint venture or associate companies of companies covered by sub-
clause (a) and sub-clause (b) as mentioned above
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1.202.20 FINANCIAL REPORTING

Phase 1

2015 2016-17

April March April March

Opening Balance Financial Statements

Comparative for
Sheet for the year ended
31st March, 2016
1 April, 2015
st
31st March, 2017

Phase II
Following companies were covered under Phase II for accounting periods beginning on or after
1 st April 2017, with the comparatives for the periods ending on 31st March 2017:
a. companies whose equity or debt securities are listed or are in the process of being listed
on any stock exchange in India or outside India and having net worth of less than rupees
five hundred crore;
b. companies other than those covered in sub-clause (a) above i.e. unlisted companies having
net worth of rupees two hundred and fifty crore or more but less than rupees five hundred
crore.
c. holding, subsidiary, joint venture or associate companies of companies covered by sub-
clause (a) and sub-clause (b) as mentioned above.
The Companies (Indian Accounting Standards) Rules, 2015 clarifies that, the roadmap shall not
be applicable to companies whose securities are listed or are in the process of being listed on
SME exchange as referred to in Chapter XB or on the Institutional Trading Platform without initial
public offering in accordance with the provisions of Chapter XC of the Securities and Exchange
Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. For the
purpose, it clarifies SME Exchange to have the same meaning as assigned to it in Chapter XB of
the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009.
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.21 1.21

Phase 2

2016-17 2017-18

April March April March

Opening Balance Financial Statements

Comparative for
Sheet for the year ended
31st March, 2017
1 April, 2016
st
31st March, 2018

Ind AS would not be applicable to companies other than listed companies whose net worth is less
than ` 250 Crores and they will continue to follow AS as per its applicability discussed above.
However, they can voluntary adopt Ind AS.
It is notable that the Companies (Indian Accounting Standards) Rules, 2015 gave an option to the
companies for early adoption of Ind AS for their financial statements for accounting periods
beginning on or after 1 st April 2015, with the comparatives for the periods ending on
31st March 2015 or any time thereafter.
10.1.1 Key Matters on Transition
1. Comparative Financial Information
All companies applying Ind AS are required to present comparative information as per Ind
AS for one year. To comply with this requirement, Ind AS will be applicable from the
beginning of the previous period.

Example 3
A company adopted Ind AS from 1st April, 20X4 for its accounting period 20X4-20X5. Hence
it will be required to prepare its first Ind AS financial statements for financial year 20X4-
20X5 with comparatives for financial year 20X3-20X4, and the date of transition to Ind AS
will be considered as 1 st April 20X3.

2. Ind AS applicability
As per clause 4 of the aforementioned MCA notification, companies to which Indian
Accounting Standards (Ind AS) are applicable as specified in those rules shall prepare their
first set of financial statements in accordance with the Ind AS effective at the end of its first
Ind AS reporting period.
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1.222.22 FINANCIAL REPORTING

Example 4
A company adopted Ind AS from 1st April, 20X4 for its accounting period 20X4-20X5.
Hence it shall prepare Ind AS financial statements for financial year 20X4-20X5 by applying
all Ind AS duly effective as on 31 st March 20X5.

3. Consistent Application of Ind AS

As per clause 9 of the notification, once a company starts following the Indian Accounting
Standards (Ind AS) either voluntarily or mandatorily on the basis of criteria specified, it shall
be required to follow the Indian Accounting Standards (Ind AS) for all the subsequent
financial statements even if any of the criteria specified in the Rules does not subsequently
apply to it.
4. Ind AS Applicability for Indian Group Companies
As specified in the Companies (Indian Accounting Standards) Rules, 2015 issued by MCA,
if Ind AS is applicable to a company, it would also be applicable to its holding company,
subsidiary company, associate company and joint venture.
5. Ind AS Applicability for Overseas Group Companies
As per clause 5 of the Companies (Indian Accounting Standards) Rules, 2015 issued by
MCA, overseas subsidiary, associate, joint venture and other similar entities of an Indian
company may prepare its standalone financial statements in accordance with the
requirements of the specific jurisdiction, provided that such Indian company shall prepare
its consolidated financial statements in accordance with the Indian Accounting Standards
(Ind AS) either voluntarily or mandatorily as per the criteria as specified in the Rules.
6. Ind AS Applicability for Standalone and Consolidated Financial Statements
As per clause 3 of the notification issued by MCA, Ind AS once required to be complied
with in accordance with these rules, shall apply to both stand-alone financial statements
and consolidated financial statements.
10.1.2 Calculation of Net Worth
For the purpose of determining the applicability of Ind AS as per the roadmap, net worth shall
have meaning as per clause 57 of section 2 of the Companies Act, 2013.

Following is the definition of net worth as per the section:

“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
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.23 1.23

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 amalgamation;”
Further, it is clarified that:
a. the net worth shall be calculated in accordance with the stand-alone financial statements
of the company as on 31 st March, 2014 or the first audited financial statements for
accounting period which ends after that date;
b. for companies which are not in existence on 31st March, 2014 or an existing company falling
under any of thresholds specified in the Ind AS applicability thresholds above for the first
time after 31 st March, 2014, the net worth shall be calculated on the basis of the first audited
financial statements ending after that date in respect of which it meets the thresholds
specified.

Example 5
The companies meeting net worth threshold for the first time as per financial statements of
the year ending on 31 st March, 2017 shall apply Ind AS for the financial year 2017-2018
with comparatives for financial year 2016-2017.

Hence to summarize, the roadmap considers net worth as on 31 st March 2014 as cut-off date for
Ind AS applicability. A company which meets the Ind AS applicability criteria on this cut-off date,
needs to apply Ind AS as per the applicable phase. If any company does not meet the Ind AS
applicability criteria as on the cut-off date, they will have to reassess the Ind AS applicability
criteria at each balance sheet date.
Illustration 1
Following is a snapshot of audited balance sheet of company A as on 31 st March 2014.
Company A’s equity shares are listed on Bombay Stock Exchange since 2010.

Liabilities ` in crores Assets ` in crores

Equity Share Capital 160 Fixed Assets 455

Securities Premium 200 Investments 200

General Reserve 150 Current Assets 50

Revaluation Reserve 40 Miscellaneous Expenditure not 80

written off
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1.242.24 FINANCIAL REPORTING

Profit and Loss A/c 75

Liabilities 160

Total 785 Total 785

• As per roadmap, which Phase company A fall into?

• Will your answer change if Company A is an unlisted company?

Solution
Calculation of Net Worth:

Particulars ` in crores

Equity Share Capital 160

Securities Premium 200

General Reserve 150

Profit and Loss A/c 75

Miscellaneous Expenditure not written off (80)

Net Worth as per Section 2(57) of The Companies Act, 2013 505

Note – Revaluation Reserve would not be included in the calculation of net worth as per definition
mentioned in section 2(57) of The Companies Act, 2013
The company is a listed company and it does meet the net worth threshold of ` 500 Crores. Hence
it would be covered under phase I. Hence Ind AS would be applicable to the company for
accounting periods beginning on or after 1st April 2016.
Even if Company A is an unlisted company as company A’s net worth is more than 500 Crores, it
would be covered under Phase I of the road map and hence Ind AS would be applicable for the
accounting periods beginning on or after 1st April 2016.
Illustration 2
Let’s say in Illustration 1, the balance of profit and loss account is negative ` 375 crores. When
Ind AS should be applicable to Company A? Will you answer change if Company A is an unlisted
company?
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.25 1.25

Solution
If the balance of Profit and Loss A/c is negative 375 Crores, the net worth as per section 2(57) of
The Companies Act, 2013 would be ` 55 Crores (Equity share capital ` 160 Cr + Securities
Premium ` 200 Cr + General Reserve ` 150 Cr – Debit balance of P&L `375 Cr – Miscellaneous
expenditure not written off ` 80 Cr). Hence, it does not meet the criteria as mentioned in Phase I
i.e. Listed company or Net worth of ` 500 Cr or more.
However, as Company A is a listed company, it will irrespective be covered under Phase II as the
first criteria of phase II states “companies whose equity or debt securities are listed or are in the
process of being listed on any stock exchange in India or outside India and having net worth of
less than rupees five hundred crore”. Hence, Ind AS would be applicable to Company A for the
accounting periods beginning on or after 1st April 2017.
If Company A is an unlisted company, Ind AS would not be applicable until it breaches the net
worth criteria mentioned in the roadmap.
Illustration 3
The net worth of Company B (an unlisted company) was ` 600 crores as on 31 st March 2014.
However due to losses incurred in FY 14-15, the net worth of the company was ` 400 Crores as
on 31st March 2015. From when company B shall apply Ind AS?
Solution
Here the company’s net worth as on cut-off date was greater than ` 500 crores, which suggests
that it should be covered under phase I of the roadmap. A question may however arise in mind
that since, the net worth as on immediately preceding year-end was ` 400 crores, would the
company be covered under phase II of the roadmap?
“It may be noted that the net worth shall be calculated in accordance with the stand-alone financial
statements of the company as on 31 st March, 2014. Accordingly, if the net worth threshold criteria
for a company are once met, then it shall be required to comply with Ind AS, irrespective of the
fact that as on later date its net worth falls below the criteria specified.”
In view of the above, the Company B will be required to follow Ind AS for accounting periods
beginning on or after 1st April 2016
Illustration 4
The net worth of Company C (an unlisted company) was ` 400 crores as on 31st March 2014.
However, the net worth of the company was ` 600 Crores as on 31 st March 2015. From when
company B shall apply Ind AS?
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1.262.26 FINANCIAL REPORTING

Solution
Similar issue has been encountered in ITFG Bulletin 1, Issue 1 which gives reference to clause
2b of the notification wherein it is stated that:
“For companies which are not in existence on 31st March, 2014 or an existing company falling
under any of thresholds specified in sub-rule (1) for the first time after 31 st March, 2014, the net
worth shall be calculated on the basis of the first audited financial statements ending after that
date in respect of which it meets the thresholds specified in sub-rule (1)”
Hence, any company that meets the thresholds as specified in the Companies (Indian Accounting
Standards) Rules, 2015 in a particular financial year, Ind AS will become applicable to such
company in immediately next financial year. Hence, in the present case, Company C is covered
by Phase I of the roadmap and accordingly, Ind AS will be applicable to Company C for accounting
periods beginning on or after 1 st April 2016

Illustration 5
Company A is the parent company of a group. Company A is an unlisted company having net
worth of 60 crores as on 31st March 2014. Following are the other companies of the group.

Name of the company Relationship Net worth as on 31 st March 2014

Company B (Unlisted) Subsidiary of Company A ` 600 Crore

Company C (Unlisted) Subsidiary of Company B ` 150 Crore

Whether Ind AS be applicable to companies A, B and C?

Solution
Company A and C are unlisted and do not exceed the net worth criteria. However, the net worth
of Company B exceeds ` 500 crore hence it would be covered as per the roadmap for
implementation of Ind AS in the preparation of its Financial Statements.
As Ind AS be applicable to Company B, the parent company of Company B i.e. Company A and
subsidiary of Company B i.e. Company C would also get covered under Ind AS irrespective of net
worth criteria. Hence Ind AS would be applicable to all three companies i.e. Company A, B and
C
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.27 1.27

Illustration 6
Following is the structure of Company D

Company D

Company E Company H
(Subsidiary of D) (Subsidiary of D)

Company F Company G Company I

(Subsidiary of E) (Associate of E) (Subsidiary of H)

All the companies in above structure are unlisted companies and the net worth of company E is
` 300 Crores and net worth of all the other companies is below ` 250 crores. To which company
would Ind AS be applicable?
Solution
As mentioned in the Companies (Indian Accounting Standards) Rules, 2015, if Ind AS is applicable
to a company, it would also be applicable to its Holding Company, subsidiary company, associate
company and Joint Venture.
As the net worth of company E is above ` 250 crores, it would be covered under Phase II of the
roadmap. Hence, its subsidiary (Company F), associate (Company G) and Holding (Company D)
would also be covered under Ind AS with effect from 1st April 2017.
With respect to other companies of the group, following guidance is given in ITFG clarification
bulletin 15, Issue 10: “It may be noted that Ind AS applies to holding, subsidiary, joint venture and
associate companies of the companies which meet the net worth/listing criteria. This requirement
does not extend to another fellow subsidiary of a holding company which is required to adopt Ind
AS because of its holding company relationship with a subsidiary meeting the net worth/listing
criteria. Holding company will be required to prepare separate and consolidated financial
statements mandatorily under Ind AS, if one of its subsidiaries meets the specified criteria and
therefore, such subsidiaries may be required by the holding company to furnish financial
statements as per Ind AS for the purpose of preparing Holding company’s consolidated Ind AS
financial statements. Such fellow subsidiaries may, however, voluntarily opt to prepare their
financial statements as per Ind AS.”
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1.282.28 FINANCIAL REPORTING

Hence the other companies of the group i.e. Company H and Company I would not be covered
under Ind AS. However, as mentioned in ITFG, Company H and I would be required to prepare
its financial statements under Ind AS so as to facilitate Company D for preparation of its
consolidated financial statements. Hence, though statutorily Company H and I may continue to
prepare its financial statements under AS, but it will also have to converge to Ind AS. Moreover,
they may also opt to voluntarily adopt Ind AS and prepare its statutory accounts under Ind AS too.
Illustration 7
ABC Inc., incorporated in a foreign country has a net worth of ` 700 Crores. It has two subsidiaries
Company X whose net worth as on 31 st March 2014 is ` 600 Crores and Company Y whose net
worth is ` 150 Crores. Whether Company X and Y would be required to follow Ind AS from
accounting periods commencing on or after 1st April 2016 on the basis of their own net worth or
on the basis of the net worth of ABC Inc.?
Solution
Similar issue has been dealt in ITFG Clarification Bulletin 2, Issue 2. ITFG noted that as per Rule
4(1)(ii)(a) of the Companies (Indian Accounting Standards) Rules, 2015, Company X having net
worth of ` 600 crores at the end of the financial year 2015-16, would be required to prepare its
financial statements for the accounting periods commencing from 1st April, 2016, as per the
Companies (Indian Accounting Standards) Rules, 2015. While Company Y Ltd. having net worth
of ` 150 crores in the year 2015-16, would be required to prepare its financial statements as per
the Companies (Accounting Standards) Rules, 2006.
Since, the foreign company ABC Inc., is not a company incorporated under the Companies Act,
2013 or the earlier Companies Act, 1956, it is not required to prepare its financial statements as
per the Companies (Indian Accounting Standards) Rules, 2015. As the foreign company is not
required to prepare financial statements based on Ind AS, the net worth of foreign company ABC
would not be the basis for deciding whether Indian Subsidiary Company X Ltd. and Company Y
Ltd. are required to prepare financial statements based on Ind AS.

10.2 Ind AS Roadmap for Non -Banking Financial Companies (NBFC)

For the purpose, NBFC is defined as a Non-Banking Financial Company as defined in clause (f)
of section 45-I of the Reserve Bank of India Act, 1934 and includes Housing Finance Companies,
Merchant Banking companies, Micro Finance Companies, Mutual Benefit Companies, Venture
Capital Fund Companies, Stock Broker or Sub-Broker Companies, Nidhi Companies, Chit
Companies, Securitisation and Reconstruction Companies, Mortgage Guarantee Companies,
Pension Fund Companies, Asset Management Companies and Core Investment Companies
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.29 1.29

Ministry of Corporate Affairs, in its circular dated 30 th March 2016, amended the Companies
(Indian Accounting Standards) Rules, 2015 to include its applicability to Non-Banking Finance
Companies. As per the circular, NBFCs to apply Ind AS in the following two phases:
Phase I
As per the Companies (Indian Accounting Standards) Rules, 2015, following NBFCs were covered
under Phase I for accounting periods beginning on or after 1st April 2018, with the comparatives
for the periods ending on 31st March 2018.
a. NBFCs having net worth of ` 500 Crores or more
b. Holding, subsidiary, associate or Joint Venture of NBFCs already covered under sub clause
(a) above, other than companies already covered under Ind AS roadmap for Non-Financial
companies

Phase 1

2017-18 2018-19

April March April March

Opening Balance
Comparative for 31st Financial Statements for the
Sheet
March, 2018 year ended 31st March, 2019
1 April, 2017
st

Phase II
Following NBFCs were covered under Phase II for accounting periods beginning on or after
1 st April 2019, with the comparatives for the periods ending on 31st March 2019
a. NBFCs whose equity or debt securities are listed or in the process of listing on any stock
exchange in India or outside India and having net worth less than rupees five hundred
crore;
b. NBFCs, that are unlisted companies, having net worth of rupees two-hundred and fifty crore
or more but less than rupees five hundred crore; and
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1.302.30 FINANCIAL REPORTING

c. Holding, subsidiary, associate or Joint Venture of Companies already covered under sub
clause (a) and (b) above, other than companies already covered under Ind AS roadmap for
Non-financial companies

Phase 2

2018-19 2019-20

April March April March

Opening Balance
Comparative for Financial Statements for the
Sheet
31st March, 2019 year ended 31st March, 2020
1 April, 2018
st

NBFCs having net worth below rupees two fifty crores and not covered above shall continue to
apply ASs. Further, where Ind AS is applicable to NBFCs, the same shall apply to both standalone
and consolidated financial statements.
It is notable that NBFC can apply Ind AS only if they fall in any of the above criteria. Voluntary
adoption of Ind AS by NBFCs are not allowed.
10.2.1 Clarification on calculation of Net Worth
For the purposes of calculation of net worth of NBFCs for determining the applicability of Ind AS,
the following principles shall apply, namely:-
a. the net worth shall be calculated in accordance with the stand-alone financial statements
of the NBFCs as on 31st March 2016 or the first audited financial statements for accounting
period which ends after that date;
b. for NBFCs which are not in existence on 31st March 2016 or an existing NBFC falling first
time, after 31st March 2016, the net worth shall be calculated on the basis of the first
audited stand-alone financial statements ending after that date, in respect of which it meets
the thresholds.
Explanation.- For the purposes of sub-clause (b), the NBFCs meeting the specified thresholds as
given in the roadmap for the first time at the end of an accounting year shall apply Ind AS from
the immediately next accounting year
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.31 1.31

For E.g. –
(i) The NBFCs meeting threshold for the first time as on 31st March, 2019 shall apply Ind AS
for the financial year 2019-20 onwards.
(ii) The NBFCs meeting threshold for the first time as on 31st March, 2020 shall apply Ind AS
for the financial year 2020-21 onwards and so on.

Application of Ind AS to non-finance companies whose parent / subsidiary or associate or

joint venture is a NBFC
The date for application of Ind AS to non-finance companies is not aligned with that of NBFCs.
Hence it has been clarified in the notification that the companies shall apply AS or Ind AS on the
basis of respective standard applicable to them. However, for the purpose of preparation of
Consolidated Financial Statements it is clarified that :

A. where an NBFC is a parent (at ultimate level or at intermediate level), and prepares
consolidated financial statements as per AS, and its subsidiaries, associates and joint
ventures are non-finance companies and are required to prepare financial statements as
per Ind AS as per the roadmap given in The Companies (Indian Accounting Standards)
Rules, 2015, such subsidiaries, associate and joint venture shall prepare its financials as
per Ind AS. However, such subsidiaries, associate and joint venture has to provide the
relevant financial statement data in accordance with the accounting policies followed by
the parent company for consolidation purposes (until the NBFC is covered under Ind AS.
B. Where a parent is a non-finance company covered under Ind AS as per the roadmap given
in The Companies (Indian Accounting Standards) Rules, 2015 and has a NBFC subsidiary,
associate or a joint venture, the parent has to prepare Ind AS-compliant consolidated
financial statements and the NBFC subsidiary, associate and a joint venture has to
provide the relevant financial statement data in accordance with the accounting policies
followed by the parent company for consolidation purposes (until the NBFC is covered
under Ind AS).
It implies that the NBFC subsidiary, associate or a joint venture, in such case shall continue to
prepare the financials under AS until Ind AS are applicable to it.
Illustration 8
As per the roadmap, Ind AS is applicable to Company X from the financial year 2017-18. Company
X (non-finance company) is a subsidiary of Company Y (NBFC). Company Y is an unlisted NBFC
company having net worth of ` 400 crores. What will be the date of applicability of Ind AS for
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1.322.32 FINANCIAL REPORTING

company X and company Y? If Ind AS applicability date for parent NBFC is different from the
applicability date of corporate subsidiary, then, how will the consolidated financial statements of
parent NBFC be prepared?
Solution
In accordance with the roadmap, it may be noted that NBFCs having net worth of less than 500
crore shall apply Ind AS from 1 April, 2019 onwards. Further, the holding, subsidiary, joint venture
or associate company of such an NBFC other than those covered by corporate roadmap shall also
apply Ind AS from 1 April, 2019.
Accordingly, in the given case, Company Y (NBFC) shall apply Ind AS for the financial year
beginning 1 April, 2019 with comparative for the period ended 31 March, 2019. Company X shall
apply Ind AS in its statutory individual financial statements from financial year 2017-2018 (as per
the corporate roadmap). However, for the purpose of Consolidation by Company Y for financial
years 2017-2018 and 2018-2019, Company X shall also prepare its individual financial statements
as per AS.

10.3 Ind AS Roadmap for Banking and Insurance Companies

As per the Companies (Indian Accounting Standards) (Amendment) Rules, 2016, The Banking
Companies and Insurance Companies shall apply the Ind AS as notified by the Reserve Bank of
India (RBI) and Insurance Regulatory Development Authority (IRDA) respectively. As the same
are yet to be notified, Ind AS is not applicable to Banking and Insurance Companies presently.

It is notable that Banks and Insurance Companies shall not be allowed to voluntarily adopt
Ind AS. However, this does not preclude them from providing Ind AS compliant financial
statements for the purpose of preparation of consolidated financial statements by its
parent/investor, as required by the parent/investor to comply with the existing requirements of law.

10.4 Ind AS Roadmap for Mutual Funds

The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (the MF
Regulations) lay down the regulatory framework for operations and functioning of Mutual Funds
(MFs). The MF Regulations are amended by SEBI from time to time to enhance transparency and
disclosures, to address emerging issues, to protect the interests of investors, and to strengthen
the regulatory framework of MFs.

On 25 January 2022, SEBI vide a notification issued the SEBI (Mutual Funds) (Amendment)
Regulations, 2022. As per this notification, the financial statements and accounts of MF schemes
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.33 1.33

will be prepared in accordance with Indian Accounting Standards (Ind AS). Additionally, SEBI
vide a circular dated 4 February 2022 (the circular) provided certain guidelines on accounting with
respect to Ind AS for MFs. The circular also provides specific formats of the financial statements
to be prepared for the MF schemes under Ind AS. The requirements of the circular will become
applicable from 1 April 2023.

11. IND AS RELEVANT STATUTORY PROVISIONS

11.1 Relevant Sections referring to Ind AS in the Companies Act, 2013

and Rules
Ind AS were initially notified under the Companies (Indian Accounting Standards) Rules, 2015.
Post that it was amended from time to time to include the amendments / changes in the Ind AS.
Following are the some of the key relevant provisions of the Companies Act 2013, which gives
reference to Ind AS:
♦ Section 2(2) states that accounting standards means the standards of accounting or any
addendum thereto for companies or class of companies referred to in Section 133
♦ Section 133 states the Central Government may prescribe the standards of accounting or
any addendum thereto, as recommended by the Institute of Chartered Accountants of India,
constituted under section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in
consultation with and after examination of the recommendations made by the National
Financial Reporting Authority. Under the power given to the Central Government under
section 133, it notified the Companies (Indian Accounting Standards) Rules, 2015.
♦ Section 129 suggests the financial statements shall give a true and fair view of the state
of affairs of the company or companies, comply with the accounting standards notified
under section 133 and shall be in the form or forms as may be provided for different class
or classes of companies in Schedule III:

♦ Section 134 (5) (a), a statement that the applicable accounting standards had been
followed with proper explanation relating to material departures shall be given in the
Director Responsibility statement to be issued under section 134 (3) (c) in the Director’s
report to be published in Annual General Meeting
♦ Section 143, auditor has to opine whether the financial statements comply with the
accounting standards
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1.342.34 FINANCIAL REPORTING

♦ Section 230 – Power to compromise or make arrangements with creditors and members
and Section 232 – Merger and amalgamation of Companies, the scheme of compromise or
arrangement is to be sanctioned by the tribunal only after obtaining a certificate from the
company’s auditor that the accounting treatment given proposed in the scheme of
compromise or arrangement is in conformity with the accounting standards mentioned in
Section 133.
♦ Section 66 – Reduction of Share Capital, which states that no application for reduction of
share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed
by the company for such reduction is in conformity with the accounting standards specified
in section 133 or any other provision of this Act and a certificate to that effect by the
company‘s auditor has been filed with the Tribunal.

11.2 Relevant SEBI Rules and Regulations

Formats for publishing financial results (Circular dated 30th November 2015)
SEBI via circular dated 30 th November, 2015 amended the format for publishing quarterly financial
statements. Point 5 of the circular clarified that Companies adopting the Ind AS in terms of
Companies (Indian Accounting Standards) Rules, 2015 notified by the Ministry of Corporate Affairs
on 16 th February, 2015 while publishing quarterly / annual financial results under Regulation 33 of
the Listing Regulations, 2015, shall ensure that the comparatives filed along with such
quarterly/annual financial results are also Ind AS compliant.
Clarification regarding applicability of Indian Accounting Standards to disclosures in offer
documents under SEBI (ICDR) Regulations, 2018
The applicability of Ind AS for financial information (last 3 years financials) to be disclosed in the
offer document as specified under SEBI (ICDR) Regulations, 2018 and provided the year wise
applicability of Ind AS based on the period of filling offer document.
Example 6
For a company filling offer document between 1 st April 2021 to 31st March 2022, the financial
statements of latest financial year, second latest financial year and third latest financial year shall
be as per Ind AS.

Revised Formats for financial results and implementation of Ind AS by Listed Entities
For the period ending on or after 31st March, 2017, the formats for Unaudited / Audited quarterly
financial results i.e. Statement of Profit and Loss and the Unaudited / Audited Half-Yearly Balance
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.35 1.35

Sheet to be submitted by the Listed Entities, with the stock exchanges, shall be as per the formats
for Balance Sheet and Statement of Profit and Loss (excluding notes and detailed sub-
classification) as prescribed in Schedule III to the Companies Act, 2013. However, Banking
Companies and Insurance Companies shall follow the formats as prescribed under the respective
Acts / Regulations as specified by their Regulators.

12. FORMAT OF DIVISION II TO SCHEDULE III TO THE

COMPANIES ACT - STRUCTURE

12.1 Introduction
Schedule III to the Companies Act, 2013 was notified along with the Companies Act, 2013 (Act)
itself on 29 th August, 2013 thereby providing the way every company registered under the Act
shall prepare its Financial Statements. Financial Statements as defined under the Act include
Balance Sheet, Statement of Changes in Equity for the period if applicable, the Statement of Profit
and Loss for the period, Cash flow statement for the period and Notes.
‘Division II’ – ‘Ind AS Schedule III’ was inserted in the Companies Act,2013 to give a format of
Financial Statements for companies that are required to comply with the Companies (Indian
Accounting Standards) Rules, 2015, as amended from time to time. This is newly inserted into
Schedule III for companies that adopt Ind AS. Accordingly, such companies, while preparing its
first and subsequent Ind AS Financial Statements, would apply Division II to Schedule III to the
Act.
The requirements of Division II to Schedule III, however, do not apply any insurance or banking
company or to any other class of company for which a form of Balance Sheet and Statement of
Profit and Loss has been specified in or under any other Act governing such class of company.
Moreover, the requirements of Division II to Schedule III do not apply to Non-Banking Finance
Companies (NBFCs) that adopt Ind AS of Companies (Indian Accounting Standards) Rules, 2015
notified in Companies (Indian Accounting Standards) (Amendment) Rules, 2016 as amended from
time to time. For NBFCs, Division III to Schedule III to the Companies Act, 2013 prescribes the
formats of financial statements.

‘Division II’ – ‘Ind AS Schedule III’ is divided into following three parts:
♦ Part I – Format of Balance Sheet and Statement of Changes in Equity and notes related to
them (Elements of Balance Sheet and its line items)
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1.362.36 FINANCIAL REPORTING

♦ Part II – Format of Statement of Profit and Loss and notes related to it (Elements of
Statement of Profit and Loss and its line items)

♦ Part III – General Instructions for preparation of Consolidated Financial Statements

12.2 Applicability
As per the Government Notification no. S.O. 902 (E) dated 26 March, 2014, Schedule III is
applicable for the Financial Statements prepared for the financial year commencing on or after
1 st April, 2014. Further, as per the Government Notification no. G.S.R. 404(E) dated
6 th April, 2016, Schedule III is amended to include a format of Financial Statements for a company
preparing Financial Statements in compliance with the Companies Ind AS Rules. Schedule III has
been further amended vide the Government Notification dated 24 th March, 2021 to include certain
additional presentation and disclosures requirements and changes some existing requirements.
These changes need to be applied in preparation of financial statements for the financial year
commencing on or after 1st April, 2021. All companies that prepare, either voluntarily or
mandatorily, Financial Statements in compliance with the Companies Ind AS Rules, should
consider Ind AS Schedule III as well as ICAI’s Guidance Note on Division II to Schedule III to the
Companies Act, 2013. Additionally, preparers of financial statements should also consider
requirements of the Act as well as other Statutes, Notifications, Circulars issued by various
Regulators.

Division II to Schedule III to the Companies Act, 2013 has been annexed at the end of the
study material for reference.

13. GUIDANCE NOTE ON DIVISION II TO SCHEDULE III TO

THE COMPANIES ACT, 2013
Corporate Laws & Corporate Governance Committee (CLCGC) of ICAI issued the Guidance Note
on Division-II to Schedule III to the Companies Act, 2013 in 2017 and kept on revising the same
as per requirements. Latest Guidance Note on the subject is issued in January, 2022. This
Guidance Note aims to provide guidance on the amended Division-II to Schedule III to the
Companies Act, 2013. It also lays down broad guidelines to deal with practical issues that may
arise in the implementation of Division-II to Schedule III to the Companies Act, 2013. Accordingly,
wherever required conceptual guidance has been provided in the Guidance Note.
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.37 1.37

Following are the some of the key guidance stated in guidance note. The following should be read
in conjunction with Guidance Note issued on the subject:
1. Property, Plant and Equipment: Under the Ind AS Schedule III, land and building are
presented as two separate classes of property, plant and equipment. In contrast,
paragraph 37 of Ind AS 16 gives an example of grouping land and building under same
class for revaluation purposes. The para states that a class of property, plant and
equipment is a grouping of assets of a similar nature and use in an entity's operations.
However, companies should continue to present land and building separately as given in
Ind AS Schedule III and such presentation needs to be followed consistently.
As per Ind AS Schedule III, capital advances/ advances for purchase of capital assets
should be included under other non- current assets and hence, should not be included
under capital work-in-progress
2. Non-current Investment: Under each sub-classification of Investments, there is a
requirement to disclose details of investments including names and the nature and extent
of the investment in each body corporate which is a subsidiary, associate, joint venture and
structured entity. The nature and extent would imply the number of such instruments held
and the face value of such instrument.
Ind AS Schedule III requires disclosure of the aggregate amount of quoted investments and
market value thereof and the aggregate amount of unquoted investments. The aggregate
amount of such investments would include aggregate amount of carrying value of these
investments as at the reporting date as included in the financial statements.
The market value of quoted investments would, generally, mean disclosure of the ‘fair
value’ of quoted investments as at each reporting date. Ind AS 113 defines fair value and
also states that the fair value of assets might be affected when there has been a significant
decrease in the volume or level of activity for that asset in relation to normal market activity
for that asset. A decrease in the volume or level of activity on its own may not indicate that
a quoted price does not represent fair value. However, based on the company’s evaluation,
if it determines that a quoted price does not represent fair value, then the company shall
disclose the market value of quoted investments based on the quoted price which would
be different from the investment’s fair value.
As per Ind AS Schedule III, aggregate amount for impairment in value of investments should
be disclosed separately. As per Ind AS 109, the company is required to recognize a loss
allowance (i.e. impairment) for expected credit losses on investments measured at
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1.382.38 FINANCIAL REPORTING

amortized cost. Such loss allowance should be presented as an adjustment to the

amortized cost of the investment.

As per Ind AS 109, in case of debt investments measured at fair value through other
comprehensive income (FVTOCI), a company shall estimate a portion of fair value change,
if any, attributable to a change in credit risk of such investment and disclose the same in
the profit and loss section of the statement of profit and loss with a corresponding impact
in other comprehensive income section.
No disclosure is required in case of equity investments measured at fair value since Ind AS
109 does not permit a separate calculation / evaluation of impairment amount for all such
investments.
The aggregate provision for impairment as per Ind AS 36 in the value of investments may
be either presented in totality, where relevant, for all the investments or separately for each
class of investments (e.g., ‘Investment at amortized cost’, ‘Investment in debt instruments
at FVOCI’) disclosed in the financial statements.
A limited liability partnership is a body corporate and not a partnership firm as envisaged
under the Partnership Act, 1932. Hence, disclosures pertaining to Investments in
partnership firms will not extend to investments in limited liability partnerships. The
investments in limited liability partnerships will be disclosed separately under ‘other
investment’.
Note: Any application money paid towards securities, where security has not been allotted
on the date of the Balance Sheet, shall be disclosed as a separate line item under ‘other
non-current financial assets’. In case the investment is of current investment in nature,
such share application money shall be accordingly, disclosed under other current financial
assets.
3. Trade Receivables: A receivable shall be classified as '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 and the company has a right to an amount of consideration that is unconditional
(i.e. if only the passage of time is required before payment of that consideration is due).
Hence, amounts due under contractual rights, other than arising out of sale of goods or
rendering of services, cannot be included within Trade Receivables. Such items may
include dues in respect of insurance claims, sale of Property, Plant and Equipment,
contractually reimbursable expenses, etc. Such receivables should be classified as "other
financial assets" and each such item should be disclosed nature-wise
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.39 1.39

The ageing of the trade receivables needs to be determined from the due date of the
invoice. Due date is generally considered to be the date on which the payment of an invoice
falls due. The due date of an invoice is determined based on terms agreed upon between
the buyer and supplier. In case if the due date is neither agreed in writing nor orally, then
the ageing related disclosure needs to be prepared from the transaction date.
Schedule III requires split of trade receivables between ‘disputed’ and ‘undisputed’. These
terms have not been defined in the Schedule III. A dispute is a matter of facts and
circumstances of the case; however, dispute means disagreement between two parties
demonstrated by some positive evidence which supports or corroborates the fact of
disagreement. In case there are any disputes such fact should also be considered while
assessing the credit risk associated with respective party while computing the impairment
loss. However, a dispute might not always be an indicator of counterparty’s credit risk and
vice-versa. Hence, both of these should be evaluated independently for the purpose of
making these disclosures.
4. Other Non-Current Financial Assets – Ind AS Schedule III does not specify about the
presentation of finance lease receivables. However, the guidance note clarifies that he non-
current portion of a finance lease receivable shall be presented under ‘Other non-current
financial assets’ while its current portion shall be presented under ‘Other current financial
assets’.
5. Current Assets - As per Ind AS Schedule III, all items of assets and liabilities are to be
bifurcated between current and non-current portions. In some cases, the items presented
under the “non-current” head of the Balance Sheet may not have a corresponding “current”
head under the format given in Ind AS Schedule III. Since Ind AS Schedule III permits the
use of additional line items, in such cases the current portion should be classified under
the “Current” category of the respective balance as a separate line item and other relevant
disclosures should be made.
6. Cash and Cash Equivalents - Cash and cash equivalents is not defined in Ind AS Schedule
III however, according to Ind AS 7 Statement of Cash Flows, Cash is defined to include
cash on hand and demand deposits with banks. Cash Equivalents are defined as short
term, highly liquid investments that are readily convertible into known amounts of cash and
which are subject to an insignificant risk of changes in value.
As per para 8 of Ind AS 7 “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
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1.402.40 FINANCIAL REPORTING

bank balance often fluctuates from being positive to overdrawn.” Although Ind AS 7 permits
bank overdrafts to be included as cash and cash equivalent, however for the purpose of
presentation in the balance sheet, it is not appropriate to include bank overdraft as a
component of cash and cash equivalents unless the offset conditions as given in paragraph
42 of Ind AS 32 are complied with. Bank overdraft, in the balance sheet, should be included
as ‘borrowings’ under Financial Liabilities.
7. Current Tax Assets - If amount of tax already paid in respect of current and prior periods
exceeds the amount of tax due for those periods (assessment year-wise and not cumulative
unless tax laws allow for e.g., say tax laws in the country of overseas subsidiary permits),
then such excess tax shall be recognised as an asset. The excess tax paid (presented as
current tax assets) may not be expected to be recovered / realised within one year from
the balance sheet date and if so, the same shall be presented under non-current assets.
An entity should evaluate whether current tax assets meet the definition of current assets
or not and should accordingly present the same.
8. Equity Share Capital - The accounting definition of ‘Equity’ is principle based as compared
to the legal definition of ‘Equity’ or ‘Share’, such that any contract that evidences residual
interest in an entity’s net asset is termed as ‘Equity’ irrespective of whether it is legally
recognized as a ‘Share’ or not. Accordingly, all instruments (including convertible
preference shares and convertible debentures) that meet the definition of ‘Equity’ as per
Ind AS 32 in its entirety and when they do not have any component of liability, should be
considered as having the nature of ‘Equity’ for the purpose of Ind AS Schedule III. Such
instruments shall be termed as ‘Instruments entirely equity in nature’.
9. Borrowings- The phrase "term loan" has not been defined in the Schedule III. Term loans
normally have a fixed or pre-determined maturity period or a repayment schedule.
Terms of repayment of term loans and other loans shall be disclosed. The term ‘other
loans’ is used in general sense and should be interpreted to mean all categories listed
under the heading ‘Non – Current borrowings’ as per Ind AS Schedule III. Disclosure of
terms of repayment should be made preferably for each loan unless the repayment terms
of individual loans within a category are similar, in which case, they may be aggregated.
Ind AS Schedule III requires presenting ‘current maturities of long-term debt’ under ‘current
borrowings’. Long-term debt is specified in Ind AS Schedule III as a borrowing having a
period of more than twelve months at the time of origination. The portion of non-current
borrowings, which is due for payments within twelve months of the reporting date is required
to be classified under “current borrowings” while the balance amount should be classified
under non-current borrowings.
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.41 1.41

10. Trade Payable - A payable shall be classified as '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. Hence, amounts due under contractual obligations or which are statutory
payables should not be included within Trade Payables. Such items may include dues
payable in respect of statutory obligations like contribution to provident fund or contractual
obligations like contractually reimbursable expenses, amounts due towards purchase of
capital goods, etc.
Due date shall be the date by when a buyer should make payment to the supplier as per
terms agreed upon between the buyer and supplier. In case if the due date is neither
agreed in writing nor oral, then the disclosure needs to be prepared from the transaction
date. Transaction date shall be the date on which the liability is recognised in the books of
accounts as per the requirement of applicable standards. A dispute is a matter of facts and
circumstances of the case. However, dispute means disagreement between two parties
demonstrated by some positive evidence which supports or corroborates the fact of
disagreement. Reference is given to the term “Dispute” as defined under the Insolvency
and Bankruptcy Code, 2016.
11. Current Borrowings - Loans payable on demand should be treated as part of current
borrowings. Current borrowings will include all loans payable within a period of 12 months
from the date of the loan. In the case of current borrowings, the period and the amount of
defaults existing as at the date of the Balance Sheet should be disclosed (item-wise).
To provide relevant information to the users of the financial statements regarding total
amount of liability under the respective category of noncurrent borrowings, Companies shall
provide the amount of non-current as well as current portion for each of the respective
category of non-current borrowings either by way of a note or a schedule or a cross-
reference, as appropriate. This shall be in addition to Ind AS Schedule III requirements for
presenting ‘current maturities of long-term borrowings’ under current borrowings.
12. Other Current Liabilities - Trade Deposits and Security Deposits, which do not meet the
definition of financial liabilities, should be classified as ‘Others’ grouped under this head.
Others may also include liabilities in the nature of statutory dues such as Withholding taxes,
Service Tax, VAT, Excise Duty, Goods and Services Tax (GST), etc.
13. Contingent Liabilities and Commitments - A contingent liability in respect of guarantees
arises when a company issue guarantees to another person on behalf of a third party e.g.
when it undertakes to guarantee the loan given to a subsidiary or to another company or
gives a guarantee that another company will perform its contractual obligations. However,
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1.422.42 FINANCIAL REPORTING

where a company undertakes to perform its own obligations, and for this purpose issues,
what is called a "guarantee", it does not represent a contingent liability and it is misleading
to show such items as contingent liabilities in the Balance Sheet. For various reasons, it
is customary for guarantees to be issued by Bankers e.g. for payment of insurance
premium, deferred payments to foreign suppliers, letters of credit, etc. For this purpose,
the company issues a "counter-guarantee" to its Bankers. Such "counter-guarantee" is not
really a guarantee at all, but is an undertaking to perform what is in any event the obligation
of the company, namely, to pay the insurance premium when demanded or to make
deferred payments when due. Hence, such performance guarantees and counter
guarantees should not be disclosed as contingent liabilities.
14. Revenue from Operations and other operating income- Indirect taxes such as Sales tax,
Goods and Services tax, etc. are generally collected from the customer on behalf of the
government in majority of the cases. However, this may not hold true in all cases and it is
possible that a company may be acting as principal rather than as an agent in collecting
these taxes. Whether revenue should be presented gross or net of taxes should depend
on whether the company is acting as a principal and hence, is responsible for paying tax
on its own account or, whether it is acting as an agent i.e. simply collecting and paying tax
on behalf of government authorities. If the entity is the principal, then revenue should also
be grossed up for the tax billed to the customer and the tax payable should be shown as
an expense. However, in cases, where a company collects such taxes only as an agent,
revenue should be presented net of taxes.
The term “other operating revenue” is not defined. This would include Revenue arising
from a company’s operating activities, i.e., either its principal or ancillary revenue-
generating activities, but which is not revenue arising from sale of products or rendering of
services. Whether a particular income constitutes “other operating revenue” or “other
income” is to be decided based on the facts of each case and detailed understanding of
the company’s activities.
15. Exceptional Items - The term ‘Exceptional items’ is neither defined in Ind AS Schedule III
nor in Ind AS. However, Ind AS 1 has reference to such items. Ind AS 1 states that
disclosing the components of financial performance assists users in understanding the
financial performance achieved and in making projections of future financial performance.
An entity considers factors including materiality and the nature and function of the items of
income and expense. It indicates circumstances that would give rise to the separate
disclosures of items of income and expenses and include:
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.43 1.43

(a) Write-downs of inventories to net realisable value or of property, plant and

equipment to recoverable amount, as well as reversals of such write-downs;

(b) restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring;
(c) disposals of items of property, plant and equipment;

(d) disposals of investments;

(e) discontinued operations;
(f) litigation settlements; and

(g) other reversals of provisions.

SUMMARY
♦ Accounting Standards is an essential building block in the economics financial reporting
world. These Accounting Standards provide principles and rules that must be followed to
ensure accuracy, consistency and comparability of financial statements
♦ Prior to introduction of Ind AS, ASB has issued various AS to deal with various reporting
matters which were known as AS and were applicable to companies and also non-corporate
entities.

♦ To enable free flow of capital across jurisdiction without increasing cost and complexity of
compliances along with need to provide comprehensive guidance to deal with rising
complexities of business and financial world, the need to have Global Accounting Standards
have strongly emerged, leading to rise of IFRS.
♦ In response to commitment to G20, MCA has notified IFRS converged Standards i.e. Ind
AS phase wise for India Corporates in 2015, which eventually got extended to NBFCs.

♦ MCA and ICAI had worked extensively together to align Statutory provisions not in
cognisant with Ind AS to ease the implementation challenges for the companies.
Schedule III revision, extensive guidance note dealing with practical application thereof,
amendment in listing regulations by SEBI, continuous guidance on key matters by ITFG are some
of the many initiatives which helped companies to transition to Ind AS smoothly.
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1.442.44 FINANCIAL REPORTING

TEST YOUR KNOWLEDGE

Question
Fresh Vegetables Limited (FVL) was incorporated on 2nd April, 20X1 under the provisions of the
Companies Act, 2013 to carry on the wholesale trading business in vegetables. As per the audited
accounts of the financial year ended 31st March, 20X7 approved in its annual general meeting
held on 31st August, 20X7 its net worth, for the first time since incorporation, exceeded ` 250
crore. The financial statements since inception till financial year ended 31st March, 20X6 were
prepared in accordance with the Companies (Accounting Standards) Rules 2006. It has been
advised that henceforth it should prepare its financial statements in accordance with the
Companies (Indian Accounting Standards) Rules, 2015.
The following additional information is provided by the Company:

1. FVL has in the financial year 20X2-20X3 entered into a 60:40 partnership with Logistics
Limited and incorporated a partnership firm 'Vegetable Logistics Associates' (VLA) to carry
on the logistics business of vegetables from farm to market.
2. FVL also has an associate company Social Welfare Limited (SWL) that was incorporated
in July, 20X5 as a charitable organization and registered under section 8 of the Companies
Act, 2013. Social Welfare Limited has been the associate company of FVL since its
incorporation.
Examine the applicability of Ind AS on VLA & SWL.

Answer
Applicability of Ind AS in general:
♦ Currently Ind AS is applicable to the following companies except for companies other than
banks and Insurance Companies, on mandatory basis:
(a) All companies which are listed or in process of listing in or outside India on Stock
Exchanges.
(b) Unlisted companies having net worth of ` 250 crore or more but less than
` 500 crore.

(c) Holding, Subsidiary, Associate and Joint venture of above.

♦ Companies listed on SME exchange are not required to apply Ind AS on mandatory basis.
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INTRODUCTION TO INDIAN ACCOUNTING STANDARDS 1.45 1.45

♦ Once a company starts following Ind AS either voluntarily or mandatorily on the basis of
criteria specified, it shall be required to follow Ind AS for all the subsequent financial
statements even if any of the criteria specified does not subsequently apply to it.
♦ Application of Ind AS is for both standalone as well as consolidated financial statements if
threshold criteria met or adopted voluntarily.

♦ Companies meeting the thresholds for the first time at the end of an accounting year shall
apply Ind AS from the immediate next accounting year with comparatives.
♦ Companies not covered by the above roadmap shall continue to apply existing Accounting
Standards notified in the Companies (Accounting Standards) Rules, 2006.
Since the net worth of FVL in immediately preceding year exceeded ` 250 crore, Ind AS is
applicable to it. The entity VLA and SWL have to be examined as they may fall in criteria (c)
above.
Applicability of Ind AS on VLA
Joint arrangement can be either joint operation or joint venture. However, for the purpose of
identifying the applicability of Ind AS, the Act defines Joint venture (as an explanation to section
2(6) of the Companies Act, 2013), as follows:
“The expression "joint venture" means a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the arrangement”.
Accordingly, if an entity is classified as joint operation and not joint venture, then Ind AS would
not be applicable to such entity.
In the case of VLA, if partners 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. However, Ind AS
would not be applicable on VLA in such a case since it is the case of joint operation (and not a
joint venture).
Alternatively, if partners conclude that they have joint control of the arrangement and have rights
to the net assets of the arrangement relating to the partnership firm, then this would be a joint
venture. In such a case, Ind AS would be applicable to them.
Applicability of Ind AS on SWL
Social Welfare Limited (SWL) is the associate company of FVL. Accordingly, Ind AS would be
applicable on SWL too irrespective of the fact that SWL has been incorporated as a charitable
organisation.
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CHAPTER 2

CONCEPTUAL FRAMEWORK
FOR FINANCIAL REPORTING
UNDER INDIAN ACCOUNTING
STANDARDS (IND AS)

LEARNING OUTCOMES
After studying this chapter, you would be able to:
 Identify the objectives of general purpose financial reporting.
 Apply qualitative characteristics of useful financial information
 Define the concept of financial statements and the reporting entity
 Describe the various elements of financial statements i.e. asset, liability,
income and expenses
 Explain the criteria for including assets and liabilities in financial
statements (recognition) and when to remove them (derecognition)
 Recognize measurement bases and when to use them
 Comprehend the concept of presentation and disclosure and its
importance as communication tools
 Explain the concept of capital and capital maintenance and identify how
it links to the concept of profit.
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2.2
2.2 FINANCIAL REPORTING

CHAPTER OVERVIEW

Conceptual Framework for Financial Reporting

Objective of Objectives and usefulness of GPFR Economic resources

general purpose and claims
financial Limitations of GPFR
reporting
Changes in economic
(GPFR)
Information provided by GPFR resources and claims

Qualitative Qualitative Relevance Faithful representation

characteristics of characteristics
useful financial
Applying the Enhancing
information
The cost constraint on fundamental qualitative qualitative
useful financial information characteristics characteristics

Financial
Objective Reporting
statements and Perspective adopted Going concern
and scope period
the reporting in financial statements assumption
entity

The reporting entity Consolidated and unconsolidated financial statements

The elements Link between asset Aspects which are

of financial information common to assets and
statements liability liabilities
Definitions of
equity

Recognition
income and expenses
process
Recognition
and Recognition Relevance Faithful representation
derecognition criteria

Derecognition Element of financial When does derecognition

statements normally occur?
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.32.3

Measurement bases of an asset or a

liability

Information provided by particular measurement

bases of an asset
or a liability
Factors for selecting a measurement basis for
initial recognition and subsequent
Measurement measurement

Factors specific to initial measurement

More than one measurement basis

Measurement of equity

Presentation Presentation and disclosure Classification Aggregation

and objectives and principles
disclosure

Concepts of
capital and Concepts of Concepts of capital Capital
capital capital maintenance and the maintenance
maintenance determination of profit adjustments
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2.4
2.4 FINANCIAL REPORTING

UNIT 1: INTRODUCTION
The Conceptual Framework for Financial Reporting under Indian Accounting Standards (Ind AS)
(hereinafter the ‘Conceptual Framework under Ind AS’) is not a Standard and it does not override
any standard or any requirement in any standard. Therefore, this does not form part of a set of
standards pronounced by the standard-setters. While the Conceptual Framework under Ind AS
is primarily meant for the standard-setter for formulating the standards, it has relevance to the
preparers in certain situations such as to develop consistent accounting policies for areas that are
not covered by a standard or where there is a choice of accounting policy, and to assist all parties
to understand and interpret the Standards. As a result, certain individual standards e.g.
Ind AS 1, Presentation of Financial Statements, Ind AS 8, Accounting Policies, Changes in
Accounting Estimates and Errors, Ind AS 103, Business Combinations, etc., require the preparers
to follow the guidance in the Conceptual Framework for Financial reporting under Indian
Accounting Standards.

The Institute of Chartered Accountants of India (ICAI), in the past, has issued a pronouncement
with the title ‘Framework for the Preparation and Presentation of Financial Statements under
Indian Accounting Standards’. This framework was primarily based on the Framework issued by
the International Accounting Standards Board’s (IASB’s) predecessor body IASC in 1989
(Framework 1989). In March 2018, the IASB issued a comprehensive revised framework titled
‘Conceptual Framework for Financial Reporting’. In view of the issuance of new Conceptual
Framework by the IASB and with an objective to remain converged with the global accounting
framework, the ICAI has developed the Conceptual Framework under Ind AS corresponding to
IASB’s Conceptual Framework 2018.
The purpose of the Conceptual Framework under Ind AS can be summarised as below:
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.52.5

• Assist ICAI in formulation of Ind AS

Standard • Formulation to be based on consistent concepts
setting

• Assist preparers to develop consistent accounting policies when no Ind AS applies to

a particular transaction or event, OR
Consistent • When an Ind AS allows a choice of accounting policy
preparation

• Assist all parties to understand Ind AS

Interpreting • Interpretation of Ind AS
Ind AS

Ind AS or any requirement in an Ind AS overrides the Conceptual Framework under Ind AS. To
meet the objective of general-purpose financial reporting, the ICAI may sometimes specify
requirements that depart from aspects of the Conceptual Framework. If the ICAI does so, it will
explain the departure in the Appendix to the relevant Ind AS.
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2.6
2.6 FINANCIAL REPORTING

UNIT 2
OBJECTIVE OF GENERAL PURPOSE FINANCIAL
REPORTING

2.1 OBJECTIVES AND USEFULNESS OF GENERAL

PURPOSE FINANCIAL REPORTING
The objective of general purpose financial reporting is to provide financial information about the
reporting entity that is useful to existing and potential investors, lenders and other creditors in making
decisions relating to providing resources to the entity. Those decisions involve decisions about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence, management’s actions that affect the
use of the entity’s economic resources.
The chart below is intended to demonstrate the strong correlation between general purpose
financial reports and decision making process of relevant stakeholders:

Assessment of
the amount,
Financial
timing and Expectation of
information about
uncertainty of returns i.e.
the economic
future net cash dividends, Decisions of
resources of the
inflows to the principal and investors, lenders
entity, claims
entity and interest and other
against the entity
management's repayments, creditors
and changes in
stewardship of market price
those resources
the entity's increases, etc.
and claims
economic
resources
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.72.7

2.2 LIMITATIONS OF GENERAL PURPOSE FINANCIAL

REPORTING
General purpose financial reports:
♦ do not and cannot provide all of the information that existing and potential investors, lenders
and other creditors need. Those users need to consider pertinent information from other
sources, for example, general economic conditions and expectations, political events and
political climate, and industry and company outlooks;
♦ are not designed to show the value of a reporting entity; but they provide information to
help existing and potential investors, lenders and other creditors to estimate the value of
the reporting entity; and
♦ are not primarily directed to other parties, such as regulators and members of the public
other than investors, lenders and other creditors.

2.3 INFORMATION PROVIDED BY GENERAL PURPOSE

FINANCIAL REPORTS
The chart below provides an overview of the information sought to be provided in the general
purpose financial reports, which will, in turn, be used by the relevant stakeholders in making their
economic decisions, as presented in the flowchart above.

Financial Information

Financial Effects of transactions and other events that change

Position entity's economic resources and claims

Economic Financial Cash Changes not resulting

Claims
resources of entity performance Flows from financial
performance

Assets Liabilities Profit and Loss

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2.8
2.8 FINANCIAL REPORTING

2.3.1 Economic resources and claims

Information about the nature and amounts of a reporting entity’s economic resources and claims
can help users to identify the reporting entity’s financial strengths and weaknesses. That
information can help users to:
(a) assess the reporting entity’s:
(i) liquidity and solvency,
(ii) its needs for additional financing and
(iii) how successful it is likely to be in obtaining that financing
(b) assess management’s stewardship of the entity’s economic resources

(c) predict how future cash flows will be distributed among those with a claim against the
reporting entity

2.3.2 Changes in economic resources and claims

Changes in a reporting entity’s economic resources and claims result from:
♦ that entity’s financial performance and

♦ other events or transactions such as issuing debt or equity instruments

To properly assess both the prospects for future net cash inflows to the reporting entity and
management’s stewardship of the entity’s economic resources, users need to be able to identify
those two types of changes.
2.3.2.1 Financial performance reflected by accrual accounting
Accrual accounting depicts the effects of transactions and other events and circumstances on a
reporting entity’s economic resources and claims in the periods in which those effects occur, even
if the resulting cash receipts and payments occur in a different period.
Such information is useful in:
♦ assessing the entity’s past and future ability to generate net cash inflows,
♦ indicating the extent to which the reporting entity has increased its available economic
resources, and thus its capacity for generating net cash inflows through its operations,
♦ helping users to assess management’s stewardship of the entity’s economic resources,
and
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.92.9

♦ indicating the extent to which events such as changes in market prices or interest rates
have increased or decreased the entity’s economic resources and claims, thereby affecting
the entity’s ability to generate net cash inflows.
2.3.2.2 Financial performance reflected by past cash flows
Information about a reporting entity’s cash flows during a period helps in assessment of:
♦ entity’s ability to generate future net cash inflows, by helping users:
• understand reporting of entity’s operations,
• evaluate its financing and investing activities,
• assess its liquidity or solvency and
• interpret other information about financial performance
♦ management’s stewardship of the entity’s economic resources.
2.3.2.3 Changes in economic resources and claims not resulting from financial performance
A reporting entity’s economic resources and claims may also change for reasons other than
financial performance, such as issuing debt or equity instruments. Information about this type of
change is necessary to give users a complete understanding of why the reporting entity’s
economic resources and claims changed and the implications of those changes for its future
financial performance.
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2.10
2.10 FINANCIAL REPORTING

UNIT 3
QUALITATIVE CHARACTERISTICS OF USEFUL
FINANCIAL INFORMATION
If financial information is to be useful, it must be relevant and faithfully represent what it purports
to represent. The usefulness of financial information is enhanced if it is comparable, verifiable,
timely and understandable.
Let’s look at these two fundamental qualitative characteristics in more detail.

3.1 QUALITATIVE CHARACTERISTICS OF USEFUL

FINANCIAL INFORMATION

3.1.1 Relevance
The following chart will explain what is considered as “relevant financial information”:

Financial information Makes it capable of

with (a) predictive value making a difference in Makes it relevant
or (b) confirmatory decisions made by financial information
value or both users

Financial information has predictive value if it can be used as an input to processes employed
by users to predict future outcomes. Financial information need not be a prediction or forecast to
have predictive value. Financial information with predictive value is employed by users in making
their own predictions.
Financial information has confirmatory value if it provides feedback about (confirms or changes)
previous evaluations.
The predictive value and confirmatory value of financial information are interrelated. Information
that has predictive value often also has confirmatory value.

Example 1
Revenue information for the current year, which can be used as the basis for predicting revenues
in future years, can also be compared with revenue predictions for the current year that were
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.11
2.11

made in past years. The results of those comparisons can help a user to correct and improve
the processes that were used to make those previous predictions.

The characteristic of ‘relevance’ also includes the concept of materiality. Information is material
if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the
primary users of general purpose financial reports make on the basis of those reports, which
provide financial information about a specific reporting entity. In other words, materiality is an
entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to
which the information relates in the context of an individual entity’s financial report. Consequently,
the ICAI cannot specify a uniform quantitative threshold for materiality or predetermine what could
be material in a particular situation.

3.1.2 Faithful representation

To be useful, financial information must also faithfully represent the substance of the phenomena
that it purports to represent. In many circumstances, the substance of an economic phenomenon
and its legal form are the same. If they are not the same, providing information only about the
legal form would not faithfully represent the economic phenomenon.
To be a perfectly faithful representation, a depiction would have following three characteristics:
♦ Complete: A complete depiction includes all information necessary for a user to understand
the phenomenon being depicted, including all necessary descriptions and explanations.

Example 2
A complete depiction of a group of assets would include, at a minimum, a description of the
nature of the assets in the group, a numerical depiction of all of the assets in the group,
and a description of what the numerical depiction represents (for example, historical cost
or fair value). For some items, a complete depiction may also entail explanations of
significant facts about the quality and nature of the items, factors and circumstances that
might affect their quality and nature, and the process used to determine the numerical
depiction (e.g. facts such as encumbrance / hypothecation / mortgage of items of Property,
Plant and Equipment against secured borrowings, disclosure of fair value of Investment
Property etc.).

♦ Neutral: A neutral depiction is without bias in the selection or presentation of financial

information. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or
otherwise manipulated to increase the probability that financial information will be received
favourably or unfavourably by users.
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2.12
2.12 FINANCIAL REPORTING

Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when
making judgements under conditions of uncertainty. The exercise of prudence means that
assets and income are not overstated and liabilities and expenses are not understated.
Equally, the exercise of prudence does not allow for the understatement of assets or income
or the overstatement of liabilities or expenses.
♦ Free from error: Free from error means there are no errors or omissions in the description
of the phenomenon, and the process used to produce the reported information has been
selected and applied with no errors in the process. In this context, free from error does not
mean perfectly accurate in all respects. For example, an estimate of an unobservable price
or value cannot be determined to be accurate or inaccurate. However, a representation of
that estimate can be faithful if the amount is described clearly and accurately as being an
estimate, the nature and limitations of the estimating process are explained, and no errors
have been made in selecting and applying an appropriate process for developing the
estimate.

Example 3
The use of reasonable estimates is an essential part of the preparation of financial
statements. Examples of estimates could include useful life of an item of Property, Plant
and Equipment, net realizable value of inventories, fair value of investment in an unlisted
entity, expected credit losses etc. As long as the estimates are fair, the financial statements
will be concluded to be free from error, even though the actual outcome may be different
from the original estimate.

3.1.3 Applying the fundamental qualitative characteristics

The most efficient and effective process for applying the fundamental qualitative characteristics
would usually be as follows:

Identify an economic phenomenon, information about which is capable of

being useful to users of the reporting entity’s financial information

Identify the type of information about that phenomenon that would be

most relevant

Determine whether that information is available and whether it can

provide a faithful representation of the economic phenomenon
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.13
2.13

If faithful representation is achieved, the process of satisfying the fundamental qualitative

characteristics ends at that point. If not, the process is repeated with the next most relevant type
of information.
In some cases, a trade-off between the fundamental qualitative characteristics may need to be
made in order to meet the objective of financial reporting, which is to provide useful information
about economic phenomena. For example, the most relevant information about a phenomenon
may be a highly uncertain estimate. In some cases, the level of measurement uncertainty involved
in making that estimate may be so high that it may be questionable whether the estimate would
provide a sufficiently faithful representation of that phenomenon. In some such cases, the most
useful information may be the highly uncertain estimate, accompanied by a description of the
estimate and an explanation of the uncertainties that affect it. In other such cases, if that
information would not provide a sufficiently faithful representation of that phenomenon, the most
useful information may include an estimate of another type that is slightly less relevant but is
subject to lower measurement uncertainty. In limited circumstances, there may be no estimate
that provides useful information. In those limited circumstances, it may be necessary to provide
information that does not rely on an estimate.

3.1.4 Enhancing qualitative characteristics

As mentioned at the beginning of Unit 3, the usefulness of financial information is enhanced if it
is comparable, verifiable, timely and understandable. Having identified the fundamental
qualitative characteristics of useful financial information, let’s understand how to enhance the
usefulness by applying four enhancing qualitative characteristics.

♦ Comparability: Users’ decisions involve choosing between alternatives, for example, selling
or holding an investment, or investing in one reporting entity or another. Consequently,
information about a reporting entity is more useful if it can be compared with similar
information about other entities and with similar information about the same entity for
another period or another date.
Comparability is neither same as consistency, nor as uniformity. Comparability is the goal;
consistency helps to achieve that goal. Comparability refers to the use of the same methods
for the same items, and uniformity implies that like things must look alike and different things
must look different.

♦ Verifiability: Verifiability means that different knowledgeable and independent observers

could reach consensus, although not necessarily complete agreement, that a particular
depiction is a faithful representation.
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2.14 FINANCIAL REPORTING

Verification can be direct or indirect. Direct verification means verifying an amount or other
representation through direct observation, for example, by counting cash. Indirect verification
means checking the inputs to a model, formula or other technique and recalculating the
outputs using the same methodology. An example is verifying the carrying amount of
inventory by checking the inputs (quantities and costs) and recalculating the ending inventory
using the same cost flow assumption (for example, using the first-in, first-out method).
♦ Timeliness: Timeliness means having information available to decision-makers in time to
be capable of influencing their decisions. Generally, the older the information is the less
useful it is. However, some information may continue to be timely long after the end of a
reporting period because, for example, some users may need to identify and assess trends.
♦ Understandability: Classifying, characterising and presenting information clearly and
concisely makes it understandable. Some phenomena are inherently complex and cannot
be made easy to understand. Excluding information about those phenomena from financial
reports might make the information in those financial reports easier to understand.
However, those reports would be incomplete and therefore possibly misleading. Financial
reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently. At times, even well-
informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.

3.1.5 Applying the enhancing qualitative characteristics

♦ Enhancing qualitative characteristics should be maximised to the extent possible.
However, the enhancing qualitative characteristics, either individually or as a group, cannot
make information useful if that information is irrelevant or does not provide a faithful
representation of what it purports to represent.

♦ Applying the enhancing qualitative characteristics is an iterative process that does not
follow a prescribed order. Sometimes, one enhancing qualitative characteristic may have
to be diminished to maximise another qualitative characteristic. For example, a temporary
reduction in comparability as a result of prospectively applying a new Ind AS may be
worthwhile to improve relevance or faithful representation in the longer term. Appropriate
disclosures may partially compensate for non-comparability.
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3.2 THE COST CONSTRAINT ON USEFUL FINANCIAL

INFORMATION
Cost is a pervasive constraint on the information that can be provided by financial reporting.
Reporting financial information imposes costs, and it is important that those costs are justified by
the benefits of reporting that information.
Both the providers and users of financial information incur costs in reporting and analysing
financial information. In applying the cost constraint, the ICAI assesses whether the benefits of
reporting particular information are likely to justify the costs incurred to provide and use that
information. When applying the cost constraint in formulating a proposed Ind AS, the ICAI seeks
information from providers of financial information, users, auditors, academics and others about
the expected nature and quantity of the benefits and costs of that Ind AS. In most situations,
assessments are based on a combination of quantitative and qualitative information.
Because of the inherent subjectivity, different individuals’ assessments of the costs and benefits
of reporting particular items of financial information will vary. Therefore, the ICAI seeks to
consider costs and benefits in relation to financial reporting generally, and not just in relation to
individual reporting entities.
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2.16 FINANCIAL REPORTING

UNIT 4
FINANCIAL STATEMENTS AND THE REPORTING
ENTITY
In this unit, we will address two critical aspects:
♦ What are financial statements?
♦ What is reporting entity?

4.1 OBJECTIVE AND SCOPE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide financial information about the reporting entity’s:
♦ assets, liabilities and equity; and
♦ income and expenses
(i.e. the elements of the financial statements – we will discuss this in more detail in Unit 5) that is
useful to users of financial statements in assessing:
♦ the prospects for future net cash inflows to the reporting entity, and
♦ management’s stewardship of the entity’s economic resources.

Such financial information is provided:

(a) in the balance sheet, by recognising assets, liabilities and equity;
(b) in the statement of profit and loss, by recognising income and expenses; and
(c) in other statements and notes, by presenting and disclosing information about:
(i) recognised assets, liabilities, equity, income and expenses, including information
about their nature and about the risks arising from those recognised assets and
liabilities;
(ii) assets and liabilities that have not been recognised, including information about their
nature and about the risks arising from them;
(iii) cash flows;
(iv) contributions from holders of equity claims and distributions to them; and
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(v) the methods, assumptions and judgements used in estimating the amounts presented
or disclosed, and changes in those methods, assumptions and judgements.

4.1.1 Reporting period

Financial statements are prepared for a specified period of time (reporting period) and to help
users of financial statements to identify and assess changes and trends; financial statements also
provide comparative information for at least one preceding reporting period.
Information about possible future transactions and other possible future events (forward-looking
information) is included in financial statements if it:
(a) relates to the entity’s assets or liabilities—including unrecognised assets or liabilities—or
equity that existed at the end of the reporting period, or during the reporting period, or to
income or expenses for the reporting period; and
(b) is useful to users of financial statements.
For example, if an asset or liability is measured by estimating future cash flows, information about
those estimated future cash flows may help users of financial statements to understand the
reported measures. Financial statements do not typically provide other types of forward-looking
information, for example, explanatory material about management’s expectations and strategies
for the reporting entity.
Financial statements include information about transactions and other events that have occurred
after the end of the reporting period if providing that information is necessary to meet the objective
of financial statements.

4.1.2 Perspective adopted in financial statements

Financial statements provide information about transactions and other events viewed from the
perspective of the reporting entity as a whole, not from the perspective of any particular group of
the entity’s existing or potential investors, lenders or other creditors.

4.1.3 Going concern assumption

Financial statements are normally prepared on the assumption that the reporting entity is a going
concern and will continue in operation for the foreseeable future. Hence, it is assumed that the
entity has neither the intention nor the need to enter liquidation or to cease trading. If such an
intention or need exists, the financial statements may have to be prepared on a different basis. If
so, the financial statements describe the basis used.
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2.18 FINANCIAL REPORTING

4.2 THE REPORTING ENTITY

A reporting entity is an entity that is required, or chooses, to prepare financial statements. A
reporting entity can be a single entity or a portion of an entity or can comprise more than one
entity. A reporting entity is not necessarily a legal entity.
Sometimes one entity (parent) has control over another entity (subsidiary). If a reporting entity
comprises both the parent and its subsidiaries, the reporting entity’s financial statements are
referred to as ‘consolidated financial statements’. If a reporting entity is the parent alone, the
reporting entity’s financial statements are referred to as ‘standalone financial statements’ or
‘separate financial statements’ as the case may be.
If a reporting entity comprises two or more entities that are not all linked by a parent-subsidiary
relationship, the reporting entity’s financial statements are referred to as ‘combined financial
statements’.
If the reporting entity is not a legal entity and does not comprise only legal entities linked by a
parent-subsidiary relationship, how can the boundary of reporting entity be determined?
In such cases, determining the boundary of the reporting entity is driven by the information needs
of the primary users of the reporting entity’s financial statements. Those users need relevant
information that faithfully represents what it purports to represent. Faithful representation requires
that:
(a) the boundary of the reporting entity does not contain an arbitrary or incomplete set of
economic activities;
(b) including that set of economic activities within the boundary of the reporting entity results
in neutral information; and

(c) a description is provided of how the boundary of the reporting entity was determined and
of what constitutes the reporting entity.

4.2.1 Consolidated and unconsolidated financial statements

Consolidated financial statements provide information about the assets, liabilities, equity, income
and expenses of both the parent and its subsidiaries as a single reporting entity. That information
is useful for existing and potential investors, lenders and other creditors of the parent in their
assessment of the prospects for future net cash inflows to the parent. This is because net cash
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inflows to the parent include distributions to the parent from its subsidiaries, and those
distributions depend on net cash inflows to the subsidiaries.

Consolidated financial statements are not designed to provide separate information about the
assets, liabilities, equity, income and expenses of any particular subsidiary. A subsidiary’s own
financial statements are designed to provide that information.

Unconsolidated financial statements are designed to provide information about the parent’s
assets, liabilities, equity, income and expenses, and not about those of its subsidiaries. That
information can be useful to existing and potential investors, lenders and other creditors of the
parent because:
(a) a claim against the parent typically does not give the holder of that claim a claim against
subsidiaries; and
(b) in some jurisdictions, the amounts that can be legally distributed to holders of equity claims
against the parent depend on the distributable reserves of the parent.
Another way to provide information about some or all assets, liabilities, equity, income and
expenses of the parent alone in consolidated financial statements, is in the notes.
Information provided in unconsolidated financial statements is typically not sufficient to meet the
information needs of existing and potential investors, lenders and other creditors of the parent.
Accordingly, when consolidated financial statements are required, unconsolidated financial
statements cannot serve as a substitute for consolidated financial statements. Nevertheless, a
parent may require, or choose, to prepare unconsolidated financial statements in addition to
consolidated financial statements.
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2.20 FINANCIAL REPORTING

UNIT 5
THE ELEMENTS OF FINANCIAL STATEMENTS
As explained in Unit 2, general purpose financial reports provide the information about:

♦ Financial position i.e. economic resources of the entity and claims against the entity; and
♦ Effects of transactions and other events that change entity's economic resources and
claims

The elements of financial statements defined in the Conceptual Framework under Ind AS are:
(a) assets, liabilities and equity, which relate to a reporting entity’s financial position; and
(b) income and expenses, which relate to a reporting entity’s financial performance.

5.1 LINK BETWEEN INFORMATION IN GENERAL PURPOSE

FINANCIAL REPORTS AS PER CONCEPTUAL
FRAMEWORK AND ELEMENTS OF FINANCIAL
STATEMENTS
In this Unit 5, we will discuss how the information in general purpose financial reports is
represented by the elements of financial statements. The table below links the two:

Information provided Element of Definition or description

by general purpose financial
financial reports statements

Economic Resources Asset A present economic resource controlled by the entity

as a result of past events.
An economic resource is a right that has the potential
to produce economic benefits.

Liability A present obligation of the entity to transfer an

economic resource as a result of past events.
Claim
Equity The residual interest in the assets of the entity after
deducting all its liabilities.
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Income Increases in assets, or decreases in liabilities, that

Changes in economic result in increases in equity, other than those relating
resources and claims, to contributions from holders of equity claims.
reflecting financial Expenses Decreases in assets, or increases in liabilities, that
performance result in decreases in equity, other than those
relating to distributions to holders of equity claims.

- Contributions from holders of equity claims, and

Other changes in distributions to them.
economic resources
and claims - Exchanges of assets or liabilities that do not result in
increases or decreases in equity.

5.2 DEFINITION OF AN ASSET

The definition of ‘asset’, which, in turn, is dependent on definition of economic resource, has three
key aspects – right, potential to produce economic benefits and control.
Let us look at these three aspects in more detail.

5.2.1 Right
The concept of what constitutes a ‘right’ is a very wide subject and can be better illustrated with
reference to various lenses through which it can be seen, and a couple of such lenses are
explained below. It must be understood that merely having a right does not mean the entity has
an ‘asset’.
5.2.1.1 Obligation of another party
Certain rights correspond to obligation of another party. For example:
♦ Rights to receive cash – say, when a loan or security deposit is given or debt instrument of
another entity is subscribed for
♦ Rights to receive goods or services – say, when an advance for purchase of inventory or
capital goods is given
♦ Rights to exchange economic resources with another party on favourable terms – say, a
forward contract to buy an economic resource on terms that are currently favourable or an
option to buy an economic resource
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2.22 FINANCIAL REPORTING

♦ Rights to benefit from an obligation of another party to transfer an economic resource if a

specified uncertain future event occurs – say, an insurance claim receivable upon
happening of the insured event.
However, there are cases when a right exists even when no other party has any obligation towards
the entity. For example,

♦ Rights over physical objects, such as property, plant and equipment or inventories.
Examples of such rights are a right to use a physical object or a right to benefit from the
residual value of a leased object
♦ Rights to use intellectual property.
5.2.1.2 Contract, legislation or similar means
Many rights are established by contract, legislation or similar means. For example, an entity might
obtain rights from owning or leasing a physical object, from owning a debt instrument or an equity
instrument, or from owning a registered patent.
However, an entity might also obtain rights in other ways, for example:
(a) by acquiring or creating know-how that is not in the public domain; or
(b) through an obligation of another party that arises because that other party has no practical
ability to act in a manner inconsistent with its customary practices, published policies or
specific statements, often referred to as a ‘constructive obligation’.
Some goods or services—for example, employee services—are received and immediately
consumed. An entity’s right to obtain the economic benefits produced by such goods or services
exists momentarily until the entity consumes the goods or services.
Not all of an entity’s rights are assets of that entity — to be assets of the entity, the rights must
have the potential to produce for the entity economic benefits beyond those available to all other
parties. The concept of ‘asset’ can also be understood if we understand what rights do not
constitute asset. A couple of such situations are discussed below:
(a) Rights available to all parties without significant cost — for instance, rights of access to public
goods, such as public rights of way over land, or know-how that is in the public domain — are
typically not assets for the entities that hold them.
(b) Similarly, an entity cannot have a right to obtain economic benefits from itself. Hence:
(i) debt instruments or equity instruments issued by the entity and repurchased and held
by it—for example, treasury shares—are not economic resources of that entity; and
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(ii) if a reporting entity comprises more than one legal entity, debt instruments or equity
instruments issued by one of those legal entities and held by another of those legal
entities are not economic resources of the reporting entity.
In principle, each of an entity’s rights is a separate asset. However, for accounting purposes,
related rights are often treated as a single unit of account that is a single asset. For example,
legal ownership of a physical object may give rise to several rights, including:
(a) the right to use the object;
(b) the right to sell rights over the object;
(c) the right to pledge rights over the object; and
(d) other rights not listed in (a)–(c).
In many cases, the set of rights arising from legal ownership of a physical object is accounted for
as a single asset. Conceptually, the economic resource is the set of rights, not the physical object.
Nevertheless, describing the set of rights as the physical object will often provide a faithful
representation of those rights in the most concise and understandable way.

Example 4
Ownership of land gives the entity the right to use the land, the right to sell the land, the right to
give the land on lease, the right to pledge land to obtain a secured loan etc. However, these
rights are normally bundled up as a single asset ‘Land’ as such classification provides a faithful
representation of those rights in the most concise and understandable way.

Lastly, in some cases, it is uncertain whether a right exists.

Example 5
An entity and another party might dispute whether the entity has a right to receive an economic
resource from that other party. Until that existence uncertainty is resolved — for example, by a
court ruling — it is uncertain whether the entity has a right and, consequently, whether an asset
exists.

5.2.2 Potential to produce economic benefits

Role of probability
For the potential to exist, it does not need to be certain, or even likely, that the right will produce
economic benefits. It is only necessary that the right already exists and that, in at least one
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2.24 FINANCIAL REPORTING

circumstance, it would produce for the entity economic benefits beyond those available to all other
parties.

A right can meet the definition of an economic resource, and hence can be an asset, even if the
probability that it will produce economic benefits is low. Nevertheless, that low probability might
affect decisions about what information to provide about the asset and how to provide that
information, including decisions about whether the asset is recognised and how it is measured.

Example 6
Receivable from a bankrupt customer is a right, even if the measurement principle renders the net
carrying amount of such an asset as ‘nil’.

Role of timing
Although an economic resource derives its value from its present potential to produce future
economic benefits, the economic resource is the present right that contains that potential, not the
future economic benefits that the right may produce.
For example, a purchased option derives its value from its potential to produce economic benefits
through exercise of the option at a future date. However, the economic resource is the present
right—the right to exercise the option at a future date. The economic resource is not the future
economic benefits that the holder will receive if the option is exercised.
Role of expenditure
There is a close association between incurring expenditure and acquiring assets, but the two do
not necessarily coincide. Hence, when an entity incurs expenditure, this may provide evidence
that the entity has sought future economic benefits but does not provide conclusive proof that the
entity has obtained an asset. Similarly, the absence of related expenditure does not preclude an
item from meeting the definition of an asset. Assets can include, for example, rights that a
government has granted to the entity free of charge or that another party has donated to the entity.

5.2.3 Control
Control links an economic resource to an entity. Assessing whether control exists helps to identify
the economic resource for which the entity accounts. For example, an entity may control a
proportionate share in a property without controlling the rights arising from ownership of the entire
property. In such cases, the entity’s asset is the share in the property, which it controls, not the
rights arising from ownership of the entire property, which it does not control.
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An entity controls an economic resource if:

(a) it has the present ability to direct the use of the economic resource i.e. it has the right to
deploy that economic resource in its activities, or to allow another party to deploy the
economic resource in that other party’s activities, and
(b) obtain the economic benefits that may flow from it. For an entity to control an economic
resource, the future economic benefits from that resource must flow to the entity either directly
or indirectly rather than to another party. This aspect of control does not imply that the entity
can ensure that the resource will produce economic benefits in all circumstances. Instead,
it means that if the resource produces economic benefits, the entity is the party that will obtain
them either directly or indirectly. Having exposure to significant variations in the amount of
the economic benefits produced by an economic resource may indicate that the entity controls
the resource. However, it is only one factor to consider in the overall assessment of whether
control exists.
An entity controls an economic resource if it has the present ability to direct the use of the
economic resource and obtain the economic benefits that may flow from it. Control includes the
present ability to prevent other parties from directing the use of the economic resource and from
obtaining the economic benefits that may flow from it. It follows that, if one party controls an
economic resource, no other party controls that resource.
Control of an economic resource usually arises from an ability to enforce legal rights. However,
control can also arise if an entity has other means of ensuring that it, and no other party, has the
present ability to direct the use of the economic resource and obtain the benefits that may flow
from it. For example, an entity could control a right to use know-how that is not in the public
domain if the entity has access to the know-how and the present ability to keep the know-how
secret, even if that know-how is not protected by a registered patent.
It must be remembered that if one party controls an economic resource, no other party controls
that resource.
Would control exist with the principal in a principal-agent relationship?
Sometimes one party (a principal) engages another party (an agent) to act on behalf of, and for
the benefit of, the principal. For example, a principal may engage an agent to arrange sales of
goods controlled by the principal. If an agent has custody of an economic resource controlled by
the principal, that economic resource is not an asset of the agent.
Furthermore, if the agent has an obligation to transfer to a third party an economic resource
controlled by the principal, that obligation is not a liability of the agent, because the economic
resource that would be transferred is the principal’s economic resource, not the agent’s.
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2.26 FINANCIAL REPORTING

5.3 DEFINITION OF A LIABILITY

For a liability to exist, three criteria must all be satisfied:

Obligation Present
is to obligation
Entity has
transfer as a result Liability
obligation
economic of past
resource events

Let us look at these three criteria in more detail.

5.3.1 Obligation
An obligation is a duty or responsibility that an entity has no practical ability to avoid. An obligation
is always owed to another party (or parties). The other party (or parties) could be a person or
another entity, a group of people or other entities, or society at large. It is not necessary to know
the identity of the party (or parties) to whom the obligation is owed. However, a requirement for
one party to recognise a liability and measure it at a specified amount does not imply that the
other party (or parties) must recognise an asset or measure it at the same amount. For example,
particular Ind AS may contain different recognition criteria or measurement requirements for the
liability of one party and the corresponding asset of the other party (or parties) if those different
criteria or requirements are a consequence of decisions intended to select the most relevant
information that faithfully represents what it purports to represent.
Many obligations are established by contract, legislation or similar means and are legally
enforceable by the party (or parties) to whom they are owed. Obligations can also arise, however,
from an entity’s customary practices, published policies or specific statements if the entity has no
practical ability to act in a manner inconsistent with those practices, policies or statements. The
obligation that arises in such situations is sometimes referred to as a ‘constructive obligation’.
Whether an entity’s duty to transfer an economic resource, that is conditional on an action
that an entity itself may choose to take, is an obligation or not?

In such situations, the entity has an obligation if it has no practical ability to avoid taking that
action. A conclusion that it is appropriate to prepare an entity’s financial statements on a going
concern basis also implies a conclusion that the entity has no practical ability to avoid a transfer
that could be avoided only by liquidating the entity or by ceasing to trade.
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The factors used to assess whether an entity has the practical ability to avoid transferring an
economic resource may depend on the nature of the entity’s duty or responsibility. For example,
in some cases, an entity may have no practical ability to avoid a transfer if any action that it could
take to avoid the transfer would have economic consequences significantly more adverse than the
transfer itself. However, neither an intention to make a transfer, nor a high likelihood of a transfer,
is sufficient reason for concluding that the entity has no practical ability to avoid a transfer.

5.3.2 Transfer of an economic resource

To satisfy this criterion, the obligation must have the potential to require the entity to transfer an
economic resource to another party (or parties). For that potential to exist, it does not need to be
certain, or even likely, that the entity will be required to transfer an economic resource — the
transfer may, for example, be required only if a specified uncertain future event occurs. It is only
necessary that the obligation already exists and that, in at least one circumstance, it would require
the entity to transfer an economic resource.
An obligation can meet the definition of a liability even if the probability of a transfer of an economic
resource is low. Nevertheless, that low probability might affect decisions about what information
to provide about the liability and how to provide that information, including decisions about whether
the liability is recognised and how it is measured.
Obligations to transfer an economic resource include, for example:
(a) obligations to pay cash.
(b) obligations to deliver goods or provide services.
(c) obligations to exchange economic resources with another party on unfavourable terms. Such
obligations include, for example, a forward contract to sell an economic resource on terms
that are currently unfavourable or an option that entitles another party to buy an economic
resource from the entity.
(d) obligations to transfer an economic resource if a specified uncertain future event occurs.
(e) obligations to issue a financial instrument if that financial instrument will oblige the entity to
transfer an economic resource.
Instead of fulfilling an obligation to transfer an economic resource to the party that has a right to
receive that resource, entities sometimes decide to, for example:
(a) settle the obligation by negotiating a release from the obligation;
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2.28 FINANCIAL REPORTING

(b) transfer the obligation to a third party; or

(c) replace that obligation to transfer an economic resource with another obligation by entering
into a new transaction.
It is however important to note that in the situations described above, the entity has the obligation
to transfer an economic resource until it has settled, transferred or replaced that obligation.

5.3.3 Present obligation as a result of past events

A present obligation exists as a result of past events only if:
(a) the entity has already obtained economic benefits (for example, goods or services obtained
from a supplier) or taken an action (for example, operating a particular business or operating
in a particular market); and
(b) as a consequence, the entity will or may have to transfer an economic resource that it would
not otherwise have had to transfer.
A present obligation can exist even if a transfer of economic resources cannot be enforced until
some point in the future. For example, a contractual liability to pay cash may exist now even if
the contract does not require a payment until a future date. Similarly, a contractual obligation for
an entity to perform work at a future date may exist now even if the counterparty cannot require
the entity to perform the work until that future date.
An entity does not yet have a present obligation to transfer an economic resource if it has not yet
satisfied the criteria above, that is, if it has not yet obtained economic benefits, or taken an action,
that would or could require the entity to transfer an economic resource that it would not otherwise
have had to transfer.

Example 7
If an entity has entered into a contract to pay an employee a salary in exchange for receiving the
employee’s services, the entity does not have a present obligation to pay the salary until it has
received the employee’s services. Before then the contract is executory — the entity has a
combined right and obligation to exchange future salary for future employee services. We will
discuss more about ‘executory contracts’ in more detail later in this Chapter.
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5.4 ASPECTS WHICH ARE COMMON TO ASSETS AND

LIABILITIES

5.4.1 Unit of account

The unit of account is the right or the group of rights, the obligation or the group of obligations, or
the group of rights and obligations, to which recognition criteria and measurement concepts are
applied.
A unit of account is selected for an asset or liability when considering how recognition criteria and
measurement concepts will apply to that asset or liability and to the related income and expenses.
In some circumstances, it may be appropriate to select one unit of account for recognition and a
different unit of account for measurement. For example, contracts may sometimes be recognised
individually but measured as part of a portfolio of contracts. For presentation and disclosure,
assets, liabilities, income and expenses may need to be aggregated or separated into
components.
A unit of account is selected to provide useful information, which implies that:
(a) the information provided about the asset or liability and about any related income and
expenses must be relevant; and

(b) the information provided about the asset or liability and about any related income and
expenses must faithfully represent the substance of the transaction or other event from which
they have arisen.
Sometimes, both rights and obligations arise from the same source. For example, some contracts
establish both rights and obligations for each of the parties. If those rights and obligations are
interdependent and cannot be separated, they constitute a single inseparable asset or liability and
hence form a single unit of account.
Conversely, if rights are separable from obligations, it may sometimes be appropriate to group the
rights separately from the obligations, resulting in the identification of one or more separate assets
and liabilities. In other cases, it may be more appropriate to group separable rights and
obligations in a single unit of account treating them as a single asset or a single liability.
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2.30 FINANCIAL REPORTING

5.4.2 Executory contracts

An executory contract is a contract, or a portion of a contract, that is equally unperformed —
neither party has fulfilled any of its obligations, or both parties have partially fulfilled their
obligations to an equal extent.
An executory contract establishes a combined right and obligation to exchange economic
resources. The right and obligation are interdependent and cannot be separated. Hence, the
combined right and obligation constitute a single asset or liability. The entity has an asset if the
terms of the exchange are currently favourable; it has a liability if the terms of the exchange are
currently unfavourable.

Whether such an asset or liability is included in the financial statements depends on both the
recognition criteria and the measurement basis selected for the asset or liability, including, if
applicable, any test for whether the contract is onerous.

5.4.3 Substance of contractual rights and contractual obligations

The terms of a contract create rights and obligations for an entity that is a party to that contract.
To represent those rights and obligations faithfully, financial statements report their substance. In
some cases, the substance of the rights and obligations is clear from the legal form of the contract.
In other cases, the terms of the contract or a group or series of contracts require analysis to
identify the substance of the rights and obligations.
All terms in a contract — whether explicit or implicit — are considered unless they have no
substance. Implicit terms could include, for example, obligations imposed by statute, such as
statutory warranty obligations imposed on entities that enter into contracts to sell goods to
customers.
Terms that have no substance are disregarded. A term has no substance if it has no discernible
effect on the economics of the contract. Terms that have no substance could include, for example:
(a) terms that bind neither party; or
(b) rights, including options, that the holder will not have the practical ability to exercise in any
circumstances.
A group or series of contracts may achieve or be designed to achieve an overall commercial effect.
To report the substance of such contracts, it may be necessary to treat rights and obligations
arising from that group or series of contracts as a single unit of account. For example, if the rights
or obligations in one contract merely nullify all the rights or obligations in another contract entered
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.31
2.31

into at the same time with the same counterparty, the combined effect is that the two contracts
create no rights or obligations. Conversely, if a single contract creates two or more sets of rights
or obligations that could have been created through two or more separate contracts, an entity may
need to account for each set as if it arose from separate contracts in order to faithfully represent
the rights and obligations.

5.5 DEFINITION OF EQUITY

Equity claims are claims on the residual interest in the assets of the entity after deducting all its
liabilities. In other words, they are claims against the entity that do not meet the definition of a
liability.
Sometimes, legal, regulatory or other requirements affect particular components of equity, such
as share capital or retained earnings. For example, some such requirements permit an entity to
make distributions to holders of equity claims only if the entity has sufficient reserves that those
requirements specify as being distributable.

5.6 DEFINITION OF INCOME AND EXPENSES

Income is increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.
It follows from these definitions of income and expenses that contributions from holders of equity
claims are not income, and distributions to holders of equity claims are not expenses.
Income and expenses are the elements of financial statements that relate to an entity’s financial
performance. Users of financial statements need information about both an entity’s financial
position and its financial performance. Hence, although income and expenses are defined in
terms of changes in assets and liabilities, information about income and expenses is just as
important as information about assets and liabilities.
Different transactions and other events generate income and expenses with different
characteristics. Providing information separately about income and expenses with different
characteristics can help users of financial statements to understand the entity’s financial
performance.
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2.32 FINANCIAL REPORTING

UNIT 6
RECOGNITION AND DERECOGNITION

6.1 THE RECOGNITION PROCESS

♦ Recognition is the process of capturing for inclusion
♦ in the balance sheet or the statement of profit and loss

♦ an item
♦ that meets the definition of one of the elements of financial statements—an asset, a liability,
equity, income or expenses.
The amount at which an asset, a liability or equity is recognised in the balance sheet is referred
to as its ‘carrying amount’.
Recognition links the elements (as discussed in Unit 5), the balance sheet and the statement of
profit and loss as follows:
Opening Statement of Other changes Closing
Balance Sheet profit and loss in equity Balance Sheet

Contributions
from holders of
Assets (-) equity claims Assets (-)
Income (-) minus
Liabilities = Liabilities =
Expenses distributions to
Equity Equity
holders of equity
claims

The balance sheet and statement of profit and loss are linked because the recognition of one item
(or a change in its carrying amount) requires the recognition or derecognition of one or more other
items (or changes in the carrying amount of one or more other items). This principle can be
explained in the form of a journal entry as below:

Particulars Statement of Balance Sheet (alternatives)

profit or loss

Recognition of Credit Income Debit Asset Debit Liability

income
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(initial recognition or (derecognition or

increase in carrying decrease in carrying
amount) amount)

Recognition of Debit Expense Credit Asset Credit Liability

expense (derecognition or (initial recognition or
decrease in carrying increase in carrying
amount) amount)

The initial recognition of assets or liabilities arising from transactions or other events may result
in the simultaneous recognition of both income and related expenses.
Example 8
The sale of goods for cash results in the recognition of both income (from the recognition of one
asset — the cash) and an expense (from the derecognition of another asset—the goods sold).
The simultaneous recognition of income and related expenses is sometimes referred to as the
matching of costs with income. It may be noted that matching of costs with income is not an
objective of the Conceptual Framework under Ind AS. The Conceptual Framework under Ind AS
does not allow the recognition in the balance sheet of items that do not meet the definition of an
asset, a liability or equity.

6.2 RECOGNITION CRITERIA

Only items that meet the definition of an asset, a liability or equity are recognised in the balance
sheet. Similarly, only items that meet the definition of income or expenses are recognised in the
statement of profit and loss. However, not all items that meet the definition of one of those
elements are recognised.
Not recognising an item that meets the definition of one of the elements makes the balance sheet
and the statement of profit and loss less complete and can exclude useful information from
financial statements. On the other hand, in some circumstances, recognising some items that
meet the definition of one of the elements would not provide useful information.
An asset or liability is recognised only if recognition provides users of financial statements with
information that is useful, i.e. with:
(a) relevant information; and
(b) a faithful representation
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2.34 FINANCIAL REPORTING

of the asset or liability and of any resulting income, expenses or changes in equity.
What is useful to users depends on the item and the facts and circumstances. Consequently,
judgement is required when deciding whether to recognise an item, and thus recognition
requirements may need to vary between and within Ind AS.
It is important when making decisions about recognition to consider the information that would be
given if an asset or liability were not recognised. For example, if no asset is recognised when
expenditure is incurred, an expense is recognised. Over time, recognising the expense may, in
some cases, provide useful information, for example, information that enables users of financial
statements to identify trends.
Even if an item meeting the definition of an asset or liability is not recognised, an entity may need
to provide information about that item in the notes. It is important to consider how to make such
information sufficiently visible to compensate for the item’s absence from the structured summary
provided by the balance sheet and, if applicable, the statement of profit and loss.
Let’s look at the aspects of ‘relevance’ and ‘faithful presentation’ in a bit more detail.

6.2.1 Relevance
Information about assets, liabilities, equity, income and expenses is relevant to users of financial
statements. However, recognition of a particular asset or liability and any resulting income,
expenses or changes in equity may not always provide relevant information. That may be the
case if, for example:

(a) it is uncertain whether an asset or liability exists (see 6.2.1.1 below); or

(b) an asset or liability exists, but the probability of an inflow or outflow of economic benefits is
low (see 6.2.1.2 below)
The presence of one or both of the factors described above does not lead automatically to a
conclusion that the information provided by recognition lacks relevance. Moreover, factors other
than those described above may also affect the conclusion. It may be a combination of factors
and not any single factor that determines whether recognition provides relevant information.
6.2.1.1 Existence uncertainty
♦ Asset
In some cases, it is uncertain whether a right exists. For example, an entity and another party
might dispute whether the entity has a right to receive an economic resource from that other
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2.35

party. Until that existence uncertainty is resolved — for example, by a court ruling — it is
uncertain whether the entity has a right and, consequently, whether an asset exists.
♦ Liability
In some cases, it is uncertain whether an obligation exists. For example, if another party is
seeking compensation for an entity’s alleged act of wrongdoing, it might be uncertain whether
the act occurred, whether the entity committed it or how the law applies. Until that existence
uncertainty is resolved — for example, by a court ruling — it is uncertain whether the entity
has an obligation to the party seeking compensation and, consequently, whether a liability
exists.
In those cases, that uncertainty, possibly combined with a low probability of inflows or outflows of
economic benefits and an exceptionally wide range of possible outcomes, may mean that the
recognition of an asset or liability, necessarily measured at a single amount, would not provide
relevant information. Whether or not the asset or liability is recognised, explanatory information
about the uncertainties associated with it may need to be provided in the financial statements.
6.2.1.2 Low probability of an inflow or outflow of economic benefits
If the probability of an inflow or outflow of economic benefits is low, the most relevant information
about the asset or liability may be information about the magnitude of the possible inflows or
outflows, their possible timing and the factors affecting the probability of their occurrence. The
typical location for such information is in the notes.
However, in some cases, recognition of the asset or liability may provide relevant information
beyond the disclosure in the notes.
Even if the probability of an inflow or outflow of economic benefits is low, recognition of the asset
or liability may provide relevant information beyond the information described above. Whether
that is the case may depend on a variety of factors. For example:
(a) if an asset is acquired or a liability is incurred in an exchange transaction on market terms,
its cost generally reflects the probability of an inflow or outflow of economic benefits. Thus,
that cost may be relevant information, and is generally readily available. Furthermore, not
recognising the asset or liability would result in the recognition of expenses or income at the
time of the exchange, which might not be a faithful representation of the transaction.
(b) if an asset or liability arises from an event that is not an exchange transaction, recognition of
the asset or liability typically results in recognition of income or expenses. If there is only a
low probability that the asset or liability will result in an inflow or outflow of economic benefits,
users of financial statements might not regard the recognition of the asset and income, or the
liability and expenses, as providing relevant information.
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2.36 FINANCIAL REPORTING

6.2.2 Faithful representation

Recognition of a particular asset or liability is appropriate if it provides not only relevant
information, but also a faithful representation of that asset or liability and of any resulting income,
expenses or changes in equity. Whether a faithful representation can be provided may be affected
by the level of measurement uncertainty associated with the asset or liability or by other factors.
6.2.2.1 Measurement uncertainty
For an asset or liability to be recognised, it must be measured. In many cases, such measures
must be estimated and are therefore subject to measurement uncertainty. The use of reasonable
estimates is an essential part of the preparation of financial information and does not undermine
the usefulness of the information if the estimates are clearly and accurately described and
explained. Even a high level of measurement uncertainty does not necessarily prevent such an
estimate from providing useful information.
In some cases, the level of uncertainty involved in estimating a measure of an asset or liability
may be so high that it may be questionable whether the estimate would provide a sufficiently
faithful representation of that asset or liability and of any resulting income, expenses or changes
in equity. The level of measurement uncertainty may be so high if, for example, the only way of
estimating that measure of the asset or liability is by using cash-flow-based measurement
techniques and, in addition, one or more of the following circumstances exists:
(a) the range of possible outcomes is exceptionally wide and the probability of each outcome
is exceptionally difficult to estimate.
(b) the measure is exceptionally sensitive to small changes in estimates of the probability of
different outcomes — for example, if the probability of future cash inflows or outflows
occurring is exceptionally low, but the magnitude of those cash inflows or outflows will be
exceptionally high if they occur.
(c) measuring the asset or liability requires exceptionally difficult or exceptionally subjective
allocations of cash flows that do not relate solely to the asset or liability being measured.
In some of the cases described above, the most useful information may be the measure that relies
on the highly uncertain estimate, accompanied by a description of the estimate and an explanation
of the uncertainties that affect it. This is especially likely to be the case if that measure is the
most relevant measure of the asset or liability. In other cases, if that information would not provide
a sufficiently faithful representation of the asset or liability and of any resulting income, expenses
or changes in equity, the most useful information may be a different measure (accompanied by
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2.37

any necessary descriptions and explanations) that is slightly less relevant but is subject to lower
measurement uncertainty.

In limited circumstances, all relevant measures of an asset or liability that are available (or can
be obtained) may be subject to such high measurement uncertainty that none would provide useful
information about the asset or liability (and any resulting income, expenses or changes in equity),
even if the measure were accompanied by a description of the estimates made in producing it and
an explanation of the uncertainties that affect those estimates. In those limited circumstances,
the asset or liability would not be recognised.
Whether or not an asset or liability is recognised, a faithful representation of the asset or liability
may need to include explanatory information about the uncertainties associated with the asset or
liability’s existence or measurement, or with its outcome — the amount or timing of any inflow or
outflow of economic benefits that will ultimately result from it.
It may be noted that the level of measurement uncertainty beyond which a measure does not
provide a faithful representation depends on facts and circumstances and so, the standard-setters
felt, that level can be determined only when developing Standards.
6.2.2.2 Other factors
Faithful representation of a recognised asset, liability, equity, income or expenses involves not
only recognition of that item, but also its measurement as well as presentation and disclosure of
information about it.
Hence, when assessing whether the recognition of an asset or liability can provide a faithful
representation of the asset or liability, it is necessary to consider not merely its description and
measurement in the balance sheet, but also:
♦ the depiction of resulting income, expenses and changes in equity. For example, if an
entity acquires an asset for consideration, not recognising the asset would result in
recognising expenses, and that result could provide a misleading representation that the
entity’s financial position has deteriorated.
♦ whether related assets and liabilities are recognised. If they are not recognised, recognition
may create a recognition inconsistency (accounting mismatch). That may not provide an
understandable or faithful representation of the overall effect of the transaction or other
event giving rise to the asset or liability, even if explanatory information is provided in the
notes.
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2.38 FINANCIAL REPORTING

♦ presentation and disclosure of information about the asset or liability, and resulting income,
expenses or changes in equity. A complete depiction includes all information necessary
for a user of financial statements to understand the economic phenomenon depicted,
including all necessary descriptions and explanations. Hence, presentation and disclosure
of related information can enable a recognised amount to form part of a faithful
representation of an asset, a liability, equity, income or expenses.

6.3 DERECOGNITION
Derecognition is the removal of all or part of a recognised asset or liability from an entity’s balance
sheet. Derecognition normally occurs when that item no longer meets the definition of an asset
or of a liability:

Element of financial When does derecognition normally occur?

statements

Asset When the entity loses control of all or part of the recognised asset

Liability When the entity no longer has a present obligation for all or part of the
recognised liability

The accounting requirements for derecognition are as below:

(a) derecognise any assets or liabilities that have expired or have been consumed, collected,
fulfilled or transferred (referred to as ‘transferred component’), and recognise any resulting
income and expenses.
(b) continue to recognise the assets or liabilities retained, referred to as the ‘retained component’,
if any. That retained component becomes a unit of account separate from the transferred
component. Accordingly, no income or expenses are recognised on the retained component
as a result of the derecognition of the transferred component, unless the derecognition results
in a change in the measurement requirements applicable to the retained component. For
example, when a parent loses control over a subsidiary and retains a minority shareholding
therein, the measurement principles in Ind AS require that minority shareholding to be
recognised at its fair value, the resulting gain or loss is then recognised in statement of profit
or loss.
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(c) applying following presentation and disclosure requirements:

(i) presenting any retained component separately in the balance sheet
(ii) presenting separately in the statement of profit and loss any income and expenses
recognised as a result of the derecognition of the transferred component
(iii) providing explanatory information.

In some cases, an entity might appear to transfer an asset or liability, but derecognition of that
asset or liability is not appropriate. For example,
♦ if an entity has apparently transferred an asset but retains exposure to significant positive
or negative variations in the amount of economic benefits that may be produced by the
asset, this sometimes indicates that the entity might continue to control that asset
♦ if an entity has transferred an asset to another party that holds the asset as an agent for
the entity, the transferor still controls the asset.
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2.40 FINANCIAL REPORTING

UNIT 7
MEASUREMENT
Elements recognised in financial statements are quantified in monetary terms. This requires the
selection of a measurement basis. A measurement basis is an identified feature — for example,
historical cost, fair value or fulfilment value — of an item being measured. Applying a
measurement basis to an asset or liability creates a measure for that asset or liability and for
related income and expenses.

7.1 MEASUREMENT BASES OF AN ASSET OR A LIABILITY

Historical cost Fair value

Measurement bases
Value in use (assets)
Current value
Fulfilment value (liabilities)

Current cost

A very broad comparison between the historical cost and current value measurement bases is
given below:

Factor Historical cost Current value

Monetary information Derived, at least in part, from Using information updated to reflect
about assets, liabilities the price of the transaction or conditions at the measurement date
and related income and other event that gave rise to
expenses them

Changes in values Not reflected except to the Reflect changes, since the previous
extent that those changes measurement date, in estimates of
relate to impairment of an cash flows and other factors
asset or a liability becoming reflected in those current values
onerous
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2.41

7.1.1 Historical cost

The table below summarises the concept of ‘historical cost’ in case of assets and liabilities:

Particulars Assets Liabilities

Components Consideration paid (+) transaction Consideration received (-)

costs transaction costs

Changes • consumption of part or all of the

economic resource that
constitutes the asset
(depreciation or amortisation)

• payments received that • fulfilment of the liability, for

extinguish part or all of the asset example, by making payments
(collection from trade that extinguish part or all of the
receivables) liability or by satisfying an
obligation to deliver goods

• effect of events that cause the • effect of events that increase the
historical cost of the asset to be value of the obligation to transfer
no longer recoverable the economic resources needed
(impairment) to fulfil the liability to such an
extent that the liability becomes
onerous. A liability is onerous if
the historical cost is no longer
sufficient to depict the obligation
to fulfil the liability

• accrual of interest to reflect any accrual of interest to reflect any

financing component financing component

When an asset is acquired or created (say, a loan is given by a parent to a subsidiary), or a liability
is incurred or taken on, as a result of an event that is not a transaction on market terms (say, at a
discounted interest rate), it may not be possible to identify a cost, or the cost may not provide
relevant information about the asset or liability. In some such cases, a current value of the asset
(say, fair value) or liability is used as a deemed cost on initial recognition and that deemed cost
is then used as a starting point for subsequent measurement at historical cost (say, amortised
cost in case of the loan - see next paragraph for discussion on this).
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2.42 FINANCIAL REPORTING

One way to apply a historical cost measurement basis to financial assets and financial liabilities
is to measure them at amortised cost. The amortised cost of a financial asset or financial liability
reflects estimates of future cash flows, discounted at a rate determined at initial recognition. For
variable rate instruments, the discount rate is updated to reflect changes in the variable rate. The
amortised cost of a financial asset or financial liability is updated over time to depict subsequent
changes, such as the accrual of interest, the impairment of a financial asset and receipts or
payments.

7.1.2 Current value

Current Value

Exit Value Entry value

Fair value Value in use (asset) Fulfilment Current cost

value (liability)

7.1.2.1 Exit value – Fair value and Value in use / Fulfilment value
The following table summarises these concepts in a comparative form:

Particulars Fair value Value in use / Fulfilment value

Definition Price that would be received to Value in use - present value of the cash
sell an asset, or paid to transfer a flows, or other economic benefits, that an
liability, in an orderly transaction entity expects to derive from the use of
between market participants at an asset and from its ultimate disposal.
the measurement date Fulfilment value - present value of the
cash, or other economic resources, that
an entity expects to be obliged to transfer
as it fulfils a liability.
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2.43

Value from Reflects the perspective of Reflect entity-specific assumptions

whose market participants—participants rather than assumptions by market
perspective? in a market to which the entity has participants
access. The asset or liability is
measured using the same
assumptions that market
participants would use when
pricing the asset or liability if
those market participants act in
their economic best interest.
How Directly by observing prices in an Cannot be observed directly and are
determined? active market or using determined using cash-flow based
measurement techniques, for measurement techniques
example, cash-flow-based
measurement techniques
Transaction Neither those costs incurred on Those costs incurred on initial
costs initial recognition, nor those costs recognition are not considered, but the
considered in to be incurred on disposal of present value of those costs to be
measurement? asset or settlement of liability are incurred on disposal of asset or
considered. settlement of liability are considered.

7.1.2.2 Entry value – Current cost

Like historical cost, current cost is also an entry value. Hence, it would be appropriate to
understand the concept of ‘current cost’ by comparing it with ‘historical cost’ as below:

Particulars Historical cost Current cost

Value Date of acquisition of asset or Each measurement date
determined on incurrence of liability
Components Assets: Consideration paid Assets: Consideration that would be paid
(+) transaction costs (+) transaction costs that would be incurred
Liabilities: Consideration Liabilities: Consideration that would be
received (-) transaction costs received (-) transaction costs that would be
incurred
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2.44 FINANCIAL REPORTING

7.2 INFORMATION PROVIDED BY PARTICULAR

MEASUREMENT BASES
When selecting a measurement basis, it is important to consider the nature of the information that
the measurement basis will produce in both the balance sheet and the statement of profit and
loss. The tables below summarise that information.

7.2.1 Assets
7.2.1.1 Balance Sheet
Historical cost Current cost Fair value Value in use
(market (entity-specific
participant assumptions)
assumptions)
Carrying Historical cost to Current cost to Price that would Present value of
amount – the extent the extent be received to future cash flows
primary unconsumed or unconsumed or sell the asset from the use of the
value uncollected, and uncollected, and asset and from its
recoverable recoverable ultimate disposal
(Includes
interest accrued
on any financing
component)
Transaction Included Included Without After deducting
costs deducting present value of
transaction costs transaction costs on
on disposal disposal

7.2.1.2 Statement of profit and loss

Event Historical cost Current cost Fair value Value in use

(market (entity-specific
participant assumptions)
assumptions)
Initial - - Difference Difference
recognition – between between
primary value consideration paid consideration paid
and fair value of and value in use of
the asset acquired the asset acquired
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Event Historical cost Current cost Fair value Value in use

(market (entity-specific
participant assumptions)
assumptions)
Transaction - - Expense Expense
costs –
purchase
Sale or Expense: Expense: Expense: Fair Expense: Value in
consumption Historical cost of Current cost value of the asset use of the asset
of the asset the asset sold or of the asset sold or consumed sold or consumed
consumed (eg. sold or
Cost of sales of consumed
inventory or WDV
of a fixed asset)
Income: Consideration received
Expenses and Income could be presented gross or net
Transaction Included Included Included Already
costs – sale considered in
computation of
value in use, hence
not included
Interest At historical rates, At current Already included in Already included in
income updated if the rates fair value changes, value in use
asset bears could be identified changes, could be
variable interest separately identified
separately
Impairment Expense Expense Already included in Already included in
fair value changes, value in use
could be identified changes, could be
separately identified
separately
Value None, except Effect of Already included in Already included in
changes impairment change in fair value changes value in use
Financial assets – prices is changes
effect of changes income or
in estimated cash expense
flows is an income
or expense
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2.46 FINANCIAL REPORTING

7.2.2 Liabilities
7.2.2.1 Balance Sheet

Historical cost Current cost Fair value Fulfilment value

(market (entity-specific
participant assumptions)
assumptions)

Carrying Consideration Consideration that Price that would Present value of

amount – received for taking would be currently be paid to future cash flows
primary on the unfulfilled received for taking transfer the that will arise in
value part of the liability, on the unfulfilled unfulfilled part fulfilling the
increased by part of the liability, of the liability unfulfilled part of
excess of increased by the liability
estimated cash excess of
outflows over estimated cash
consideration outflows over that
received. consideration.

Transaction Netted off from Netted off from Not including Including present
costs above above transaction value of
costs that would transaction costs
be incurred on to be incurred in
transfer fulfilment or
transfer

7.2.2.2 Statement of profit and loss

Event Historical cost Current cost Fair value Fulfilment value

(market (entity-specific
participant assumptions)
assumptions)

Initial - - Difference Difference

recognition – between between
primary value consideration consideration
received and the received and the
fair value of the fulfilment value of
liability the liability
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Event Historical cost Current cost Fair value Fulfilment value

(market (entity-specific
participant assumptions)
assumptions)

Transaction - - Expense Expense

costs –
purchase

Income: Income: Income: fair Income: fulfilment

historical reflects current value of the value of the
Fulfilment or consideration consideration liability liability
transfer of the
Expenses: costs incurred in fulfilling the liability or cost paid to transfer the
liability
liability

Could be presented net or gross

Interest At historical At current rates Already included Already included

expense rates, updated if in fair value in changes in
the liability bears changes, could fulfilment value,
variable interest be identified could be identified
separately separately

Effect of Expenses = Expenses = Already included Already included

events that estimated cash estimated cash in fair value in changes in
cause a outflows minus outflows minus changes, could fulfilment value,
liability to historical cost of current cost of be identified could be identified
become the liability the liability separately separately
onerous

Value None, to the Effect of change Already included Already included

changes extent that the in prices is in fair value in changes in
liability is income or changes fulfilment value
onerous. expense
Financial
liabilities – effect
of changes in
estimated cash
flows is an
income or
expense
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7.3 FACTORS TO CONSIDER WHEN SELECTING A

MEASUREMENT BASIS FOR INITIAL RECOGNITION
AND SUBSEQUENT MEASUREMENT OF AN ASSET OR
A LIABILITY
In section 7.2, we have discussed the information that various measurement basis will produce in
both the balance sheet and the statement of profit and loss. While selecting a measurement basis,
it is necessary to consider such information.
Additionally, certain other factors must also be considered while selecting a measurement basis
for initial recognition and subsequent measurement and this section 7.3 focuses on the same.
Section 7.4 will focus on certain additional factors to be considered when selecting measurement
basis for initial measurement only.
In most cases, no single factor will determine which measurement basis should be selected. The
relative importance of each factor will depend on facts and circumstances. As discussed in Unit
3, the information provided by a measurement basis must be useful to users of financial
statements. To achieve this, the information must be relevant and it must faithfully represent what
it purports to represent. In addition, the information provided should be, as far as possible,
comparable, verifiable, timely and understandable.
The following chart lays down the overall scheme of factors relevant for selection of measurement
basis, besides the information provided by the same:

Factors for selection of measurement basis

Relevance Faithful representation

Asset or liability Contribution to future

Consistency Certainty
characteristics cash flows
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7.3.1 Relevance
7.3.1.1 Characteristics of the asset or liability
The relevance of information provided by a measurement basis depends partly on the
characteristics of the asset or liability, in particular, on:
♦ Variability of cash flows, and
♦ Sensitivity of the value of the asset or liability to market factors or other risks
Asset or liability carried at historical cost
If the value of an asset or liability is sensitive to market factors or other risks, its historical cost
might differ significantly from its current value and hence may not provide relevant information if
information about changes in value is important to users of financial statements.
As an example, amortised cost cannot provide relevant information about a financial asset or
financial liability that is a derivative.
Furthermore, if historical cost is used, changes in value are reported not when that value changes,
but when an event such as disposal, impairment or fulfilment occurs. This could be incorrectly
interpreted as implying that all the income and expenses recognised at the time of that event
arose then, rather than over the periods during which the asset or liability was held.
Moreover, because measurement at historical cost does not provide timely information about
changes in value, income and expenses reported on that basis may lack predictive value and
confirmatory value by not depicting the full effect of the entity’s exposure to risk arising from
holding the asset or liability during the reporting period.
Asset or liability carried at fair value
Changes in the fair value of an asset or liability reflect changes in expectations of market
participants and changes in their risk preferences. Depending on the characteristics of the asset
or liability being measured and on the nature of the entity’s business activities, information
reflecting those changes may not always provide predictive value or confirmatory value to users
of financial statements. This may be the case when the entity’s business activities do not involve
selling the asset or transferring the liability.
As an example, if the entity holds assets solely for use or solely for collecting contractual cash
flows or if the entity is to fulfil liabilities itself, information reflecting changes in the fair value of an
asset or liability may not always provide predictive value or confirmatory value to users of financial
statements.
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2.50 FINANCIAL REPORTING

7.3.1.2 Contribution to future cash flows

How economic resources are used, and hence how assets and liabilities produce cash flows,
depends in part on the nature of the business activities conducted by the entity.
When a business activity of an entity involves the use of several economic resources that produce
cash flows indirectly, by being used in combination to produce and market goods or services to
customers, historical cost or current cost is likely to provide relevant information about that activity.

For example, property, plant and equipment is typically used in combination with an entity’s other
economic resources. Similarly, inventory typically cannot be sold to a customer, except by making
extensive use of the entity’s other economic resources (for example, in production and marketing
activities). Paragraphs 6.24–6.31 and 6.40–6.42 of the Conceptual Framework explain how
measuring such assets at historical cost or current cost can provide relevant information that can
be used to derive margins achieved during the period.

For assets and liabilities that produce cash flows directly, such as assets that can be sold
independently and without a significant economic penalty (for example, without significant
business disruption), the measurement basis that provides the most relevant information is likely
to be a current value that incorporates current estimates of the amount, timing and uncertainty of
the future cash flows.
As discussed in more detail in the chapter on financial instruments, when a business activity of
an entity involves managing financial assets and financial liabilities with the objective of collecting
contractual cash flows, amortised cost may provide relevant information that can be used to derive
the margin between the interest earned on the assets and the interest incurred on the liabilities.
However, in assessing whether amortised cost will provide useful information, it is also necessary
to consider the characteristics of the financial asset or financial liability. Amortised cost is unlikely
to provide relevant information about cash flows that depend on factors other than principal and
interest.

7.3.2 Faithful representation

7.3.2.1 Consistency
When assets and liabilities are related in some way, using different measurement bases for those
assets and liabilities can create a measurement inconsistency (accounting mismatch). If financial
statements contain measurement inconsistencies, those financial statements may not faithfully
represent some aspects of the entity’s financial position and financial performance.
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Therefore, when the cash flows from one asset or liability are directly linked to the cash flows from
another asset or liability, using the same measurement basis for related assets and liabilities may
provide users of financial statements with information that is more useful than the information that
would result from using different measurement bases. This may be particularly likely when the
cash flows from one asset or liability are directly linked to the cash flows from another asset or
liability.
7.3.2.2 Certainty
When a measure cannot be determined directly by observing prices in an active market and must
instead be estimated, measurement uncertainty arises. The level of measurement uncertainty
associated with a particular measurement basis may affect whether information provided by that
measurement basis provides a faithful representation of an entity’s financial position and financial
performance. A high level of measurement uncertainty does not necessarily prevent the use of a
measurement basis that provides relevant information. However, in some cases the level of
measurement uncertainty is so high that information provided by a measurement basis might not
provide a sufficiently faithful representation. In such cases, it is appropriate to consider selecting
a different measurement basis that would also result in relevant information.
Measurement uncertainty is different from both outcome uncertainty and existence uncertainty,
but their presence may sometimes contribute to measurement uncertainty.
(a) outcome uncertainty arises when there is uncertainty about the amount or timing of any inflow
or outflow of economic benefits that will result from an asset or liability.
(b) existence uncertainty arises when it is uncertain whether an asset or a liability exists.
The presence of outcome uncertainty or existence uncertainty may sometimes contribute to
measurement uncertainty. However, outcome uncertainty or existence uncertainty does not
necessarily result in measurement uncertainty. For example, if the fair value of an asset can be
determined directly by observing prices in an active market, no measurement uncertainty is
associated with the measurement of that fair value, even if it is uncertain how much cash the asset
will ultimately produce and hence there is outcome uncertainty.
Illustration 1: Derecognition vs. Faithful Representation
As at 31st March 20X2, Natasha Ltd. carried trade receivables of ` 280 crores in its balance sheet.
At that date, Natasha Ltd. entered into a factoring agreement with Samantha Ltd., a financial
institution, according to which it transferred the trade receivables in exchange for an immediate
cash payment of ` 250 crores. As per the factoring agreement, any shortfall between the amount
collected and ` 250 crores will be reimbursed by Natasha Ltd. to Samantha Ltd. Once the trade
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2.52 FINANCIAL REPORTING

receivables have been collected, any amounts above ` 250 crores, less interest on this amount,
will be repaid to Natasha Ltd. The directors of Natasha Ltd. are of the opinion that the trade
receivables should be derecognized.
You are required to explain the appropriate accounting treatment of this transaction in the financial
statements for the year ending 31st March 20X2, and also evaluate this transaction in the context
of the Conceptual Framework.
Solution:
Accounting Treatment:
Trade Receivables fall within the ambit of financial assets under Ind AS 109, Financial
Instruments. Thus, the issue in question is whether the factoring arrangement entered into with
Samantha Ltd. requires Natasha Ltd. to derecognize the trade receivables from its financial
statements.
As per Para 3.2.3, 3.2.4, 3.2.5 and 3.2.6 of Ind AS 109, Financial Instruments, an entity shall
derecognise a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire, or
(b) it transfers the financial asset or substantially all the risks and rewards of ownership of the
financial asset to another party.
In the given case, since the trade receivables are appearing in the Balance Sheet of Natasha Ltd.
as at 31st March 20X2 and are expected to be collected, the contractual rights to the cash flows
have not expired.
As far as the transfer of the risks and rewards of ownership is concerned, the factoring
arrangement needs to be viewed in its substance, rather than its legal form. Natasha Ltd. has
transferred the receivables to Samantha Ltd. for cash of ` 250 crores, and yet, it remains liable
for making good any shortfall between ` 250 crores and the amount collected by Samantha Ltd.
Thus, in substance, Natasha Ltd. is effectively liable for the entire ` 250 crores, although the
shortfall would not be such an amount. Accordingly, Natasha Ltd. retains the credit risk despite
the factoring arrangement entered.
It is also explicitly stated in the agreement that Samantha Ltd. would be liable to pay to
Natasha Ltd. any amount collected more than ` 250 crores, after retaining an amount towards
interest. Thus, Natasha Ltd. retains the potential rewards of full settlement.
A perusal of the above clearly shows that substantially all the risks and rewards continue to remain
with Natasha Ltd., and hence, the trade receivables should continue to appear in the Balance
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Sheet of Natasha Ltd. The immediate payment (i.e. consideration as per the factoring agreement)
of ` 250 crores by Samantha Ltd. to Natasha Ltd. should be regarded as a financial liability, and
be shown as such by Natasha Ltd. in its Balance Sheet.
*****
According to the Conceptual Framework, an asset should be derecognized when control of all, or
part of an asset is lost.
As discussed in Section 6.3 above, in some cases, an entity might appear to transfer an asset or
liability, but derecognition of that asset or liability is not appropriate. For example, if an entity has
apparently transferred an asset but retains exposure to significant positive or negative variations
in the amount of economic benefits that may be produced by the asset, then this sometimes
indicates that the entity might continue to control that asset, which appears to be the case in the
current scenario.
The accounting requirements for derecognition aim to faithfully represent both:
(a) any assets and liabilities retained after the transaction or other event that led to the
derecognition (including any asset or liability acquired, incurred or created as part of the
transaction or other event); and
(b) the change in the entity’s assets and liabilities as a result of that transaction or other event.

Meeting both the above requirements becomes difficult if there is only a part disposal of an asset,
or there is a retention of some exposure to that asset. It is difficult to faithfully represent the legal
form (which is, in this scenario, a decrease in trade receivables under the factoring arrangement)
with the substance of retaining the corresponding risks and rewards.
In view of the difficulties in practical scenarios in meeting the two aims, the Conceptual Framework
does not advocate the use of a control approach or a risk-and-rewards approach to derecognition
in every circumstance.
As such, the treatment as per Ind AS 109, as well as the principles laid down in the Conceptual
Framework do not appear to be in conflict with each other in this case.
Illustration 2:
Explain the criteria in the Conceptual Framework for Financial Reporting for the recognition of an
asset and discuss whether there are inconsistencies with the criteria in Ind AS 38, Intangible
Assets.
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2.54 FINANCIAL REPORTING

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

Para 8 of Ind AS 38, Intangible Assets defines an intangible asset as an identifiable non-monetary
asset without physical substance. Further, Ind AS 38 defines an asset as a resource:
(a) controlled by an entity as a result of past events; and

(b) from which future economic benefits are expected to flow to the entity.
Furthermore, Para 21 of Ind AS 38 states that an intangible asset shall be recognised if, and only
if:
(a) it is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity; and
(b) the cost of the asset can be measured reliably.

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

internally generated intangible asset. The probability of expected future economic benefits must
be based on reasonable and supportable assumptions that represent management’s best estimate
of the set of economic conditions that will exist over the useful life of the asset. Further, as per
Para 33 of Ind AS 38, the probability recognition criterion is always considered to be satisfied for
intangible assets acquired in business combinations. If the recognition criteria are not satisfied,
Ind AS 38 requires the expenditure to be expensed as and when it is incurred.
It is notable that the Conceptual Framework does not prescribe a ‘probability criterion’. As long
as there is a potential to produce economic benefits, even with a low probability, an item can be
recognized as an asset according to the Conceptual Framework. However, in terms of intangible
assets, it could be argued that recognizing an intangible asset having low probability of generating
economic benefits would not be useful to the users of financial statements given that the asset
has no physical substance.
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The recognition criteria and definition of an asset under Ind AS 38 are different as compared to
those outlined in the Conceptual Framework. To put in simple words, the criteria in Ind AS 38 are
more specific, but definitely do provide information that is relevant and a faithful representation.
When viewed from the prism of relevance and faithful representation, the requirements of
Ind AS 38 in terms of recognition appear to be consistent with the Conceptual Framework. Further,
in case of differences between conceptual framework and Ind AS, Ind AS would prevail.
*****
Illustration 3:
The directors of Hind Ltd. are particular about the usefulness of the financial statements. They
have opined that although Ind AS implement a fair value model, Ind AS are failing in reflecting the
usefulness of the financial statements as they do not reflect the financial value of the entity.
Discuss the views of the directors as regards the use of fair value in Ind AS and the fact that the
Ind AS do not reflect the financial value of an entity, making special reference to relevant Ind AS
and the Conceptual Framework.
Solution:
Usage of Fair Value in Ind AS:
Treatment under Ind AS:
The statement of the directors regarding Ind AS implementing a fair value model is not entire
accurate. Although Ind AS do use fair value (and present value), it is not a complete fair value
system. Ind AS are often based on the business model of the entity and on the expectations of
realizing the asset- and liability-related cash flows through operations and transfers.
It is notable that what is preferred is a mixed measurement system, with some items being
measured at fair value while others measured at historical cost.
About Fair Value (Ind AS 113)
Ind AS 113 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. This
price is an exit price.
Ind AS 113 has given consistency to the definition and application of fair value, and this
consistency is applied across other Ind AS, which are generally required to measure fair value in
accordance with Ind AS 113. However, it cannot be implied that Ind AS requires all assets and
liabilities to be measured at fair value. Rather, many entities measure most items at depreciated
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2.56 FINANCIAL REPORTING

historical costs, although the exception being in the case of business combinations, where assets
and liabilities are recorded at fair value on the date of acquisition. In other cases, usage of fair
value is restricted.
Examples of use of fair value in Ind AS:
(a) Ind AS 16 Property, Plant and Equipment permits revaluation through other comprehensive
income, provided it is carried out regularly.
(b) Disclosure of fair value of Investment Property in Ind AS 40, while the companies account for
the same under the cost model.
(c) Ind AS 38 Intangible Assets allows measurement of intangible assets at fair value with
corresponding changes in equity, but only if the assets can be measured reliably by way of
existence of an active market for them.

(d) Ind AS 109 Financial Instruments requires some financial assets and liabilities to be
measured at amortized cost and others at fair value. The measurement basis is largely
determined by the business model for that financial instrument. Where the financial
instruments are carried at fair value, depending on the category and circumstances, the
movement in the fair value (gain or loss) is either recognized in profit or loss or in other
comprehensive income.
Financial value of an entity
Although Ind AS makes use of fair values in the measurement of assets and liabilities, the financial
statements prepared under Ind AS are not intended to reflect the aggregate value of the entity, as
could be the notion among people. As discussed in 2.2 above, the Conceptual Framework
specifically states that general purpose financial statements are not intended to show the value
of a reporting entity. Furthermore, such an attempt would not be fruitful as certain internally
generated intangible assets cannot be recognized under Ind AS. Instead, the objective of general
purpose financial reports is to provide financial information about the reporting entity which would
be useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
It is only in the case of acquisition of an entity by another entity and subsequent consolidation in
group accounts that an entity’s net assets are reported at fair value.
*****
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7.3.3 Implications of enhancing qualitative characteristics for the

selection of measurement basis
As per Section 3.1.4, the usefulness of financial information is enhanced by applying four
enhancing qualitative characteristics – comparability, verifiability, timeliness and
understandability. Of these, timeliness has no specific implications for measurement. Let’s briefly
discuss the implications of the other three:
Comparability: Consistently using the same measurement bases for the same items, either from
period to period within a reporting entity or in a single period across entities, can help make
financial statements more comparable. A change in measurement basis can make financial
statements less understandable. However, a change may be justified if other factors outweigh
the reduction in understandability, for example, if the change results in more relevant information.
If a change is made, users of financial statements may need explanatory information to enable
them to understand the effect of that change.
Understandability: Understandability depends partly on how many different measurement bases
are used and on whether they change over time. In general, if more measurement bases are used
in a set of financial statements, the resulting information becomes more complex and, hence, less
understandable and the totals or subtotals in the balance sheet and the statement of profit and
loss become less informative. However, it could be appropriate to use more measurement bases
if that is necessary to provide useful information.
Verifiability: Verifiability is enhanced by using measurement bases that result in measures that
can be independently corroborated either directly, for example, by observing prices, or indirectly,
for example, by checking inputs to a model. If a measure cannot be verified, users of financial
statements may need explanatory information to enable them to understand how the measure was
determined. In some such cases, it may be necessary to specify the use of a different
measurement basis.

7.4 FACTORS SPECIFIC TO INITIAL MEASUREMENT OF

AN ASSET OR A LIABILITY
As a general principle, the entities should use the same measurement basis for initial recognition
and subsequent measurement. Let’s look at the two possible scenarios of “at-market” transactions
and “off-market” transactions.
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2.58 FINANCIAL REPORTING

7.4.1 Transactions on market terms

Transactions using currency (i.e. cash):
At initial recognition, the cost of an asset acquired, or of a liability incurred is normally similar to
its fair value at that date, unless transaction costs are significant. Therefore, whether historical
cost or current value is used as a measurement basis subsequently, the same basis is also
normally appropriate at initial recognition.
Exchange of asset or liability
When an entity acquires an asset, or incurs a liability, in exchange for transferring another asset
or liability, the initial measure of the asset acquired, or the liability incurred, determines whether
any income or expenses arise from the transaction.
For example, if the asset transferred is carried for ` 100 in the books and the asset acquired is
initially measured at fair value (because it is subsequently measured at fair value), of say ` 120,
the difference of ` 20 is recognised in statement of profit and loss as an income. The reverse will
apply for a liability.

Continuing with the example above, if the asset acquired is subsequently measured at cost, no
income or expenses arise at initial recognition since the asset acquired is initially measured at
cost which is the fair value of the asset transferred i.e. given up, unless income or expenses arise
from the derecognition of the transferred asset or liability, or unless the asset is impaired or the
liability is onerous.

7.4.2 Transactions not on market terms (or off-market transactions)

Assets may be acquired, or liabilities may be incurred, as a result of an event that is not a
transaction on market terms. For example:
(a) the transaction price may be affected by relationships between the parties;
(b) an asset may be granted to the entity free of charge by a government or
(c) an asset may be donated to the entity by another party;
(d) a liability may be imposed by legislation or regulation; or
(e) a liability to pay compensation or a penalty may arise from an act of wrongdoing.
In such cases, measuring the asset acquired, or the liability incurred, at its historical cost may not
provide a faithful representation of the entity’s assets and liabilities and of any income or expenses
arising from the transaction or other event. Hence, it may be appropriate to measure the asset
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acquired, or the liability incurred, at deemed cost. In some such cases, a current value of the
asset or liability is used as a deemed cost on initial recognition and that deemed cost is then used
as a starting point for subsequent measurement at historical cost. Any difference between that
deemed cost and any consideration given or received would be recognised as income or expenses
at initial recognition.
Example 9
If a parent provides an interest free loan to its subsidiary, it is an off-market transaction. The loan,
in parent’s books, should be initially measured at its fair value and the difference between the
loan given and its fair value should be appropriately accounted for (refer Ind AS 109).
When assets are acquired, or liabilities incurred, as a result of an event that is not a transaction
on market terms, all relevant aspects of the transaction or other event need to be identified and
considered. For example, it may be necessary to recognise other assets, other liabilities,
contributions from holders of equity claims or distributions to holders of equity claims to faithfully
represent the substance of the effect of the transaction or other event on the entity’s financial
position and any related effect on the entity’s financial performance.

In the example given above, the difference shall be accounted for as an equity contribution
(classified as “investments”) in the books of the parent.

7.5 MORE THAN ONE MEASUREMENT BASIS

In some cases, consideration of the factors described in sections 7.3 and 7.4 above may lead to
the conclusion that more than one measurement basis is needed for an asset or liability and for
related income and expenses in order to provide relevant information that faithfully represents
both the entity’s financial position and its financial performance.
In most cases, the most understandable way to provide that information is:

(a) to use a single measurement basis both for the asset or liability in the balance sheet and for
related income and expenses in the statement of profit and loss ; and
(b) to provide in the notes additional information applying a different measurement basis.

However, in some cases, that information is more relevant, or results in a more faithful
representation of both the entity’s financial position and its financial performance, through the use
of:
(a) a current value measurement basis for the asset or liability in the balance sheet; and
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(b) a different measurement basis for the related income and expenses in the profit or loss
section of statement of profit and loss
Example 10
An entity may choose to measure an interest bearing financial asset at fair value through other
comprehensive income. In this case, the total fair value change is separated and classified so
that:
(a) the profit or loss section of statement of profit and loss includes the interest income applying
the amortised cost as the measurement basis; and
(b) other comprehensive income includes all the remaining fair value changes.
For more details on the principles used in this example, refer to chapter on financial instruments.

Therefore, the principle for all such cases is stated as below:

The total income or total expenses arising in the period from the change in the current value of
the asset or liability is separated and classified so that:
(a) the profit or loss section of statement of profit and loss includes the income or expenses
measured applying the measurement basis selected for that statement; and
(b) other comprehensive income includes all the remaining income or expenses.
As a result, the accumulated other comprehensive income related to that asset or liability equals
the difference between:
(1) the carrying amount of the asset or liability in the balance sheet; and
(2) the carrying amount that would have been determined applying the measurement basis
selected for the profit or loss section of statement of profit and loss.

7.6 MEASUREMENT OF EQUITY

The total carrying amount of equity (total equity) is not measured directly. It equals the total of
the carrying amounts of all recognised assets less the total of the carrying amounts of all
recognised liabilities.
What ‘equity’ in the financial statements does not represent?
The general purpose financial statements are not designed to show an entity’s value. Hence, the
total carrying amount of equity will not generally equal:
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(a) the aggregate market value of equity claims on the entity;

(b) the amount that could be raised by selling the entity as a whole on a going concern basis; or
(c) the amount that could be raised by selling all of the entity’s assets and settling all of its
liabilities.
Although total equity is not measured directly, it may be appropriate to measure directly the
carrying amount of some individual classes of equity and some components of equity.
Nevertheless, because total equity is measured as a residual, at least one class of equity cannot
be measured directly. Similarly, at least one component of equity cannot be measured directly.
The total carrying amount of an individual class of equity or component of equity is normally
positive but can be negative in some circumstances. Similarly, total equity is generally positive,
but it can be negative, depending on which assets and liabilities are recognised and on how they
are measured.
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UNIT 8
PRESENTATION AND DISCLOSURE
A reporting entity communicates information about its assets, liabilities, equity, income and
expenses by presenting and disclosing information in its financial statements.

8.1 PRESENTATION AND DISCLOSURE OBJECTIVES AND

PRINCIPLES
To facilitate effective communication of information in financial statements, when developing
presentation and disclosure requirements in Ind ASs a balance is needed between:
(a) giving entities the flexibility to provide relevant information that faithfully represents the
entity’s assets, liabilities, equity, income and expenses; and
(b) requiring information that is comparable, both from period to period for a reporting entity and
in a single reporting period across entities.

Effective communication in financial statements is also supported by considering the following

principles:
(a) entity-specific information is more useful than standardised descriptions; and
(b) duplication of information in different parts of the financial statements is usually unnecessary
and can make financial statements less understandable.

8.2 CLASSIFICATION
Classification is the sorting of assets, liabilities, equity, income or expenses on the basis of shared
characteristics for presentation and disclosure purposes. Such characteristics include — but are
not limited to — the nature of the item, its role (or function) within the business activities conducted
by the entity, and how it is measured.
Classifying dissimilar assets, liabilities, equity, income or expenses together can obscure relevant
information, reduce understandability and comparability and may not provide a faithful
representation of what it purports to represent.
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8.2.1 Classification of assets and liabilities

Classification is applied to the unit of account selected for an asset or liability. However, it may
sometimes be appropriate to separate an asset or liability into components that have different
characteristics and to classify those components separately. That would be appropriate when
classifying those components separately would enhance the usefulness of the resulting financial
information. For example, it could be appropriate to separate an asset or liability into current and
non-current components and to classify those components separately.

8.2.2 Offsetting
Offsetting occurs when an entity recognises and measures both an asset and liability as separate
units of account, but groups them into a single net amount in the balance sheet. Offsetting
classifies dissimilar items together and therefore is generally not appropriate.
Offsetting assets and liabilities differs from treating a set of rights and obligations as a single unit
of account.

8.2.3 Classification of equity

To provide useful information, it may be necessary to classify equity claims separately if those
equity claims have different characteristics.
Similarly, to provide useful information, it may be necessary to classify components of equity
separately if some of those components are subject to particular legal, regulatory or other
requirements. For example, in some jurisdictions, an entity is permitted to make distributions to
holders of equity claims only if the entity has sufficient reserves specified as distributable.
Separate presentation or disclosure of those reserves may provide useful information.

8.2.4 Classification of income and expenses

Classification is applied to:
(a) income and expenses resulting from the unit of account selected for an asset or liability; or
(b) components of such income and expenses if those components have different characteristics
and are identified separately. For example, a change in the current value of an asset can
include the effects of value changes and the accrual of interest (see tables in section 7.2). It
would be appropriate to classify those components separately if doing so would enhance the
usefulness of the resulting financial information.
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2.64
2.64 FINANCIAL REPORTING

8.2.5 Profit or loss and other comprehensive income

Income and expenses are classified and included either:
(a) in the profit or loss section of statement of profit and loss; or
(b) outside the profit or loss section of statement of profit and loss, in other comprehensive
income.
Because the profit or loss section of statement of profit and loss is the primary source of
information about an entity’s financial performance for the period, all income and expenses are,
in principle, included in that statement. However, in formulating Ind AS, the ICAI may decide in
exceptional circumstances that income or expenses arising from a change in the current value of
an asset or liability are to be included in other comprehensive income when doing so would result
in the profit or loss section of statement of profit and loss providing more relevant information, or
providing a more faithful representation of the entity’s financial performance for that period.
In principle, income and expenses included in other comprehensive income in one period are
reclassified from other comprehensive income into the profit or loss section of statement of profit
and loss in a future period when doing so results in the profit or loss section of statement of profit
and loss providing more relevant information or providing a more faithful representation of the
entity’s financial performance for that future period. However, if, for example, there is no clear
basis for identifying the period in which reclassification would have that result, or the amount that
should be reclassified, the ICAI may, in formulating Ind AS, decide that income and expenses
included in other comprehensive income are not to be subsequently reclassified.

8.3 AGGREGATION
Aggregation is adding together of assets, liabilities, equity, income or expenses that have shared
characteristics and are included in the same classification.
Aggregation makes information more useful by summarising a large volume of detail. However,
aggregation conceals some of that detail. Hence, a balance needs to be found so that relevant
information is not obscured either by a large amount of insignificant detail or by excessive
aggregation.
Different levels of aggregation may be needed in different parts of the financial statements. For
example, typically, the balance sheet and the statement of profit and loss provide summarised
information and more detailed information is provided in the notes.
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.65
2.65

Illustration 4:
Everest Ltd. is a listed company having investments in various subsidiaries. In its annual financial
statements for the year ending 31 st March 20X2 as well as 31st March 20X3, Everest Ltd. classified
Kanchenjunga Ltd. a subsidiary as ‘held-for-sale’ and presented it as a discontinued operation.
On 1 st November 20X1, the shareholders had authorized the management to sell all of its holding
in Kanchenjunga Ltd. within the year. In the year to 31st March 20X2, the management made a
public announcement of its intention to sell the investment but did not actively try to sell the
subsidiary as it was still operational within the Everest group.
Certain organizational changes were made by Everest Ltd. during the year to 31 st March 20X3,
thereby resulting in additional activities being transferred to Kanchenjunga Ltd. Additionally,
during the year ending 31 st March 20X3, there had been draft agreements and some
correspondence with investment bankers, which showed in principle only that Kanchenjunga was
still for sale.
Discuss whether the classification of Kanchenjunga Ltd. as held for sale and its presentation as a
discontinued operation is appropriate, by referring to the principles of the relevant Ind AS and
evaluating the treatment in the context of the Conceptual Framework for Financial Reporting.
Solution:
Kanchenjunga Ltd. is a disposal group in accordance with Ind AS 105, Non-current Assets Held
for Sale and Discontinued Operations. Disposal group can be defined as 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.
Para 6 of Ind AS 105 provides that a disposal group shall be classified as held for sale if its
carrying amount will be recovered principally through a sale transaction rather than through
continuing use. Ind AS 105 is particularly strict as far as the application of held for sale criteria is
concerned, and often the decision to sell an asset or a disposal group is made well before the
criteria are met.
Thus, as per Ind AS 105, for the asset (or disposal group) to be classified as held for sale, it must
be available for immediate sale in its present condition subject only to terms that are usual and
customary for sales of such assets (or disposal groups) and its sale must be highly probable.
For the sale to be highly probable:
 The appropriate level of management must be committed to a plan to sell the asset (or
disposal group).
 An active programme to locate a buyer and complete the plan must have been initiated.
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2.66 FINANCIAL REPORTING

 The asset (or disposal group) must be actively marketed for sale at a price that is
reasonable in relation to its current fair value.

 The sale should be expected to qualify for recognition as a completed sale within one year
from the date of classification.
 It is unlikely that significant changes to the plan will be made or that the plan will be
withdrawn.
In the given case, the draft agreements and correspondence with investment bankers are not
specific enough to fit in the points above to prove that the criteria for held for sale was met at that
date. Additional information would be needed to confirm that the subsidiary was available for
immediate sale, and that it was being actively marketed at an appropriate price so as to satisfy
the criteria in the year to 31 st March 20X2.
Further, the organizational changes made by Everest Ltd. in the year 20X2-20X3 are a good
indicator that Kanchenjunga Ltd. was not available for immediate sale in its present condition at
the point of classification. The fact that additional activities have been given to Kanchenjunga
Ltd. indicate that the change wasn’t insignificant. The shareholders had authorized for a year
from 1 st November 20X1. There is no evidence that this authorization extended beyond
1 st November 20X2.
Conclusion:
Based on the information provided in the given case, it appears that Kanchenjunga Ltd. should
not be classified by Everest Ltd. as a subsidiary held for sale. Instead, the results of the subsidiary
should be reported as a continuing operation in the financial statements for the year ending
31st March 20X2 and 31st March 20X3.
Evaluation of treatment in context of the Conceptual Framework
The Conceptual Framework states that the users need information to allow them to assess the
amount, timing and uncertainty of the prospects for future net cash inflows. Highlighting the
results of discontinued operations separately equips users with the information that is relevant to
this assessment as the discontinued operation will not contribute to cash flows in the future.

If a company has made a firm decision to sell the subsidiary, it could be argued that the subsidiary
should be classified as discontinued operation, even if the criteria to classify it as ‘held for sale’
as per Ind AS 105 have not been met, because this information would be more useful to users.
However, Ind AS 105 criteria was developed with high degree of strictness on classification.
Accordingly, this decision could be argued to be in conflict with the Conceptual Framework.
*****
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.67
2.67

UNIT 9
CONCEPTS OF CAPITAL AND CAPITAL
MAINTENANCE

9.1 CONCEPTS OF CAPITAL

Concepts of capital

Financial concept
Physical concept
[Invested money / purchasing
power] [Operating capability]
Net assets or Equity Productive capacity

The selection of the appropriate concept of capital by an entity should be based on the needs of
the users of its financial statements. Thus, a financial concept of capital should be adopted if the
users of financial statements are primarily concerned with the maintenance of nominal invested
capital or the purchasing power of invested capital. If, however, the main concern of users is with
the operating capability of the entity, a physical concept of capital should be used. The concept
chosen indicates the goal to be attained in determining profit, even though there may be some
measurement difficulties in making the concept operational.

9.2 CONCEPTS OF CAPITAL MAINTENANCE AND THE

DETERMINATION OF PROFIT
The concept of capital maintenance is concerned with how an entity defines the capital that it
seeks to maintain. It provides the linkage between the concepts of capital and the concepts of
profit because it provides the point of reference by which profit is measured. In general terms, an
entity has maintained its capital if it has as much capital at the end of the period as it had at the
beginning of the period. Any amount over and above that required to maintain the capital at the
beginning of the period is profit.
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2.68 FINANCIAL REPORTING

There are two concepts of capital maintenance:

♦ Financial capital maintenance: Under this concept a profit is earned only if the financial (or
money) amount of the net assets at the end of the period exceeds the financial (or money)
amount of net assets at the beginning of the period, after excluding any distributions to,
and contributions from, owners during the period. Financial capital maintenance can be
measured in either nominal monetary units or units of constant purchasing power.
♦ Physical capital maintenance: Under this concept a profit is earned only if the physical
productive capacity (or operating capability) of the entity (or the resources or funds needed
to achieve that capacity) at the end of the period exceeds the physical productive capacity
at the beginning of the period, after excluding any distributions to, and contributions from,
owners during the period.
The principal difference between the two concepts of capital maintenance is the treatment of the
effects of changes in the prices of assets and liabilities of the entity.
Under the concept of financial capital maintenance where capital is defined in terms of nominal
monetary units, profit represents the increase in nominal money capital over the period. Thus,
increases in the prices of assets held over the period, conventionally referred to as holding gains,
are, conceptually, profits. They may not be recognised as such, however, until the assets are
disposed of in an exchange transaction. When the concept of financial capital maintenance is
defined in terms of constant purchasing power units, profit represents the increase in invested
purchasing power over the period. Thus, only that part of the increase in the prices of assets that
exceeds the increase in the general level of prices is regarded as profit. The rest of the increase
is treated as a capital maintenance adjustment and, hence, as part of equity.
Under the concept of physical capital maintenance when capital is defined in terms of the physical
productive capacity, profit represents the increase in that capital over the period. All price
changes affecting the assets and liabilities of the entity are viewed as changes in the measurement
of the physical productive capacity of the entity; hence, they are treated as capital maintenance
adjustments that are part of equity and not as profit.

9.3 CAPITAL MAINTENANCE ADJUSTMENTS

The revaluation or restatement of assets and liabilities gives rise to increases or decreases in
equity. While these increases or decreases meet the definition of income and expenses, they are
not included in the income statement under certain concepts of capital maintenance. Instead
these items are included in equity as capital maintenance adjustments or revaluation reserves.
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.69
2.69

Example 11
A trader commenced business on 1.1.20X1 with ` 12,000 represented by 6,000 units of a
certain product at ` 2 per unit. During the year 20X1, he sold these units at ` 3 per unit and
had withdrawn ` 6,000. Thus:
Opening Equity = ` 12,000 represented by 6,000 units at ` 2 per unit.
Closing Equity = ` 12,000 (` 18,000 – ` 6,000) represented entirely by cash.
Retained Profit = ` 12,000 – ` 12,000 = Nil
The trader can start year 20X2 by purchasing 6,000 units at ` 2 per unit once again for selling
them at ` 3 per unit. The whole process can repeat endlessly if there is no change in purchase
price of the product.
Example 12
In the previous example, suppose that the average price indices at the beginning and at the
end of year are 100 and 120 respectively.

Opening Equity = ` 12,000 represented by 6,000 units at ` 2 per unit.

Opening equity at closing price = (` 12,000 / 100) x 120 = ` 14,400 (6,000 x ` 2.40)
Closing Equity at closing price = ` 12,000 (` 18,000 – ` 6,000) represented entirely by cash.

Retained Profit = ` 12,000 – ` 14,400 = (-) ` 2,400

The negative retained profit indicates that the trader has failed to maintain his capital. The
available fund ` 12,000 is not sufficient to buy 6,000 units again at increased price ` 2.40 per
unit. In fact, he should have restricted his drawings to ` 3,600 (` 6,000 – ` 2,400).
Had the trader withdrawn ` 3,600 instead of ` 6,000, he would have left with ` 14,400, the fund
required to buy 6,000 units at ` 2.40 per unit.
Example 13 (Physical Capital Maintenance)
In the previous example, suppose that the price of the product at the end of year is ` 2.50 per
unit. In other words, the specific price index applicable to the product is 125.
Current cost of opening stock = (` 12,000 / 100) x 125 = 6,000 x ` 2.50 = ` 15,000

Closing cash after adjustment of stock at current costs = ` 9,000 [(` 6,000 x 2.5) – ` 6,000]
Opening equity at closing current costs = ` 15,000
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2.70
2.70 FINANCIAL REPORTING

Closing equity at closing current costs = ` 9,000

Retained Profit = ` 9,000 – ` 15,000 = (-) ` 6,000
The negative retained profit indicates that the trader has failed to maintain his capital. The
available fund ` 9,000 is not sufficient to buy 6,000 units again at increased price ` 2.50 per
unit. There should not be any drawings in the year.
Had the trader withdrawn nothing during the year instead of ` 6,000, he would have left with
` 15,000, the fund required to buy 6,000 units at ` 2.50 per unit.
Capital maintenance can be computed under all three bases as shown below:
Financial Capital Maintenance at historical costs

` `
Closing Capital (at historical cost) 12,000
Less: Capital to be maintained
Opening capital (At historical cost) 12,000
Introduction (At historical cost) NIL (12,000)
Retained profit 12,000
Financial Capital Maintenance at current purchasing power:

` `
Closing Capital (at closing price) 12,000
Less: Capital to be maintained
Opening capital (at closing price) 14,400
Introduction (at closing price) NIL (14,400)
Retained profit (2,400)
Physical Capital Maintenance:

` `
Closing Capital (at current cost) 9,000
Less: Capital to be maintained
Opening capital (at current cost) 15,000
Introduction (at current cost) NIL (15,000)
Retained profit (6,000)
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.71
2.71

TEST YOUR KNOWLEDGE

Questions
1. The directors of Jayant Ltd. have received the following email from its majority shareholder:
To: Directors of Jayant Ltd.
Re: Measurement

I recently read an article published in the financial press about the ‘mixed measurement
approach’ that is used by lots of companies. I hope Jayant Ltd. does not follow such an
approach because ‘mixed’ seems to imply ‘inconsistent’. I believe that consistency is of
paramount importance, and hence feel it would be better to measure everything in a uniform
manner. It would be appreciated if you could provide further information at the next annual
general meeting on measurement bases, covering what approach is taken by Jayant Ltd. and
why, and the potential effect such an approach has on the investors trying to analyse the
financial statements.
Prepare notes for the directors of Jayant Ltd. to discuss the issue raised in the shareholders’
email with reference to the Conceptual Framework wherever appropriate.
2. Defense Innovators Limited is a public sector undertaking and is engaged in the construction
of warships and submarines. XYZ Private Limited approached Defense Innovators Limited
for construction of "specially designed" ships for it, which will be used by XYZ Private Limited
for transportation of specific goods. The offer was accepted by the Defense Innovators
Limited and both the companies entered into an agreement for the construction and delivery
of 3 specially designed ships on 'Fixed Price' basis with variable component in respect to
certain items.
Base and depot (B & D) spares for all three ships shall be procured by Defense Innovators
Limited and will be paid on the cost of the item with certain percentage.
The contract states that "certain equipment" out of variable cost items, will be supplied by
XYZ Private Limited at 'free of cost' for installation on board of ship. It is, therefore, to be
noted as under:
(i) Some equipment are procured by Defense Innovators Limited in the presence of the
XYZ Private Limited's representative for technical scrutiny as well as negotiating the
prices. The vendors of these equipment are paid by Defense Innovators Limited. The
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2.72
2.72 FINANCIAL REPORTING

cost of the equipment along with the cost of installation and profit thereon is claimed
and reimbursed by XYZ Private Limited to Defense Innovators Limited.

(ii) There are certain other equipment for which orders are directly placed and also paid
by the XYZ Private Limited. These equipment are known as 'Buyer Furnished
Equipment (BFE)' and are delivered to the company 'free of cost' for installing in the
ship. The labour cost of Installation of these are already included in the price
component of the contract. BFEs are returned to the buyer after completion of the
ship.

The period required for construction of one ship was approximately four years.
Whether the cost of Buyer Furnished Equipment's (BFE's) supplied by XYZ Private Limited
to Defense Innovators Limited for-installing the same in the ships can be considered as
'inventory' by Defense Innovators Limited and then on delivery of ship will be recognised as
revenue in its books of account? Elaborate.

Answers
1. ‘Mixed measurement’ approach implies that a company selects different measurement bases
(e.g. historical cost or fair value) for its various assets and liabilities, rather than using one
single measurement basis for all items. The measurement basis so selected should reflect
the type of entity and the sector in which it operates and the business model that the entity
adopts.
There are criticisms of the mixed measurement approach, particularly under the IFRS regime,
because investors think that if different measurement bases are used for assets and liabilities,
the resulting figures could lack relevance or exhibit little meaning.
It is however important to note that figures of items in the financial statements cannot be
derived by following a one-size-fits-all approach. Such an approach may not provide relevant
information to users. A particular measurement basis may be easier to understand, more
verifiable and less costly to implement. Therefore, to state that ‘mixed measurement’
approach is ‘inconsistent’ is a poor argument. A mixed approach may actually provide more
relevant information to the stakeholders.
The Conceptual Framework confirms the allowance of the usage of a mixed measurement
approach in developing standards. The measurement methods included in the standards are
those which the standard-setters believe provide the most relevant information and which
most faithfully represent the underlying transaction or event. Based on the reactions to the
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CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING UNDER IND AS 2.73
2.73

convergence to Ind AS, it feels that most investors feel this approach is consistent with their
analysis of financial statements. Thus, the arguments against a mixed measurement are far
outweighed by the greater relevance achieved by such measurement bases.
Jayant Ltd. prepares its financial statements under Ind AS, and therefore applies the
measurement bases permitted in Ind AS. Ind AS adopt a mixed measurement basis, which
includes current value (fair value, value in use, fulfilment value and current cost) and historical
cost.
Where an Ind AS allows a choice of measurement basis, the directors of Jayant Ltd. must
exercise judgment as to which basis will provide the most useful information for its primary
users. Furthermore, when selecting a measurement basis, measurement uncertainty should
also be considered. The Conceptual Framework states that for some estimates, a high level
of measurement uncertainty may outweigh other factors to such an extent that the resulting
information may be of little relevance.
2. Defense Innovators Limited is a public sector undertaking and is engaged in the
construction of warships and submarines. XYZ Private Limited approached Defense
Innovators Limited for construction of "specially designed" ships for it, which will be used
by XYZ Private Limited for transportation of specific goods. The offer was accepted by
Defense Innovators Limited and both the companies entered into an agreement for the
construction and delivery of 3 specially designed ships on 'Fixed Price' basis with variable
component in respect to certain items.
Base and depot (B & D) spares for all three ships shall be procured by Defense Innovators
Limited and will be paid on the cost of the item with certain percentage.
The contract states that "certain equipment" out of variable cost items, will be supplied by
XYZ Private Limited 'free of cost' for installation on board of ship. It is, therefore, to be
noted as under:
(i) Some equipment are procured by Defense Innovators Limited in the presence of
XYZ Private Limited's representative for technical scrutiny as well as negotiating the
prices. The vendors of these equipment are paid by Defense Innovators Limited.
The cost of the equipment along with the cost of installation and profit thereon is
claimed and reimbursed by XYZ Private Limited to Defense Innovators Limited.
(ii) There are certain other equipment for which orders are directly placed and also paid
for by XYZ Private Limited. These equipment are known as 'Buyer Furnished
Equipment (BFE)' and are delivered to the company 'free of cost' for installing in the
ship. The labour cost of Installation of these are already included in the price
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2.74
2.74 FINANCIAL REPORTING

component of the contract. BFEs are returned to the buyer after completion of the
ship.
The period required for construction of one ship was approximately four years.
Whether the cost of Buyer Furnished Equipment's (BFE's) supplied by XYZ Private Limited
to Defense Innovators Limited for-installing the same in the ships can be considered as
'inventory' by Defense Innovators Limited and then on delivery of ship will be recognised
as revenue in its books of account? Elaborate.
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CHAPTER 3
IND AS ON PRESENTATION
OF GENERAL PURPOSE
FINANCIAL STATEMENTS
UNIT 1 :
INDIAN ACCOUNTING STANDARD 1 :
PRESENTATION OF FINANCIAL STATEMENTS

LEARNING OUTCOMES
After studying this unit, you will be able to:
 List the scope and objective of Ind AS 1
 Define the relevant terms used in Ind AS 1
 Explain the purpose of financial statements
 Illustrate the complete set of financial statements
 Describe the general features of the financial statements
 Follow the structure and content of the financial statements
 Identify the various components of financial statements
 Prepare the disclosures to be made in the financial statements
 Discuss the significant differences in Ind AS 1 vis-à-vis AS 1
 Reconcile the carve out in Ind AS 1 from IAS 1.
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3.2 2.2 FINANCIAL REPORTING

UNIT OVERVIEW

• Objective
• Scope
• Definitions
Ind AS 1

• Purpose of financial statements

• Complete set of financial statements
Financial • General features
Statements

• Identification of the financial statements

• Components of financial statements
Structure and
Content
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INDIAN ACCOUNTING STANDARD3 1 . 3.3 3

1.1 IND AS 1 ‘PRESENTATION OF FINANCIAL

STATEMENTS’ - INTRODUCTION
Ind AS 1 is a basic standard, which prescribes the overall requirements for the presentation of
general-purpose financial statements and guidelines for their structure, i.e., components of
financial statements, viz., balance sheet, statement of profit and loss (including other
comprehensive income), statement of cash flows and notes comprising significant accounting
policies, etc. Further, the standard prescribes the minimum disclosures that are to be made in
the financial statements and explains the general features of the financial statements. The
presentation requirements prescribed in the standard are supplemented by the recognition,
measurement and disclosure requirements set out in other Ind AS for specific transactions and
other events.

1.2 OBJECTIVE
This standard prescribes the basis for presentation of general-purpose financial statements to
ensure comparability:
(a) with the entity’s financial statements of previous periods and
(b) with the financial statements of other entities.
It sets out overall requirements for the presentation of financial statements, guidelines for their
structure and minimum requirements for their content.

1.3 SCOPE
• This standard applies to all types of entities including those that present:
(a) consolidated financial statements in accordance with Ind AS 110 ‘Consolidated
Financial Statements’; and

(b) separate financial statements in accordance with Ind AS 27 ‘Separate Financial

Statements’.
• This standard does not apply to structure and content of condensed interim financial
statements prepared in accordance with Ind AS 34 except for para 15 to 35 of Ind AS 1.
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3.4 2.4 FINANCIAL REPORTING

• This Standard uses terminology that is suitable for profit-oriented entities, including public
sector business entities.

• If entities with not for-profit activities in the private sector or the public sector apply this
Standard, they may need to amend the descriptions used for line items in the financial
statements and for the financial statements themselves.

• Similarly, entities that do not have equity as defined in Ind AS 32 Financial Instruments:
Presentation (e.g. some mutual funds) and entities whose share capital is not equity (e.g.
some co-operative entities) may need to adapt the financial statement presentation of
members’ or unit holders’ interests.

1.4 DEFINITIONS
1. Accounting policies are defined in paragraph 5 of Ind AS 8 Accounting Policies, Changes
in Accounting Estimates and Errors, and the term is used in this Standard with the same
meaning.
2. General purpose financial statements (referred to as ‘financial statements’) are those
intended to meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs.

3. Impracticable: Applying a requirement is impracticable when the entity cannot apply it after
making every reasonable effort to do so.
4. Indian Accounting Standards (Ind AS) are Standards prescribed under Section 133 of the
Companies Act, 2013.
5. Material
Information is material if omitting, misstating or obscuring it could reasonably be expected to
influence decisions that the primary users of general-purpose financial statements make on
the basis of those financial statements, which provide financial information about a specific
reporting entity.
Materiality depends on the nature or magnitude of information, or both. An entity assesses
whether information, either individually or in combination with other information, is material in
the context of its financial statements taken as a whole.

Information is obscured if it is communicated in a way that would have a similar effect for
primary users of financial statements to omitting or misstating that information.
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INDIAN ACCOUNTING STANDARD3 1 . 3.5 5

Examples of circumstances that may result in material information being obscured:

(a) information regarding a material item, transaction or other event is disclosed in the
financial statements but the language used is vague or unclear;
(b) information regarding a material item, transaction or other event is scattered
throughout the financial statements;

(c) dissimilar items, transactions or other events are inappropriately aggregated;

(d) similar items, transactions or other events are inappropriately disaggregated; and
(e) the understandability of the financial statements is reduced as a result of material
information being hidden by immaterial information to the extent that a primary user is
unable to determine what information is material.
Assessing whether information could reasonably be expected to influence decisions made by
the primary users of a specific reporting entity’s general purpose financial statements requires
an entity to consider the characteristics of those users while also considering the entity’s own
circumstances.
Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial
statements for much of the financial information they need. Consequently, they are the
primary users to whom general purpose financial statements are directed. Financial
statements are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information diligently. At times, even
well-informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.
6. Notes contain information in addition to that presented in the balance sheet, statement of
profit and loss, other comprehensive income, statement of changes in equity and statement
of cash flows. Notes provide narrative descriptions or disaggregation of items presented in
those statements and information about items that do not qualify for recognition in those
statements.
7. Owners are holders of instruments classified as equity.
8. Profit or loss is the total of income less expenses, excluding the components of other
comprehensive income.
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3.6 2.6 FINANCIAL REPORTING

9. Reclassification adjustments are amounts reclassified to profit or loss in the current period
that were recognised in other comprehensive income in the current or previous periods.

10. Total comprehensive income is the change in equity during a period resulting from
transactions and other events, other than those changes resulting from transactions with
owners in their capacity as owners.

Total comprehensive income comprises all components of ‘profit or loss’ and ‘other
comprehensive income’.

11. Other comprehensive income comprises items of income and expense (including
reclassification adjustments) that are not recognised in profit or loss as required or permitted
by other Ind AS.
The components of Other Comprehensive Income include the following:

S.No. Components Reference

1. Changes in revaluation surplus Ind AS 16 ‘Property, Plant and
Equipment’ and Ind AS 38
‘Intangible Assets’
2. Re-measurements of defined benefit plans Ind AS 19, Employee Benefits
3. Gains and losses arising from translating the Ind AS 21 ‘The Effects of
financial statements of a foreign operation Changes in Foreign Exchange
Rates’
4. Gains and losses from investments in equity Paragraph 5.7.5 of Ind AS
instruments designated at fair value through 109, Financial Instruments
other comprehensive income
5. Gains and losses on financial assets measured Paragraph 4.1.2A of Ind AS
at fair value through other comprehensive 109
income
6. The effective portion of gains and losses on Paragraph 5.7.5 of Ind AS 109
hedging instruments in a cash flow hedge and
the gains and losses on hedging instruments
that hedge investments in equity instruments
measured at fair value through other
comprehensive income
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INDIAN ACCOUNTING STANDARD3 1 . 3.7 7

7. For liabilities designated as at fair value Paragraph 5.7.7 of Ind AS 109

through profit or loss, the amount of the change
in fair value that is attributable to changes in the
liability’s credit risk
8. Changes in the value of the time value of Ind AS 109
options when separating the intrinsic value and
time value of an option contract and designating
as the hedging instrument only the changes in
the intrinsic value
9. Changes in the value of the forward elements Ind AS 109
of forward contracts when separating the
forward element and spot element of a forward
contract and designating as the hedging
instrument only the changes in the spot
element, and changes in the value of the
foreign currency basis spread of a financial
instrument when excluding it from the
designation of that financial instrument as the
hedging instrument

1.5 PURPOSE OF FINANCIAL STATEMENTS

The objective of financial statements is to provide information about the financial position, financial
performance, and cash flows of an entity that is useful to a wide range of users in making economic
decisions. To meet the objective, financial statements provide information about an entity’s:
• assets;

• liabilities;
• equity;
• income and expenses, including gains and losses;

• contributions by and distributions to owners in their capacity as owners; and

• cash flows.
These information, along with other information in the notes, assists users of financial statements
in predicting the entity’s future cash flows and, in particular, their timing and certainty.
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3.8 2.8 FINANCIAL REPORTING

1.6 COMPLETE SET OF FINANCIAL STATEMENTS

A complete set of financial statements comprises:

• a balance sheet as at the end of the period;

• a statement of profit and loss for the period;

• statement of changes in equity for the period;

• a statement of cash flows for the period;

• notes, comprising material accounting policy information and other explanatory information;

• comparative information in respect of the preceding period;

• a balance sheet as at the beginning of the preceding period when an entity applies an
accounting policy retrospectively or makes a retrospective restatements of items in its
financial statements, or when it reclassifies items in its financial statements.
An entity shall present a single statement of profit and loss, with profit or loss and other
comprehensive income presented in two sections. The sections shall be presented together, with
the profit or loss section presented first followed directly by the other comprehensive income
section.
An entity shall present with equal prominence all of the financial statements in a complete set of
financial statements.

Many entities also present reports and statements (generally in annual reports) such as financial
reviews by management, environmental reports, and value added statements that are outside the
financial statements. Such reports and statements that are presented outside the financial
statements are outside the scope of Ind AS.
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INDIAN ACCOUNTING STANDARD3 1 . 3.9 9

Complete set of financial statements

includes

A balance A statement A statement A statement Notes, comprising material

sheet of profit and of changes of cash accounting policy information
loss in equity flows and other explanatory
information

Comparative information for

As at the end narrative and descriptive
of the period For the period Of the preceding information shall be given if it
period (comparative is relevant for understanding
information for all the current period’s financial
Of the preceding period amounts reported in statements
(comparative information for the current period’s
all amounts reported in the financial
current period’s financial statements)
statements)

At the beginning of the preceding period when

• an entity applies an accounting policy retrospectively; or
• makes a retrospective restatement of items in its financial statements; or
• it reclassifies items in its financial statements.

Note:
1. An entity shall present a single statement of profit and loss, with profit or loss and other
comprehensive income (OCI) presented in two sections. The sections shall be presented
together, with the profit or loss section presented first followed directly by the other
comprehensive income section.
2. Reports and statements presented outside financial statements are outside the scope of
Ind AS.
3. An entity is not required to present the related notes to the opening balance sheet as at
the beginning of the preceding period.
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3.10 2.10 FINANCIAL REPORTING

1.7 GENERAL FEATURES OF FINANCIAL STATEMENTS

General Features

Presentatio Going Accrual Materiality Offsetting Frequency

n of True concern basis of and of
and Fair accounting aggregation
View and
compliance
Consistency of Comparative
with Ind AS
presentation information

Change in accounting policy, Additional Minimum

retrospective restatement or comparative comparative
reclassification information information

1.7.1 Presentation of True and Fair View and compliance with Ind AS
Financial statements shall present a true and fair view of the financial position, financial
performance and cash flows of an entity. Presentation of true and fair view requires the faithful
representation of the effects of transactions, other events and conditions in accordance with the
definitions and recognition criteria for assets, liabilities, income and expenses set out in the
Conceptual Framework. The application of Ind AS, with additional disclosure when necessary, is
presumed to result in financial statements that present a true and fair view.
1.7.1.1 An explicit and unreserved statement
An entity whose financial statements comply with Ind AS shall make an explicit and unreserved
statement of such compliance in the notes.
An entity shall not describe financial statements as complying with Ind AS unless they comply with
all the requirements of Ind AS. There may be disagreement between the Company and its auditor
on the applicability of any Ind AS or any particular requirement of any Ind AS and accordingly
auditor may qualify the audit report. Even in such a situation, the financial statements shall be
assumed to be Ind AS compliant.
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INDIAN ACCOUNTING STANDARD3 1 . 3.111 1

In virtually all circumstances, presentation of a true and fair view is achieved by compliance with
applicable Ind AS. Presentation of a true and fair view also requires an entity:

(a) to select and apply accounting policies in accordance with Ind AS 8 ‘Accounting Policies,
Changes in Accounting Estimates and Errors’. Ind AS 8 sets out a hierarchy of authoritative
guidance that management considers in the absence of an Ind AS that specifically applies to
an item.
(b) to present information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information.
(c) to provide additional disclosures when compliance with the specific requirements in Ind AS
is insufficient to enable users to understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial performance.

An extract from the annual report of Tata Consultancy Services Limited for the year ended 31st
March, 2022:
Notes forming part of Standalone Financial Statements
2) Statement of compliance
These standalone financial statements have been prepared in accordance with the Indian
Accounting Standards (referred to as “Ind AS”) as prescribed under section 133 of the
Companies Act, 2013 read with the Companies (Indian Accounting Standards) Rules as
amended from time to time.

1.7.1.2 Inappropriate Accounting Policies

An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting
policies used or by notes or explanatory material.
1.7.1.3 Departure from the Requirements of an Ind AS — Whether Permissible?
In the extremely rare circumstances in which management concludes that compliance with a
requirement in an Ind AS would be so misleading that it would conflict with the objective of financial
statements set out in the Conceptual Framework, the entity shall depart from that requirement if
the relevant regulatory framework requires, or otherwise does not prohibit, such a departure.
When an entity departs from a requirement of an Ind AS, it shall disclose:
(a) that management has concluded that the financial statements present a true and fair view of
the entity’s financial position, financial performance and cash flows;
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3.12 2.12 FINANCIAL REPORTING

(b) that it has complied with applicable Ind AS, except that it has departed from a particular
requirement to present a true and fair view;

(c) the title of the Ind AS from which the entity has departed, the nature of the departure, including
the treatment that the Ind AS would require, the reason why that treatment would be so
misleading in the circumstances that it would conflict with the objective of financial statements
set out in the Conceptual Framework, and the treatment adopted; and
(d) for each period presented, the financial effect of the departure on each item in the financial
statements that would have been reported in complying with the requirement.
When an entity has departed from a requirement of an Ind AS in a prior period, and that departure
affects the amounts recognised in the financial statements for the current period, it shall make the
disclosures given above. For example, when an entity departed in a prior period from a
requirement in an Ind AS for the measurement of assets or liabilities and that departure affects
the measurement of changes in assets and liabilities recognised in the current period’s financial
statements.
In the extremely rare circumstances in which management concludes that compliance with a
requirement in an Ind AS would be so misleading that it would conflict with the objective of financial
statements set out in the Conceptual Framework, but the relevant regulatory framework prohibits
departure from the requirement, the entity shall to the maximum extent possible, reduce the
perceived misleading aspects of compliance by disclosing:
(a) the title of the Ind AS in question, the nature of the requirement, and the reason why
management has concluded that complying with that requirement is so misleading in the
circumstances that it conflicts with the objective of financial statements set out in the
Conceptual Framework; and

(b) for each period presented, the adjustments to each item in the financial statements that
management has concluded would be necessary to present a true and fair view.
An item of information would conflict with the objective of financial statements when it does not
represent faithfully the transactions, other events and conditions that it either purports to represent
or could reasonably be expected to represent and, consequently, it would be likely to influence
economic decisions made by users of financial statements. When assessing whether complying
with a specific requirement in an Ind AS would be so misleading that it would conflict with the
objective of financial statements set out in the Framework, management considers:
(a) why the objective of financial statements is not achieved in the particular circumstances; and
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INDIAN ACCOUNTING STANDARD3 1 . 3.131 3

(b) how the entity’s circumstances differ from those of other entities that comply with the
requirement. If other entities in similar circumstances comply with the requirement, there is
a rebuttable presumption that the entity’s compliance with the requirement would not be so
misleading that it would conflict with the objective of financial statements set out in the
Framework.

Presentation of True and Fair View and compliance with Ind AS

Of the financial position Of the financial performance Of the cash flows of an entity

Presentation of a true and fair view requires an entity to

To select and To present information, in a To provide additional

apply accounting manner that provides relevant, disclosures, if required, to
policies as per reliable, comparable and enable users to understand
Ind AS 8 understandable information the impact of particular item

When an entity departs from a requirement of an Ind AS (in extremely rare

circumstances), it shall disclose

Management’s Management’s • The title of the Ind AS For each

conclusion that compliance departed period
the financial with applicable • The nature of the departure presented, the
statements Ind AS, except • The treatment that the Ind financial effect
present a true departure from AS would require of the
and fair view a particular departure on
• The reason why that
requirement to each item in
treatment would be so
present a true the financial
misleading; and

Note: An entity cannot rectify inappropriate accounting policies either by disclosure of

the accounting policies used or by notes or explanatory material.
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3.14 2.14 FINANCIAL REPORTING

Illustration 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 contains a qualification because of disagreement on
application of Accounting Standard(s), as the preparation of financial statements is the
responsibility of the entity’s management and not the auditors. In case the management has a
bona fide reason to believe that it has complied with all Ind AS, it can make an explicit and
unreserved statement of compliance with Ind AS.
*****
1.7.2 Going concern
Financial statements prepared under Ind AS should be prepared 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. Management is required to assess, at the time of preparing the financial statements,
the entity's ability to continue as a going concern, and this assessment should cover the entity's
prospects for at least 12 months from the end of the reporting period. The 12-month period for
considering the entity's future is a minimum requirement; an entity cannot, for example, prepare
its financial statements on a going concern basis if it intends to cease operations 18 months from
the end of the reporting period.
The assessment of the entity's status as a going concern will often be straight forward. A profitable
entity with no financing problems will generally be a going concern. In other cases, management
might need to consider very carefully the entity's ability to meet its liabilities as they fall due.
Detailed cash flow and profit forecasts might be required to satisfy management that the entity is
a going concern.
The following are examples of events or conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going concern. This listing is neither all-
inclusive nor does the existence of one or more of the items always signify that a material
uncertainty exists:
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INDIAN ACCOUNTING STANDARD3 1 . 3.151 5

• Net liability or net current liability position;

• Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets;
• Indications of withdrawal of financial support by creditors;
• Negative operating cash flows indicated by historical or prospective financial statements;

• Adverse key financial ratios;

• Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows;
• Arrears or discontinuance of dividends;
• Inability to pay creditors on due dates;
• Inability to comply with the terms of loan agreements;
• Change from credit to cash-on-delivery transactions with suppliers;
• Inability to obtain financing for essential new product development or other essential
investments;
• Loss of key management without replacement;
• Loss of a major market, key customer(s), franchise, license, or principal supplier(s);
• Emergence of a highly successful competitor;
• Changes in law or regulation or government policy expected to adversely affect the entity.
If management has significant doubt of the entity’s ability to continue as a going concern, the
uncertainties should be disclosed.
In case the financial statements are not prepared on a going concern basis, the entity should
disclose the basis of preparation of financial statements and also the reason why the entity is not
regarded as a going concern.
Events that occur after the reporting period might indicate that the entity is no longer a going
concern. An entity does not prepare its financial statements on a going concern basis if
management’s post-year end assessment indicates that it is not a going concern. Any financial
statements that are prepared after that assessment (including the financial statements in respect
of which management are making the assessment) are not prepared on a going concern basis.
This is consistent with Ind AS 10, which requires a fundamental change to the basis of accounting
when the going concern assumption is no longer appropriate.
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3.16 2.16 FINANCIAL REPORTING

Illustration 2
Entity XYZ is a large manufacturer of plastic products for the local market. On 1st April, 20X6 the
newly elected government unexpectedly abolished all import tariffs, including the 40 per cent tariff
on all imported plastic products. Many other economic reforms implemented by the new
government contributed to the value of the country’s currency ` appreciating significantly against
most other currencies. The currency appreciation severely reduced the competitiveness of the
entity’s products.
Before 20X6 entity XYZ was profitable. However, because it was unable to compete with low
priced imports, entity XYZ went into losses. As at 31st March, 20X7, entity XYZ’s equity was
` 1,000. During the second quarter of financial year ended 31st March 20X7, the management
restructured entity’s operations. That restructuring helped reduce losses for the third and fourth
quarters to ` 400 and ` 380, respectively. During the year ended 31 st March, 20X7, entity XYZ
reported a loss of ` 4,000. In January 20X7, the local plastic industry and labour union lobbied
government to reinstate tariffs on plastic. On 15 th March, 20X7, the government announced that
it would reintroduce limited plastic import tariffs at 10 percent in 20X8. However, it emphasised
that those tariffs would not be as protective as the tariffs enacted by the previous government. In
its latest economic forecast, the government 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 the entity XYZ undertook a going concern assessment at 31st March, 20X7.
Management projects / forecasts that imposition of a 10 per cent tariff on the import of plastic
products 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 31st March, 20X7 annual financial statements?
Solution
Going concern is a general feature to be considered while preparing the 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.
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INDIAN ACCOUNTING STANDARD3 1 . 3.171 7

While assessing the going concern assumption, an entity is required to take into consideration all
factors covering atleast 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:
Extracts from the notes to entity XYZ’s 31st March, 20X7 financial statements
Note 1: Basis of preparation
On the basis of management’s assessment at 31st March 20X7, the financial statements have
been prepared on the going concern basis. However, management’s assessment assumes that
the government will reintroduce limited plastic import tariffs and that the currency exchange
rate will remain constant. On 15 th March 20X7, the government announced that limited import
tariffs will be imposed in 20X8. However, the government emphasised that the tariff would not
be as protective as the 40 percent tariff in effect before 20X7.

Provided that ` does not strengthen, management projects / forecasts that a 10 percent tariff
on all plastic products would result in entity XYZ returning to profitability. As at
31st March, 20X7 entity XYZ had net assets of ` 1,000. If import tariffs are not imposed and
currency exchange rates remain unchanged, entity XYZ’s liabilities could exceed its assets by
the end of financial year 20X7-20X8. On the basis of their assessment of these factors,
management believes that entity XYZ is a going concern.

*****
1.7.3 Accrual basis of accounting
• An entity shall prepare its financial statements, except for cash flow information, using the
accrual basis of accounting.
• When the accrual basis of accounting is used, an entity recognises items as assets,
liabilities, equity, income and expenses (the elements of financial statements) when they
satisfy the definitions and recognition criteria for those elements in the Conceptual
Framework.
1.7.4 Materiality and aggregation
• An entity shall present separately each material class of similar items. An entity shall
present separately items of a dissimilar nature or function unless they are immaterial except
when required by law.
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3.18 2.18 FINANCIAL REPORTING

• Financial statements result from processing large numbers of transactions or other events
that are aggregated into classes according to their nature or function. The final stage in
the process of aggregation and classification is the presentation of condensed and
classified data, which form line items in the financial statements. If a line item is not
individually material, it is aggregated with other items either in those statements or in the
notes. An item that is not sufficiently material to warrant separate presentation in those
statements may warrant separate presentation in the notes.
• An entity shall not reduce the understandability of its financial statements by obscuring
material information with immaterial information or by aggregating material items that have
different natures or functions.
• An entity need not provide a specific disclosure required by an Ind AS if the information is
not material except when required by law.
Examples 1 - 3
1. Entity A has made a wrong classification of assets between 2 categories of plant
and machinery. Such a classification would not be material in amount if it affected
two categories of plant or machinery, however, it might be material if it changes the
classification between a non-current and a current asset category.

2. Losses from bad debts or pilferage that could be shrugged off as routine by a large
business may threaten the continued existence of a small business.
3. An error in inventory valuation may be material in a small enterprise for which it
may cut earnings by half but could be immaterial in an enterprise for which it might
make a barely perceptible ripple in the earnings.

*****
1.7.5 Offsetting
• An entity shall not offset assets and liabilities or income and expenses, unless required or
permitted by an Ind AS.
• An entity reports separately both assets and liabilities, and income and expenses.
Measuring assets net of valuation allowances — for example, obsolescence allowances on
inventories and doubtful debts allowances on receivables—is not offsetting.
• Ind AS 115, ‘Revenue from Contracts with Customers’, requires an entity to measure
revenue from contracts with customers at the amount of consideration to which the entity
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INDIAN ACCOUNTING STANDARD3 1 . 3.191 9

expects to be entitled in exchange for transferring promised goods or services. For

example, the amount of revenue recognized reflects any trade discounts and volume
rebates the entity allows. An entity undertakes, in the course of its ordinary activities, other
transactions that do not generate revenue but are incidental to the main revenue-generating
activities. An entity presents the results of such transactions, when this presentation
reflects the substance of the transaction or other event, by netting any income with related
expenses arising on the same transaction.

Examples 4 and 5
4. An entity presents gains and losses on the disposal of non-current assets, including
investments and operating assets, by deducting from the amount of consideration
on disposal the carrying amount of the asset and related selling expenses; and
5. An entity may net expenditure related to a provision that is recognised in accordance
with Ind AS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’, and
reimbursed under a contractual arrangement with a third party (for example, a
supplier’s warranty agreement) against the related reimbursement.

• In addition, an entity presents on a net basis gains and losses arising from a group of
similar transactions, for example, foreign exchange gains and losses or gains and losses
arising on financial instruments held for trading. However, an entity presents such gains
and losses separately if they are material.
Illustration 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 guidance regarding offsetting, 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 understand the transaction.
Accordingly, 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.
*****
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3.20 2.20 FINANCIAL REPORTING

1.7.6 Frequency of reporting

• An entity shall present a complete set of financial statements (including comparative
information) at least annually.

• When an entity changes the end of its reporting period and presents financial statements
for a period longer or shorter than one year, an entity shall disclose, in addition to the period
covered by the financial statements:

♦ the reason for using a longer or shorter period, and

♦ the fact that amounts presented in the financial statements are not entirely
comparable.

Example 6
In 20X8 entity ‘Superb’ was acquired by entity ‘Happy Go Luck’. To align its reporting date with
that of its parent, Superb changed the end of its annual reporting period from 31 st January to
31st March. Consequently, entity Superb’s reporting period for the year ended 31 st March, 20X8
is 14 months. On the basis of these facts, the following disclosure would be appropriate:
Extract from the notes to entity Superb’s 31st March, 20X8 financial statements:
Note 1
Basis of preparation and accounting policies
Reporting period
To align the entity’s reporting period with that of its parent (Happy Go Luck), the entity changed
the end of its reporting period from 31st January to 31 st March. Amounts presented for the period
ended 31 st March, 20X8 are for 14 months. Comparative figures are for a 12 months period.
Consequently, comparative amounts for the statement of comprehensive income, statement of
changes in equity, statement of cash flows and related notes are not entirely comparable.

1.7.7 Comparative information

1.7.7.1 Minimum comparative information
• An entity should present comparative information in respect of the preceding period for all
amounts reported in the current period’s financial statements except when Ind AS permit
or require otherwise.
• Comparative information for narrative and descriptive information should be included if it is
relevant to understand the current period’s financial statements.
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INDIAN ACCOUNTING STANDARD3 1 . 3.212 1

For example, in the current period an entity discloses details of a legal dispute whose
outcome was uncertain at the end of the immediately preceding reporting period and that is
yet to be resolved.

• An entity shall present, as a minimum:

♦ 2 Balance Sheets
♦ 2 Statement of Profit and Loss
♦ 2 Statement of Cash Flows
♦ 2 Statement of Changes in Equity and
♦ Related Notes.
1.7.7.2 Additional comparative information
An entity may present comparative information in addition to the minimum comparative financial
statements required by Ind AS, as long as that information is prepared in accordance with Ind AS.
This comparative information may consist of one or more statements referred to in ‘Complete set
of financial statements’ but need not comprise a complete set of financial statements. When this
is the case, the entity shall present related note information for those additional statements.

Example 7
An entity may present a third statement of profit or loss (thereby presenting the current period,
the preceding period and one additional comparative period). However, the entity is not required
to present a third balance sheet, a third statement of cash flows or a third statement of changes
in equity (ie an additional financial statement comparative). The entity is required to present, in
the notes to the financial statements, the comparative information related to that additional
statement of profit or loss and other comprehensive income.

Illustration 4
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 31 st 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 20X1-20X2 annual
financial statements. Does the restatement require an opening statement of financial position
(that is, an additional statement of financial position) as of 1 st April, 20X0?
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3.22 2.22 FINANCIAL REPORTING

Solution
An additional statement of financial position is not required, because the acquisition had no impact
on the entity’s financial position at 1st April, 20X0.
*****
1.7.7.3 Change in accounting policy, retrospective restatement or reclassification
• When an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statements or reclassifies items in its financial
statements and the retrospective application, retrospective restatement or the
reclassification has a material effect on the information in the balance sheet at the
beginning of the preceding period, it shall present, as a minimum, three balance sheets,
two of each of the other statements, and related notes. An entity presents balance sheets
as at
♦ the end of the current period,
♦ the end of the preceding period, and

♦ the beginning of the preceding period.

• When an entity is required to present an additional balance sheet as at the beginning of
the preceding period, it must disclose the information as required by Ind AS 8 and also the
information as explained in subsequent points. However, it need not present the related
notes to the opening balance sheet as at the beginning of the preceding period.
• When the entity changes the presentation or classification of items in its financial
statements, the entity shall reclassify comparative amounts unless reclassification is
impracticable.
• When the entity reclassifies comparative amounts, the entity shall disclose:

♦ the nature of the reclassification;

♦ the amount of each item or class of items that is reclassified; and
♦ the reason for the reclassification.

• When it is impracticable to reclassify comparative amounts, an entity shall disclose:

♦ the reason for not reclassifying the amounts, and
♦ the nature of the adjustments that would have been made if the amounts had been
reclassified.
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INDIAN ACCOUNTING STANDARD3 1 . 3.232 3

1.7.8 Consistency of presentation

An entity shall retain the presentation and classification of items in the financial statements from
one period to the next unless:
• it is apparent, following a significant change in the nature of the entity’s operations or a
review of its financial statements, that another presentation or classification would be more
appropriate having regard to the criteria for the selection and application of accounting
policies in Ind AS 8; or
• an Ind AS requires a change in presentation.

Example 8
A significant acquisition or disposal, or a review of the presentation of the financial statements,
might suggest that the financial statements need to be presented differently. An entity changes
the presentation of its financial statements only if the changed presentation provides information
that is reliable and more relevant to users of the financial statements and the revised structure is
likely to continue, so that comparability is not impaired. When making such changes in
presentation, an entity reclassifies its comparative information.

1.8 STRUCTURE AND CONTENT

Ind AS 1 requires particular disclosures in the balance sheet or in the statement of profit and loss,
or in the statement of changes in equity and requires disclosure of other line items either in those
statements or in the notes. Ind AS 7, Statement of Cash Flows, sets out requirements for the
presentation of cash flow information.
1.8.1 Identification of Financial Statements
• An entity shall clearly identify the financial statements and distinguish them from other
information in the same published document. Ind AS apply only to financial statements, and
not necessarily to other information presented in an annual report, a regulatory filing, or
another document though they may be useful to users.

• An entity shall display the following information prominently:

♦ the name of the reporting entity or other means of identification, and any change in
that information from the end of the preceding reporting period

♦ whether the financial statements are of an individual entity or a group of entities;

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3.24 2.24 FINANCIAL REPORTING

♦ the date of end of reporting date or the period covered by the financial statements or
notes

♦ the presentation currency

♦ the level of rounding used in presenting amounts in the financial statements.
♦ An entity meets above requirements by presenting appropriate headings for pages,
statements, notes, columns and the like. Judgement is required in determining the
best way of presenting such information.
For example, when an entity presents the financial statements electronically separate
pages are not always used; an entity then presents the above items to ensure that the
information included in the financial statements can be understood.
♦ An entity often makes financial statements more understandable by presenting
information in thousands or millions of units of the presentation currency. This is
acceptable as long as the entity discloses the level of rounding and does not omit
material information.

As per Schedule III of the Companies Act 2013, depending upon the total income of
the company, the figures appearing in the financial statements shall be rounded off
as below:
 Less than one hundred crore rupees - To the nearest hundreds, thousands,
lakhs or millions, or decimals thereof.
 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.

1.8.2 Balance Sheet

At a minimum, the balance sheet shall include following line items:

a Property, plant and equipment

b Investment property

c Intangible assets

d Financial assets (excluding amounts shown under (e, h &i)

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INDIAN ACCOUNTING STANDARD3 1 . 3.252 5

da Portfolios of contracts as per Ind AS 117 that are assets, disaggregated as required
by Ind AS 117

e Investments accounted for using the equity method

f Biological assets

g Inventories

h Trade and other receivables

i Cash and cash equivalents

j The total of assets classified as held for sale and assets included in disposal groups
classified as held for sale in accordance with Ind AS 105 ‘Non-current Assets Held for
Sale and Discontinued Operations’

k Trade and other payables

l Provisions

m Financial liabilities (excluding amounts shown under k and l)

ma portfolios of contracts within the scope of Ind AS 117 that are liabilities,
disaggregated as required by Ind AS 117

n Liabilities and assets for current tax, as defined in Ind AS 12 ‘Income Taxes’

o Deferred tax liabilities and deferred tax assets, as defined in Ind AS 12

p Liabilities included in disposal groups classified as held for sale in accordance with
Ind AS 105

q Non-controlling interests, presented within equity

r Issued capital and reserves attributable to owners of the parent

Additional line items, headings and subtotals in the balance sheet should be presented when such
presentation is relevant to an understanding of the entity’s financial position.

The descriptions of the line items, and the order in which they are shown, can be adapted
according to the entity's nature and its transactions.
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3.26 2.26 FINANCIAL REPORTING

Example 9
Financial institutions would amend the descriptions of line items to provide information that is
relevant to the operations of financial institutions.

1.8.2.1 Distinction between Current / Non-current

Entities preparing Ind AS financial statements are required to present the face of the balance
sheet, differentiating between current and non-current assets and between current and non-
current liabilities.
When an entity presents current and non-current assets, and current and non-current liabilities,
as separate classifications in its balance sheet, it shall not classify deferred tax assets (liabilities)
as current assets (liabilities).
An entity shall present current and non-current assets, and current and non-current liabilities, as
separate classifications in its balance sheet except when a presentation based on liquidity
provides information that is reliable and more relevant. When that exception applies, an entity
shall present all assets and liabilities in order of liquidity.
Whichever method of presentation is adopted, an entity shall disclose the amount expected to be
recovered or settled after more than twelve months for each asset and liability line item that
combines amounts expected to be recovered or settled:
(a) no more than twelve months after the reporting period, and
(b) more than twelve months after the reporting period.
When an entity supplies goods or services within a clearly identifiable operating cycle, separate
classification of current and non-current assets and liabilities in the balance sheet provides useful
information by distinguishing the net assets that are continuously circulating as working capital
from those used in the entity’s long-term operations. It also highlights assets that are expected
to be realised within the current operating cycle, and liabilities that are due for settlement within
the same period.
When an entity presents current and non-current assets, and current and non-current liabilities,
as separate classifications in its balance sheet, it shall not classify deferred tax assets (liabilities)
as current assets (liabilities).

Note:
1. Financial institutions may present assets and liabilities in increasing or decreasing order of
liquidity if the presentation is reliable and more relevant than a current / non-current
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INDIAN ACCOUNTING STANDARD3 1 . 3.272 7

presentation. This is because such entity does not supply goods or services within a clearly
identifiable operating cycle.
2. An entity is permitted to present some of its assets and liabilities using a current / non-
current classification and others in order of liquidity. The need for a mixed basis of
presentation might arise when an entity has diverse operations.
1.8.2.2 Current Assets
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 (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.
An entity shall classify all other assets as non-current.
This Standard uses the term ‘non-current’ to include tangible, intangible and financial assets of a
long-term nature. It does not prohibit the use of alternative descriptions as long as the meaning
is clear.

An extract from the annual report of Reliance Industries Limited for the year ended 31st March,
2022:
Notes to the Standalone Financial Statements for the year ended 31st March, 2022
B.2 Summary of Significant Accounting Policies
(a) Current and Non-current Classification
The Company presents assets and liabilities in the Balance Sheet based on Current/ Non-
Current classification.
An asset is treated as current when it is –
- Expected to be realised or intended to be sold or consumed in normal operating
cycle;
- Held primarily for the purpose of trading;
- Expected to be realised within twelve months after the reporting period, or
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3.28 2.28 FINANCIAL REPORTING

- Cash or cash equivalent unless restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting period.
All other assets are classified as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.

1.8.2.3 Operating Cycle

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. Current assets include assets (such as
inventories and trade receivables) that are sold, consumed or realised as part of the normal
operating cycle even when they are not expected to be realised within twelve months after the
reporting period. Current assets also include assets held primarily for the purpose of trading.
For example
• Some financial assets classified as held for trading in accordance with Ind AS 109
• Current portion of non-current financial assets.

Examples 10 -13
10. An entity produces whisky from barley, water and yeast in a 24-month distillation
process. At the end of the reporting period the entity has one month’s supply of
barley and yeast raw materials, 800 barrels of partly distilled whisky and 200 barrels
of distilled whisky.

All raw materials (barley and yeast) work in process (partly distilled whisky) and finished
goods (distilled whisky) are inventories. The raw materials are expected to be realised (ie
turned into cash after being processed into whisky) in the entity’s normal operating cycle.
Therefore, even though the realisation is expected to take place more than twelve months
after the end of the reporting period, the raw materials, work in progress and finished goods
are current assets.

11. An entity owns a machine with which it manufactures goods for sale. It also owns
the building in which it carries out its commercial activities.
The machine and the building are non-current assets because:
♦ they are not cash or cash equivalents;
♦ they are not expected to be realised or consumed in the entity’s normal operating cycle;
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INDIAN ACCOUNTING STANDARD3 1 . 3.292 9

♦ they are not held for the purpose of trading; and

♦ they are not expected to be realised within twelve months of the end of the reporting
period.
12. On 31 st December 20X2, an entity replaced a machine in its production line. The
replaced machine was sold to a competitor for ` 3,00,000. Payment is due 15 months
after the end of the reporting period.
The receivable is a non-current asset because:
♦ it is not cash or a cash equivalent;
♦ it is not expected to be realised or consumed in the entity’s normal operating cycle;
♦ it is not held for the purpose of trading; and
♦ it is not expected to be realised within twelve months of the end of the reporting period.

Note: If payment was due in less than twelve months from the end of the reporting period,
it would have been classified as a current asset.
13. On 1 st April, 20X2, XYZ Ltd invested ` 15,00,000 surplus funds in corporate bonds
that bear interest at 8 percent per year. Interest is payable on the corporate bonds
on 1 st April, of each year. The principal is repayable in three annual instalments of
` 5,00,000 starting from 1 st April, 20X3.

In its statement of financial position at 31st March, 20X3, the entity must present the
` 1,20,000 accrued interest and ` 5,00,000 current portion of the non-current loan (i.e. the
portion repayable on 31st March, 20X3) as current assets because they are expected to be
realised within twelve months of the end of the reporting period.
The instalments of ` 10,00,000 due later than twelve months after the end of the reporting
period is presented as a non-current asset because it is not cash or a cash equivalent as
it is not expected to be realised or consumed in the entity’s normal operating cycle, it is not
held for the purpose of trading and it is not expected to be realised within twelve months of
the end of the reporting period.

Illustration 5
X Ltd. provides you the following information:
Raw material stock holding period : 3 months
Work-in-progress holding period : 1 month
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3.30 2.30 FINANCIAL REPORTING

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.
*****
Illustration 6
Inventory or trade receivables of X Ltd. are normally realised in 15 months. How should X Ltd.
classify such inventory / trade receivables: current or non-current if these are expected to be
realised within 15 months?
Solution
These should be classified as current.
*****
Illustration 7
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 realised within normal operating cycle, i.e.,
16 months, both the inventory as well as debtors should be classified as current.
*****
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INDIAN ACCOUNTING STANDARD3 1 . 3.313 1

1.8.2.4 Current Liabilities

• 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 its settlement by the issue of equity instruments do not
affect its classification.

An extract from the annual report of Reliance Industries Limited for the year ended 31 st
March, 2022:
Notes to the Standalone Financial Statements for the year ended 31st March, 2022
B.2 Summary of Significant Accounting Policies
(a) Current and Non-Current Classification
The Company presents assets and liabilities in the Balance Sheet based on Current/ Non-
Current classification.
A liability is current when:
- It is expected to be settled in normal operating cycle;
- It is held primarily for the purpose of trading;
- It is due to be settled within twelve months after the reporting period, or
- There is no unconditional right to defer the settlement of the liability for at least
twelve months after the reporting period.
The Company classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.

• An entity shall classify all other liabilities as non-current.

• 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.
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3.32 2.32 FINANCIAL REPORTING

• 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.

• The same normal operating cycle applies to the classification of an entity’s assets and
liabilities.
• When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be
twelve months.
• Other current liabilities which are not settled as part of the normal operating cycle, but are
due for settlement within twelve months after the reporting period or held primarily for the
purpose of trading.

Examples are some financial liabilities classified as held for trading in accordance with
Ind AS 109, bank overdrafts, and the current portion of non-current financial liabilities,
dividends payable, income taxes and other non-trade payables.

• Financial liabilities that provide financing on a long-term basis (i.e. are not part of the
working capital used in the entity’s normal operating cycle) and are not due for settlement
within twelve months after the reporting period are non-current liabilities.
• An entity classifies its financial liabilities as current when they are due to be settled within
twelve months after the reporting period, even if:
♦ the original term was for a period longer than twelve months, and
♦ an agreement to refinance, or to reschedule payments, on a long-term basis is
completed after the reporting period and before the financial statements are
approved for issue.
• If an entity expects, and has the discretion, to refinance or roll over an obligation for at
least twelve months after the reporting period under an existing loan facility, it classifies
the obligation as non-current, even if it would otherwise be due within a shorter period.
However, 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.
• When an entity breaches a provision of a long-term loan arrangement on or before the end
of the reporting period with the effect that the liability becomes payable on demand, the
entity does not classify the liability as current, even if the lender agreed, after the reporting
period and before the approval of the financial statements for issue, not to demand payment
as a consequence of the breach.
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INDIAN ACCOUNTING STANDARD3 1 . 3.333 3

• 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.
Illustration 8
On 1st April, 20X3, Charming Ltd issued 1,00,000 ` 10 bonds for ` 10,00,000. On 1 st April, each
year interest at the fixed rate of 8 percent per year is payable on outstanding capital amount of
the bonds (ie the first payment will be made on 1 st April, 20X4). On 1st April each year (i.e from
1 st 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 31 st March, 20X4. How should this be presented
in the 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 1 st April, 20X4) as current liabilities. The ` 9,00,000
due later than 12 months after the end of the reporting period is presented as a non-current
liability.
*****
Illustration 9
X Ltd provides you the following information:
Raw material stock holding period : 3 months
Work-in-progress holding period : 1 month

Finished goods holding period : 5 months

Debtors collection period : 5 months
The trade payables of the Company are paid in 12.5 months. Should these be classified as current
or non-current?
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.
*****
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3.34 2.34 FINANCIAL REPORTING

Illustration 10
Entity A has two different businesses, real estate and manufacturing 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 15 months. Under such circumstance where an
entity has different operating cycles for different types of businesses, how classification into
current and non-current be made?
Solution
As per paragraph 66(a) of Ind AS 1, an asset should be classified as current if an entity expects
to realise 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 businesses 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.
*****
Illustration 11
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) Electricity Deposit - 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 realise the asset within twelve months from the end of the reporting period. Hence,
electricity deposit should be classified as a non-current asset.
(b) Tender Deposit/Earnest Money Deposit [EMD] -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
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INDIAN ACCOUNTING STANDARD3 1 . 3.353 5

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 realise the deposit
within a period of twelve months, it should be classified as current otherwise non-current.
(c) GST Deposit paid under dispute or GST payment under dispute -Classification of GST
deposit 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 realise the
same within a period of twelve months. In the case the entity expects these to be realised
within 12 months, it should classify such amounts paid as current otherwise these should be
classified as non-current.
*****
Illustration 12
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 payment 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.”
In accordance with the above, income received in advance would be classified as current liability
since it is a part of the working capital, which the entity expects to earn within its normal operating
cycle.
*****
Illustration 13
An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months from
the end of the reporting period. Prior to the end of the reporting period, the entity and the bank
enter into an arrangement, whereby the existing outstanding loan will, unconditionally, roll into the
new facility which expires after a period of 5 years.

(a) How should such loan be classified in the balance sheet of the entity?
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3.36 2.36 FINANCIAL REPORTING

(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 liability for at
least twelve months after the reporting period, the loan should be classified as non-current.
(b) Yes, the answer will be different if the arrangement for roll over is agreed upon after the end
of the reporting period, since assessment is required to be made based on terms of the
existing loan facility. As at the end of the reporting period, the entity does not have an
unconditional right to defer settlement of the liability for at least twelve months after the
reporting period. Hence the loan is to be classified as current.
(c) Yes, loan facility arranged with new bank cannot be treated as refinancing, as the loan with
the earlier bank would have to be settled which may coincide with loan facility arranged with
a new bank. In this case, loan has to be repaid within a period of 9 months from the end of
the reporting period, therefore, it will be classified as current liability.
(d) Yes, the answer will be different and the loan should be classified as current. This is because,
as per paragraph 73 of Ind AS 1, when refinancing or rolling over the obligation is not at the
discretion of the entity (for example, there is no arrangement for refinancing), the entity does
not consider the potential to refinance the obligation and classifies the obligation as current.
*****
Illustration 14
In December 20X1 an entity entered into a loan agreement with a bank. The loan is repayable in
three equal annual instalments starting from December 20X5. One of the loan covenants is that
an amount equivalent to the loan amount should be contributed by promoters by 24 th March 20X2,
failing which the loan becomes payable on demand. As on 24 th March 20X2, the entity has not
been able to get the promoter’s contribution. On 25 th March, 20X2, the entity approached the
bank and obtained a grace period up to 30 th June, 20X2 to get the promoter’s contribution.
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INDIAN ACCOUNTING STANDARD3 1 . 3.373 7

The bank cannot demand immediate repayment during the grace period. The annual reporting
period of the entity ends on 31st March, 20X2.
(a) As on 31st March, 20X2, 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 20X2, the entity approached the bank and got the compliance date
extended up to 30 th June, 20X2 for getting promoter’s contribution. In this case will the
loan classification as on 31st March, 20X2 be different from (a) above?
Solution
(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 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 31st March 20X2, 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 30th June 20X2,
i.e., after the reporting date. Consequently, in the absence of actual breach of the loan
covenant as on 31st March 20X2, the loan will retain its classification as non-current.
*****
Illustration 15
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.
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3.38 2.38 FINANCIAL REPORTING

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 repayment
for 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.
*****
1.8.2.5 Information to be provided in the Balance Sheet or in the notes
• An entity shall disclose, either in the balance sheet or in the notes, further sub-
classifications of the line items presented, classified in a manner appropriate to the entity’s
operations.
• The detail provided in sub-classifications depends on the requirements of Ind AS and on
the size, nature and function of the amounts involved. The disclosures vary for each item,
for example:
(i) items of property, plant and equipment are disaggregated into classes in accordance
with Ind AS 16;
(ii) receivables are disaggregated into amounts receivable from trade customers,
receivables from related parties, prepayments and other amounts;
(iii) inventories are disaggregated, in accordance with Ind AS 2, Inventories, into
classifications such as merchandise, production supplies, materials, work in progress
and finished goods;
(iv) provisions are disaggregated into provisions for employee benefits and other items;
and
(v) equity capital and reserves are disaggregated into various classes, such as paid-in
capital, share premium and reserves.
• An entity shall disclose the following, either in the balance sheet or in the statement of
changes in equity which is part of the balance sheet, or in the notes:
(i) for each class of share capital:
(a) the number of shares authorised;
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INDIAN ACCOUNTING STANDARD3 1 . 3.393 9

(b) the number of shares issued and fully paid, and issued but not fully paid;
(c) par value per share, or that the shares have no par value;
(d) a reconciliation of the number of shares
(e) the rights, preferences and restrictions attaching to that class including
restrictions on the distribution of dividends and the repayment of capital;

(f) shares in the entity held by the entity or by its subsidiaries or associates; and
(g) shares reserved for issue under options and contracts for the sale of shares,
including terms and amounts; and

(ii) a description of the nature and purpose of each reserve within equity.
• An entity whose capital is not limited by shares e.g., a company limited by guarantee, shall
disclose information, showing changes during the period in each category of equity interest,
and the rights, preferences and restrictions attaching to each category of equity interest.
Illustrated format of Balance Sheet
Balance Sheet (with hypothetical figures given for ease in understanding) ` '000

As at As at
31 st March 20X6 31 st March 20X5
Assets
Non-current Assets
Property, plant and equipment 1,37,048 97,023
Capital work in progress 17,450 3,100
Investment property 7,419 7,179
Goodwill 8,670 4,530
Other Intangible Assets 12,033 10,895
Intangible assets under development 2,365 1,965
Financial assets
Investments 38,576 32,416
Loans 1,033 850
Trade Receivables 3,238 2,376
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3.40 2.40 FINANCIAL REPORTING

Deferred tax assets (net) 4,598 2,774

Other non-current assets 21,586 10,565
Total Non-Current Assets (A) 2,54,016 1,73,673
Current Assets
Inventories 67,878 61,062
Financial assets
Loans 623 546
Trade receivables 30,712 30,078
Derivative instruments
Cash and cash equivalents 25,031 7,035
Investments 10,695 9,170
Other financial assets 2,856 2,093
Prepayments 459 543
1,38,254 1,10,527
Assets classified as held for sale 220 19,310
Total Current Assets (B) 1,38,474 1,29,837
Total Assets (A+B) 3,92,490 3,03,510

As at As at
31 st March 31 st March
20X6 20X5
Equity and liabilities
Equity
Equity share capital 22,400 12,600
Other equity
Equity component of compound financial instruments 372
Reserves and surplus 2,16,092 1,60,796
Other reserves 4,233 3,215
Equity attributable to equity holders of the parent 2,43,097 1,76,611
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INDIAN ACCOUNTING STANDARD3 1 . 3.414 1

Non-Controlling interest 24,742 16,248

Total equity (C) 2,67,839 1,92,859
Non-current liabilities
Financial liabilities
Borrowings 41,455 35,565
Other financial liabilities 1,670 199
Long term provision 241 91
Deferred Income - Government grants 2,352 2,550
Net employee defined benefit liabilities 7,296 5,076
Deferred tax liabilities (net) 12,085 9,864
Other non-current liabilities
Total non-current liabilities (D) 65,099 53,345
Current Liabilities
Financial liabilities
Borrowings 2,807 2,685
Trade payables (Other than micro enterprises and 38,011 28,977
small enterprises)
Other current financial liabilities 8,909 8,837
Deferred income - Government grants 938 1,017
Employee benefit obligations 430 378
Deferred revenue 4,152 3,986
Liabilities for current tax (net) 2,803 1,905
Provisions 1,502 531
Liabilities directly associated with the assets classified as
held for distribution 8,990
Total current liabilities (E) 59,552 57,306
Total liabilities (F=D+E) 1,24,651 1,10,651
Total equity and liabilities (C+F) 3,92,490 3,03,510
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3.42 2.42 FINANCIAL REPORTING

1.8.3 Statement of Profit and Loss

• The statement of profit and loss shall present, in addition to the profit or loss and other
comprehensive income sections:

(a) profit or loss;

(b) total other comprehensive income;
(c) comprehensive income for the period, being the total of profit or loss and other
comprehensive income.
• An entity shall present (in case of consolidated statement of profit and loss) the following
items as allocation of profit or loss and other comprehensive income for the period:
(a) profit or loss for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
(b) comprehensive income for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
1.8.3.1 Information to be presented in the profit or loss section of the Statement of
Profit and Loss
In addition to items required by other Ind AS, the profit or loss section of the statement of profit
and loss should include line items that present the following amounts for the period:
(a) revenue, presenting separately

(i) interest revenue calculated using the effective interest method; and
(ii) insurance revenue (see Ind AS 117)
(b) gains and losses arising from the derecognition of financial assets measured at amortised
cost
(c) insurance service expenses from contracts issued within the scope of Ind AS 117
(d) income or expenses from reinsurance contracts held
(e) finance costs;
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INDIAN ACCOUNTING STANDARD3 1 . 3.434 3

(f) impairment losses (including reversals of impairment losses or impairment gains) determined
in accordance with Section 5.5 of Ind AS 109

(g) insurance finance income or expenses from contracts issued within the scope of
Ind AS 117
(h) finance income or expenses from reinsurance contracts held (see Ind AS 117)

(i) share of the profit or loss of associates and joint ventures accounted for using the equity
method;
(j) if financial asset is reclassified out of the amortised cost measurement category so that it is
measured at fair value through profit or loss, any gain or loss arising from a difference
between the previous amortised cost of the financial asset and its fair value at the
reclassification date;

(k) if a financial asset is reclassified out of the fair value through other comprehensive income
measurement category so that it is measured at fair value through profit or loss, any
cumulative gain or loss previously recognized in other comprehensive income that is
reclassified to profit or loss
(l) tax expense;
(m) a single amount for the total discontinued operations
1.8.3.2 Information to be presented in the Other Comprehensive Income section
• The other comprehensive income section should present line items for the amounts of other
comprehensive income classified by nature and grouped into those that, in accordance with
other Ind AS:
(i) will not be reclassified subsequently to profit or loss; and
(ii) will be reclassified subsequently to profit or loss when specific conditions are met.
• An entity shall present additional line items, headings and subtotals in the statement of
profit and loss, when such presentation is relevant to an understanding of the entity’s
financial performance.
• When an entity presents subtotals, those subtotals shall:

(a) be comprised of line items made up of amounts recognised and measured in

accordance with Ind AS;
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3.44 2.44 FINANCIAL REPORTING

(b) be presented and labelled in a manner that makes the line items that constitute the
sub total clear and understandable;

(c) be consistent from period to period; and

(d) not be displayed with more prominence than the subtotals and totals required in Ind
AS for the statement of profit and loss.

• An entity shall present the line items in the statement of profit and loss that reconcile any
sub totals presented with the subtotals or totals required in Ind AS for such statement.
• An entity shall not present any items of income or expense as extraordinary items, in the
statement of profit and loss or in the notes.
1.8.3.3 Profit or loss for the period
With regard to profit or loss for the period, the Standard requires the recognition of all items of
income and expense in a period in profit or loss unless an Ind AS requires or permits otherwise.
Illustrative format of Statement of Profit and Loss (only profit or loss section of statement of
profit and loss)
Statement of Profit and Loss for the year ended 31 st March 20X6

31 st March 31 st March
20X6 20X5

` '000 ` '000

Revenue from operations 6,33,124 4,86,316

Other Income 6,704 6,676

Total Income 6,39,828 4,92,992

Expenses

Cost of raw material consumed 2,43,929 2,34,262

Purchase of stock-in-trade 56,300 51,700

(Increase)/decrease in inventories of finished goods,

Stock-in-Trade and work-in-progress 2,895 (2,587)

Employee benefits expenses 80,998 69,962

Finance costs 3,085 2,963

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INDIAN ACCOUNTING STANDARD3 1 . 3.454 5

Depreciation and amortisation expense 10,147 8,534

Impairment of non-current assets 480 790

Other expenses 15,308 9,065

Total Expense 4,13,142 3,74,689

Profit/(loss) before exceptional items and tax 2,26,686 1,18,303

Exceptional items (2,856)

Profit / (loss) before tax from operations 2,23,830 1,18,303

a) Current tax 5,388 4,474

b) Deferred tax 427 (746)

Income tax expense 5,815 3,728

Profit / (loss) for the year 2,18,015 1,14,575

Profit for the year attributable to *

Equity holders of the parent 2,11,475 1,11,138

Non-controlling interest 6,540 3,437

* To be given in case of consolidated statement of profit and loss.

1.8.3.4 Other comprehensive income for the period

• With regard to other comprehensive income for the period, the Standard requires to
disclose the amount of income tax relating to each item of other comprehensive income,
including reclassification adjustments, either in the statement of profit and loss or in the
notes.
• An entity may present items of other comprehensive income either:
(a) net of related tax effects, or
(b) before related tax effects with one amount shown for the aggregate amount of income
tax relating to those items.

• The Standard further prescribes that an entity should disclose reclassification adjustments
relating to components of other comprehensive income.
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3.46 2.46 FINANCIAL REPORTING

• Other Ind AS specify whether and when amounts previously recognised in other
comprehensive income are reclassified to profit or loss. Such reclassifications are referred
to in this Standard as reclassification adjustments.
• A reclassification adjustment is included with the related component of other
comprehensive income in the period that the adjustment is reclassified to profit or loss.

changes in revaluation surplus

reameasurements of defined benefit plans

gains and losses arising from translating the financial statements of a foreign

gains and losses from investments in equity instruments designated at fair value
through OCI
Components of Other Comprehensive Income (OCI)

gains and losses on financial assets measured at fair value through OCI

the effective portion of gains and losses on hedging instruments in a cash flow hedge
and the gains and losses on hedging instruments that hedge investments in equity
instruments measured at fair value through OCI

for particular liabilities designated as at FVTPL, the amount of the change in fair
value that is attributable to changes in the liability’s credit risk

changes in the value of the time value of options when separating the intrinsic value
and time value of an option contract and designating as the hedging instrument only
the changes in the intrinsic value

changes in the value of the forward elements of forward contracts when separating the
forward element and spot element of a forward contract and designating as the
hedging instrument only the changes in the spot element, and changes in the value of
the foreign currency basis spread of a financial instrument when excluding it from the
designation of that financial instrument as the hedging instrument

insurance finance income and expenses from contracts issued as per Ind AS 117,
excluded from profit or loss when total insurance finance income or expenses is
disaggregated to include in profit or loss an amount determined by a systematic
allocation, or by an amount that eliminates accounting mismatches with the finance
income or expenses arising on the underlying items, applying Ind AS 117

finance income and expenses reinsurance contracts held excluded from profit or loss
when total reinsurance finance or expenses is disaggregated to include in profit or
loss an amount determined by a systematic allocation applying Ind AS 117
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INDIAN ACCOUNTING STANDARD3 1 . 3.474 7

Example 14
Gains realised on the disposal of financial assets are included in profit or loss of the current
period. These amounts may have been recognised in other comprehensive income as
unrealised gains in the current or previous periods. Those unrealised gains must be
deducted from other comprehensive income in the period in which the realised gains are
reclassified to profit or loss to avoid including them in total comprehensive income twice.

The following table depicts some of the items which are taken to OCI (numbers are illustrative
only): ` in lakhs
Cash flow FVTOCI Foreign Revaluation Retained Total
Hedge reserve currency reserve earnings
reserve translation
reserve
Net Investment 2,340 2,340
hedge
Foreign Exchange (2,950) (2,950)
translation reserve
Currency Forward (7,680) (7,680)
contracts
Reclassified to 3,385 3,385
statement of profit or
loss
Commodity forward (1,850) (1,850)
contract
Gain / (loss) on (480) (480)
FVTOCI financial
assets
Re-measurement 3,085 3,085
gains (losses) on
defined benefit plans
Revaluation of land
and buildings 7,100 7,100
(6,145) (480) (610) 7,100 3,085 2,950

• An entity may present reclassification adjustments in the statement of profit and loss or in
the notes. An entity presenting reclassification adjustments in the notes presents the items
of other comprehensive income after any related reclassification adjustments.
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3.48 2.48 FINANCIAL REPORTING

• Reclassification adjustments arise, for example, on disposal of a foreign operation (see

Ind AS 21), and when some hedged forecast cash flows affect profit or loss (see paragraph
6.5.11(d) of Ind AS 109 in relation to cash flow hedges).
• Reclassification adjustments do not arise on changes in revaluation surplus recognised in
accordance with Ind AS 16 or Ind AS 38 or on re-measurements of defined benefit plans
recognised in accordance with Ind AS 19. These components are recognised in other
comprehensive income and are not reclassified to profit or loss in subsequent periods.
Changes in revaluation surplus may be transferred to retained earnings in subsequent
periods as the asset is used or when it is derecognised (see Ind AS 16 and Ind AS 38). In
accordance with Ind AS 109, reclassification adjustments do not arise if a cash flow hedge
or the accounting for the time value of an option (or the forward element of a forward
contract or the foreign currency basis spread of a financial instrument) result in amounts
that are removed from the cash flow hedge reserve or a separate component of equity,
respectively, and included directly in the initial cost or other carrying amount of an asset or
a liability. These amounts are directly transferred to assets or liabilities.
Illustrative format of other Comprehensive Income
31.3.20X6 31.3.20X5
` '000 ` '000
Other comprehensive income to be reclassified to profit
and loss in subsequent periods
Net gain on hedge of a net investment 467 300
Income tax effect (156) (100)
311 200
Exchange differences on translation of foreign operations (590) (281)
Income tax effect 0 0
(590) (281)
Net movement on cash flow hedges (1757) 80
Income tax effect 528 (22)
(1229) 58
Net gain / (loss) through FVTOCI debt securities (115) 7
Income tax effect 36 (2)
(79) 5
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INDIAN ACCOUNTING STANDARD3 1 . 3.494 9

Net other comprehensive income to be reclassified to

profit or loss in subsequent periods (1587) (18)
Other comprehensive income not to be reclassified to
profit or loss in subsequent periods
Re-measurement gains /(losses) on defined benefit plans 886 (933)
Income tax effect (269) 278
617 (655)
Revaluation of land and building 2030
Income tax effect (610)
1420 0
Net loss / (gain) through FVTOCI equity securities (24)
Income tax effect 7
(17)
Net other comprehensive income not to be classified to profit
or loss in subsequent periods 2020 (655)
Other comprehensive income for the year, net of tax 433 (673)
Total comprehensive income for the year attributable to*
Equity holders of the parent 2,11,908 1,10,465
Non-controlling interest 6,540 3,437

*To be given in case of consolidated statement of profit and loss.

1.8.3.5 Information to be presented in the Statement of Profit and Loss or in the
Notes
• When items of income or expense are material, an entity shall disclose their nature and
amount separately.
• Circumstances that would give rise to the separate disclosure of items of income and
expense include:
(a) write-downs of inventories to net realisable value or of property, plant and equipment
to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring;
(c) disposals of items of property, plant and equipment;
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3.50 2.50 FINANCIAL REPORTING

(d) disposals of investments;

(e) discontinued operations;
(f) litigation settlements; and
(g) other reversals of provisions.
• An entity shall present an analysis of expenses recognised in profit or loss using a
classification based on the nature of expense method.

Revenue X

Other income X

Changes in inventories of finished goods and work in progress X

Raw materials and consumables used X

Employee benefits expense X

Depreciation and amortisation expense X

Other expenses X

Total expenses (X)

Profit before tax X

1.8.4 Statement of Changes in Equity

An entity shall present a statement of changes in equity which includes all changes in equity. It
includes both - relating to performance and owner changes in equity (from transactions and events
that increase or decrease equity but are not part of performance). The statement of changes in
equity includes the following information:

a. total comprehensive income for the period, showing separately the total amounts
attributable to owners of the parent and to non-controlling interests;
b. for each component of equity, the effects of retrospective application or retrospective
restatement recognised in accordance with Ind AS 8;
c. for each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing each change resulting from:

• profit or loss;
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INDIAN ACCOUNTING STANDARD3 1 . 3.515 1

• each item of other comprehensive income;

• transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners and changes in ownership interests in
subsidiaries that do not result in a loss of control; and
• any item recognised directly in equity such as amount recognised directly in equity
as capital reserve with Ind AS 103.
1.8.4.1 Information to be presented in the statement of changes in equity or in the
notes.
• An entity shall present, either in the statement of changes in equity or in the notes, an
analysis of other comprehensive income by item.
• An entity shall present, either in the statement of changes in equity or in the notes, the
amount of dividends recognised as distributions to owners during the period, and the
related amount of dividends per share.
• Ind AS 8 requires retrospective adjustments to effect changes in accounting policies, to the
extent practicable, except when the transition provisions in another Ind AS require
otherwise. Ind AS 8 also requires restatements to correct errors to be made retrospectively,
to the extent practicable. Retrospective adjustments and retrospective restatements are
not changes in equity but they are adjustments to the opening balance of retained earnings,
except when an Ind AS requires retrospective adjustment of another component of equity.
• Para 106(b) requires disclosure in the statement of changes in equity of the total adjustment
to each component of equity resulting from changes in accounting policies and, separately,
from corrections of errors. These adjustments are disclosed for each prior period and the
beginning of the period.
Format of Statement of changes in equity for the year ended 31 st March 20X6*

`
Share capital

Translation

earnings
Retained
reserve

Total

Equity as at 31 st March 20X5 (A) 1,041 (47,382) 2,65,266 2,18,925

Profit for the year 28,461 28,461

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3.52 2.52 FINANCIAL REPORTING

Other comprehensive income for the year (3,399) (5,535) (8,934)

Total comprehensive income for the year (B) (3,399) 22,926 19,527

Dividend paid to shareholders of the parent (17,817) (17,817)

Equity compensation plans 15 15

Reduction in share capital (51) (26,427) (26,478)

Total transactions (C) (51) (44,229) (44,280)

Equity as at 31 st March, 20X6 (A+B+C) 990 (50,781) 2,43,963 1,94,172

*For the purpose of convenience, the movement has been given only for one year. However as
per the requirement, the similar reconciliation is also required from 31st March, 20X4 to
31st March, 20X5 as comparatives in the Statement of changes in equity.
1.8.5 Statement of Cash Flows
• Cash flow information provides users of financial statements with a basis to assess the
ability of the entity to generate cash and cash equivalents and the needs of the entity to
utilise those cash flows.
• An entity should present a statement of cash flows in accordance with Ind AS 7, Statement
of Cash Flows.
1.8.6 Notes
1.8.6.1 Structure
The notes shall:
a. present information about the basis of preparation of the financial statements and the specific
accounting policies used;
b. disclose the information required by Ind AS that is not presented elsewhere in the financial
statements; and
c. provide information that is not presented elsewhere in the financial statements but is relevant
to an understanding of any of them.

An entity shall present notes in a systematic manner. In determining a systematic manner, the
entity shall consider the effect on the understandability and comparability of its financial
statements.
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INDIAN ACCOUNTING STANDARD3 1 . 3.535 3

An entity shall cross-reference each item in the balance sheet, in the statement of changes in
equity, in the statement of profit and loss, and statement of cash flows to any related information
in the notes.
Examples of systematic ordering or grouping of the notes include:
(a) giving prominence to the areas of its activities that the entity considers to be most relevant to
an understanding of its financial performance and financial position, such as grouping
together information about particular operating activities;
(b) grouping together information about items measured similarly such as assets measured at
fair value; or
(c) Notes may be in the following order:
(i) statement of compliance with Ind AS;

(ii) material accounting policy information;

(iii) supporting information for items presented in the balance sheet and in the statement
of profit and loss, and in the statements of changes in equity and of cash flows, in the
order in which each statement and each line item is presented; and
(iv) other disclosures, including:
(1) contingent liabilities (see Ind AS 37) and unrecognised contractual
commitments; and
(2) non-financial disclosures, eg the entity’s financial risk management objectives
and policies (see Ind AS 107).
An entity may present notes providing information about the basis of preparation of the financial
statements and specific accounting policies as a separate section of the financial statements.
1.8.6.2 Disclosure of accounting policies
An entity shall disclose material accounting policy information. Accounting policy information is
material if, when considered together with other information included in an entity’s financial
statements, it can reasonably be expected to influence decisions that the primary users of general
purpose financial statements make on the basis of those financial statements.
Accounting policy information that relates to immaterial transactions, other events or conditions is
immaterial and need not be disclosed. Not all accounting policy information relating to material
transactions, other events or conditions is itself material.
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3.54 2.54 FINANCIAL REPORTING

An entity is likely to consider accounting policy information material to its financial statements if
that information relates to material transactions, other events or conditions and:

(a) the entity changed its accounting policy during the reporting period and this change resulted
in a material change to the information in the financial statements;
(b) the entity chose the accounting policy from one or more options permitted by Ind AS

(c) the accounting policy was developed in accordance with Ind AS 8 in the absence of an
Ind AS that specifically applies;
(d) the accounting policy relates to an area for which an entity is required to make significant
judgements or assumptions in applying an accounting policy, and the entity discloses those
judgements or assumptions; or
(e) the accounting required for them is complex and users of the entity’s financial statements
would otherwise not understand those material transactions, other events or conditions—
such a situation could arise if an entity applies more than one Ind AS to a class of material
transactions.
Accounting policy information that focuses on how an entity has applied the requirements of the
Ind AS to its own circumstances provides entity-specific information that is more useful to users
of financial statements than standardised information, or information that only duplicates or
summarises the requirements of the Ind AS.
If an entity discloses immaterial accounting policy information, such information shall not obscure
material accounting policy information.
An entity’s conclusion that accounting policy information is immaterial does not affect the related
disclosure requirements set out in other Ind AS.
An entity shall disclose, along with material accounting policy information or other notes, the
judgements, apart from those involving estimations, that management has made in the process of
applying the entity’s accounting policies and that have the most significant effect on the amounts
recognised in the financial statements.
1.8.6.3 Sources of estimation uncertainty
An entity must disclose, in the notes, information about the assumptions made concerning the
future, and other important sources of estimation uncertainty at the end of the reporting period,
that have a significant risk of resulting in a material adjustment to the carrying amounts of assets
and liabilities within the next financial year. Disclosures about nature of such assets and their
carrying amount as at the end of the reporting period should also be made.
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INDIAN ACCOUNTING STANDARD3 1 . 3.555 5

1.8.6.4 Capital
An entity shall disclose information that enables users of its financial statements to evaluate the
entity’s objectives, policies and processes for managing capital.
Examples 15 -17
15. For the purpose of the Group’s capital management, capital includes issued equity capital,
convertible preference shares, share premium and all other equity reserves attributable to
the equity holders of the parent. The primary objective of the Group’s capital management
is to maximise the shareholder value.
The Group manages its capital structure and makes adjustments in light of changes in
economic conditions and the requirements of the financial covenants. To maintain or adjust
the capital structure, the Group may adjust the dividend payment to shareholders, return
capital to shareholders or issue new shares. The Group monitors capital using a gearing
ratio, which is net debt divided by total capital plus net debt. The Group’s policy is to keep
the gearing ratio between 20% and 40%. The Group includes within net debt, interest
bearing loans and borrowings, trade and other payables, less cash and cash equivalents,
excluding discontinued operations.

`
31.3.20X6 31.3.20X5
Borrowings other than convertible preference shares 1,44,201 1,57,506
Trade payables 1,26,489 1,36,563
Other payables 13,506 12,693
Less : Cash and cash equivalents (1,18,362) (1,05,615)
Net debt 1,65,834 2,01,147
Convertible preference shares 20,001 19,038
Equity 4,29,600 3,37,000
Total Capital 4,49,601 3,56,038
Capital and net debt 6,15,435 5,57,185
Gearing ratio 27 36

In order to achieve this overall objective, the Group’s capital management, amongst other
things, aims to ensure that it meets financial covenants attached to the interest-bearing
loans and borrowings that define capital structure requirements. Breaches in meeting the
financial covenants would permit the bank to immediately call loans and borrowings. There
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3.56 2.56 FINANCIAL REPORTING

have been no breaches in the financial covenants of any interest-bearing loans and
borrowing in the current period. No changes were made in the objectives, policies or
processes for managing capital during the years ended 31st March 20X6 and 31st March
20X5.
16. Capital Allocation Policy: The Board reviewed and approved a revised Capital Allocation
Policy of the Company after taking into consideration the strategic and operational cash
requirements of the Company in the medium term.
The key aspects of the Capital Allocation Policy are:
1. The Company’s current policy is to pay dividends of up to 50% of post-tax profits of
the Financial Year. Effective from Financial Year 20X1, the Company expects to
payout up to 70% of the free cash flow* of the corresponding Financial Year in such
manner (including by way of dividend and/or share buyback) as may be decided by
the Board from time to time, subject to applicable laws and requisite approvals, if
any.
2. In addition to the above, the Board has identified an amount of upto ` 13,000 crore
($2 billion)** to be paid out to shareholders during Financial Year 20X1, in such
manner (including by way of dividend and/ or share buyback), to be decided by the
Board, subject to applicable laws and requisite approvals, if any. Further
announcements in this regard will be made, as appropriate, in due course
*Free cash flow is defined as net cash provided by operating activities less capital expenditure
as per the consolidated statement of cash flows prepared under Ind AS.
**USD/Rupee exchange rate as on 31st March, 20X0 was 65.
17. The groups’ objective when managing capital are to:
 Safeguard their ability to continue as a going concern, so that they can continue to
provide returns to shareholders and benefits for other stakeholders, and
 Maintain an optimum capital structure to reduce the cost of capital
In order to maintain or adjust the capital structure, the group may adjust the amounts of
dividends paid to shareholders, return capital to shareholders, issue new shares or sell
assets to reduce debt. Consistent with others in the industry, the group monitors capital
on the basis of the following gearing ratio: Net debt divided by the Total equity (as shown
in balance sheet including Non-Controlling Interest)
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INDIAN ACCOUNTING STANDARD3 1 . 3.575 7

During 20X5, the group’s strategy which was unchanged from 20X4 was to maintain a
gearing ratio within 20% to 30% and credit rating of A. The credit rating was unchanged
and the gearing ratio was within the limits as follows:

31 st March 20X5 31 st March 20X4

Net debt 3,384 3,447

Total equity 16,035 11,762

Net debt to equity 21% 29%

1.8.6.5 Puttable financial instruments classified as equity

For puttable financial instruments classified as equity instruments, an entity shall disclose (to the
extent not disclosed elsewhere):
a. summary quantitative data about the amount classified as equity;
b. its objectives, policies and processes for managing its obligation to repurchase or redeem
the instruments when required to do so by the instrument holders, including any changes
from the previous period;
c. the expected cash outflow on redemption or repurchase of that class of financial
instruments; and
d. information about how the expected cash outflow on redemption or repurchase was
determined.
1.8.6.6 Other disclosures
An entity must disclose the amount of dividends proposed or declared before the financial
statements were approved for issue but not recognised as a distribution to owners during the
period, and the related amount per share and the amount of any cumulative preference dividends
not recognised.
Ind AS 1 requires certain other disclosures, if not disclosed elsewhere in information published
with the financial statements:

a) the domicile and legal form of the entity, its country of incorporation and the address of its
registered office (or principal place of business, if different from the registered office);
b) a description of the nature of the entity’s operations and its principal activities;
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3.58 2.58 FINANCIAL REPORTING

c) the name of the parent and the ultimate parent of the group; and
d) if it is a limited life entity, information regarding the length of its life.

(a) An extract from the annual report of Tata Consultancy Services Limited for the year
ended 31 st March, 2022:
Notes forming part of Standalone Financial Statements
1) Corporate information
Tata Consultancy Services Limited (referred to as “TCS Limited” or “the Company”) provides
IT services, consulting and business solutions and has been partnering with many of the
world’s largest businesses in their transformation journeys. The Company offers a consulting-
led, cognitive powered, integrated portfolio of IT, business and engineering services and
solutions. This is delivered through its unique Location-Independent Agile delivery model,
recognised as a benchmark of excellence in software development.
The Company is a public limited company incorporated and domiciled in India. The address
of its corporate office is TCS House, Raveline Street, Fort, Mumbai - 400001. As at 31st March,
2022, Tata Sons Private Limited, the holding company owned 72.27% of the Company’s equity
share capital.
The Board of Directors approved the standalone financial statements for the year ended 31 st
March, 2022 and authorised for issue on 11 th April, 2022.
(b) An extract from the annual report of Tata Consultancy Services Limited for the year
ended 31 st March, 2022:
Overview and notes to the standalone financial statements
1. Overview
1.1 Company overview
Infosys Limited ("the Company" or Infosys) provides consulting, technology, outsourcing and
next-generation digital services, to enable clients to execute strategies for their digital
transformation. Infosys strategic objective is to build a sustainable organization that remains
relevant to the agenda of clients, while creating growth opportunities for employees and
generating profitable returns for investors. Infosys strategy is to be a navigator for our clients
as they ideate, plan and execute on their journey to a digital future.
The Company is a public limited company incorporated and domiciled in India and has its
registered office at Electronic city, Hosur Road, Bengaluru 560100, Karnataka, India. The
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INDIAN ACCOUNTING STANDARD3 1 . 3.595 9

Company has its primary listings on the BSE Ltd. and National Stock Exchange of India
Limited. The Company’s American Depositary Shares (ADS) representing equity shares are
listed on the New York Stock Exchange (NYSE).
The Standalone financial statements are approved for issue by the Company’s Board of
Directors on 13 th April 2022.

Illustration 16
A Limited has prepared the following draft balance sheet as on 31st March 20X1: (` in crores)
Particulars 31 st March, 31 st March,
20X1 20X0
ASSETS
Cash 250 170
Cash equivalents 70 30
Non-controlling interest’s share of profit for the year 160 150
Dividend declared and paid 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 1 st January each year) 3,300 3,885
Interest accrued on long term debt (due in less than 12 months) 260 290
Share Capital
Retained earnings at the beginning of the year 1,130 1,050
Profit for the year 1,875 1,740
Non-controlling interest 1,200 830
Accumulated depreciation on PPE 830 540
Provision for doubtful receivables 1,610 1,240
Trade payables 200 65
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3.60 2.60 FINANCIAL REPORTING

Accrued expenses 880 790

Warranty provision (for 12 months from the date of sale) 15 30
Environmental restoration provision (restoration expected in 600 445
20X6) 765 640
Provision for accrued leave (due within 12 months)
Dividend payable 35 25
150 230
Total 12,850 11,800

Prepare a consolidated balance sheet using current and non-current classification in

accordance with Ind AS 1. Assume operating cycle is 12 months

Solution

A Limited
Consolidated Balance Sheet as at 31st March 20X1
(` in crores)

Particulars Note 31.3.20X1 31.3.20X0

ASSETS
Non-current assets
(a) Property, plant and equipment 1 3,590 3,460
(b) Investment property 3,100 3,100
Total non-current assets 6,690 6,560
Current assets
(a) Inventory 2 1,680 1,780
(b) Financial assets
(i) Trade and other receivables 3 2,100 1,735
(ii) Cash and cash equivalents 4 320 200
Total current assets 4,100 3,715
Total assets 10,790 10,275

EQUITY & LIABILITIES

Equity attributable to owners of the parent
Share capital 1,130 1,050
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INDIAN ACCOUNTING STANDARD3 1 . 3.616 1

Other Equity 5 2,825 2,350

Non-controlling interests 830 540
Total equity 4,785 3,940
LIABILITIES
Non-current liabilities
(a) Financial Liabilities
Borrowings -Long-term debt 6 2,800 3,385
(b) Provisions
Long-term provisions (environmental restoration) 765 640
Total non-current liabilities 3,565 4,025
Current liabilities
(a) Financial Liabilities
(i) Trade and other payables (Other than micro
enterprises and small enterprises) 7 895 820
(ii) Current portion of long-term debt 8 500 500
(i) Interest accrued on long-term debt 260 290
(ii) Dividend payable 150 230
(b) Provisions
(i) Warranty provision 600 445
(ii) Other short-term provisions 35 25
Total current liabilities 2,440 2,310
Total liabilities 6,005 6,335
Total equity and liabilities 10,790 10,275

Working Notes:

Notes Particulars Basis Calculation Amount

` crores ` crores
1 Property, plant Property, plant and 5,200 – 1,610 3,590
and equipment equipment (PPE) at cost (4,700 – 1,240) (3,460)
less Accumulated
(depreciation on PPE
2 Inventory Inventory at cost add 1,500 + 180 1,680
Inventory at fair value less (1,650 + 130) (1,780)
cost to complete and sell
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3.62 2.62 FINANCIAL REPORTING

3 Trade and other Accounts receivable less 2,300 – 200 2,100

receivables Provision for doubtful (1,800 – 65) (1,735)
receivables
4 Cash and cash Cash and Cash equivalents 250 + 70 320
equivalents (170 + 30) (200)
5 Other Equity Retained earnings at the 1,875 + 1,200–
beginning of the year add 160 – 90 2,825
Profit for the year less Non- (1,740 + 830 –
controlling interest’s share 150 – 70) (2,350)
of profit for the year less
Dividend declared by A
Limited
6 Long-term debt Long-term debt less Due on 3,300 – 500 2,800
1 stJanuary each year (3,885 – 500) (3,385)
7 Trade & other Trade payables add 880 + 15 895
payables Accrued expenses (790 + 30) (820)
8 Current portion Due on 1 stJanuary each year - 500
of long- term - (500)
debt

Note: Figures in brackets represent the figures for comparative year.

*****

1.9 SIGNIFICANT DIFFERENCES IN IND AS 1 VIS-À-VIS

AS 1
Ind AS 1 deal with presentation of financial statements, whereas AS 1 deal only with the disclosure
of accounting policies. The scope of Ind AS 1 is thus much wider and some of its requirements
are contained in other AS e.g. AS 5 and, therefore, line by line comparison of the differences
between Ind AS 1 and AS 1 is not possible. Therefore, the differences between Ind AS 1 and
Indian GAAP are divided into following parts and summarised below.
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INDIAN ACCOUNTING STANDARD3 1 . 3.636 3

S.No. Particulars Ind AS 1 AS 1

I. Part 1 Ind AS 1 requirement not covered in any AS
1. Complete set of Ind AS 1 prescribes what comprises a Not covered in any
Financial complete set of financial statements such AS
Statements as balance sheet, statement of profit and
loss, statement of changes in equity,
statement of cash flows, notes,
comprising significant accounting
policies, and comparative information in
respect of preceding period.
2. Purpose and Ind AS 1 lays down purpose of financial Not covered in any
General Features statements and general feature of AS
of Financial financial statements such as True and
Statements Fair view and compliance with Ind AS. An
enterprise shall make an explicit
statement in the financial statements of
compliance with all the Indian Accounting
Standards. Further, Ind AS 1 allows
deviation from a requirement of an
accounting standard in case the
management concludes that compliance
with Ind AS will be misleading and if the
regulatory framework requires or does
not prohibit such a departure.
3. Off-setting Ind AS 1 state that an entity shall not Not covered in any
offset assets and liabilities or income and AS
expenses, unless required or permitted
by an Ind AS.
4. Frequency of Ind AS 1 requires an entity to present a Not covered in any
reporting complete set of financial statements AS
(including comparative information) at
least annually.
5. Structure and Ind AS 1 requires an entity Not covered in any
Contents  to clearly identify the financial AS
statements and distinguish them from
other information in the same
published document.
 To give information about the name of
the entity, whether financial
statements are of individual entity of
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3.64 2.64 FINANCIAL REPORTING

S.No. Particulars Ind AS 1 AS 1

group of entities, presentation
currency and level of rounding off.
6. Balance sheet  Prescribes certain line items to be Not covered in any
presented in the balance sheet and AS
permits presentation of additional line
items.
 Ind AS 1 requires presentation and
provides criteria for classification of
Current / Non- Current assets /
liabilities.
 Ind AS 1 requires presentation of
balance sheet as at the beginning of
the earliest period when an entity
applies an accounting policy
retrospectively or makes a
retrospective restatement of items in
the financial statements, or when it
reclassifies items in its financial
statements.
7. Statement of profit  Ind AS 1 requires that an entity shall Not covered in any
and loss present a single statement of profit AS
and loss, with profit or loss and other
comprehensive income presented in
two sections. The sections shall be
presented together, with the profit or
loss section presented first followed
directly by the other comprehensive
income section.
 Ind AS 1 prohibits presentation of any
item as ‘Extraordinary Item’ in the
statement of profit and loss or in the
notes.
 Ind AS 1 requires classification of
expenses to be presented based on
nature of expenses.
8. Reclassification of Ind AS 1 requires disclosure of nature, Not covered in any
items amount and reason for reclassification in AS
the notes to financial statements.
9. Statement of Ind AS 1 requires the financial statements Not covered in any
Changes in Equity to include a ‘Statement of Changes in AS
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INDIAN ACCOUNTING STANDARD3 1 . 3.656 5

S.No. Particulars Ind AS 1 AS 1

Equity’ to be shown as a separate
statement, which, inter alia, includes
reconciliation between opening and
closing balance for each component of
equity.
10. Comparative As per Ind AS 1, an entity shall include Not covered in any
information certain comparative information for AS
understanding the current period’s
financial statements.
11. Classification of Ind AS 1 clarifies that long-term loan Not covered in any
long-term loan arrangement need not be classified as AS
arrangement current on account of breach of a material
provision, for which the lender has
agreed to waive before the approval of
financial statements for issue.
(Paragraph 74 of Ind AS 1)
II. Part 2 Ind AS 1 requirements vis-a-vis AS 1
1. Fundamental Ind AS 1 requires adherence to accrual AS 1 only requires
accounting basis of accounting. disclosure if this
assumptions fundamental
accounting
assumption, among
others like going
concerns and
consistency, is not
followed by the entity.
2. Rectification of Ind AS 1 explicitly states that an entity
accounting cannot rectify inappropriate accounting
policies policies either by disclosure of the
accounting policies used or by notes or
explanatory material.
3. Sources of Ind AS 1 requires to disclose information
estimation about the assumptions it makes about the
uncertainty future, and other major sources of
estimation uncertainty at the end of the
reporting period, that have a significant
risk of resulting in a material adjustment
to the carrying amounts of assets and
liabilities within the next financial year.
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3.66 2.66 FINANCIAL REPORTING

1.10 CARVE OUT IN IND AS 1 FROM IAS 1

As per IFRS
IAS 1 requires that in case of a non-current loan liability, if any condition of the loan agreement is
breached on or before the reporting date, such loan liability should be classified as current, even
if the breach is rectified after the balance sheet date.
Carve Out
Ind AS 1 clarifies that where there is a breach of a material provision of a long-term loan
arrangement on or before the end of the reporting period with the effect that the liability becomes
payable on demand on the reporting date, the entity does not classify the liability as current, if the
lender agreed, after the reporting period and before the approval of the financial statements for
issue, not to demand payment as a consequence of the breach. Consequent to this, requirements
of paragraph 76 of IAS 1 to treat such events as non-adjusting events are also deleted.
Reason
Under Indian banking system, a long-term loan agreement generally contains a large number of
conditions. Some of these conditions are substantive, such as, recalling the loan in case interest
is not paid, and some conditions are procedural and not substantive, such as, submission of
insurance details where the entity has taken the insurance but not submitted the details to the
lender at the end of the reporting period. Generally, in case of any procedural breach, a loan is
generally not recalled. Also, in many cases, a breach is rectified after the balance sheet date and
before the approval of financial statements. Carve out has been made as it is felt that if the breach
is rectified after the balance sheet date but before the approval of the financial statements, it
would be appropriate that the users are informed about the true nature of liabilities being non-
current liabilities instead of current liabilities.
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INDIAN ACCOUNTING STANDARD3 1 . 3.676 7

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

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 20X1 an entity entered into a loan agreement with a bank. The loan is repayable
in three equal annual instalments starting from December 20X5. One of the loan covenants
is that an amount equivalent to the loan amount should be contributed by promoters by
24th March, 20X2, failing which the loan becomes payable on demand. As on
24th March, 20X2, the entity has not been able to get the promoter’s contribution. On
25th March, 20X2, the entity approached the bank and obtained a grace period upto
30th June, 20X2 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 31st March.
(a) As on 31st March, 20X2, 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 20X2, the entity approached the bank and got the
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3.68 2.68 FINANCIAL REPORTING

compliance date extended upto 30 th June, 20X2 for getting promoter’s contribution.
In this case will the loan classification as on 31 st March, 20X2 be different from (a)
above?
3. Company A has taken a long-term loan from Company B. In the month of December 20X1,
there was a breach of material provision of the arrangement. As a consequence of which the
loan becomes payable on demand on 31st March, 20X2. In the month of May 20X2, the
company started negotiation with company B for not 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.
4. Entity A has undertaken various transactions in the financial year ended 31st March, 20X1.
Identify and present the transactions in the financial statements 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 fair 1,00,000
value through other comprehensive income
Income tax expense 35,000
Share based payments cost 3,35,000
5. 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 31st March, 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.
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INDIAN ACCOUNTING STANDARD3 1 . 3.696 9

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
financial statements?
(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 have been presented in `.
(iv) 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 a general-purpose
financial statement.
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 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
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3.70 2.70 FINANCIAL REPORTING

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 31st
March, 20X2, 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 30 th June, 20X2, i.e., after the reporting date. Consequently, in
the absence of actual breach of the loan covenant as on 31st March, 20X2, the loan
will retain its classification as non-current.
3. 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 arrangement on or before the end of the reporting
period with the effect that the liability becomes payable on demand on the reporting date,
the entity does not classify the liability as current, if the lender agreed, after the reporting
period and before the approval of the financial statements for issue, not to demand payment
as a consequence of the breach.
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 month 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 statement as at
31st March, 20X2.
4. Items impacting the Statement of Profit and Loss for the year ended 31 st March, 20X1 (`)
Current service cost 1,75,000
Gains and losses arising from translating the monetary assets in foreign 75,000
currency
Income tax expense 35,000
Share based payments cost 3,35,000
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INDIAN ACCOUNTING STANDARD3 1 . 3.717 1

Items impacting the other comprehensive income for the year ended 31 st 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 designated at
fair value through other comprehensive income 1,00,000

5. (i) Yes, an entity whose financial statements comply with Ind AS shall make an explicit
and unreserved statement of such compliance in the notes. An entity shall not
describe financial statements as complying with Ind AS unless they comply with all
the requirements of Ind AS. (Refer Para 16 of Ind AS 1)
(ii) No, but need to disclose in the financial statement that these are individual financial
statements of the Company. (Refer Para 51(b) of Ind AS 1)
(iii) Yes, Para 51(d) of Ind AS 1 inter alia states that an entity shall display the presentation
currency, as defined in Ind AS 21 prominently, and repeat it when necessary for the
information presented to be understandable.
(iv) No, as per Para 38 of Ind AS 1, except when Ind AS permit or require otherwise, an
entity shall present comparative information in respect of the preceding period for all
amounts reported in the current period’s financial statements. An entity shall include
comparative information for narrative and descriptive information if it is relevant to
understanding the current period’s financial statements.
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3.72 FINANCIAL REPORTING

UNIT 2:
INDIAN ACCOUNTING STANDARD 34: INTERIM
FINANCIAL REPORTING

LEARNING OUTCOMES
After studying this unit, you will be able to:
 State the objective and scope of Ind AS 34
 Define the relevant terms used in the standard
 Elaborate the contents of interim financial report
 Prescribe minimum content of Interim Financial Report
 Account for the significant events and transactions while preparing the
interim financial report
 Recommend principles of recognition and measurement in complete or
condensed financial statement for an interim period
 Prepare the interim financial report of an entity
 Differentiate between Ind AS 34 and AS 25.
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INDIAN ACCOUNTING STANDARD 34 3.73

UNIT OVERVIEW

Contents of an Interim Financial Report

Minimum
Components
of Interim Recognition and Measurement
Financial
Report

Significant
Events and Same
Transactions Accounting
Policies as Restatement of Previously
Annual
Revenues
Reported Interim Periods
Received
Seasonally,
Other Cyclically, or
Disclosures Occasionally
Costs incurred
Unevenly during Interim Financial
Disclosure in Annual
the Financial Reporting and
Financial Statements
Year Impairment

Materiality Use of Estimates

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3.74 FINANCIAL REPORTING

2.1 INTRODUCTION
Interim Financial Reporting applies when an entity prepares an interim financial report. Ind 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, lenders and others to understand an entity’s
capacity to generate earnings and cash flows and its financial condition 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.

2.2 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.

2.3 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.
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INDIAN ACCOUNTING STANDARD 34 3.75

2.4 DEFINITIONS
1. Interim period is a 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.

2.5 CONTENTS OF AN INTERIM FINANCIAL REPORT

• An Interim Financial Report shall include, at minimum, 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, material accounting policy information 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 discourage an entity from including in condensed interim financial
statements more than the minimum line items or selected explanatory notes asset out in
this Standard.
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3.76 FINANCIAL REPORTING

2.5.1 Form and Content of Interim financial report

Form and content

If an entity’s latest annual financial report

If entity publishes a If an entity publishes
included the parent’s separate financial
complete set of condensed financial
statements in addition to consolidated
financial statements statements
financial statements

Statements Additional line This Standard

Its form and
shall included items if their neither requires
content should Present Basic
headings and ommission nor prohibits the
be in line with and diluted
subtotals would make inclusion of the
Ind AS 1 for a earnings per
included in their condensed parent’s separate
complete set of share for that
most recent interim financial statements in the
financial period
annual financial statements entity’s interim
statements
statements misleading. financial report.

2.5.2 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 of 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 financial 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 below 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, assets arising from contracts with customers, or other
assets, and the reversal of such an impairment loss;
3. the reversal of any provisions for the costs of restructuring;
4. acquisitions and disposals of items of property, plant and equipment;
5. commitments for the purchase of property, plant and equipment;
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INDIAN ACCOUNTING STANDARD 34 3.77

6. litigation settlements;
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 instruments;
12. changes in the classification of financial assets as a result of a change 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 or 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.

Significant events and transactions

Include in interim financial report Do not include in interim financial report

An explanation of events and Avoid relatively insignificant updates to the

transactions that are significant to an information that was reported in the notes in the
understanding of the changes in financial most recent annual financial report because the
position and performance of the entity user will have access to the most recent annual
since the end of the last annual reporting financial report carrying such information.
period.

Information disclosed in relation to those

events and transactions shall update the
relevant information presented in the
most recent annual financial report.
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3.78 FINANCIAL REPORTING

2.5.3 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-reference from the interim financial
statements to some other statement (such as management commentary or risk report) that is
available to users of 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 statements. If those recently used policies or methods 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 assets, 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 amounts reported in
prior 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 regularly
provided to the chief operating decision maker.
ii. inter segment 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 for a particular reportable segment if
such amounts 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.
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INDIAN ACCOUNTING STANDARD 34 3.79

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 segments’
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 combinations, obtaining or losing control of subsidiaries and long-term
investments, restructurings, and discontinued operations. In the case of business
combinations, the entity shall disclose the information required by Ind AS 103, Business
Combinations.
j) for financial instruments, 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.
l) the disaggregation of revenue from contracts with customers required by Ind AS 115,
Revenue from Contracts with Customers.

Other Disclosures

Shall be given (Refer the list in para 16A of Ind AS 34)

Either Or

in the interim incorporated by cross-reference from the interim financial

financial statements statements to some other statement (such as management
commentary or risk report)

Statements should be available to users of the financial statements on the same terms as the
interim financial statements and at the same time otherwise the interim financial statements
shall be considered as incomplete

The information shall normally be reported on a financial year-to-date basis.

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3.80 FINANCIAL REPORTING

2.5.4 Periods for which interim financial statements are required 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 for the comparable year-to-date period of the immediately preceding financial year.
(d) statement of cash flows cumulatively for the current financial year to date,with a comparative
statement for the comparable year-to-date period of the immediately preceding financial year.
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.
Periods for which interim financial statements are required to be presented

Interim reports shall include interim financial statements (condensed or complete) ie

balance sheet statements of profit and statement of changes in statement of cash flows
loss equity

• as of the end • for the current interim • cumulatively for • cumulatively for
of the current period the current the current
interim
• cumulatively for the financial year to financial year to
period
current financial year date date
• a comparative to date • comparative • a comparative
balance sheet
• comparative statements statement for the statement for the
as of the end
of the of profit and loss for the comparable comparable year-
immediately comparable interim year-to-date to-date period of
preceding periods (current and period of the the immediately
financial year-to-date) of the immediately preceding
year immediately preceding preceding financial year
financial year financial year

Note: 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.
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INDIAN ACCOUNTING STANDARD 34 3.81

Following is the illustrative example to understand the periods for which interim financial
statements are required to be presented.
Scenario (a) Entity publishes interim financial reports half-yearly
The entity's financial year ends 31 March (Financial year). The entity will present the following
financial statements (condensed or complete) in its half-yearly interim financial report as of
30 September 20X2:

Name of the component Current period Comparative

period

Balance sheet as at 30 September 20X2 31 March 20X2

Statement of profit and loss : 6 months ending 30 September 20X2 30 September 20X1

Statement of cash flows: 6 months ending 30 September 20X2 30 September 20X1

Statement of changes in equity: 6 months 30 September 20X2 30 September 20X1

ending

Scenario (b) Entity publishes interim financial reports quarterly

The entity's financial year ends 31 March (Financial year). The entity will present the following
financial statements (condensed or complete) in its quarterly interim financial report as of
30 September 20X2:

Name of the component Current periods Comparative periods

Balance sheet as at 30 September 20X2 31 March 20X2

Statement of profit and loss:

6 months ending; and 30 September 20X2; and 30 September 20X1; and
3 months ending 30 September 20X2 30 September 20X1

Statement of cash flows: 6 30 September 20X2 30 September 20X1

months ending

Statement of changes in equity:

6 months ending 30 September 20X2 30 September 20X1
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3.82 FINANCIAL REPORTING

2.5.5 Materiality
• In deciding how to recognise, measure, classify, or disclose an item for interim financial
reporting purposes, materiality shall be assessed in relation to the interim period financial
data.
• In making assessments of materiality, it shall be recognised that interim measurements
may rely on estimates to a greater extent than measurements of annual financial data.

• While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures.
• Unusual items, changes in accounting policies or estimates, and errors are recognised and
disclosed on the basis of materiality in relation to interim period data to avoid misleading
inferences that might result from non-disclosure.

2.6 DISCLOSURE IN ANNUAL FINANCIAL STATEMENTS

• If an estimate of an amount reported in an interim period is changed significantly during the
final interim period of the financial year but a separate financial report is not published for
that final interim period, the nature and amount of that change in estimate shall be disclosed
in a note to the annual financial statements for that financial year.

• Ind AS 8 requires disclosure of the nature and (if practicable) the amount of a change in
estimate that either has a material effect in the current period or is expected to have a
material effect in subsequent periods.
• An entity is not required to include additional interim period financial information in its
annual financial statements.

2.7 RECOGNITION AND MEASUREMENT

S. No. Criteria Recognition and Measurement
1 Same 1. An entity shall apply the same accounting policies in its interim
accounting financial statements as are applied in its annual financial
policies as statements, except for accounting policy changes made after
annual the date of the most recent annual financial statements that
are to be reflected in the next annual financial statements.
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INDIAN ACCOUNTING STANDARD 34 3.83

2. The frequency of an entity’s reporting (annual, half-yearly, or

quarterly) shall not affect the measurement of its annual
results. To achieve that objective, measurements for interim
reporting purposes shall be made on a year-to-date basis.
3. Year-to-date measurements may involve changes in estimates
of amounts reported in prior interim periods of the 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 or
cyclically, deferred as of an interim date if anticipation or deferral would
occasionally or not be appropriate at the end of the entity’s financial year.
seasonally Example: 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 incurred Costs that are incurred unevenly during an entity’s financial year
unevenly shall be anticipated or deferred for interim reporting purposes if,
during the and only if, it is also appropriate to anticipate or defer that type of
financial year cost at the end of the financial year.
4 Use of 1. To ensure that the resulting information is reliable and that all
estimates material financial information that is relevant to an
understanding of the financial position or performance of the
entity is appropriately disclosed.
2. The preparation of interim financial reports requires a greater
use of estimation methods than annual financial reports.

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 recognised in interim periods 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
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3.84 FINANCIAL REPORTING

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.
Major planned periodic maintenance or overhaul
The cost of a planned major periodic maintenance or overhaul or other seasonal expenditure that
is expected to occur late in the year is not anticipated for interim reporting purposes unless an
event has caused the entity to have a legal or constructive obligation. The mere intention or
necessity to incur expenditure related to the future is not sufficient to give rise to an obligation.
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 based 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 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.
Variable lease payments

Contingent lease payments can be an example of a legal or constructive obligation that is

recognised as a liability. If a lease provides for contingent payments based on the lessee
achieving a certain level of annual sales, an obligation can arise in the interim periods of the
financial year before the required annual level of sales has been achieved, if that required level
of sales is expected to be achieved and the entity, therefore, has no realistic alternative but to
make the future lease payment.
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INDIAN ACCOUNTING STANDARD 34 3.85

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 foran
intangible asset are met, are recognised as an 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 future
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 reporting period. That principle is also applied at the end of interim
financial reporting periods. Conversely, an entity recognises no expense or liability for non-
accumulating compensated absences at the end of an interim reporting period, just as it
recognises none at the end of an annual reporting period.
Other planned but irregularly occurring costs
An entity’s budget may include certain costs expected to be incurred irregularly during the financial
year, such as charitable contributions and employee training costs. Those costs generally are
discretionary even though they are planned and tend to recur from year to year. Recognising an
obligation at the end of an interim financial reporting period for such costs that have not yet been
incurred generally is not consistent with the definition of a liability.
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
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3.86 FINANCIAL REPORTING

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. The estimated average annual income tax rate would be re-estimated on a
year-to-date basis, consistent with paragraph 28 of this Standard. The Standard requires
disclosure of a significant change 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 to different categories of income
(such as capital gains or income earned in particular industries), to the extent practicable a
separate rate is applied to each individual category of interim period pre-tax income. While that
degree of precision is desirable, it may not be achievable in all cases, 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.

Contractual or anticipated purchase price changes

Volume rebates or discounts and other contractual changes in the prices of raw materials, labour,
or other purchased goods and services are anticipated in interim periods, by both the payer and
the recipient, if it is probable that they have been earned or will take effect. Thus, contractual
rebates and discounts are anticipated but discretionary rebates and discounts are not anticipated
because the resulting asset or liability would not satisfy the conditions in the Conceptual
Framework for Financial Reporting that an asset must be a resource controlled by the entity as a
result of a past event and that a liability must be a present obligation whose settlement is expected
to result in an outflow of resources.

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 later 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, costs, and net realisable values. Nonetheless, the same
measurement principles are applied for interim inventories. To save cost and time, entities often
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INDIAN ACCOUNTING STANDARD 34 3.87

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-down
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.

• Interim period manufacturing cost variances

Price, efficiency, spending, and volume variances of a manufacturing entity are recognised
in the statement of profit and loss at interim reporting dates to the same extent that those
variances are recognised in the statement of profit and loss at financial year-end. Deferral
of variances that are expected to be absorbed by year-end is not appropriate because it
could result in reporting inventory at the interim date at more or less than its portion of the
actual cost of manufacture.
Foreign currency translation gains and losses
Foreign currency translation gains and losses are measured for interim financial reporting by the
same principles as at financial year-end.
Ind AS 21, The Effects of Changes in Foreign Exchange Rates specifies how to translate the
financial statements for foreign operations into the presentation currency, including guidelines for
using average or closing foreign exchange rates and guidelines for recognising the resulting
adjustments in profit or loss or in other comprehensive income. Consistently with Ind AS 21, the
actual average and closing rates for the interim period are used. Entities do not anticipate some
future changes in foreign exchange rates in the remainder of the current financial year in
translating foreign operations at an interim date.
If Ind AS 21 requires translation adjustments to be recognised as income or expense in the period
in which they arise, that principle is applied during each interim period. Entities do not defer some
foreign currency translation adjustments at an interim date if the adjustment is expected to reverse
before the end of the financial year.
Inventories

Full stock-taking and valuation procedures may not be required for inventories at interim dates,
although it may be done at financial year-end. It may be sufficient to make estimates at interim
dates based on sales margins.
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3.88 FINANCIAL REPORTING

Provisions
Determination of an appropriate amount of a provision (such as a provision for warranties,
environmental costs, and site restoration costs) may be complex and often costly and time-
consuming. Entities sometimes engage outside experts to assist in the annual calculations.
Making similar estimates at interim dates often entails updating of the prior annual provision rather
than the engaging of outside experts to do a new calculation.
Pensions
Ind AS 19, Employee Benefits requires that an entity determine the present value of defined
benefit obligations and the market value of plan assets at the end of each reporting period and
encourages an entity to involve a professionally qualified actuary in measurement of the
obligations. For interim reporting purposes, reliable measurement is often obtainable by
extrapolation of the latest actuarial valuation.
Contingencies
The measurement of contingencies may involve the opinions of legal experts or other advisers.
Formal reports from independent experts are sometimes obtained with respect to contingencies.
Such opinions about litigation, claims, assessments, and other contingencies and uncertainties
may or may not also be needed at interim dates.

Inter-company reconciliations
Some inter-company balances that are reconciled on a detailed level in preparing consolidated
financial statements at financial year-end might be reconciled at a less detailed level in preparing
consolidated financial statements at an interim date.

Illustration 1
Company A has reported ` 60,000 as pre tax 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 on 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 in 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

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INDIAN ACCOUNTING STANDARD 34 3.89

Average Annual Income tax rate = 3,000 / 15,000 = 20%

Q1 Q2 Q3 Q4
Profit / (Loss) before tax 60,000 (15,000) (15,000) (15,000)
Tax charge / (credit) 12,000 (3,000) (3,000) (3,000)
*****
Illustration 2
ABC Ltd. presents interim financial report quarterly. On 1.4.20X1, ABC Ltd. has carried forward
loss of ` 600 lakhs for income-tax purpose for which deferred tax asset has not been recognized.
ABC Ltd. earns ` 900 lakhs in each quarter ending on 30.6.20X1, 30.9.20X1, 31.12.20X1 and
31.3.20X2 excluding the carried forward loss. Income-tax rate is expected to be 40%. Calculate
the amount of tax expense to be reported in each quarter.
Solution
Amount of income tax expense reported in each quarter would be as below:

The estimated payment of the annual tax on earnings for the current year:

` 3,000* x 40 / 100 = ` 1,200 lakhs.

*(3,600 lakhs - ` 600 lakhs) = ` 3,000 lakhs
Average annual effective tax rate = (1,200 / 3,600) × 100 = 33.33%

Tax expense to be shown in each quarter = 900 x 33.33% = ` 300 lakhs

*****

Illustration 3
Innovative Corporation Private Limited (or “ICPL”) is dealing in seasonal product and the sales
pattern of the product, quarter wise is as under during the financial year 20X1-20X2:

Qtr. I Qtr. II Qtr. III Qtr. IV

ending 30 June ending 30 September ending 31 December ending 31 March

10% 10% 60% 20%

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3.90 FINANCIAL REPORTING

For the first quarter ending on 30 June, 20X1, ICPL has provided the following information :

Particulars Amounts (in crore)

Sales 70
Employees benefits expenses 25
Administrative and other expenses 12
Finance cost 4

ICPL while preparing interim financial report for first quarter wants to defer ` 16 crores
expenditure to third quarter on the argument that third quarter is having more sales therefore
third quarter should be debited by more expenditure. Considering the seasonal nature of
business and that the expenditures are uniform throughout all quarte `
Calculate the result of first quarter as per Ind AS 34 and comment on the company’s view.

Solution
Result of the first quarter ending 30 June

Particulars Amounts (in crore)

Sales 70
Total Revenue (A) 70
Less: Employees benefits expenses (25)
Administrative and other expenses (12)
Finance cost (4)
Total Expense (B) (41)
Profit (A-B) 29

Note- As per Ind AS 34, the income and expense should be recognized when they are earned
and incurred respectively. Seasonal incomes will be recognized when they occur. Therefore,
the argument of ICPL is not correct considering the priciples of Ind AS 34.
*****

Illustration 4
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
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INDIAN ACCOUNTING STANDARD 34 3.91

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 no 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. Will the
quarterly results affect the annual results?

Solution
If it is considered that there is no quarterly / seasonal variation, therefore normal expected
production for each quarter is 500 MT and fixed production overheads for the quarter are
` 2,500.
Fixed production overhead to be allocated per unit of production in every quarter will be ` 5 per
MT (Fixed overheads / Normal production).

Quarters Allocations
First  Actual fixed production overheads = ` 2,500
Quarter  Fixed production overheads based on the allocation rate of ` 5 per unit
allocated to actual production = ` 5 x 400 = ` 2,000
 Unallocated fixed production overheads to be charged as expense as per
Ind AS 2 and consequently as per Ind AS 34 = ` 500
Second  Actual fixed production overheads on year-to-date basis = ` 5,000
Quarter  Fixed production overheads to be absorbed on year-to-date basis = 1,000 x
` 5 = ` 5,000
 Earlier, ` 500 was not allocated to production in the 1 st quarter. To give
effect to the entire ` 5,000 to be allocated in the second quarter, as per Ind
AS 34, ` 500 are reversed by way of a credit to the statement of profit and
loss of the 2 nd quarter.
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3.92 FINANCIAL REPORTING

Third  Actual production overheads on year-to-date basis = ` 7,500

Quarter  Fixed production overheads to be allocated on year-to-date basis = 1,500 x
5 = ` 7,500
 There is no under or over recovery of allocated overheads. Hence, no
further action is required.
Fourth  Actual fixed production overheads on year-to-date basis
Quarter = ` 10,000
 Fixed production overheads to be allocated on year-to-date basis 1,900 x 5
= ` 9,500
 ` 500, i.e., [` 2,500 – (` 5 x 400)] unallocated fixed production overheads
in the 4 th quarter, are to be expensed off as per the principles of Ind AS 2
and Ind AS 34 by way of a charge to the statement of profit and loss.
 Unallocated productions overheads for the year ` 500 (i.e ` 10,000 –
` 9,500) are expensed in the Statement of profit and loss as per
Ind AS 2.

The cumulative result of all the quarters would also result in unallocated overheads of ` 500, thus,
meeting the requirements of Ind AS 34 that the quarterly results should not affect the
measurement of the annual results.
*****

2.8 RESTATEMENT OF PREVIOUSLY REPORTED INTERIM

PERIODS
A change in accounting policy, other than one for which the transition is specified by a new
Ind AS, shall be reflected by:
(a) restating the financial statements of prior interim periods of the current financial year and
the comparable interim periods of any prior financial years that will be restated in the annual
financial statements in accordancewith Ind AS 8; or
(b) when it is impracticable to determine the cumulative effect at the beginning of the financial
year of applying a new accounting policy to all prior periods, adjusting the financial
statements of prior interim periods of the current financial year, and comparable interim
periods of prior financial years to apply the new accounting policy prospectively from the
earliest date practicable.
Under Ind AS 8, a change in accounting policy is reflected by retrospective application, with
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INDIAN ACCOUNTING STANDARD 34 3.93

restatement of prior period financial data as far back as is practicable. However, if the cumulative
amount of the adjustment relating to prior financial years is impracticable to determine, then under
Ind AS 8 the new policy is applied prospectively from the earliest date practicable.
The effect of this alongwith respect to interim periods shall be that within the current financial year
any change in accounting policy is applied either retrospectively or, if that is not practicable,
prospectively, from no later than the beginning of the financial year.

2.9 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 changed 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 recognised in a previous interim period
in respect of goodwill.
Illustration 5
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) Additional depreciation of ` 4,50,000 resulting from the change in the method of depreciation.
(iii) Exceptional loss of ` 28,000 incurred during the third quarter. 50% of exceptional loss have
been deferred to next quarter.
(iv) ` 5,00,000 expenditure on account of administrative expenses pertaining to the third quarter
is deferred on the argument that the fourth quarter will have more sales; therefore fourth
quarter should be debited by higher expenditure. The expenditures are uniform throughout
all quarters.
Ascertain the correct net profit to be shown in the Interim Financial Report of third quarter to be
presented to the Board of Directors.
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3.94 FINANCIAL REPORTING

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:
(i) The treatment of bad debts is not correct as the expenses incurred during an inter imreporting
period should be recognised in the same period. Accordingly, ` 50,000 should be deducted
from ` 20,00,000.
(ii) Recognising additional depreciation of ` 4,50,000 in the same quarter is correct and is in
tune with Ind AS 34.
(iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire amount
of ` 28,000 incurred during the third quarter should be recognized in the same quarter. Hence
` 14,000 which was deferred should be deducted from the profits of third quarter only.
(iv) As per Ind AS 34 the income and expense should be recognised when they are earned and
incurred respectively. As per para 39 of Ind AS 34, the costs should be anticipated or deferred
only when:
(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 profits to be shown in Interim Financial Report of the
third quarter shall be ` 14,36,000 (` 20,00,000 - ` 50,000 - ` 14,000 - ` 5,00,000).
*****

2.10 SIGNIFICANT DIFFERENCES IN IND AS 34 VIS-À-VIS

AS 25
S. Particular Ind AS 34 AS 25
No.
1. Disclosures Ind AS 34 requires disclosure AS 25 does not specifically
by way of an explanation of requires such disclosure.
events and transactions that
are significant to an
understanding of the changes
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INDIAN ACCOUNTING STANDARD 34 3.95

in financial position and

performance of the entity since
the end of the last annual
reporting period.
2. Reversal of Ind AS 34 prohibits reversal of There is no such specific
Impairment Loss impairment loss recognised in prohibition in the AS 25.
a previous interim period in
respect of goodwill (in harmony
with paragraph 124 of Ind AS
36, which prohibits reversal of
impairment loss recognised for
goodwill in a subsequent
period) or an investment in
either an equity instrument or a
financial asset carried at cost.
Ind AS 34 includes Appendix A
which addresses the
interaction between the
requirements of Ind AS 34 and
the recognition of impairment
losses on goodwill in Ind AS 36
and the effect of that interaction
on subsequent interim and
annual financial statements
3. Inclusion of the Ind AS 34 states that it neither Under AS 25, if an entity’s annual
Parent’s Separate requires nor prohibits the financial report included the
Statements and inclusion of the parent’s consolidated financial
the Consolidated separate statements inthe statements in addition to the
Financial entity’s interim report if an separate financial statements,
Statements in the entity’s annual financial report the interim financial report
Entity’s Interim included the parent’s separate should include both the
Report financial statements in addition consolidated financial
to consolidated financial statements and separate
statements. financial statements, complete or
condensed.
4. Accounting Ind AS 34 additionally requires AS 25 requires the Notes to
Policies the information in respect of interim financial statements, (if
methods of computation material and not disclosed
followed. elsewhere in the interim financial
report), to contain a statement
that the same accounting
policies are followed in the
interim financial statements as
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3.96 FINANCIAL REPORTING

those followed in the most recent

annual financial statements or, in
case of change in those policies,
a description of the nature and
effect of the change.
5. Contingent Ind AS 34 requires furnishing of AS 25 requires furnishing of
Liabilities and information on both contingent information on contingent
Contingent Assets liabilities and contingent liabilities only.
assets, if they are significant.
6. Interim Financial Ind AS 34 requires that, where AS 25 does not contain these
Statements an interim financial report has requirements.
prepared on been prepared in accordance
Complete Basis with the requirements of Ind AS
34, that fact should be
disclosed.
Further, an interim financial
report should not be described
as complying with Ind AS
unless it complies with allofthe
requirements of Ind AS.
(The latter statement is
applicable when interim
financial statements are
prepared on complete basis
instead of ‘condensed basis’).
7. Transitional Ind AS 34 does not have this Under AS 25, when an interim
provision transitional provision. financial report is presented for
the first time in accordance with
that Standard, an entity need not
present, in respect of all the
interim periods of the current
financial year, comparative
statements of profit and loss for
the comparable interim periods
(current and year-to-date) of the
immediately preceding financial
year and comparative cash flow
statement for the comparable
year-to-date period of the
immediately preceding financial
year.
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INDIAN ACCOUNTING STANDARD 34 3.97

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. The entity’s financial year ends on 31st March. What are the “reporting periods” for which
financial statements (condensed or complete) in the interim financial report of the entity as
on 30th September, 20X1 are required to be presented, if:
(i) Entity publishes interim financial reports quarterly

(ii) Entity publishes interim financial reports half-yearly.

2. Narayan Ltd. provides you the following information and asks you to calculate the tax
expense for each quarter, assuming that there is no difference between the estimated
taxable income and the estimated accounting income:
Estimated Gross Annual Income 33,00,000
(inclusive of Estimated Capital Gains of ` 8,00,000)
Estimated Income of Quarter I is ` 7,00,000, Quarter II is ` 8,00,000, Quarter III (including
Estimated Capital Gains of ` 8,00,000) is ` 12,00,000 and Quarter IV is ` 6,00,000.
Tax Rates: On Capital Gains 12%

On Other Income: First ` 5,00,000 30%

Balance Income· 40%
3. An entity reports quarterly, earns ` 1,50,000 pre-tax profit in the first quarter but expects
to incur losses of ` 50,000 in each of the three remaining quarters. The entity operates in
a jurisdiction in which its estimated average annual income tax rate is 30%.
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3.98 FINANCIAL REPORTING

The management believes that since the entity has zero income for the year, its income-
tax expense for the year will be zero. State whether the management’s views are correct
or not? If not, then calculate the tax expense for each quarter as well as for the year as
per Ind AS 34.
4. Due to decline in market price in second quarter, Happy India Ltd. incurred an inventory
loss. The Market price is expected to return to previous levels by the end of the year. At
the end of year, the decline had not reversed. When should the loss be reported in interim
statement of profit and loss of Happy India Ltd.?
Answers
1. Paragraph 20 of Ind AS 34, Interim Financial Reporting states as follows:
“Interim reports shall include interim financial statements (condensed or complete) for
periods as follows:

a) balance sheet as of the end of the current interim period and a comparative balance
sheet as of the end of the immediately preceding financial year.
b) statements of profit and loss for the current interim period and cumulatively for the
current financial year to date, with comparative statements of profit and loss for the
comparable interim periods (current and year-to-date) of the immediately preceding
financial year.
c) statement of changes in equity cumulatively for the current financial year to date,
with a comparative statement for the comparable year-to-date period of the
immediately preceding financial year.
d) statement of cash flows cumulatively for the current financial year to date, with a
comparative statement for the comparable year-to-date period of the immediately
preceding financial year.
Accordingly, periods for which interim financial statements are required to be presented
are provided herein below:
(i) Entity publishes interim financial reports quarterly

The entity will present the following financial statements (condensed or complete) in
its interim financial report of 30th September, 20X1:
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INDIAN ACCOUNTING STANDARD 34 3.99

Balance 30th September 31st March 20X1 - -

sheet at 20X1
Statement of 3 months ended 3 months ended 6 months 6 months ended
profit and 30 th September 30 th September ended 30 th 30 th September
loss for 20X1 20X0 September 20X0
20X1
Statement of 6 months ended 6 months ended
changes in 30 th September 30 th September
equity for 20X1 20X0
Statement of 6 months ended 6 months ended - -
cash flows for 30 th September 30 th September
20X1 20X0
(ii) Entity publishes interim financial reports half-yearly
The entity’s financial year ends 31st March. The entity will present the following
financial statements (condensed or complete) in its half-yearly interim financial report
of 30th September, 20X1:

Balance sheet at 30th September, 20X1 31st March, 20X1

Statement of profit and loss for 6 months ending 6 months ending

30 th September, 20X1 30 th September, 20X0

Statement of changes in equity for 6 months ending 6 months ending

30 th September 20X1 30 th September 20X0

Statement of cash flows for 6 months ending 6 months ending

30 th September 20X1 30 th September 20X0

2. As per para 30(c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is
recognised in each interim period based on the best estimate of the weighted average annual
income tax rate expected for the full financial year.
If different income tax rates apply to different categories of income (such as capital gains or
income earned in particular industries) to the extent practicable, a separate rate is applied to
each individual category of interim period pre-tax income.

`
Estimated annual income exclusive of estimated capital gain
(33,00,000 – 8,00,000) (A) 25,00,000
Tax expense on other income:
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3.100 FINANCIAL REPORTING

30% on ` 5,00,000 1,50,000

40% on remaining ` 20,00,000 8,00,000
(B) 9,50,000
9,50,000
Weighted average annual income tax rate = B = = 38%
A 25,00,000

Tax expense to be recognised in each of the quarterly reports

`
Quarter I - ` 7,00,000 x 38% 2,66,000
Quarter II - ` 8,00,000 x 38% 3,04,000
Quarter III - ` (12,00,000 - 8,00,000) x 38% 1,52,000
` 8,00,000 x 12% 96,000 2,48,000
Quarter IV - ` 6,00,000 x 38% 2,28,000
10,46,000
3. As illustrated in para 30 (c) of Ind AS 34 ‘Interim financial reporting’, income tax expense is
recognised in each interim period based on the best estimate of the weighted average
annual income tax rate expected for the full financial year.
Accordingly, the management’s contention that since the net income for the year will be zero
no income tax expense shall be charged quarterly in the interim financial report, is not correct.
Since the effective tax rate or average annual income tax rate is already given in the question
as 30%, the income tax expense will be recognised in each interim quarter based on this
rate only. The following table shows the correct income tax expense to be reported each
quarter in accordance with Ind AS 34:
Period Pre-tax earnings Effective tax rate Tax expense
(in `) (in `)
First Quarter 1,50,000 30% 45,000
Second Quarter (50,000) 30% (15,000)
Third Quarter (50,000) 30% (15,000)
Fourth Quarter (50,000) 30% (15,000)
Annual 0 0

4. Loss should be recognised in the second quarter of the year.

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INDIAN ACCOUNTING STANDARD 7 3.101
3.101

UNIT 3:
INDIAN ACCOUNTING STANDARD 7: STATEMENT
OF CASH FLOWS

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Understand the meaning of cash flow statement
 Describe the objective and scope of issuance of Ind AS 7
 Define the relevant terms used in the Ind AS
 Classify the types of cash flows into operating, investing and financing
activities
 Distinguish between direct and indirect method of presentation of cash
flows under the operating activity
 Identify the provision applicable to various peculiar situations of cash
flows
 Disclose the necessary information as required in the standard
 Differentiate between Ind AS 7 and AS 3.
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3.102 2. FINANCIAL REPORTING
102

UNIT OVERVIEW

• Objectives
• Scope
• Benefits
Ind AS 7 • Definitions

• Operating Cash Flows

• Investing Cash Flows
Presentation of
Statement of • Financing Cash Flows
Cash Flows

• Direct Method
Method of • Indirect Method
Presentation

• Reporting on a net basis

• Foreign Currency Transactions
• Interest and Dividend
• Taxes on Income
Peculiar Cases • Investments in Subsidiaries, associates and Joint ventures
of Cash flows • Changes in ownerships Interests in subsidiaries and other businesses
• Non Cash Transactions

• Components of cash and cash equivalents

• Other Disclosures
Discosure
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INDIAN ACCOUNTING STANDARD 7 3.103
3.103

3.1 INTRODUCTION
The balance sheet is a snapshot of entity’s financial resources and obligations at a particular
point of time and the statement of profit and loss reflects the financial performance for the
period. These two components of financial statements are based on accrual basis of
accounting. The statement of cash flows includes only inflows and outflows of cash and cash
equivalents; it excludes transactions that do not affect cash receipts and payments.
The information on cash flows is useful in assessing sources of generating and deploying cash
and cash equivalents during the reporting period. The statement of cash flows can be used for
comparison with earlier reporting periods of the same entity as well as comparison with other
entities for the same reporting period.

Ind AS 7, Statement of Cash Flows, prescribes principles and guidance on preparation and
presentation of cash flows of an entity from operating activities, investing activities and financing
activities for a reporting period.

3.2 MEANING OF STATEMENT OF CASH FLOWS

Cash flow statement, in simple words is a statement, which provides the details about how the
cash is generated by an 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 flows from Operating Activities
(b) Cash flows from Investing Activities
(c) Cash flows from Financing Activities
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3.104 2. FINANCIAL REPORTING
104

From Operating
Activities

From Investing From Financing

Activities Activities

Cash Flows

The simplified example of cash flow statement, for understanding purpose is given below

Particulars Amount (`)

Cash flow from Operating Activities 10,000

Cash flow used in Investing Activities (2,000)

Cash flow used in Financing Activities (4,000)

Net Cash Generated during the year 4,000

Add: Cash and Cash Equivalents at the beginning of the year 13,000

Cash and Cash Equivalents at the end of the year (which will also tally with
the cash and cash equivalents given in the balance sheet) 17,000
Thus, one can see that at the beginning of the year, the opening balance of cash and cash
equivalent was ` 13,000. During the year, the business generated (inflow) cash from its main
operations ` 10,000. Thus, the entity had ` 23,000 at its disposal. Out of it, the entity has
used (outflow) ` 2,000 for additional investments and ` 4,000 for financing activities.
Therefore, at the end of the year, the entity is left with the balance of ` 17,000.
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INDIAN ACCOUNTING STANDARD 7 3.105
3.105

3.3 OBJECTIVE
Ind AS 7, has specified the following objectives of Statement of Cash Flows:

3.3.1 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 purposes has it been utilised. The information will be provided for
current year and immediate previous year.

3.3.2 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. It is useful in examining the relationship between
profitability and net cash flow and the impact of changing prices.

3.3.3 To understand the timing and certainty of their generation

The historical analysis of statement 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.

Objectives of Ind AS 7

To assess
To require

the provision of
the ability of the the needs of the the timing and information about the
entity to generate entity to utilise certainty of historical changes in
cash and cash
cash and cash those cash flows generation of equivalents of an entity
h fl
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3.106 2. FINANCIAL REPORTING
106

3.4 BENEFITS OF CASH FLOW INFORMATION

3.4.1 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 equivalents 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.

3.4.2 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 throw light on whether company could generate sufficient cash or not.

For example, company wants to expand its production capacity. The cash flow statement can
indicate whether company could generate the required cash from their operations, or whether
company has generated the funds from share capital or whether company has taken a loan for
the same.

3.4.3 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.

3.4.4 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.
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INDIAN ACCOUNTING STANDARD 7 3.107
3.107

3.5 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 for 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 and utilises
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.

3.6 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
known amounts of cash and which are subject to an insignificant risk of changes in value.
3. Cash flows are inflows and outflows of cash and cash equivalents.

4. Operating activities are the principal revenue-producing activities of the entity and other
activities that are not investing or financing activities.
5. Investing activities are the acquisition and disposal of long-term assets and other
investment 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.
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3.108 2. FINANCIAL REPORTING
108

3.7 CASH AND CASH EQUIVALENTS

Cash Equivalent means investments which can be realised easily in cash in a short period from
the date of investing the same.
1. Purpose: Cash equivalents are held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes.
2. Known amount of cash: This means that the cash amount that will be received on
redemption should be known at the time of the initial investment. It is not sufficient that the
instrument itself is readily convertible into cash and has a determinable market value.
Instead, it means that, at the time of the initial investment, the entity is satisfied that the risk
of changes in value is insignificant and that therefore the amount of cash to be received on
redemption is known.
3. 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.
4 Equity investments are excluded from cash equivalents unless they are, in substance,
cash equivalents.
5. Bank borrowings are generally considered to be financing activities. However, the bank
overdrafts may be an integral part of an entity's cash management in which case they will
be 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. .
6. 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.

Illustration 1
Company has provided the following information regarding the various assets held by company
on 31st March 20X1. 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:
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INDIAN ACCOUNTING STANDARD 7 3.109
3.109

Sr.No. Name of the Security Additional Information

1. Fixed deposit with SBI 12%, 3 years maturity on 1st January 20X4
2. Fixed deposit with HDFC 10%, original term was for 2 years, but due for
maturity on 30 th June 20X1
3. Redeemable Preference shares Acquired on 31st January 20X1 and the
in ABC ltd redemption is due on 30th April 20X1
4. Cash balances at various banks All branches of all banks in India
5. Cash balances at various banks All international branches of Indian banks
6. Cash balances at various banks Branches of foreign banks outside India
7. Bank overdraft of SBI Fort Temporary overdraft, which is payable on
branch demand
8. Treasury Bills 90 days maturity

Solution
Sr. No. Name of the Security Decision
1. Fixed deposit with SBI Not to be considered – long term
2. Fixed deposit with HDFC Exclude as original maturity is not less than
90 days from the date of acquisition
3. Redeemable Preference shares in Include as due within 90 days from the date
ABC Ltd. of acquisition
4. Cash balances at various banks Include
5. Cash balances at various banks Include
6. Cash balances at various banks Include
7. Bank overdraft of SBI Fort branch Include (Assumed as integral part of an
entity's cash management)
8. Treasury Bills Include

*****

3.8 PRESENTATION OF STATEMENT OF CASH FLOWS

The statement of cash flows shall report cash flows during the period classified by operating,
investing and financing activities.
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3.110 2. FINANCIAL REPORTING
110

Activities

Operating Investing Financing

Principal revenue- Activities that result in the Activities that result in

producing activities of the acquisition and disposal of changes in the size and
entity and other activities long-term assets and other composition of the
that are not investing or investment not included in contributed equity and
financing activities cash equivalents borrowings of the entity

3.8.1 Operating Activities

• Cash flows from operating activities are primarily derived from the principal revenue
producing activities of the entity ie from operations of the business. 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 from operating activities are:

Operating Cash Inflows Operating Cash Outflows

Cash receipts from the sale of goods Cash payments to suppliers for goods and
and the rendering of services services

Cash receipts from royalties, fee, Cash payments to and on behalf of employees
commission and other revenue

Cash receipts and payments from Cash payments or refunds of income taxes unless
contracts held for dealing or trading they can be specifically identified with financing
purposes and investing activities

Illustration 2
From the following transactions, identify which 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
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INDIAN ACCOUNTING STANDARD 7 3.111
3.111

2 Purchases of mobile phones from various companies

3 Employees expenses paid
4 Advertisement expenses paid
5 Credit sales of mobile
6 Miscellaneous charges received from customers for repairs of mobiles
7 Loss due to decrease in market value of the closing stock of old mobile phones
8 Payment to suppliers of mobile phones
9 Depreciation on furniture of sales showrooms
10 Interest paid on cash credit facility of the bank
11 Profit on sale of old computers and printers, in exchange of new laptop and printer
12 Advance received from customers
13 Sales tax and excise duty paid

Solution
Sr. No. Nature of Transaction Included / Excluded with reason
1 Receipt from sale of mobile phones Include – main revenue generating activity
2 Purchases of mobile phones from Include – expenses related to main operations
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
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 mobiles activity
7 Loss due to decrease in market Do not include - Non cash transaction
value of the closing stock of old
mobile phones
8 Payment to suppliers of mobile Include – cash outflow related to main
phones operations of business
9 Depreciation on furniture of sales Do not include – non cash item
showrooms
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3.112 2. FINANCIAL REPORTING
112

10 Interest paid on cash credit facility Do not include – cost of finance

of the bank
11 Profit on sale of old computers and Do not include – non cash item
printers, in exchange of new laptop
and printer
12 Advance received from customers Include – Related to operations of business
13 Sales tax and excise duty paid Include – related to operations of business

*****
• The amount of cash flows arising from operating activities is a key indicator of the extent to
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 investment 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 will depend on whether the entity has generated
enough cash or not.
3.8.1.1 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 profit or loss. The cash flows
relating to such transactions are cash flows from investing activities.
2. Properties built for let out : Cash payments to manufacture or acquire assets held for
rental to others and subsequently held for sale are cash flows from operating activities. The
cash receipts from rents and subsequent sales of such assets are also cash flows from
operating activities.
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INDIAN ACCOUNTING STANDARD 7 3.113
3.113

3.8.2 Investing Activities

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
recognized 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 from Investing Activities
receipts from sales of property, plant and payments to acquire property, plant and
equipment, intangibles and other long-term equipment, intangibles and other long-term
assets assets. These payments include those
relating to capitalised development costs and
self-constructed property, plant and
equipment
receipts from sales of equity or debt payments to acquire equity or debt
instruments of other entities and interests in instruments of other entities and interests in
joint ventures (other than receipts for those joint ventures (other than payments for those
instruments considered to be cash instruments considered to be cash
equivalents and those held for dealing or equivalents or those held for dealing or
trading purposes) trading purposes);
receipts from the repayment of advances and advances and loans made to other parties
loans made to other parties (other than (other than advances and loans made by a
advances and loans of a financial institution) financial institution)
receipts from futures contracts, forward payments for futures contracts, forward
contracts, option contracts and swap contracts, option contracts and swap
contracts except when the contracts are held contracts except when the contracts are held
for dealing or trading purposes, or the for dealing or trading purposes, or the
receipts are classified as financing activities payments are classified as financing activities
When a contract is accounted for as a hedge of an identifiable position the cash flows of the
contract are classified in the same manner as the cash flows of the position being hedged.
Illustration 3
From the following transactions taken from a private sector bank operating in India, identify
which transactions will be classified as operating and which would be classified as Investing
activity.
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3.114 2. FINANCIAL REPORTING
114

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 and remaining
amount paid in cash
14 Provident fund paid for the employees
15 Issued employee stock options

Solution

Sr. No. Nature of transaction paid 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 – in case of financial institutes
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 – in case of financial institutes
7 Commission received Operating – Main revenue generating
activity
8 Lease rentals paid for various Operating – Main expenses of operations
branches
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INDIAN ACCOUNTING STANDARD 7 3.115
3.115

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 purpose
banking software
12 Purchase of shares in 100% Investing – strategic investment
subsidiary for opening a branch in
Abu Dhabi
13 New cars purchased from Honda Investing-for cash payment
dealer, in exchange of old cars and
cash payment
14 Provident fund paid for the Operating
employees
15 Issued employee stock options Not to be considered. No cash flow

*****

3.8.3 Financing Activities

During the life time of the entity, it needs money for long term investments as well as for working
capital purpose. Company can raise the capital by way 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 of 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 instruments; redeem the entity’s shares;
Cash proceeds from issuing debentures, loans, Cash repayments of amounts borrowed; and
notes, bonds, mortgages and other
Short-term or long-term borrowings; Cash payments by a lessee for the reduction
of the outstanding liability relating to a lease.
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3.116 2. FINANCIAL REPORTING
116

Illustration 4
From the following transactions taken from a parent company having multiple businesses and
multiple segments, identify which transactions will be classified as Operating, Investing and
Financing:

Sr. 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 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 loans and advances 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. Nature of transaction Operating / Investing

No. / Financing / Not to be
considered
1 Issued preference shares Financing
2 Purchased the shares of 100% subsidiary company Investing
3 Dividend received from shares of subsidiaries Investing
4 Dividend received from other companies Investing
5 Bonus shares issued No cash flow
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INDIAN ACCOUNTING STANDARD 7 3.117
3.117

6 Purchased license for manufacturing of special drugs Investing

7 Royalty received from the goods patented by the company Operating
8 Rent received from the let out building (letting out is not main Investing
business)
9 Interest received from loans and advances given Investing
10 Dividend paid Financing
11 Interest paid on security deposits Financing
12 Purchased goodwill Investing
13 Acquired the assets of a company by issue of equity shares Not to be considered
(not parting any cash)
14 Interim dividends paid Financing
15 Dissolved the 100% subsidiary and received the amount in Investing
final settlement

*****
Illustration 5
An entity has entered into a factoring arrangement and received money from the factor. Examine
the said transaction and state how should it be presented in the statement of cash flows?

Solution
Under factoring arrangement, it needs to be assessed whether the arrangement is recourse or
non-recourse.
Recourse factoring:
The cash received is classified as a financing cash inflow as the entity continues to recognize
the receivables and the amount received from the factor is indeed a liability, The substance of
the arrangement is financing, as the entity retains substantially all of the risk and rewards of the
factored receivables.
When the cash is collected by the factor, the liability and the receivables are de-recognized. It
is acceptable for this to be disclosed as a non-cash transaction, because the settlement of the
liability and the factored receivables does not result in cash flows. The net impact of these
transactions on the cash flow statement is to present a cash inflow from financing, but there is
no operating cash flow from the original sale to the entity’s customers.
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3.118 2. FINANCIAL REPORTING
118
Non-recourse factoring:
Where an entity de-recognises the factored receivables and receives cash from the factor, the
cash receipt is classified as an operating cash inflow. This is because the entity has received
cash in exchange for receivables that arose from its operating activities.
*****

3.9 REPORTING CASH FLOWS FROM OPERATING

ACTIVITIES

Major classes of gross cash receipts and

Direct Method
gross cash payments are disclosed
Cash Flows from
Operating Activities Profit or loss is adjusted for the effects of
transactions of a non-cash nature, any
deferrals or accruals of past or future operating
Indirect Method
cash receipts or payments, 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 of gross cash receipts and gross cash
payments are disclosed; or
(b) the indirect method, whereby profit or loss is adjusted for the effects of transactions
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 payments may be
obtained either:
(a) from the accounting records of the entity; or
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INDIAN ACCOUNTING STANDARD 7 3.119
3.119

(b) by adjusting sales, cost of sales (interest and similar income and interest expense
and similar charges for a financial institution) and other items in the statement of
profit and loss for:
(i) changes during the period in inventories and operating receivables and
payables;

(ii) other non-cash items; and

(iii) other items for which the cash effects are investing or financing cash flows.
Analysis

Direct method starts with cash revenue / income / receipts of the company. All the cash
expenses will be 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 be cash flow from operating activity. The
exercise would be similar to converting the income and expenditure account (accrual system)
into receipt and payment (cash system), with certain adjustments. Thus, if we consider the
vertical operating statement, direct method will have (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 foreign
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 flow from 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 accounts. Thereafter, the profit will be adjusted for non-cash items,
losses and gains on investing and financing activities, interest and dividends, collection and
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3.120 2. FINANCIAL REPORTING
120

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.

Illustration 6
Find out the cash from operations by direct method and indirect method from the following information:
Operating statement of ABC Ltd. for the year ended 31.3.20X2

Particulars `
Sales 5,00,000.00
Less: Cost of goods sold 3,50,000.00
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

20X2 20X1
Assets
Non-current Assets
Property, Plant and Equipment 75,000.00 65,000.00
Investment 12,000.00 10,000.00
Current Assets
Inventories 12,000.00 13,000.00
Trade receivables 10,000.00 7,000.00
Cash and cash equivalents 6,000.00 5,000.00
Total 1,15,000.00 1,00,000.00
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INDIAN ACCOUNTING STANDARD 7 3.121
3.121

Equity and Liabilities

Shareholders’ Funds 60,000.00 50,000.00
Non-current Liabilities 33,000.00 35,000.00
Current Liabilities
Trade Payables 12,000.00 8,000.00
Payables for Expenses 10,000.00 7,000.00
Total 1,15,000.00 1,00,000.00

Solution
1. Cash flow from Operations by Direct Method

Particulars ` See Note

Cash Sales 4,97,000.00 1
Less: Cash Purchases 3,45,000.00 2
Overheads 52,000.00 3
Interest - Financing
Depreciation - Non cash item
Loss on sale of asset - Investing item
Cash profit 100,000.00
Less: Tax (30,000.00)
Cash profit after tax 70,000.00
Note No 1 - Cash Receipts from Sales and Trade receivables
Particulars `
Sales 5,00,000.00
Add : Opening Trade receivables 7,000.00
Less : Closing Trade receivables (10,000.00)
Cash Receipts 4,97,000.00

Note No 2 :- Payment to Trade Payables for Purchases

Particulars `
Cost of goods sold 3,50,000.00
Closing inventories 12,000.00
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3.122 2. FINANCIAL REPORTING
122

Less: Opening inventories (13,000.00)

Purchases 3,49,000.00
Add: Opening Trade Payables 8,000.00
Less: Closing Trade Payables (12,000.00)
Payment to creditors 3,45,000.00
Particulars `
Overheads 55,000.00
Add: Opening payables 7,000.00
Less: Closing payables (10,000.00)
Payment for Overheads 52,000.00

2. Cash flow from Operations by Indirect Method

Indirect Method `
Profit After Tax 53,000.00
Add back/(Less): Depreciation 7,000.00
Loss on sale of asset 2,000.00
Interest paid 3,000.00
Decrease in Inventory 1,000.00
Increase in Trade Receivables (3,000.00)
Increase in Trade Payables 4,000.00
Increase in Payables for expenses 3,000.00
Net cash generated from operating activities 70,000.00

Note: Cash flow derived from operations ` 70,000 is same in both Direct Method and
Indirect Method.
*****

3.10 REPORTING 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.
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INDIAN ACCOUNTING STANDARD 7 3.123
3.123

3.11 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 1
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
` 2.5 crores and 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 deposits 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
• other short-term borrowings, for example, those which have a maturity period
of three months or less.
2. Cash flows arising from each of the following activities of a financial institution maybe
reported on a net basis:
(a) cash receipts and payments for the acceptance and repayment of deposits with a
fixed maturity date;
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3.124 2. FINANCIAL REPORTING
124

(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.

3.12 FOREIGN CURRENCY CASH FLOWS

• Cash flows arising from transactions in a foreign currency shall be recorded in an entity’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.
• 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 2
Suppose the money is received on account of exports on 15 th January 20X1 in US$. The
company prepares the accounts in rupees. In such case the exchange rate between USD
and Rupee as on 15th January 20X1 need to be applied for 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 rates.
3.12.1 Treatment of foreign exchange differences arising from unsettled transactions
relating to operating activities
Under indirect method of preparation of statement of cash flows, the exchange differences that arise on
translation at the balance sheet date, for monetary items that form part of operating activities, will
require no adjustment in the reconciliation of profit to net cash flow from operating activities.

Example 3
Entity A (Indian Company) purchased goods for resale from France during January for EUR 10,000
(Exchange rate: 1 EUR = ` 70) on a credit period of 4 months. It accounted for the purchase of
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INDIAN ACCOUNTING STANDARD 7 3.125
3.125

inventory at ` 7,00,000 (10,000 x 70). On 31st March, the exchange rate has changed to
1 EUR = ` 65. This would mean an unrealised gain due to exchange fluctuation of ` 50,000 (since
the payables will be recorded at ` 6,50,000 (at closing exchange rate).
Assuming that the inventory is unsold at that date, the movement is reported as under:
Profit ` 50,000
Less: Increase in Inventory ` (7,00,000)
Add: Increase in Payables ` 6,50,000
Net Cash flows from operating activities ` 0

Foreign currency cash flows

Arising from transactions in a foreign currency Of a foreign subsidiary

Recorded in an entity’s functional

currency Cash Exchange rates
flows of a between the
foreign functional currency
subsidiary and the foreign
Foreign Exchange rate currency at the dates
currency between the of the cash flows
amount functional currency
and the foreign
currency at the date
of the cash flow

Note:
1. Cash flows denominated in a foreign currency are reported in a manner consistent
with Ind AS 21.
2. A weighted average exchange rate for a period may be used for recording foreign
currency transactions or the translation of the cash flows of a foreign subsidiary
3. Ind AS 21 does not permit use of the exchange rate at the end of the reporting period
when translating the cash flows of a foreign subsidiary
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3.126 2. FINANCIAL REPORTING
126

3.13 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 operating Cash flows from financing
activities activities
Interest and dividends Cash flows arising from operating Cash flows from investing
received activities activities
Dividends paid Cash flows from financing Cash flows from financing
activities activities

Interest and Dividends

Cash flows from interest and

dividends received and paid shall
each be disclosed separately

In case of financial institutions In the case of other entities

Interest paid Interest and Dividends Dividends Interest Interest and

dividends paid paid paid dividends
received received

Classified as cash Classified as cash

flows arising from Classified as cash flows from financing flows from investing
operating activities activities activities

They are costs of obtaining financial

They are returns on
resources
investments
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INDIAN ACCOUNTING STANDARD 7 3.127
3.127

Illustration 7
A firm invests in a five-year bond of another company with a face value of ` 10,00,000 by paying
` 5,00,000. The effective rate is 15%. The firm recognises proportionate interest income in 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, whether the receipt of ` 10,00,000 should be split between interest income and
receipts from investment activity.
Solution
Interest income will be 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 been 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.
*****

3.14 TAXES ON INCOME

Cash flows arising from taxes on income shall be separately disclosed 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 tax cash flow is
classified as an investing or financing activity as appropriate.
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3.128 2. FINANCIAL REPORTING
128

Shall be
Cash flows separately When it is
Tax cash flow is
arising from disclosed practicable to
classified as an
taxes on identify
investing or
income financing activity as
appropriate
When it is Shall be classified as
impracticable cash flows from
operating activities
to identify
when impracticable to
identify with financing
and investing activities

Note: When tax cash flows are allocated over more than one class of activity, the total
amount of taxes paid is disclosed.

Illustration 8
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 statements of X Limited?
Solution
Cash flows arising from taxes on income should be classified as cash flows from operating
activities unless they can be specifically identified with financing and investing activities. In the
case 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.
*****
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INDIAN ACCOUNTING STANDARD 7 3.129
3.129

3.15 INVESTMENTS IN SUBSIDIARIES, ASSOCIATES AND

JOINT 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 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 investments in the
associate or joint venture, and distributions and other payments or receipts between it and the
associate or joint venture.

Investments in When accounted an investor restricts its reporting in the statement

subsidiaries, for by use of the of cash flows to the cash flows between itself
associates and equity or cost and the investee,
joint ventures method for example, to dividends and advances.

When reporting its Includes in its statement of cash flows

interest in an the cash flows in respect of its investments in
associate or a the associate or joint venture, and
joint venture using
distributions and other payments or receipts
the equity method
between it and the associate or joint venture.

3.16 CHANGES IN OWNERSHIP INTERESTS IN

SUBSIDIARIES AND OTHER BUSINESSES

3.16.1 Classification of Cash Flows as Investing Activity

• The aggregate cash flows arising from obtaining or losing control of subsidiaries or other
businesses shall be presented separately and classified as investing activities.
• An entity shall disclose, in aggregate, in respect of both obtaining and losing control of
subsidiaries or other businesses during the period each of the following:

(a) the total consideration paid or received;

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3.130 2. FINANCIAL REPORTING
130

(b) the portion of the consideration consisting of cash and cash equivalents;
(c) the amount of cash and cash equivalents in the subsidiaries or other businesses
over which control is obtained or lost; and
(d) the amount of the assets and liabilities other than cash or cash equivalents in the
subsidiaries or other businesses over which control is obtained or lost, summarised
by each major category.
• The separate presentation of the cash flow effects of obtaining or losing control of
subsidiaries or other businesses as single line items, together with the separate disclosure
of the amounts of assets and liabilities acquired or disposed of, helps to distinguish those
cash flows from the cash flows arising from the other operating, investing and financing
activities. The cash flow effects of losing control are not deducted from those of obtaining
control.
• The aggregate amount of the cash paid or received as consideration for obtaining or losing
control of subsidiaries or other businesses is reported in the statement of cash flows net of
cash and cash equivalents acquired or disposed of as part of such transactions, events or
changes in circumstances.

3.16.2 Classification of Cash Flows as Financing Activity

• Cash flows arising from changes in ownership interests in a subsidiary that do not result
in a loss of control shall be classified as cash flows from financing activities, unless the
subsidiary is held by an investment entity and is required to be measured at fair value
through profit or loss.

• Changes in ownership interests in a subsidiary that do not result in a loss of control, such
as the subsequent purchase or sale by a parent of a subsidiary’s equity instruments, are
accounted for as equity transactions (see Ind AS 110), unless the subsidiary is held by an
investment entity and is required to be measured at fair value through profit or loss.
Accordingly, the resulting cash flows are classified in the same way as other transactions
with owners.
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INDIAN ACCOUNTING STANDARD 7 3.131
3.131

Changes in ownership interests in subsidiaries and other businesses

Cash flows arising from

Obtaining control of subsidiaries or Losing control of subsidiaries or other

other businesses businesses

Shall be classified Shall be presented Shall disclose, in aggregate, during

as investing separately the period
activities

The cash flow effects of losing control are not

deducted from those of obtaining control

The total The portion of The amount of cash The amount of the
consideratio the and cash equivalents in assets and liabilities
n paid or consideration the subsidiaries or other than cash or cash
received consisting of other businesses over equivalents in the
cash and cash which control is subsidiaries or other
equivalents obtained or lost businesses over which
control is obtained or
lost, summarised by
Cash flows arising from changes in ownership interests
each major category
in a subsidiary that do not result in a loss of control

Shall be classified as cash flows from Need not apply to an investment in a subsidiary
financing activities, unless the subsidiary measured at fair value through profit or loss (FVTPL)
is held by an investment entity
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3.132 2. FINANCIAL REPORTING
132

3.17 NON-CASH TRANSACTIONS

• Investing and financing transactions that do not require the use of cash or cash equivalents
shall be excluded from a statement of cash flows.
• Such transactions shall be disclosed elsewhere in the financial statements in a way that
provides all the relevant information about these investing and financing activities.
• Many investing and financing activities do not have a direct impact on current cash flows
although they do affect the capital and asset structure of an entity. Such non-cash items
will not form part of the cash flow statement.
Examples of non-cash transactions are:
(a) the acquisition of assets either by assuming directly related liabilities or by means of
a lease;
(b) the acquisition of an entity by means of an equity issue; and
(c ) the conversion of debt to equity
Illustration 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.
*****

3.17.1 Changes in liabilities arising from financing activities

• An entity shall provide disclosures that enable users of financial statements to evaluate
changes in liabilities arising from financing activities, including both changes arising from
cash flows and non-cash changes.
• To the extent necessary to satisfy the above requirement, an entity shall disclose the
following changes in liabilities arising from financing activities:
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INDIAN ACCOUNTING STANDARD 7 3.133
3.133

(a) changes from financing cash flows;

(b) changes arising from obtaining or losing control of subsidiaries or other businesses;
(c) the effect of changes in foreign exchange rates;
(d) changes in fair values; and
(e) other changes.
• Liabilities arising from financing activities are liabilities for which cash flows were, or future
cash flows will be, classified in the statement of cash flows as cash flows from financing
activities.
• In addition, the disclosure requirement also applies to changes in financial assets (for
example, assets that hedge liabilities arising from financing activities) if cash flows from
those financial assets were, or future cash flows will be, included in cash flows from
financing activities.
• One way to fulfil the disclosure requirement is by providing a reconciliation between the
opening and closing balances in the balance sheet for liabilities arising from financing
activities, including the changes identified.
• If an entity provides the disclosure required in combination with disclosures of changes in
other assets and liabilities, it shall disclose the changes in liabilities arising from financing
activities separately from changes in those other assets and liabilities.

3.18 COMPONENTS OF CASH AND CASH EQUIVALENTS

• An entity shall disclose the components of cash and cash equivalents and shall present a
reconciliation of the amounts in its statement of cash flows with the equivalent items
reported in the balance sheet.
• Company will provide a policy which it adopts in determining the composition of cash and
cash equivalents (As per Ind AS 1).

It has been clarified, that there should not be a difference in the amount of cash and cash
equivalent as per Ind AS 1 and as per Ind AS 7. However, as per Ind AS 7 “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.” Although Ind AS 7 permits bank overdrafts to
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3.134 2. FINANCIAL REPORTING
134

be included as cash and cash equivalent, for the purpose of presentation in the balance
sheet, it would not be appropriate to include bank overdraft in the line item cash and cash
equivalents unless the netting off conditions as given in paragraph 42 of Ind AS 32, Financial
Instruments: Presentation are complied with.
Bank overdraft, in the balance sheet, will be included within financial liabilities. Just because
the bank overdraft is included in cash and cash equivalents for the purpose of Ind AS 7, does
not mean that the same should be netted off against the cash and cash equivalent balance in
the balance sheet. Instead Ind AS 7 requires a disclosure of the components of cash and
cash equivalent and a reconciliation of amounts presented in the cash flow statements.

Another element on account of which there could be difference between the cash and cash
equivalents presented in the balance sheet and the statement of cash flows is unrealised gains
or losses arising from changes in foreign currency exchange rates, which are not considered to
be cash flows. The following illustration would explain the issue:
Illustration 10
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
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INDIAN ACCOUNTING STANDARD 7 3.135
3.135

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.
*****

3.19 OTHER DISCLOSURES

An entity shall disclose, together with a commentary by management, the amount of significant
cash and cash equivalent balances held by the entity that are not available for use by the group.
There are various circumstances in which cash and cash equivalent balances held by an entity
are not available for use by the group. Examples include cash and cash equivalent balances
held by a subsidiary that operates in a country where exchange controls or other legal
restrictions apply when the balances are not available for general use by the parentor other
subsidiaries.
Additional information may be relevant to users in understanding the financial position and
liquidity of an entity. It may include:
1. The amount of undrawn borrowing facilities that may be available for future operating
activities and to settle capital commitments, indicating any restrictions on the use of these
facilities.
2. The aggregate amount of cash flows that represent increases in operating capacity
separately from those cash flows that are required to maintain operating capacity it will help
the stakeholders to know whether entity is paying proper attention for maintenance also;
3. The amount of the cash flows arising from the operating, investing and financing activities
of each reportable segment (see Ind AS 108, Operating Segments). This will provide the
idea about the company as a whole as well as the various parts of the company and their
efficiencies.

Investing and financing shall be excluded from a statement of cash flows

transactions that do not
disclosed elsewhere in the financial statements
require the use of cash
or cash equivalents
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3.136 2. FINANCIAL REPORTING
136

Components of cash disclose the components of cash and cash equivalents

and cash equivalents
shall present a reconciliation of the amounts in its statement of cash
flows with the equivalent items reported in the balance sheet

discloses the policy which entity adopts in determining the

composition of cash and cash equivalents.

Other disclosures disclose, together with a commentary by management, the amount of

significant cash and cash equivalent balances held and are not
available for use by the group

Note: The requirements shall be equally applicable to the entities

in case of separate financial statements also.

Illustration 11
Following is the balance sheet of Kuber Limited for the year ended 31 March, 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
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INDIAN ACCOUNTING STANDARD 7 3.137
3.137

EQUITY AND LIABILITIES

Equity
Equity share capital 300 300
Other equity 12,000 8,000
Total equity 12,300 8,300
Liabilities
Non-current liabilities
Financial liabilities
Long-term borrowings 2,000 5,000
Other non-current liabilities 2,740 3,615
Total non-current liabilities 4,740 8,615
Current liabilities
Financial liabilities
Trade payables 150 90
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
Additional Information:
(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
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3.138 2. FINANCIAL REPORTING
138

(6) Other non-current / current assets and liabilities are related to operations of Kuber Ltd. and
do not contain any element of financing and investing activities.
Using the above information of Kuber Limited, construct a statement of cash flows under indirect
method.

Solution
Statement of Cash Flows
` in lacs
Cash flows from Operating Activities
Net Profit after Tax 4,450
Add: Tax Paid 105
4,555
Add: Depreciation & Amortisation (500 + 20) 520
Less: Gain on Sale of Machine (70-60) (10)
Less: Increase in Deferred Tax Asset (855-750) (105)
4,960
Change in operating assets and liabilities
Add: Decrease in financial asset (170 - 145) 25
Less: Increase in other non-current asset (800 - 770) (30)
Less: Increase in other current asset (195 - 85) (110)
Less: Decrease in other non-current liabilities (3,615 – 2,740) (875)
Add: Increase in other current liabilities (300 - 200) 100
Add: Increase in trade payables (150-90) 60
4,130
Less: Income Tax (105)
Cash generated from Operating Activities 4,025
Cash flows from Investing Activities
Sale of Machinery 70
Purchase of Machinery [13,000-(12,500 – 500-60)] (1,060)
Purchase of Intangible Asset [50-(30-20)] (40)
Sale of Financial asset - Investment (2,500 – 2,300) 200
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INDIAN ACCOUNTING STANDARD 7 3.139
3.139

Cash outflow from Investing Activities (830)

Cash flows from Financing Activities
Dividend Paid (450)
Long term borrowings paid (5,000 – 2,000) (3,000)
Cash outflow from Financing Activities (3,450)
Net Cash outflow from all the activities (255)
Opening cash and cash equivalents (460 – 60) 400
Closing cash and cash equivalents (220 – 75) 145

*****

Illustration 12
The relevant extracts of consolidated financial statements of A Ltd. are provided below:
Consolidated Statement of Cash Flows
For the year ended (` in Lac)
31 st March 20X2 31 st March 20X1
Assets
Non-Current Assets
Property, Plant and Equipment 4,750 4,650
Investment in Associate 800 -
Financial Assets 2,150 1,800
Current Assets
Inventories 1,550 1,900
Trade Receivables 1,250 1,800
Cash and Cash Equivalents 4,650 3,550

Liabilities
Current Liabilities
Trade Payables 1,550 3,610
Extracts from Consolidated Statement of Profit and Loss
for the year ended 31st March 20X2
Particulars Amount (` in Lac)
Revenue 12,380
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3.140 2. FINANCIAL REPORTING
140

Cost of Goods Sold (9,860)

Gross Profit 2,520
Other Income 300
Operating Expenses (450)
Other expenses (540)
Interest expenses (110)
Share of Profit of Associate 120
Profit before Tax 1,840

The below information is relevant for A Ltd Group.

1. A Ltd had spent ` 30 Lac on renovation of a building. A Ltd charged the entire renovation
cost to profit and loss account.
2. On 1st April 20X1, A Ltd acquired 100% shares in S Ltd, for cash of ` 300 Lac. Fair value
of the assets acquired and liabilities assumed under the acquisition are as under:
Property, Plant and Equipment 140 Lac
Inventories 60 Lac
Trade Receivables 30 Lac
Cash and Cash Equivalents 20 Lac
Total Assets 250 Lac
Less: Trade Payables (50 Lac)
Net Assets on acquisition 200 Lac
3. A Ltd.’s property, plant and equipment comprise the following:
Carrying amount on 1st April 20X1 4,650 Lac
Addition (at cost) including assets in S Ltd. 800 Lac
Revaluation Surplus 80 Lac
Disposal (Sale) of Assets (490 Lac)
Depreciation for the year (290 Lac)
Carrying Amount on 31st March 20X2 4,750 Lac
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.
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INDIAN ACCOUNTING STANDARD 7 3.141
3.141

Property, plant and equipment was sold at 630 Lac. Gain on disposal is adjusted against
operating expenses.
4. 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.
5. Impairment test was conducted on 31 st 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.

Solution
Extracts of Statement of Cash Flows for the year ended 31 st March 20X2

Cash Flows from Operating Activities Amount in ` Lacs

Profit before tax (W.N.1) 1,920
Less: Profit on Sale of PPE (630 - 490) (140)
Add back: Depreciation 290
Impairment of Goodwill 265
Impairment of Intangible Assets 900
Less: Share of Profits of Associate (400 x 30%) (120)
Add: Interest expense [110 – 10] 100
Working Capital Changes (W.N.2):
Add: Decrease in Trade Receivables 580
Add: Decrease in Inventories 410
Less: Decrease in Trade Payables (2,110)
Cash generated from operations 2,095
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3.142 2. FINANCIAL REPORTING
142
Working Notes:
1. Profit before tax Amount in ` Lacs

Reported profit as per Profit or Loss Statement 1,840

Add back: Renovation costs charged as expense 30
Construction costs charged as expense 40
Borrowing costs to be capitalized 10
Revised Profit before tax 1,920
2. Changes in Trade Receivables Amount in ` Lacs
Opening Balance 1,800
Add: Receivables of S Ltd. 30
1,830
Less: Closing Balance (1,250)
580
3. Changes in Inventories Amount in ` Lacs

Opening Balance 1,900

Add: Inventories of S Ltd. 60
1,960
Less: Closing Balance (1,550)
410
4. Changes in Trade Payables Amount in ` Lacs

Opening Balance 3,610

Add: Trade Payables of S Ltd. 50
3,660
Less: Closing Balance (1,550)
2,110
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INDIAN ACCOUNTING STANDARD 7 3.143
3.143

3.20 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITY
Following is the extract from the financial statements of the listed entity ‘ITC Limited’ for the
financial year 2021-2022 with respect to ‘Cash Flow Statement’.
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3.144 2. FINANCIAL REPORTING
144
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INDIAN ACCOUNTING STANDARD 7 3.145
3.145

(Source: Annual Report 2021-2022 - ‘ITC Limited’)

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3.146 2. FINANCIAL REPORTING
146

3.21 SIGNIFICANT DIFFERENCES IN IND AS 7 VIS-À-VIS

AS 3

S.No. Particulars Ind AS 7 AS 3

1. Bank Overdraft Ind AS 7 specifically includes bank AS 3 is silent on this

Repayable on overdrafts which are repayable on aspect.
Demand demand as a part of cash and cash
equivalents (Refer Para 8 of Ind AS 7)

2. Treatment of Ind AS 7 provides the treatment of AS 3 does not contain

Cash Payments cash payments to manufacture or such requirements.
in Specific Cases acquire assets held for rental to others
and subsequently held for sale in the
ordinary course of business as cash
flows from operating activities.
Further, treatment of cash receipts
from rent and subsequent sale of such
assets as cash flow from operating
activity is also provided. (Refer Para
14 of Ind AS 7)

3. Examples of cash Ind AS 7 includes following examples These examples are not
flows arising from of cash flows arising from financing mentioned in AS 3
financing activities (paragraph 17 of Ind AS 7):
activities (a) cash payments to owners to
acquire or redeem the entity’s
shares;
(b) cash proceeds from mortgages;
(c) cash payments by a lessee for
the reduction of the outstanding
liability relating to a lease.

4. Adjustment of the Ind AS 7 specifically requires AS 3 does not contain

Profit or Loss for adjustment of the profit or loss for the such requirements.
the Effects of effects of ‘undistributed profits of
Undistributed associates and non-controlling
Profits of interests’ while determining the net
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INDIAN ACCOUNTING STANDARD 7 3.147
3.147

Associates and cash flow from operating activities

Non-controlling using the indirect method. (Refer Para
Interests 20(b) of Ind AS 7)

5. Cash Flows Ind AS 7 does not contain this AS 3 requires cash

associated with requirement. flows associated with
Extraordinary extraordinary activities
Activities to be separately
classified as arising
from operating,
investing and financing
activities

6. Disclosure of the Ind AS 7 requires an entity (except an AS 3 does not contain

Amount of Cash investment entity) to disclose the such requirements.
and Cash amount of cash and cash equivalents
Equivalents in and other assets and liabilities in the
Specific subsidiaries or other businesses over
Situations which control is obtained or lost (Refer
Para 40(c) and (d) of Ind AS 7). It
also requires to report the aggregate
amount of the cash paid or received
as consideration for obtaining or losing
control of subsidiaries or other
businesses in the statement of cash
flows, net of cash and cash
equivalents acquired or disposed of as
a part of such transactions, events or
changes in circumstances (Refer Para
42 of Ind AS 7).

7. Cash Flows Ind AS 7 requires to classify cash AS 3 does not contain

arising from flows arising from changes in such a requirement.
Changes in ownership interests in a subsidiary
Ownership that do not result in a loss of control
Interests in a as cash flows from financing activities
Subsidiary (Refer Para 42A and 42B of Ind AS 7).
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3.148 2. FINANCIAL REPORTING
148

8. Investment in an Ind AS 7 mentions the use of equity or AS 3 does not contain

associate, joint cost method while accounting for an such requirements.
venture or a investment in an associate, joint
subsidiary venture or a subsidiary (refer
paragraph 37 of Ind AS 7).
It also specifically deals with the
reporting of interest in an associate or
a joint venture using equity method
(refer paragraph 38 of Ind AS 7).

9. Cash flows With regard to cash flows arising from AS 3 requires it to be

arising from transaction in a foreign currency, recorded in an entity’s
transaction in a Ind AS 7 requires it to be recorded in ‘reporting currency’.
foreign currency an entity’s functional currency.
Ind AS 7 also deals with translation of AS 3 does not deal with
cash flows of a foreign subsidiary it.
(refer paragraphs 25 to 27 of
Ind AS 7)

10. Disclosure of Ind AS 7 requires disclosure of AS 3 does not contain

changes in changes in liabilities arising from such requirement.
liabilities financing activities, both changes i.e.
changes arising from cash flows and
non-cash changes.

11. Disclosures Ind AS 7 requires more disclosures, In comparison to

i.e. additional information that may be Ind AS 7, AS 3 does not
relevant to understanding the financial have that many
position and liquidity of an entity disclosure requirements.
(Refer Paragraph 50 of the Ind AS 7)
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INDIAN ACCOUNTING STANDARD 7 3.149
3.149

QUICK RECAP
Presentation of a statement of cash flows

Report cash flows (inflows and outflows) during the period

Classified as

Operating activities Investing activities Financing activities Cash and cash equivalents

These are the Investing activities Financing activities Cash Cash equivalents
principal revenue- are the acquisition are activities that
producing activities and disposal of result in changes Are short-
of the entity other It term, highly
long-term assets in the size and
than investing or comprises liquid
and other composition of the
financing activities cash on investments
investments not contributed equity
hand &
included in cash and borrowings of
demand Are readily
Reporting equivalents the entity
deposits convertible to
known
An entity shall report separately amounts of
Under Under indirect major classes of gross cash cash
direct method receipts and gross cash
method payments arising from investing Are subject to
and financing activities an
Whereby Whereby profit or loss is insignificant
major classes adjusted for risk of
of gross cash • non-cash transactions changes in
receipts and value
• any deferrals or accruals of
gross cash
past or future operating Are not for
payments are
cash receipts or payments investment
disclosed
• items of income or expense purposes
associated with investing
or financing cash flows has a short
maturity of,
say, 3 months
or less from
Exception the date of
Entities are encouraged to follow the direct
acquisition
method. The direct method provides information
which may be useful in estimating future cash
flows and which is not available under the Equity investments are excluded from cash
indirect method. equivalents
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3.150 2. FINANCIAL REPORTING
150

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

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
Property, Plant and Equipment 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
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INDIAN ACCOUNTING STANDARD 7 3.151
3.151

20X2
Sales 2,00,000
Cost of Goods Sold (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 dividend of ` 2,500.
During 20X2, ABC Ltd. paid ` 46,000 in cash to acquire new fixed assets. The accounts
payable was used only for 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
3. Z Ltd. has no foreign currency cash flow for the year 20X1. It holds some deposit in a bank
in the USA. The balances as on 31.12.20X1 and 31.12.20X2 were US$ 100,000 and
US$ 102,000 respectively. The exchange rate on December 31, 20X1 was US$1 = ` 45.
The same on 31.12.20X2 was US$1 = ` 50. The increase in the balance was on account of
interest credited on 31.12.20X2. Thus, the deposit was reported at ` 45,00,000 in the
balance sheet as on December 31, 20X1. It was reported at ` 51,00,000 in the balance
sheet as on 31.12.20X2. How these transactions should be presented in cash flow for the
year ended 31.12.20X2 as per Ind AS 7?
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3.152 2. FINANCIAL REPORTING
152

4. 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.
5. Entity A acquired a subsidiary, Entity B, during the year. Summarised 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
Depreciation (30,000)
Other operating expenses (56,000)
Interest cost (4,000)
Profit before taxation 70,000
Taxation (15,000)
Profit after taxation 55,000

Consolidated balance sheet

20X2 20X1
Assets Amount Amount
(`) (`)
Cash and cash equivalents 8,000 5,000
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INDIAN ACCOUNTING STANDARD 7 3.153
3.153

Trade receivables 54,000 50,000

Inventories 30,000 35,000
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:

Particulars Amount (`)

Inventories 4,000
Trade receivables 8,000
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.
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3.154 2. FINANCIAL REPORTING
154

Answers
1. A. DIRECT METHOD

Cash flows from operating activities 20X2

Cash received from customers 2,07,500
Cash paid for inventory (1,24,000)
Cash paid for insurance (9,000)
Cash paid for wages (53,000)
Net cash flow from operating activities 21,500
Cash flows from investing activities
Purchase of Property, Plant and Equipment (46,000)
Cash flows from financing activities
Dividend paid (2,500)
Proceeds from issuance of debentures 13,000
Proceeds from issue of equity 4,000
Net cash flows from financing activities 14,500
Net decrease in cash and cash equivalents (10,000)
Opening Cash Balance 14,000
Closing Cash Balance 4,000

B. INDIRECT METHOD
Cash flows from operating activities 20X2
Net Profit 1,000
Adjustments for Depreciation 15,000
16,000
Decrease in accounts receivable 7,500
Decrease in prepaid insurance 2,000
Increase in inventory (3,000)
Increase in accounts payable 2,000
Decrease in wages payable (3,000)
Net cash flow from operating activities 21,500
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INDIAN ACCOUNTING STANDARD 7 3.155
3.155

Cash flows from investing activities

Purchase of fixed assets (46,000)
Cash flows from financing activities
Dividend paid (2,500)
Proceeds from issue of debentures 13,000
Proceeds from issue of equity 4,000
Net cash flows from financing activities 14,500
Net decrease in cash and cash (10,000)
equivalents
Opening Cash Balance 14,000
Closing Cash Balance 4,000
Working Notes:
Fixed Assets Account
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 2,70,000 By Balance c/d 3,16,000
To Cash (Purchase of Fixed Assets) 46,000
3,16,000 3,16,000

Inventory Account
Particulars Amount Particulars Amount
(`) (`)
To Balance b/d 34,000 By Cost of goods 1,23,000
To Creditors account (credit 2,000 sold 37,000
purchase) By Balance c/d
To Purchase (Bal. Figure) 1,24,000
1,60,000 1,60,000

Accounts Payable Account

Particulars Amount Particulars Amount
(`) (`)
To Balance c/d 18,000 By Balance b/d 16,000
By Inventory Account 2,000
_____ (credit purchase) ______
18,000 (Bal.Fig.) 18,000
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3.156 2. FINANCIAL REPORTING
156
Equity Share Capital Account
Particulars Amount (`) Particulars Amount
(`)
To Balance c/d 88,000 By Balance b/d 84,000
By Bank account 4,000
(Proceeds from equity
______ share issued) ______
88,000 88,000

2. XYZ Ltd.
Cash Flow Statement for the year ended March 31, 20X1 (Using the Direct Method)

Cash flows from operating activities ` ‘000 ` ‘000

Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash from operating activities 250
Cash flow from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at the beginning of the period 50
Cash at end of the period 150
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INDIAN ACCOUNTING STANDARD 7 3.157
3.157

3. The profit and loss account was credited by ` 1,00,000 (US $ 2,000 × ` 50) towards
interest income. It was credited by the exchange difference of US$ 1,00,000 × (` 50 - ` 45)
that is, ` 500,000. In preparing the cash flow statement, ` 5,00,000, the exchange
difference, should be deducted from the ‘net profit before taxes’. However, in order to
reconcile the opening balance of the cash and cash equivalents with its closing balance, the
exchange difference ` 5,00,000, should be added to the opening balance in note to cash
flow statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow.
4. As per para 39 of Ind AS 7, the aggregate cash flows arising from obtaining control of
subsidiary shall be presented separately and classified as investing activities.
As per para 42 of Ind AS 7, the aggregate amount of the cash paid or received as
consideration for obtaining subsidiaries is reported in the statement of cash flows net of
cash and cash equivalents acquired or disposed of as part of such transactions, events or
changes in circumstances.
Further, investing and financing transactions that do not require the use of cash or cash
equivalents shall be excluded from a statement of cash flows. Such transactions shall be
disclosed elsewhere in the financial statements in a way that provides all the relevant
information about these investing and financing activities.
As per para 42A of Ind AS 7, cash flows arising from changes in ownership interests in a
subsidiary that do not result in a loss of control shall be classified as cash flows from
financing activities, unless the subsidiary is held by an investment entity, as defined in
Ind AS 110, and is required to be measured at fair value through profit or loss. Such
transactions are accounted for as equity transactions and accordingly, the resulting cash
flows are classified in the same way as other transactions with owners.
Considering the above, for the financial year ended 31st March, 20X2 total consideration of
` 15,00,000 less ` 250,000 will be shown under investing activities as “Acquisition of the
subsidiary (net of cash acquired)”.
There will not be any impact of issuance of equity shares as consideration in the cash flow
statement however a proper disclosure shall be given elsewhere in the financial statements
in a way that provides all the relevant information about the issuance of equity shares for
non-cash consideration.
Further, in the statement of cash flows for the year ended 31st March, 20X3, cash
consideration paid for the acquisition of additional 10% stake in Company B will be shown
under financing activities.
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3.158 2. FINANCIAL REPORTING
158

5. This information will be incorporated into the Consolidated Statement of Cash Flows as
follows:
Statement of Cash Flows for the year ended 20X2 (extract)
Amount (`) Amount (`)
Cash flows from operating activities
Profit before taxation 70,000
Adjustments for non-cash items:
Depreciation 30,000
Decrease in inventories (W.N. 1) 9,000
Decrease in trade receivables (W.N. 2) 4,000
Decrease in trade payables (W.N. 3) (24,000)
Interest paid to be included in financing activities 4,000
Taxation (11,000 + 15,000 – 12,000) (14,000)
Net cash generated from operating activities 79,000
Cash flows from investing activities
Cash paid to acquire subsidiary (74,000 – 2,000) (72,000)
Net cash outflow from investing activities (72,000)
Cash flows from financing activities
Interest paid (4,000)
Net cash outflow from financing activities (4,000)
Increase in cash and cash equivalents during the year 3,000
Cash and cash equivalents at the beginning of the 5,000
year
Cash and cash equivalents at the end of the year 8,000
Working Notes:

1. Calculation of change in inventory `

during the year
Total inventories of the Group at the end 30,000
of the year
Inventories acquired during the year from (4,000)
subsidiary
26,000
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INDIAN ACCOUNTING STANDARD 7 3.159
3.159

Opening inventories 35,000

Decrease in inventories 9,000

2. Calculation of change in Trade Receivables during the year `

Total trade receivables of the Group at the end of the year 54,000
Trade receivables acquired during the year from subsidiary (8,000)
46,000
Opening trade receivables 50,000
Decrease in trade receivables 4,000

3. Calculation of change in Trade Payables during the year `

Trade payables at the end of the year 68,000
Trade payables of the subsidiary assumed during the year (32,000)
36,000
Opening trade payables 60,000
Decrease in trade payables 24,000
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CHAPTER 4
IND AS ON MEASUREMENT
BASED ON ACCOUNTING
POLICIES

UNIT 1:
INDIAN ACCOUNTING STANDARD 8 :
ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Apply the principles laid down for selection of accounting policies.
 Explain the treatment of changes in accounting policies, changes in
accounting estimates and correction of prior period errors.
 Distinguish between accounting policies, estimates, changes in them
and errors.
 Assess the limitations of giving retrospective effect while accounting.
 Judge the impracticability of a requirement for giving retrospective
effect.
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4.2 2.2 FINANCIAL REPORTING

UNIT OVERVIEW

Ind AS 8 “Accounting Policies, Changes

in Accounting Estimates and Errors”

Changes in
Accounting
Accounting Errors
Policies
Estimates
• Selection and • Apply changes in • Limitations on
application of accounting retrospective
accounting estimates restatement
policies prospectively • Disclosure of prior
• Consistency of • Disclosure period errors
accounting
policies
• Changes in
accounting
policies
• Applying changes
in accounting
policies
• Retrospective
application
• Limitations on
retrospective
application
• Disclosure
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INDIAN ACCOUNTING STANDARD 8 4.3 4.3

1.1 INTRODUCTION
Ind AS 1, Presentation of Financial Statements, lays down the foundation for an entity regarding
how the financial statements need to be presented. Ind AS 1 gives equal importance to the
disclosure, in notes, of significant accounting policies and other explanatory information besides
balance sheet, statement of profit and loss, statement of changes in equity and statement of
cash flows.
Accounting policies, estimates and correction of errors play a major role in the presentation of
financial statements. That is why Ind AS 1 states that an entity cannot rectify inappropriate
accounting policies either by disclosure of the accounting policies used or by notes or
explanatory material. If there is any change in accounting policies, that needs to be dealt with
due diligence and not just by mere note or explanation.
Further, Ind AS 1 makes it mandatory for the entity to present a third balance sheet as at the
beginning of the preceding period, if it applies an accounting policy retrospectively, which has a
material effect on the information in the balance sheet at that date.
Further, Ind AS 1 provides detail guidance about the proper disclosure of accounting policies
and estimates.
Therefore, in the current chapter we are going to see, how to select the accounting policies, how
to make the changes in accounting policies if needed, how to deal with changes in the
estimates, how to rectify errors, etc., as all these elements will have impact on the true and fair
position of the financial statements.

1.2 OBJECTIVE

1.2.1 To prescribe the criteria for selecting and changing accounting

policies
As per Ind AS 1, an entity is required to disclose the significant accounting policies. However, it
does not specify which accounting policies are to be disclosed. Depending upon the nature of
business and types of transactions, the entity is supposed to decide whether an accounting
policy is to be disclosed. In this regard, Ind AS 1 lays emphasis on usefulness of the disclosure
in assisting the users in understanding financial statements, nature of an entity’s operations and
expectations of users. Ind AS 8 further provides some criteria / guidelines which will facilitate
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4.4 2.4 FINANCIAL REPORTING

the entity to take a decision on selection and application of accounting policies and also making
changes in them.

1.2.2 To prescribe the accounting treatment and disclosure of changes

in accounting policies
At certain times, there is a need to make the changes in the policies in the light of changing
circumstances of business, changing nature of business, new guidelines issued by regulatory
authorities, enforcement of new laws etc. In such cases, an entity needs guidance as to
whether the changes need to be affected retrospectively or only prospectively and how to
present and disclose the effect of the same in the financial statements. Ind AS 8 provides
guidance to the entity in such areas.

1.2.3 To prescribe the accounting treatment and disclosure of changes

in accounting estimates
In business, there are many things which are uncertain. For example, how many trade
receivables will turn bad? What will be the estimated life of property, plant and equipment?
What will be the value of investments? Will the net realisable value of closing inventory be more
or less than the actual realised value less actual costs of completion and actual costs necessary
to make the sale? And so on. In such cases, the entity will have to make few assumptions and
make an estimate. Ind AS 1 allows an entity to do the estimation. Ind AS 8 takes it further and
deals with how to incorporate the changes in the accounting estimates already made in the past.
Is it possible to change such estimates with changing circumstances and available new
information? If yes, how would the entity incorporate the effect of the changes? Such questions
are addressed in Ind AS 8.

1.2.4 To prescribe the accounting treatment and disclosure of

corrections of errors
It is said that ‘to err is human’. Making mistakes is an integral part of life and the possibility of
having some errors in the financial statements already published cannot be ruled out. In such
cases, the question arises as to how to rectify the errors and provide the true and fair position to
the stakeholders of financial statements. Should the entity rectify the error by way of
retrospective restatement or should it rectify the same in the current reporting period? Such
questions are addressed in Ind AS 8.
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INDIAN ACCOUNTING STANDARD 8 4.5 4.5

1.2.5 To provide better base for inter-firm and intra-firm comparison

The standard is intended to enhance the relevance and reliability of an entity’s financial
statements and the comparability of those financial statements over time and with the financial
statements of other entities.

Objective and Scope

Is to prescribe

The criteria for selecting and The accounting treatment and disclosure of
changing accounting policies

Changes in Changes in Corrections of

accounting policies accounting estimates errors

1.3 SCOPE
This standard shall be applied in
• selecting and applying accounting policies;
• accounting for changes in accounting policies;
• accounting for changes in accounting estimates; and
• accounting for corrections of prior period errors.
However, tax effects of retrospective application of accounting policy changes and correction of
prior period errors are not dealt with in this standard. The tax effects of these items are dealt
with Ind AS 12, ‘Income Taxes’.
Note: Requirements of Ind AS 8 in respect of changes in accounting policies do not apply in an
entity’s first Ind AS financial statements.
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4.6 2.6 FINANCIAL REPORTING

1.4 DEFINITIONS
1. Accounting policies are the specific principles, bases, conventions, rules and practices
applied by an entity in preparing and presenting financial statements.
2. Accounting estimates are monetary amounts in financial statements that are subject to
measurement uncertainty.
3. Indian Accounting Standards (Ind AS) are Standards prescribed under Section 133 of the
Companies Act, 2013 read with Companies (Indian Accounting Standards) Rules, 2015 (as
amended from time to time).
4. Material – (As per Ind AS 1) Information is material if omitting, misstating or obscuring it
could reasonably be expected to influence decisions that the primary users of general
purpose financial statements make on the basis of those financial statements, which
provide financial information about a specific reporting entity.
Materiality depends on the nature or magnitude of information, or both. An entity assesses
whether information, either individually or in combination with other information, is material
in the context of its financial statements taken as a whole.
Information is obscured if it is communicated in a way that would have a similar effect for
primary users of financial statements to omitting or misstating that information. The
following are examples of circumstances that may result in material information being
obscured:

(a) information regarding a material item, transaction or other event is disclosed in the
financial statements but the language used is vague or unclear;
(b) information regarding a material item, transaction or other event is scattered
throughout the financial statements;
(c) dissimilar items, transactions or other events are inappropriately aggregated;
(d) similar items, transactions or other events are inappropriately disaggregated; and

(e) the understandability of the financial statements is reduced as a result of material

information being hidden by immaterial information to the extent that a primary
user is unable to determine what information is material.
Assessing whether information could reasonably be expected to influence decisions made
by the primary users of a specific reporting entity‘s general purpose financial statements
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INDIAN ACCOUNTING STANDARD 8 4.7 4.7

requires an entity to consider the characteristics of those users while also considering the
entity‘s own circumstances.

Many existing and potential investors, lenders and other creditors cannot require reporting
entities to provide information directly to them and must rely on general purpose financial
statements for much of the financial information they need. Consequently, they are the
primary users to whom general purpose financial statements are directed. Financial
statements are prepared for users who have a reasonable knowledge of business and
economic activities and who review and analyse the information diligently. At times, even
well informed and diligent users may need to seek the aid of an adviser to understand
information about complex economic phenomena.
The application of the concept of materiality is set out in two Standards. Ind AS 1 continues
to specify its application to disclosures and Ind AS 8 specifies the application of materiality
in applying accounting policies and correcting errors (including errors in measuring items).
5. Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of, reliable
information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements. Such errors include the
effects of mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts, and fraud.
6. Retrospective application is applying a new accounting policy to transactions, other
events and conditions as if that policy had always been applied.
7. Retrospective restatement is correcting the recognition, measurement and disclosure of
amounts of elements of financial statements as if a prior period error had never occurred.

8. Impracticable: Applying a requirement is impracticable when the entity cannot apply it after
making every reasonable effort to do so. For a particular prior period, it is impracticable to
apply a change in an accounting policy retrospectively or to make a retrospective
restatement to correct an error if:
(a) the effects of the retrospective application or retrospective restatement are not
determinable;
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4.8 2.8 FINANCIAL REPORTING

(b) the retrospective application or retrospective restatement requires assumptions

about what management’s intent would have been in that period; or

(c) the retrospective application or retrospective restatement requires significant

estimates of amounts and it is impossible to distinguish objectively information about
those estimates that:

(i) provides evidence of circumstances that existed on the date(s)as at which

those amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period
were approved for issue from other information.
9. Prospective application of a change in accounting policy and of recognising the effect of a
change in an accounting estimate, respectively, are:
(a) applying the new accounting policy to transactions, other events and conditions
occurring after the date as at which the policy is changed; and
(b) recognising the effect of the change in the accounting estimate in the current and
future periods affected by the change.

1.5 ACCOUNTING POLICIES

1.5.1 Selection and application of accounting policies

When an Ind AS specifically applies to a transaction, other event or condition, the accounting
policy or policies applied to that item shall be determined by applying the Ind AS.
Ind AS 1 narrates the importance of accounting policies but Ind AS 8 goes a step further and
gives guidance to the entity as to how to select and apply accounting policies.
Let us take few examples of accounting policies:
(a) Basis of accounting – Cash or accrual or hybrid?

(b) Method of determination of cost of inventories – FIFO or specific identification or

Weighted Average?
(c) What is included in cash equivalents and what is excluded from cash equivalents?
(d) When should revenue be recognised?
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INDIAN ACCOUNTING STANDARD 8 4.9 4.9

Thus, one will notice that while preparing the financial statements, the entity has to make
numerous assumptions and define the base for measurement of particular transactions, other
events or conditions. If every entity follows a different base or a different rule or a different
convention according to their convenience/ interpretation, then it will be impossible to compare
the financial statements across entities having similar nature of business. Therefore, the role of
Ind AS is very important in selection and application of the policies.
As per Ind AS 8, if any of the Ind AS already specifies the guidelines about following a particular
policy then entity must follow that standard and apply the policy as per the guidance provided.
Moreover, an entity can also refer to guidance notes which are published by ICAI, along with the
relevant Ind AS, if there is an ambiguity or there is need to go into the depth of a particular
transaction.

1.5.2 Is it compulsory to apply accounting policies?

• Ind AS set out accounting policies that result in financial statements containing relevant
and reliable information about the transactions, other events and conditions to which they
apply.
• Those policies need not be applied when the effect of applying them is immaterial.
• However, it is inappropriate to make, or leave uncorrected, immaterial departures from
Ind AS to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows.
Analysis
Ind AS leaves the judgement to the entity to decide whether it would be material or not material
to apply any accounting policy. Users are assumed to have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the information with
reasonable diligence. Therefore, the assessment needs to take into account how users with
such attributes could reasonably be expected to be influenced in making economic decisions.

1.5.3 How to select and apply an accounting policy when specific

Ind AS is not available on the particular transaction / condition /
event?
• In the absence of an Ind AS that specifically applies to a transaction, other event or
condition, management shall use its judgement in developing and applying an accounting
policy that results in information that is:
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4.10 2.10 FINANCIAL REPORTING

(a) relevant to the economic decision-making needs of users; and

(b) reliable in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash
flows of the entity;
(ii) reflect the economic substance of transactions, other events and conditions,
and not merely the legal form;
(iii) are neutral, i.e. free from bias;
(iv) are prudent; and

(v) are complete in all material respects.

Analysis
The businesses may have large variety of transactions in terms of their nature and size.
Though Ind AS cover most of the transactions which are of general nature for any type of
business, there is possibility of new business models coming into picture and new
technologies changing the face of the business, resulting in some new and complex types
of transactions. In such circumstances it will be difficult to find the appropriate accounting
standard for such specific transactions.
Example 1

Before the wake of online transactions of capital markets, the trading of shares used to
take place mainly through brokers and stock exchanges. However, OTC online terminals
changed the face of the capital markets, giving direct access to the layman to trading
transactions. Even if the basic nature of business was same, the technology changed the
face of the business, and many giant financial institutions became the dominant players in
the market as brokerage firms. In view of the changing circumstances, SEBI and ICAI
have come up with new guidelines and new standards which will cater to the need of new
business models, such as trading in derivatives. However, there was a period of
transformation when new transactions were slowly creeping in, but the guidelines were in
the preparatory phase.

In such circumstances, Ind AS 8 provides the following guiding principles for selecting and
applying the accounting policies. The main two objectives to be kept in mind while making
the decision for selecting an accounting policy would be:
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INDIAN ACCOUNTING STANDARD 8 4.11 4.11

(i) Whether it is relevant? The basic purpose of presenting financial statements is to

facilitate the economic decision making of the stakeholders, which would be based
on the information provided in the financial statements. So, if the management is
of the opinion that an accounting policy related to a particular transaction/
condition / event results in information that is going to help the users to make the
economic decisions, then the entity must select and apply such accounting policy
as it is relevant for decision making.
(ii) Whether it is reliable? The information will be said to be reliable if it makes a
faithful representation, unbiased, prudent, complete in all material respects and it
reflects substance of the transaction and is not presented solely with a purpose of
adhering to the law.
• In making the judgement, management shall refer to, and consider the applicability of, the
following sources in descending order:
(a) the requirements in Ind AS dealing with similar and related issues; and

(b) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Conceptual Framework for Financial Reporting under
Indian Accounting Standards (Conceptual Framework).
• Management may also first consider the most recent pronouncements of International
Accounting Standards Board (IASB) and in absence thereof those of the other standard-
setting bodies that use a similar conceptual framework to develop accounting standards,
other accounting literature and accepted industry practices, to the extent that these do
not conflict with the sources mentioned above.
Analysis
There is a need to have some authentic base for selecting and applying the accounting
policy. Even if it is left to the judgement of the entity, there has to be some basis for making
the judgement. It cannot be left to the personal opinions/ understanding/ intuitions of the
people working for the entity. In view of this, Ind AS 8 requires that in absence of specific
Ind AS, the entity should refer to the following material, in their descending order.
Accordingly, Ind AS 8 provides the following list:

(i) Check if there are any other Ind AS available which are dealing with similar and
related issues
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4.12 2.12 FINANCIAL REPORTING

(ii) Check the basic Conceptual Framework of Ind AS, which provides the general
principles

(iii) Check the pronouncements of International Accounting Standard Board

(iv) Check the pronouncements of other standard setting bodies having a similar
conceptual framework

(v) Check the accounting literature and accepted industry practices.

1.5.4 Consistency of accounting policies

An entity shall select and apply its accounting policies consistently for similar transactions, other
events and conditions, unless an Ind AS specifically requires or permits categorisation of items
for which different policies may be appropriate. If an Ind AS requires or permits such
categorisation, an appropriate accounting policy shall be selected and applied consistently to
each category.
Analysis
Accounting policies are the bases or principles or conventions or rules which are followed by an
entity while preparing the financial statements. If the entity keeps on changing the base from
year to year, it will not reflect the true and fair financial position of the entity. Secondly the
results of earlier years cannot be compared with the latest year as the base of the measurement
is changed. Therefore, it is utmost necessity that the entity follows the accounting policies
consistently.

Examples 2 & 3
2. An entity has grouped its property, plant and equipment into four classes viz., land, factory
building, plant and machinery and furniture. The entity may propose to apply revaluation
model only to land. It need not apply this model to building or plant and machinery.
3. Ind AS 2 ‘Inventories’ requires that inventory be valued at lower of cost and net realizable
value. In identifying cost, it allows alternative cost formulas; FIFO and Weighted average.
The same cost formula must be applied to items of inventory having similar nature or use,
but a different cost formula can be applied to a different classification of inventory.
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INDIAN ACCOUNTING STANDARD 8 4.13 4.13

1.5.5 Changes in accounting policies

• An 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 of transactions, other events or conditions on the entity’s financial
position, financial performance or cash flows.

Example 4 - Voluntary change in accounting policy

As per Ind AS 27 ‘Separate Financial Statements’, investment in subsidiaries, associates
and joint ventures are accounted for in an entity’s separate financial statements at cost or
in accordance with Ind AS 109 (i.e., at fair value). The same accounting is required to be
applied for each category of investment.

Assume that an entity decides to change its policy of measuring investment in

subsidiaries (or associates or joint ventures) from cost to fair value in accordance with Ind
AS 109, as this will result in the financial statements providing reliable and more relevant
information.
This would constitute a voluntary change in accounting policy.

• 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.
Analysis
Continuing with the same rationale, the frequent changes in accounting policies are not
permitted by Ind AS 8. Frequent changes in accounting policies will make it impossible for
a stakeholder to make the economic decisions properly.
For example, suppose an entity has been following the FIFO method of determination of
cost for inventories. In the current year, it shifts from FIFO to weighted average method.
Assuming that cost is less than NRV, it means the opening stock is valued at FIFO method
whereas closing stock is valued at Weighted Average Method, if retrospective application of
the change is impracticable. This will directly impact the gross profit measurement of the
entity. Additionally, the opening inventories and closing inventories will not be comparable.
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4.14 2.14 FINANCIAL REPORTING

Moreover, if the investment companies and banks are using the information for calculation
of liquidity, then, the liquidity ratios based on opening inventory and closing inventory may
show major discrepancies. Thus, changing the base will not only affect the true and fair
position of the financial statements but it will also affect the decision making of the
stakeholders.
In view of the above, Ind AS 8 allows the entity to change the accounting policy only in
following circumstances:
(a) when the change is required by an Ind AS; or

(b) when the change results in the financial statements providing reliable and more
relevant information about the effects of transactions, other events or conditions on
the entity’s financial position, financial performance or cash flows.
• The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events or conditions
that differ in substance from those previously occurring; and
(b) the application of a new accounting policy for transactions, other events or
conditions that did not occur previously or were immaterial.
Analysis
Ind AS 8 clearly states that if the entity applies an accounting policy which is different from
the previous one to a transaction, other event or condition that differs in substance from a
previously occurring transaction, other event or condition, the application of the new policy
will not be considered as a change in accounting policy.

Example 5
A company owns several hotels and provides significant ancillary services to occupants
of rooms. These hotels are, therefore, treated as owner-occupied properties and
classified as property, plant and equipment in accordance with Ind AS 16. The company
acquires a new hotel but outsources entire management of the same to an outside
agency and remains as a passive investor. The selection and application of an
accounting policy for this new hotel in line with Ind AS 40 is not a change in accounting
policy simply because the new hotel rooms are also let out for rent. This is because the
way in which the new hotel is managed differs in substance from the way other existing
hotels have been managed so far.
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INDIAN ACCOUNTING STANDARD 8 4.15 4.15

Similarly, if an entity is not applying the accounting policy currently and starts applying the
accounting policy newly, that will also not be treated as a change in accounting policy.

Example 6
An entity has classified as investment property, an owner-occupied property previously
classified as part of property, plant and equipment where it was measured after initial
recognition applying the revaluation model. Ind AS 40 on investment property permits
only cost model. The entity now measures this investment property using the cost model.
This is not a change in accounting policy.

• The initial application of a policy to revalue assets in accordance with Ind AS 16

‘Property, Plant and Equipment’, or Ind AS 38 ‘Intangible Assets’, is a change in an
accounting policy to be dealt with as a revaluation in accordance with Ind AS 16 or Ind AS
38, rather than in accordance with Ind AS 8.
• As per Ind AS 16, a change in depreciation method should be accounted for as a change
in accounting estimate in accordance with Ind AS 8. Similarly, as per Ind AS 38, a
change in amortisation method should be accounted for as a change in accounting
estimate in accordance with Ind AS 8. These changes are, therefore, not changes in
accounting policies.
Illustration 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, an 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 of transactions, other events or conditions on the 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.
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4.16 2.16 FINANCIAL REPORTING

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 and 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 8
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.”
*****
Illustration 2
Entity ABC acquired a building for its administrative purposes and presented the same as
property, plant and equipment (PPE) in the financial year 20X1-20X2. During the financial year
20X2-20X3, 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 20X2-20X3. Should Entity ABC account for the change
as 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.
As per Ind AS 16, ‘property, plant and equipment’ are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
(b) are expected to be used during more than one period.”
As per Ind AS 40, ‘investment property’ is property (land or a building—or part of a building—or
both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
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INDIAN ACCOUNTING STANDARD 8 4.17 4.17

(b) sale in the ordinary course of business.”

As per the above definitions, whether a building is an item of property, plant and equipment
(PPE) or an investment property for an entity depends on the purpose for which it is held by the
entity. It is thus possible that due to a change in the purpose for which it is held, a building that
was previously classified as an item of property, plant and equipment may warrant
reclassification as an investment property, or vice versa. Whether a building is in the nature of
PPE or investment property is determined by applying the definitions of these terms from the
perspective of that entity. Thus, the classification of a building as an item of property, plant and
equipment or as an investment property is not a matter of an accounting policy choice.
Accordingly, a change in classification of a building from property, plant and equipment to
investment property due to change in the purpose for which it is held by the entity is not a
change in an accounting policy.
*****
Illustration 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.
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 recognised that there may be cases where the functional currency is
not obvious. In such cases, Ind AS 21 requires the management to use its judgement to
determine the functional currency that most faithfully represents the economic effects of 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 changed 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 choice.
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4.18 2.18 FINANCIAL REPORTING

In view of the above, a change in functional currency of an entity does not represent a change in
accounting policy and Ind AS 8, therefore, does not apply to such a change. Ind AS 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.
*****
1.5.5.1 How to apply the changes in accounting policies?
While discussing the process for application of changes of accounting policies, Ind AS 8, deals
with two situations:
1. An entity shall account for a change in accounting policy resulting from the initial application
of an Ind AS in accordance with the specific transitional provisions, if any, in that Ind AS.
If a change in accounting policy is due to a new Ind AS, then, generally the standard itself
provides the transitional provisions i.e., provisions applicable on initial application of the
standard, such as method of application (retrospective or prospective or modified
retrospective), availability of any transitional relief etc. In such cases, the entity needs to
follow the transitional provisions accordingly.
2. When an entity changes an accounting policy upon initial application of an Ind AS that does
not include specific transitional provisions applying to that change, or changes an
accounting policy voluntarily, it shall apply the change retrospectively.
If the change in accounting policy is made voluntarily or where the Ind AS is not containing
transitional provisions, then the accounting policy needs to be applied retrospectively.
Note: Early application of an Ind AS is not a voluntary change in accounting policy.

In the absence of an Ind AS that specifically applies to a transaction, other event or condition,
management may apply an accounting policy from the most recent pronouncements of IASB 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 change in
accounting policy.

Suppose in absence of any specific Ind AS to a particular transaction, a company follows an

accounting policy as per the relevant IFRS which addresses that transaction and, subsequently
there is an amendment to that IFRS, then, the company may change its accounting policy as per
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INDIAN ACCOUNTING STANDARD 8 4.19 4.19

that amendment. In such cases, it will be considered as if the company is making the change
voluntarily and, accordingly, change in the accounting policy should be applied retrospectively.
Illustration 4
An entity developed one of its accounting policies by considering a pronouncement of an
overseas national standard-setting body in 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 or 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 change 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).
*****
1.5.5.2 Retrospective application
When a change in accounting policy is applied retrospectively, 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 as if the new
accounting policy had always been applied.
Analysis
The word retrospective application is defined in Ind AS 8 as applying a new accounting policy to
transactions, other events and conditions as if that policy had always been applied. This means
that comparative information for all prior periods presented will be adjusted for the effect of
change in the policy. 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 (for
example, to comply with an Ind AS).
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4.20 2.20 FINANCIAL REPORTING

Example 7
An entity which is trading in goods (and not a manufacturer) was incorporated in the year
20X1-20X2 and is a regular user of Ind AS from that year. It has been using weighted average
cost formula for determining cost of inventories. In 20X8-20X9, it decides to change the above
accounting policy. It wants to use FIFO cost formula. The change in the policy is justified
because that formula reflects the actual flow of inventories and, hence, provides reliable and
more relevant information to the users of financial statements. The entity presents one year
comparative period in its financial statements. Its purchase bills include freight etc., and
quantities of inventories as on 1st April, 20X7 and 31 st March, 20X8 are such that latest invoices
for the relevant years can be attributed to them. Further, other purchase incidental expenses
are immaterial. Due to these reasons, retrospective application of change in accounting policy
is practicable.
The entity trades in goods, both purchases of stock-in-trade and increase/decrease in
inventories of stock-in-trade will appear in the statement of profit and loss. This is because
Ind AS 1 permits nature-wise presentation only, which is also the position in Schedule III to the
Companies Act, 2013. The change in accounting policy, however, will affect only the carrying
amount of inventories and consequently, increase/decrease in inventories, if cost is below NRV,
but will not affect amount of purchases.
In the above situation, the entity should apply the change in the accounting policy
retrospectively. For this purpose, the entity should recalculate inventory value at the lower of
cost determined on FIFO basis and NRV as at 1st April, 20X7 and 31 st March, 20X8. The
difference between previously presented opening inventory value as at 1 st April, 20X7 (which
would have been presented in the balance sheet as at 31st March, 20X7) and the recalculated
value as on that date as above is the cumulative effect of change in accounting policy on the
opening balance sheet for the comparative year 20X7-20X8. The difference between previously
presented closing inventory value as at 31st March, 20X8 and the recalculated value as on that
date as above is the cumulative effect of change in accounting policy on the closing balance
sheet for the comparative year 20X7-20X8. The difference between the cumulative effects on
the opening and closing balance sheets for the comparative year 20X7-20X8 as arrived at above
is the period-specific effect of change in the policy for that comparative year. Accordingly, while
preparing the financial statements for the year 20X8-20X9, the entity should adjust the opening
inventory as at 1st April, 20X7 and adjust retained earnings on that date for the cumulative effect
of change in accounting policy and restate comparative amount in respect of increase/decrease
in inventories in the statement of profit and loss for the comparative year 20X7-20X8. This
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INDIAN ACCOUNTING STANDARD 8 4.21 4.21

results in consequential restatement of profit or loss, total comprehensive income, closing

balances of retained earnings and inventories for that comparative year. The said restated
closing balances of retained earnings and inventories become opening balances of these items
for the year 20X8-20X9, which is the year of change in accounting policy. Income tax effect due
to change in accounting policy will be accounted for in accordance with Ind AS 12.
1.5.5.3 Limitations on retrospective application
• The intention of the standard is, as far as possible, that the companies should follow the
same accounting policies consistently year after year to ensure the relevance and
reliability of financial statements.
• There are some advantages of making the process of change in accounting policy so
tedious as outlined below.
(i) Companies will not make the frequent changes in their accounting policies just to do
the window dressing of their financial statements.
(ii) The comparison of financial statements over time and with other entities will be
possible, in a reliable way.
• Having said this, there can be practical difficulties in making the retrospective changes in
policies, when the company wants to change the policy.

Example 8
A company has been incorporated 25 years ago and since then doing the business on
pan India basis. Now, is it supposed to incorporate the changes in accounting policy for
last 25 years? Will it be practicable? Will it be worth doing it? Will it be material? Such
questions arise when one wants to change the accounting policy, since voluntary change
in policy is required to be applied retrospectively.

• When retrospective application is required, a change in accounting policy shall be applied

retrospectively except to the extent that it is impracticable to determine either the period-
specific effects or the cumulative effect of the change.
• The term ‘Impracticability’ is defined under Ind AS 8 as follows:
Impracticable - Applying a requirement is impracticable when the entity cannot apply it
after making every reasonable effort to do so. For a particular prior period, it is
impracticable to apply a change in an accounting policy retrospectively or to make a
retrospective restatement to correct an error if:
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4.22 2.22 FINANCIAL REPORTING

(a) the effects of the retrospective application or retrospective restatement are not
determinable;

(b) the retrospective application or retrospective restatement requires assumptions

about what management’s intent would have been in that period; or
(c) the retrospective application or retrospective restatement requires significant
estimates of amounts and it is impossible to distinguish objectively information about
those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which
those amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that prior period
were approved for issue from other information.
• After going through the above-mentioned definition of impractical, it is clear that the
Ind AS 8 does provide some relief if there are practical difficulties in applying the policy
retrospectively.

• Ind AS 8 talks about two types of effects which one need to understand:
(i) Period Specific: Period specific means for each financial year.
(ii) Cumulative: Cumulative is the sum total of the period specific effects.
• When it is impracticable to determine the period-specific effects of changing an
accounting policy on comparative information for one or more prior periods presented,
then the entity shall apply the new accounting policy to the carrying amounts of assets
and liabilities as at the beginning of the earliest period for which retrospective application
is practicable, which may be the current period, and shall make a corresponding
adjustment to the opening balance of each affected component of equity for that period.
• Thus, if it is impracticable for an entity to change the policy from day 1, because it is
impracticable to determine period-specific effects for one or more comparative prior
periods presented, it can apply the changed policy from the earliest period for which it
would be practicable to make the changes in policies retrospectively which may be the
current period.
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INDIAN ACCOUNTING STANDARD 8 4.23 4.23

Example 9
In the example given in the section 1.5.5.2 above, if comparative information is presented
for two years i.e., 20X6-20X7 and 20X7-20X8 and if it is not practicable to apply the
changed policy retrospectively from 20X6-20X7, then, the entity can apply the changed
policy retrospectively from 20X7-20X8. This may happen if it is not practicable to
compute the inventory value in accordance with the changed policy as on 1st April, 20X6,
for example, due to loss of latest purchase bills for the year 20X5-20X6 and computer
records of the same are also lost.
In the above example, if comparative information is presented for one year and if it is not
practicable to compute the opening inventory value as at 1st April, 20X7, the entity can
apply the changed policy retrospectively from 20X8-20X9.

• 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. Retrospective application to a prior 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 (for example, 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.
• When it is impracticable to determine the cumulative effect, at the beginning of the
current period, of applying a new accounting policy to all prior periods, the entity shall
adjust the comparative information to apply the new accounting policy prospectively from
the earliest date practicable. It therefore disregards the portion of the cumulative
adjustment to assets, liabilities and equity arising before that date. Changing an
accounting policy is permitted even if it is impracticable to apply the policy retrospectively
for any prior period.

Example 10
In 20X6, an entity changes its accounting policy with respect to determination of cost of
its inventories from FIFO to weighted average cost formula. This change is made
because management believes that weighted average cost formula results in better
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4.24 2.24 FINANCIAL REPORTING

matching of cost with revenue. Further, weighted average cost formula is generally used
by other entities whose business is similar to that of the entity and, hence, provides
reliable and more relevant information to the users of the financial statements. This being
a voluntary change, it has to be applied retrospectively. The entity had commenced
operations in 20X1. No records of earlier years are available as a virus attack on server
in 20X6 had wiped off all past records. It is not possible to recreate the records. It is
therefore impracticable to determine the cumulative effect of change in policy at the
beginning of 20X6. The entity will apply the change in accounting policy prospectively
from 20X6 only. Since the change in policy is applied prospectively from 20X6, the
question of adjusting comparative information for any prior period(s) presented does not
arise at all. Cost of closing inventories for 20X6 alone will be determined using weighted
average cost formula. The carrying amount of closing inventories for 20X5 will simply be
carried as carrying amount of opening inventories for 20X6. Cost of closing inventories
for 20X5 determined on FIFO basis will be the starting point for applying weighted
average cost formula during 20X6.
Change in accounting policies

- Required by Ind AS - Application of

- Results in financial accounting policies for

Not changes in accounting

statements providing transactions that differ in
reliable and more substance from those
relevant information previously occurring
policies

- Application of new
accounting policies for
new transactions

Illustration 5
Whether an entity can change its accounting policy of subsequent measurement of property,
plant and equipment (PPE) from revaluation model to cost model?
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INDIAN ACCOUNTING STANDARD 8 4.25 4.25

Solution
Paragraph 29 of Ind AS 16 provides that an entity shall choose either the cost model or the
revaluation model as its accounting policy for subsequent measurement of an entire 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 that industry so as to enhance the comparability of its
financial statements 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.
*****

1.5.6 Disclosure regarding the changes in accounting policies

• When initial application of an Ind AS has an effect on the current period or any prior
period, would have such an effect except that it is impracticable to determine the amount
of the adjustment, or might have an effect on future periods, an entity shall disclose:
(a) the title of the Ind AS;
(b) when applicable, that the change in accounting policy is made in accordance with its
transitional provisions;
(c) the nature of the change in accounting policy;
(d) when applicable, a description of the transitional provisions;

(e) when applicable, the transitional provisions that might have an effect on future
periods;
(f) for the current period and each prior period presented, to the extent practicable, the
amount of the adjustment:
(i) for each financial statement line item affected; and
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4.26 2.26 FINANCIAL REPORTING

(ii) if Ind AS 33, ‘Earnings per Share’, applies to the entity, for basic and diluted
earnings per share;

(g) the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
(h) if retrospective application required by paragraph 19(a) or (b) of Ind AS 8 is
impracticable for a particular prior period, or for periods before those presented, the
circumstances that led to the existence of that condition and a description of how
and from when the change in accounting policy has been applied.
• When a voluntary change in accounting policy has an effect on the current period or any
prior period, would have an effect on that period except that it is impracticable to
determine the amount of the adjustment, or might have an effect on future periods, an
entity shall disclose:
(a) the nature of the change in accounting policy;
(b) the reasons why applying the new accounting policy provides reliable and more
relevant information;
(c) for the current period and each prior period presented, to the extent practicable, the
amount of the adjustment:
(i) for each financial statement line item affected; and
(ii) if Ind AS 33 applies to the entity, for basic and diluted earnings per share;
(d) the amount of the adjustment relating to periods before those presented, to the
extent practicable; and
(e) if retrospective application is impracticable for a particular prior period, or for periods
before those presented, the circumstances that led to the existence of that condition
and a description of how and from when the change in accounting policy has been
applied.

Note:
• Financial statements of subsequent periods need not repeat these disclosures.

• These disclosures will form part of Notes to Accounts.

• When an entity has not applied a new Ind AS that has been issued but is not yet effective,
the entity shall disclose:
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INDIAN ACCOUNTING STANDARD 8 4.27 4.27

(a) this fact; and

(b) known or reasonably estimable information relevant to assessing the possible impact
that application of the new Ind AS will have on the entity’s financial statements in the
period of initial application.
• In complying with the above requirement, an entity considers disclosing:

(a) the title of the new Ind AS;

(b) the nature of the impending change or changes in accounting policy;
(c) the date by which application of the Ind AS is required;

(d) the date as at which it plans to apply the Ind AS initially;

(e) either:
(i) a discussion of the impact that initial application of the Ind AS is expected to
have on the entity’s financial statements; or
(ii) if that impact is not known or reasonably estimable, a statement to that effect.
Illustration 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 per Ind AS 8?
Solution
Paragraph 30 of Ind AS 8 Accounting Policies, Changes in Accounting Estimates 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 will have on the entity’s financial statements 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.
*****
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4.28 2.28 FINANCIAL REPORTING

1.6 CHANGE IN ACCOUNTING ESTIMATES

1.6.1 Meaning
• An accounting policy may require items in financial statements to be measured in a way
that involves measurement uncertainty — that is, the accounting policy may require such
items to be measured at monetary amounts that cannot be observed directly and must
instead be estimated. In such a case, an entity develops an accounting estimate to
achieve the objective set out by the accounting policy. Developing accounting estimates
involves the use of judgements or assumptions based on the latest available, reliable
information. Examples of accounting estimates include:
(a) a loss allowance for expected credit losses, applying Ind AS 109, Financial
Instruments;
(b) the net realisable value of an item of inventory, applying Ind AS 2 Inventories;
(c) the fair value of an asset or liability, applying Ind AS 113, Fair Value Measurement;
(d) the depreciation expense for an item of property, plant and equipment, applying
Ind AS 16; and
(e) a provision for warranty obligations, applying Ind AS 37, Provisions, Contingent
Liabilities and Contingent Assets.
• An entity uses measurement techniques and inputs to develop an accounting estimate.
Measurement techniques include estimation techniques (for example, techniques used to
measure a loss allowance for expected credit losses applying Ind AS 109) and valuation
techniques (for example, techniques used to measure the fair value of an asset or liability
applying Ind AS 113).
• The term ‘estimate’ in Ind AS sometimes refers to an estimate that is not an accounting
estimate as defined in this Standard. For example, it sometimes refers to an input used
in developing accounting estimates.

• The use of reasonable estimates is an essential part of the preparation of financial

statements and does not undermine their reliability.
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INDIAN ACCOUNTING STANDARD 8 4.29 4.29

1.6.2 Can changes in estimates be related to prior periods?

• An entity may need to change an accounting estimate if changes occur in the
circumstances on which the accounting estimate was based or as a result of new
information, new developments or more experience.
• By its nature, a change in an accounting estimate does not relate to prior periods and is
not the correction of an error.

• The effects on an accounting estimate of a change in an input or a change in a

measurement technique are changes in accounting estimates unless they result from the
correction of prior period errors.

1.6.3 Change in the basis of measurement – Whether a change in

accounting policy or change in estimate?
A change in the measurement basis applied is a change in an accounting policy and is not a
change in an accounting estimate. When it is difficult to distinguish a change in an accounting
policy from a change in an accounting estimate, the change is treated as a change in an
accounting estimate.
Illustration 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.
*****
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4.30 2.30 FINANCIAL REPORTING

1.6.4 Accounting treatment for applying changes in accounting

estimates
• The effect of change in an accounting estimate, except to the extent that the change
results in change in assets, liabilities or relates to an item of equity, 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.
A change in an accounting estimate may affect only the current period’s profit or loss, or the
profit or loss of both the current period and future periods.
• To the extent that a change in an accounting estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, it shall be recognised by adjusting the carrying
amount of the related asset, liability or equity item in the period of the change.
• Prospective recognition of the effect of a change in an accounting estimate means that
the change is applied to transactions, other events and conditions from the date of that
change. A change in an accounting estimate may affect only the current period’s profit or
loss, or the profit or loss of both the current period and future periods. For example, a
change in a loss allowance for expected credit losses affects only the current period’s
profit or loss and therefore is recognised in the current period. However, a change in the
estimated useful life of, or the expected pattern of consumption of the future economic
benefits embodied in, a depreciable asset affects depreciation expense for the current
period and for each future period during the asset’s remaining useful life. In both cases,
the effect of the change relating to the current period is recognised as income or expense
in the current period. The effect, if any, on future periods is recognised as income or
expense in those future periods.
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INDIAN ACCOUNTING STANDARD 8 4.31 4.31

Relevant extract from Annual Report of Indus Towers Limited for Financial Year
2020-2021 on change in accounting estimates
The Company has revised the useful life of property, plant and equipment and useful life
and estimation of ARO and taken the impact prospectively from the date of change.

Examples 11 and 12

11. A change in the estimate of the amount of bad debts affects only the current
period’s profit or loss and therefore is recognised in the current period. However,
a change in the estimated useful life of, or the expected pattern of consumption of
the future economic benefits embodied in, a depreciable asset affects depreciation
expense for the current period and for each future period during the asset’s
remaining useful life. In both cases, the effect of the change relating to the current
period is recognised as income or expense in the current period. The effect, if
any, on future periods is to be recognised as income or expense in those future
periods.
12. During the financial year ended 31st March, 20X2, Entity ABC introduced a new
range of electric motors. It sold the motors with a standard warranty of two years.
Warranty provides assurance that a product will function as expected and in
accordance with certain specifications and it has been assessed that it is not a
separate performance obligation under Ind AS 115.
Based on results of testing of the motors during trials prior to commercial
production, Entity ABC made a provision for warranty costs amounting to `
1,00,000 for motors sold during the year ended 31st March, 20X2.
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4.32 2.32 FINANCIAL REPORTING

During financial year 20X2-20X3, a defect was discovered in the motors that had
not come to light during the trials. The defect resulted in the entity incurring an
amount of ` 2,00,000 during the financial year 20X2-20X3 on repairs of motors
sold during the financial year 20X1-20X2. Besides, the entity expects to incur
` 1,50,000 as costs during the year 20X3-20X4 on meeting its warranty obligations
in respect of motors sold during the financial year 20X2-20X3.
In preparing its financial statements for the year ended 31 st March, 20X3, the entity
would carry forward a warranty provision of ` 1,50,000 in respect of motors sold
during the financial year 20X1-20X2. It would recognise an amount of ` 2,50,000
(` 2,00,000 plus ` 1,50,000 minus ` 1,00,000) in respect of motors sold during the
financial year 20X1-20X2 as an expense in profit or loss for the financial year
20X2-20X3. The warranty provision included in the comparatives for financial year
ended 31st March, 20X2 would not be adjusted.
The provision for warranty costs in respect of motors sold during the financial year
20X2-20X3 would be made by considering the information concerning the defect in
motors that came to light during the financial year 20X2-20X3.

1.6.5 Disclosure of changes in estimates

• An entity shall disclose the nature and amount of a change in an accounting estimate that
has an effect in the current period or is expected to have an effect in future periods,
except for the disclosure of the effect on future periods when it is impracticable to
estimate that effect.
• If the amount of the effect in future periods is not disclosed because estimating it is
impracticable, an entity shall disclose that fact.
Thus, to summarise the above-mentioned provisions, the entity should disclose:
(a) Effect of change in estimate on the current period
(b) If applicable and practicable, effect of change in estimate on the future periods
(c) If applicable but impracticable, the fact that it is impracticable to estimate the effect on
future periods.
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INDIAN ACCOUNTING STANDARD 8 4.33 4.33

1.7 ERRORS

1.7.1 Meaning
• Ind AS 8 deals with the treatment of errors that have taken place in past but were not
discovered at that time. Subsequently, when they are discovered, it is necessary to
correct such errors in the financial statements and make sure that the financial
statements present relevant and reliable information in the period in which they are
discovered.
As per the definition given in Ind AS 8, Prior period errors are omissions from, and
misstatements in, the entity’s financial statements for one or more prior periods arising from
a failure to use, or misuse of, reliable information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements. Such errors include the
effects of mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts, and fraud.
• Errors can arise in respect of the recognition, measurement, presentation or disclosure of
elements of financial statements. Financial statements do not comply with Ind AS if they
contain either material errors or immaterial errors made intentionally to achieve a
particular presentation of an entity’s financial position, financial performance or cash
flows.

1.7.2 Common types of errors

(i) Mathematical Mistakes: In accounting terms, generally the errors are called as error of
commission. Wrong calculations, carry forward of wrong balances and errors in totals are
few examples of mathematical errors.
(ii) Mistakes in applying policies: Specific standards may prescribe method of applying
specific policies for particular nature of transaction. For example, as a general rule,
assets and liabilities and income and expenses should not be offset, unless otherwise
specifically required or permitted in an Ind AS. If a receivable from another entity and
payable to that entity are offset without any currently existing legally enforceable right to
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4.34 2.34 FINANCIAL REPORTING

set off the recognised amounts, then, it will be an error while applying the policies, since
it is against the principles of offset prescribed in Ind AS 32, ‘Financial Instruments:
Presentation’.
(iii) Misinterpretations of facts: Ind AS 10 deals with treatment of the events after the
reporting period. Whether the event is an adjusting event or a non-adjusting event
depends on whether that event provides evidence of a condition existing at the end of the
reporting period. Sometimes, this requires judgement of the management and may result
into misinterpretation of facts, if not dealt with properly.

(iv) Omissions: The mistakes that happened due to omission to record a material
transaction, perhaps, due to oversight.
(v) Frauds: Major theft undetected in the past.
The abovementioned errors and any other error may happen while recognising the transaction,
or while measuring the transaction, or while presenting it in financial statements or it might be
possible that proper disclosure is not done.

Example 13
The following errors occurred in preparation of A Ltd.’s financial statements for the immediately
preceding financial year –
(a) Depreciation on plant and machinery understated by an amount equal to 0.30% of sales;
(b) Warranty provisions understated by an amount equal to 0.15% of sales;

(c) Allowance for bad debts understated by an amount of 0.25% of sales.

Individually none of these errors may be material but could collectively influence the economic
decision of the users of the financial statements. These are material prior period errors.

1.7.3 Treatment of errors

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.
1.7.3.1 Potential errors of current period
Potential current period errors discovered in that period are corrected before the financial
statements are approved for issue.
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INDIAN ACCOUNTING STANDARD 8 4.35 4.35

1.7.3.2 Prior period errors discovered subsequently

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.
Following is the snapshot of how the balance sheet and statement of profit and loss is presented
after correction of prior period errors:
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4.36 2.36 FINANCIAL REPORTING

Situation 1: Error discovered relates to the comparative prior period presented:

Unless impracticable, an entity shall correct material prior period errors retrospectively in the
first set of financial statements approved for issue after their discovery by restating the
comparative amounts for the prior period(s) presented in which the error occurred;
Example 14
While preparing the financial statement for the financial year 20X2-20X3, the prior period
presented would be financial year 20X1-20X2, if one year comparative period is presented. If
the error occurred in the year 20X1-20X2 but discovered in year 20X2-20X3, then it should be
corrected in the financial statements for the year 20X2-20X3 by restating the comparative
amounts for the year 20X1-20X2. This will result in consequential restatement of opening
balances for the year 20X2-20X3.

Situation 2: Error discovered relates to period before the earliest comparative prior period
presented:

If the material error occurred before the earliest prior period presented, an entity shall, unless
impracticable, correct the same retrospectively in the first set of financial statements approved
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INDIAN ACCOUNTING STANDARD 8 4.37 4.37

for issue after their discovery by restating the opening balances of assets, liabilities and
equity for the earliest prior period presented.
Examples 15-17
15. An entity presents one year comparative period in its financial statements. While
preparing the financial statements for the financial year 20X4-20X5, if an error has been
discovered which occurred in the year 20X1-20X2, i.e., for the period which was earlier
than earliest prior period presented (which is 20X3-20X4 in this example), then, the error
should be corrected by restating the opening balances of relevant assets and/or liabilities
and relevant component of equity for the year 20X3-20X4. This will result in
consequential restatement of balances as at 1 st April, 20X3 (i.e, the third balance sheet).
16. A material error in depreciation provision of the preceding year ended 31st March, 20X2
was discovered when preparing the financial statements for the year ended
31st March, 20X3. The amount recognised in statement of profit and loss for the year
ended 31st March, 20X2 was ` 1,00,000 instead of ` 50,000. In this case, when
presenting the financial statements for the year ended 31st March, 20X3, depreciation for
the comparative year 20X1-20X2 will be restated at ` 50,000. The carrying amount i.e.,
net book value of property, plant and equipment for the comparative year ending
31st March, 20X2 will be increased by ` 50,000 (due to restatement of accumulated
depreciation). This will result in consequential restatement of opening balance of
retained earnings and property, plant and equipment for the year 20X2-20X3.

17. Continuing with the aforesaid example, assume that the error relates to year ended
31st March, 20X1 and 20X0-20X1 is not the earliest period for which comparative
information is presented. In this case, the error will be corrected by restating the opening
balances of retained earnings and carrying amount i.e., net book value, of property, plant
and equipment, for the year 20X1-20X2. This will result in restatement of balances as at
1 st April, 20X1.
Illustration 8
An entity has presented certain material liabilities as non-current in its financial statements for
periods upto 31 st 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 restate the comparative amounts for the prior period
presented (i.e., as at 31 st March, 20X1). Would this reclassification of liabilities from non-current
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4.38 2.38 FINANCIAL REPORTING

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 8, errors can arise in respect of the recognition, measurement,
presentation or disclosure of elements of financial statements. Financial statements do not
comply with Ind AS if they contain either material errors or immaterial errors made intentionally
to achieve a particular presentation of an entity’s financial position, financial performance or
cash flows. Potential current period errors discovered in that period are corrected before the
financial statements are approved for issue. However, material errors are sometimes not
discovered until a subsequent period, and these prior period errors are corrected in the
comparative information presented in the financial statements for that subsequent period.
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 31 st March, 20X2, the comparative amounts as at 31 st 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.

Accordingly, the entity should present a third balance sheet as at the beginning of the preceding
period, i.e., as at 1st April, 20X0 in addition to the comparatives for the financial year
20X0-20X1.
*****

1.7.4 Limitations on retrospective restatement

We have already discussed in detail the treatment when there are the limitations on giving
retrospective effect to changes in accounting policies. Similar provisions are included in
Ind AS 8 to deal with limitations on retrospective restatement of prior period errors.
Step 1: A prior period error shall be corrected by retrospective restatement if it is practicable to
determine both the period specific effects and cumulative effect of the error.
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INDIAN ACCOUNTING STANDARD 8 4.39 4.39

The correction of a prior period error is excluded from profit or loss for the period in which the
error is discovered. Any information presented about prior periods, including any historical
summaries of financial data, is restated as far back as is practicable.
Step 2: If it is not practicable to determine the period-specific effects of an error on comparative
information for one or more prior periods presented, the entity shall first find out the earliest
period for which retrospective restatement is practicable and then restate the opening balances
of assets, liabilities and equity for that period. Ind AS 8 further states that such period can be
the current period also.
For meaning of ‘impracticable’ for the purposes of Ind AS 8, see section 1.5.5.3.
Step 3: If it is not practicable to determine the cumulative effect, at the beginning of the current
period, of an error on all prior periods, the entity shall restate the comparative information to
correct the error prospectively from the earliest date practicable.
When it is impracticable to determine the amount of an error (e.g., a mistake in applying an
accounting policy) for all prior periods, the entity restates the comparative information
prospectively from the earliest date practicable. It therefore disregards the portion of the
cumulative restatement of assets, liabilities and equity arising before that date.
Corrections of errors are distinguished from changes in accounting estimates. Accounting
estimates by their nature are approximations that may need changing as additional information
becomes known. For example, the gain or loss recognised on the outcome of a contingency is
not the correction of an error.

1.8 DISCLOSURE OF PRIOR PERIOD ERRORS

An entity shall disclose the following:
(a) the nature of the prior period error;

(b) for each prior period presented, to the extent practicable, the amount of the correction:
(i) for each financial statement line item affected; and
(ii) if Ind AS 33 applies to the entity, for basic and diluted earnings per share;

(c) the amount of the correction at the beginning of the earliest prior period presented; and
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4.40 2.40 FINANCIAL REPORTING

(d) if retrospective restatement is impracticable for a particular prior period, the circumstances
that led to the existence of that condition and a description of how and from when the error
has been corrected.
Financial statements of subsequent periods need not repeat these disclosures.

1.9 IMPRACTICABILITY IN RESPECT OF RETROSPECTIVE

APPLICATION AND RETROSPECTIVE RESTATEMENT
In some circumstances, it is impracticable to adjust comparative information for one or more
prior periods to achieve comparability with the current period.
For example, data may not have been collected in the prior period(s) in a way that allows either
retrospective application of a new accounting policy (including, its prospective application to
prior periods) or retrospective restatement to correct a prior period error, and it may be
impracticable to recreate the information.
It is frequently necessary to make estimates in applying an accounting policy to elements of
financial statements recognised or disclosed in respect of transactions, other events or
conditions. Estimation is inherently subjective, and estimates may be developed after the
reporting period. Developing estimates is potentially more difficult when retrospectively applying
an accounting policy or making a retrospective restatement to correct a prior period error,
because of the longer period of time that might have passed since the affected transaction,
other event or condition occurred. However, the objective of estimates related to prior periods
remains the same as for estimates made in the current period, namely, for the estimate to reflect
the circumstances that existed when the transaction, other event or condition occurred.
Therefore, retrospectively applying a new accounting policy or correcting a prior period error
requires distinguishing information that
(a) provides evidence of circumstances that existed on the date(s) as at which the transaction,
other event or condition occurred, and

(b) would have been available when the financial statements for that prior period were
approved for issue
from other information.

For some types of estimates (eg a fair value measurement that uses significant unobservable
inputs), it is impracticable to distinguish these types of information. When retrospective
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INDIAN ACCOUNTING STANDARD 8 4.41 4.41

application or retrospective restatement would require making a significant estimate for which it
is impossible to distinguish these two types of information, it is impracticable to apply the new
accounting policy or correct the prior period error retrospectively.
Hindsight should not be used when applying a new accounting policy to, or correcting amounts
for, a prior period, either in making assumptions about what management’s intentions would
have been in a prior period or estimating the amounts recognised, measured or disclosed in a
prior period. For example, when an entity corrects a prior period error in calculating its liability
for employees’ accumulated sick leave in accordance with Ind AS 19, ‘Employee Benefits’, it
disregards information about an unusually severe influenza season during the next period that
became available after the financial statements for the prior period were approved for issue.
The fact that significant estimates are frequently required when amending comparative
information presented for prior periods does not prevent reliable adjustment or correction of the
comparative information.

1.10 SIGNIFICANT DIFFERENCES BETWEEN IND AS 8 AND

AS 5
S. No. Particulars Ind AS 8 AS 5

Title Accounting Policies, Net Profit or Loss for the

Changes in Accounting Period, Prior Period Items and
Estimates and Errors Changes in Accounting
Policies

1. Scope There are some differences in Under AS, selection of

the scope of the two accounting policies is dealt with
standards. For example, Ind in AS 1 ‘Disclosure of
AS 8 deals with the criteria for Accounting Policies’.
selecting and applying
accounting policies.

2. Extraordinary Under Ind AS, presentation of AS 5, on the other hand,

items any items of income or requires separate presentation
expense as extraordinary of extraordinary items in the
items is explicitly prohibited by statement of profit and loss.
Ind AS 1. AS 5 defines extraordinary
items as income or expenses
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4.42 2.42 FINANCIAL REPORTING

that arise from events or

transactions that are clearly
distinct from the ordinary
activities of the enterprise and,
therefore, are not expected to
recur frequently or regularly.
As per AS 5, extraordinary
items should be disclosed in the
statement of profit and loss as a
part of net profit or loss for the
period. The nature and the
amount of each extraordinary
item should be separately
disclosed in the statement of
profit and loss in a manner that
its impact on current profit or
loss can be perceived.

3. Change in Ind AS 8 does not deal with AS 5 allows change in

accounting change in accounting policy on accounting policy if required by
policies the basis of the requirement the statute.
by the statute.

4. Accounting for Ind AS 8 requires that, subject While AS 5 does not clearly
changes in to limited exceptions, changes specify how changes in
accounting in accounting policies should accounting policies other than
policies be accounted for those dealt with by specific
retrospectively by restatement transitional provisions of an
of comparative information. In accounting standard should be
addition, a third balance sheet accounted for (i.e., whether
as of the beginning of the retrospectively or
preceding period is also prospectively), it requires that
required to be presented by an the impact of, and the
entity where it applies an adjustments resulting from, a
accounting policy change in an accounting policy,
retrospectively and the if material, should be shown in
retrospective application has a the financial statements of the
material effect on the period in which the change is
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INDIAN ACCOUNTING STANDARD 8 4.43 4.43

information in the balance made.

sheet at the beginning of the
preceding period.

5. Prior period Ind AS refers to the term ‘prior AS 5 defines prior period items
items period errors’ which is wider in as incomes or expenses which
scope as compared to ‘prior arise in the current period as a
period items’ used in AS 5. result of errors or omissions in
the preparation of financial
Ind AS 8 definition of prior
statements of one or more prior
period errors include the
periods.
effects of misinterpretations of
facts and fraud as well.

6. Correction of Ind AS 8 requires, subject to Unlike Ind AS 8, AS 5 requires

material prior limited exception, the correction of prior period
period errors retrospective correction of items by including the required
material prior period errors, adjustments in the
i.e., restatement of determination of net profit or
comparative information and loss for the current period,
presentation of a third balance though the standard also
sheet as in case of a permits an alternative approach
retrospective change in an under which the adjustments
accounting policy where the are included in the statement of
retrospective correction has a profit and loss after
material effect on the determination of current net
information in the balance profit or loss.
sheet at the beginning of the
preceding period.
Thus, under Ind AS 8, material
prior period errors are
corrected by correcting the
recognition, measurement and
disclosure of amounts of
elements of financial
statements retrospectively as
if the prior period error had
never occurred.
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4.44 2.44 FINANCIAL REPORTING

7. Disclosure Disclosure requirements of Disclosure requirements of AS 5

requirements Ind AS 8 are more detailed as are less as compared to those
compared to those of AS 5. of Ind AS 8.
For e.g. in case of a voluntary
change in accounting policy,
an entity is required to
disclose the reasons why
applying the new accounting
policy provides reliable and
more relevant information.
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INDIAN ACCOUNTING STANDARD 8 4.45 4.45

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. A carpet retail outlet sells and fits carpets to the general public. It recognizes 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?
2. Under what circumstances an entity is required to present a third balance sheet at the
beginning of the preceding period?
3. During 20X2, Delta Ltd., changed its accounting policy for depreciating property, plant and
equipment, so as to apply a component approach completely, whilst at the same time
adopting the revaluation model.
In years before 20X2, Delta Ltd.’s asset records were not sufficiently detailed to apply a
component approach fully. At the end of 20X1, 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 20X2.
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.
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4.46 2.46 FINANCIAL REPORTING

Delta Ltd.’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 component approach retrospectively, or to account for that change prospectively
from any earlier date than the start of 20X2. 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 Ltd.’s new policy prospectively from the start of 20X2.
Additional information:
(i) Delta Ltd.’s tax rate is 30%
(ii) Property, plant and equipment at the end of 20X1:
Cost ` 25,000
Depreciation ` 14,000
Net book value ` 11,000
(iii) Prospective depreciation expense for 20X2 (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 existing property, plant and equipment
for 20X2 (new basis) ` 2,000
You are required to prepare the relevant note for disclosure in accordance with Ind AS 8.
4. Is change in the depreciation method for an item of property, plant and equipment a change
in accounting policy or a change in accounting estimate?
5. An entity charged off certain expenses as finance costs in its financial statements for the
year ended 31 st 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 costs. 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 finance costs to
other expenses in the comparative amounts will be considered as correction of an error
under Ind AS 8? Would the entity need to present a third balance sheet?
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INDIAN ACCOUNTING STANDARD 8 4.47 4.47

Answers
1. This is not a change in accounting policy as the carpet retailer has changed the way that
the carpets are fitted.

Therefore, there would not be any need to retrospectively change the prior period figures for
revenue already recognized.
2. As per paragraph 40A of Ind AS 1, Presentation of Financial Statements, an entity shall
present a third balance sheet as at the beginning of the preceding period in addition to the
minimum comparative financial statements required by paragraph 38A of the standard if:
 it applies an accounting policy retrospectively, makes a retrospective restatement
of items in its financial statements or reclassifies items in its financial statements;
and
 the retrospective application, retrospective restatement or the reclassification has
a material effect on the information in the balance sheet at the beginning of the
preceding period.
3. Extract from the notes
From the start of 20X2, Delta Ltd., 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 20X2 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.
4. As per paragraphs 60 and 61 of Ind AS 16, Property, Plant and Equipment, 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 shall
be 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
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4.48 2.48 FINANCIAL REPORTING

asset, the method shall be changed to reflect the changed pattern. Such a change is
accounted for as a change in an accounting estimate in accordance with Ind AS 8.

As per the above, depreciation method for a depreciable asset has to reflect the expected
pattern of consumption of future economic benefits embodied in the asset. Determination
of depreciation method involves an accounting estimate and thus depreciation method is
not a matter of an accounting policy.
Accordingly, Ind AS 16 requires a change in depreciation method to be accounted for as a
change in an accounting estimate, i.e., prospectively.
5. As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition,
measurement, presentation or disclosure of elements of financial statements. Financial
statements do not comply with Ind AS if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows. Potential current period errors discovered in
that period are corrected before the financial statements are approved for issue. However,
material errors are sometimes not discovered until a subsequent period, and these prior
period errors are corrected in the comparative information presented in the financial
statements for that subsequent period.
In accordance with the above, the reclassification of expenses from finance costs 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 a third balance
sheet.
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INDIAN ACCOUNTING STANDARD 10 4.49 4.49

UNIT 2:
IND AS 10: EVENTS AFTER THE REPORTING PERIOD

LEARNING OUTCOMES

After studying this unit, you will be able to:

 Define the relevant terms like ‘events after the reporting period’, ‘date
of approval’, ‘adjusting events’ and ‘non-adjusting events’.

 Differentiate between adjusting events and non-adjusting events in

terms of their treatment and disclosure.

 Recommend the accounting treatment for special cases like dividend,

going concern, long-term loan arrangements.
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4.50 2.50 FINANCIAL REPORTING

UNIT OVERVIEW
IND AS 10
• Of adjusting events • Long term loan
after the reporting arrangements
period • Going concern
• No recognition of non-
adjusting events after
the reporting period;
only disclosure is
required
Recognition Special
and Cases
measurement

Distribution of
Non-cash Disclosure
Assets to
Owners
• When to recognise a • Date of approval for
dividend payable issue
• Measurement of a • Non-adjusting events
dividend payable after the reporting
• Presentation and period
disclosures
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INDIAN ACCOUNTING STANDARD 10 4.51 4.51

2.1 INTRODUCTION
It is impossible for any company to present the information on the same day, as the day of
reporting. There would always be a gap between the end of the period for which financial
statements are presented and the date on which the same will actually be made available to the
public.
During this gap, there is a possibility of occurring of few events which will have far reaching
effects on the business / existence of the company. Now the question arises: what view the
company should take about such events? Should it leave it without any cognizance as they are
taking place after the reporting period, or should it take cognizance of such events as at the time
of preparation of the financial statement and making it available to the public? If the company is
aware of the facts and is still not disclosing the same, it may mislead the users.
Ind AS 10 deals with such events and provides guidance about its treatment in the financial
statements.

2.2 OBJECTIVE
The objective of this standard is to prescribe.
1. When an entity should adjust its financial statements for the events after the reporting
period.
2. 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.
The standard also requires that an entity should not prepare its financial statements on a going
concern basis if events after the reporting period indicate that the going concern assumption is
no longer appropriate.
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4.52 2.52 FINANCIAL REPORTING

Objective

Ind AS 10 prescribes

When to adjust Disclosures that Not to prepare financial

financial statements for an entity should statements on a going concern
events after the give about basis if events after the
reporting period reporting period indicate that
the going concern assumption is
not appropriate

Date when the financial statements Events after the

were approved for issue reporting period

2.3 SCOPE
The Standard -shall be applied in:
1. Accounting for events after reporting period; and
2. Disclosure of events after the reporting period.
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INDIAN ACCOUNTING STANDARD 10 4.53 4.53

2.4 DEFINITIONS 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.
2.4.1 Events after the Reporting Period
Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors (in case of a company) and by the corresponding approving
authority (in case of any other entity) for issue. This is depicted in the below chart:

Cut off
date
Financial Statements
Start of the End of the Approved by the
reporting reporting Management Shareholders’
period period Meeting

Events after the Not covered by Ind AS 10

reporting period
covered by Ind AS 10

Example 1
The financial year of an entity ends on 31 st March, 20X2. If the board of directors approves the
financial statements on 15 th May, 20X2, ‘after the reporting period’ will be the period between
31st March, 20X2 and 15th May, 20X2 and the events occurring during this period should be
considered as ‘events after the reporting period’.

2.4.2 Approval of Financial statements

Now the question arises that what is meant by approval of financial statements? When can one
say that the financial statements are approved? Which body needs to be considered as an
approving authority? If there is a hierarchy of approvals, at what level one can assume that the
financial statements are approved?
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4.54 2.54 FINANCIAL REPORTING

What is the date of approval of financial statements?

It is worthwhile to note that the process involved in approving the financial statements for issue
will vary depending upon the (a) management structure, (b) statutory requirements and
(c) procedures followed in preparing and finalising the financial statements.
This standard prescribes,
(i) In case of a company: The financial statements will be treated as approved when board of
directors approves the same;
(ii) In the case of any other entity: The financial statements will be treated as approved
when the corresponding approving authority approves the same. The standard does not
mention specifically what will constitute the approving authority in case of any other entity.
But from the word “Corresponding” one can construe that it is the body which is
authorised to manage the entity on behalf of all members.
It is pertinent to note that in some cases, an entity is required to submit its financial
statements to its shareholders for approval after the financial statements have been
approved by the Board for issue. In such cases, as per paragraph 5 of Ind AS 10, even
though shareholders’ approval is needed, yet, for the purpose of deciding the events after
the reporting period, the date of approval of financial statements will be considered as the
date of approval by the board of directors only.

Example 2
The Board of Directors of ABC Ltd., in its meeting on 5 th May, 20X1, reviews and
approves the financial statements for the year ended 31 st March, 20X1 and issues them
to the shareholders. The financial statements are adopted by the shareholders in the
annual general meeting on 23rd June, 20X1. The date of approval of financial statements
for the is 5 th May, 20X1 in accordance with the standard.

Likewise, in some cases, the management of an entity is required to issue its financial
statements to a supervisory board (made up solely of non-executives) for approval. In
such cases, as per paragraph 6 of Ind AS 10, the financial statements are approved for
issue when the management approves them for issue to the supervisory board.

Example 3
On 18 th May, 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
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INDIAN ACCOUNTING STANDARD 10 4.55 4.55

board approves the financial statements on 26 th May, 20X2. The financial statements are
made available to shareholders and others on 1st June, 20X2. The shareholders approve
the financial statements at their annual meeting on 15th July, 20X2 and the financial
statements are then filed with a regulatory body on 17 th July, 20X2.
The financial statements are approved for issue on 18 th May, 20X2 (date of management
approval for issue to the supervisory board).

2.4.3 When date of approval is after the public announcement of some

other financial information
‘Events after the reporting period’ include all events up to the date when the financial statements
are approved for issue, even if those events occur after the public announcement of profit or of
other selected financial information.
Illustration 1

What is the date of approval for issue of the financial statements prepared for the reporting
period from 1st April, 20X1 to 31st March, 20X2, in a situation where following dates are
available? Completion of preparation of financial statements 28 th May, 20X2 Board reviews and
approves it for issue 19 th June, 20X2.
Available to shareholders 1 st July, 20X2

Annual General Meeting 15th September, 20X2

Filed with regulatory authority 16th October, 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 are approved by the Board of Directors in case of a company, and, by the
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., 19 th June, 20X2.
If the entity is a partnership firm, the date of approval will be the date when the relevant
approving authority of such entity approves the financial statements for issue i.e. the date when
the partner(s) of the firm approve(s) the financial statements.
*****
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4.56 2.56 FINANCIAL REPORTING

Illustration 2
ABC Ltd. prepared interim financial report for the quarter ending 30 th June, 20X1. The interim
financial report was approved for issue by the Board of Directors on 15 th July, 20X1. Whether
events occurring between end of the interim financial report and date of approval by Board of
Directors, i.e., events between 1st July, 20X1 and 15th July, 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 30 th June, 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 not been dealt with in Ind AS 10. Absence of any specific guidance
regarding reporting period implies that any term for which reporting is done by preparing
financial statements is the reporting period for 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 as reporting period for the purpose of
Ind AS 10.
Paragraph 2 of Ind AS 34, inter alia, provides that each financial report, annual or interim, is
evaluated on its own for conformity with Ind AS. Further, paragraph 19 of 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 with all the provisions of 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 adjusting 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
1 st July, 20X1 and 15 th July, 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
30th June, 20X1.
*****
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INDIAN ACCOUNTING STANDARD 10 4.57 4.57

Illustration 3
The Board of Directors of ABC Ltd. approved the financial statements for the reporting period
20X1-20X2 for issue on 15th June, 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 30 th June, 20X2. What is the date of approval for issue
as per Ind AS 10 in the given case?
Solution
As per paragraph 3 of Ind AS 10, the – date of approval is the date on which 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. 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
30th June, 20X2.
*****
2.4.4 Should the company report only unfavourable events?
The standard clearly states that events after reporting period can be favourable as well as
unfavourable. Accordingly, an entity should report both favourable as well as unfavourable
events after the reporting period.

2.5 TYPES OF EVENTS

The ‘events after the reporting period’ are classified into two categories
(i) Adjusting Events: Adjusting events are those that provide evidence of conditions that
existed at the end of the reporting period (adjusting events after the reporting period);
and
(ii) Non Adjusting Events: Non-adjusting events are those that are indicative of conditions
that arose after the reporting period (non-adjusting events after the reporting period).
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4.58 2.58 FINANCIAL REPORTING

Both favourable
and unfavourable
Events after the By the Board of
reporting period Directors in case of a
That occur between company
the end of the
reporting period
and the date when By the corresponding
the financial approving authority
statements are in case of any other
approved entity

Adjusting events Non-adjusting events

Those that provide evidence of Those that are indicative

conditions that existed at the of conditions that arose
end of the reporting period after the reporting period

Ind AS 10 Carve Out: Where there is a breach of a material provision of a long-term loan
arrangement on or before the end of the reporting period with the effect that the liability
becomes payable on demand on the reporting date, the agreement by lender before the
approval of the financial statements for issue, to not demand payment as a consequence of the
breach, shall be considered as an adjusting event.

2.6 RECOGNITION AND MEASUREMENT 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 require an entity to
adjust the amounts recognised in its financial statements, or to recognise items that were not
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INDIAN ACCOUNTING STANDARD 10 4.59 4.59

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’ or recognises 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.
Illustration 4
A case is going on between ABC Ltd., and GST department on claiming some exemption
for the year 20X1-20X2. The court issued the order on 15th April, 20X2 and rejected the
claim of the company. Accordingly, the company is liable to pay 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 (but before the financial statements are approved)
provides evidence of the liability existing at the end of the reporting period. Therefore, the
event will be considered as an adjusting event and, accordingly, the amounts will be
adjusted in financial statements for 20X1-20X2.
*****
(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 end of the reporting period;

Example 4
Loss allowance for expected credit loss in respect of the amount due from a
customer was recognised at the end of the reporting period in accordance with
Ind AS 109, ‘Financial Instruments’. Subsequent liquidation order on the customer
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4.60 2.60 FINANCIAL REPORTING

issued before the date of approval of financial statements for the reporting period
indicates that nothing could be received from the customer. This confirms that the
expected credit loss at the end of the reporting period on this particular trade
receivable is equal to its gross carrying amount and, consequently, the entity
needs to adjust the loss allowance for the expected credit loss at the end of the
reporting period so that net carrying amount of this particular trade receivable at
the end of the reporting period is zero.

Illustration 5
While preparing its financial statements for the year ended 31 st 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
event 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 became bankrupt. Can XYZ Ltd. provide for the full loss
arising out of insolvency 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 in February 20X1 (i.e. before the end of the reporting period).
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 31st March,
20X1. In this case, assuming that the financial statements are approved by the
approving authority after April, 20X1, XYZ Ltd should provide for the remaining
amount as a consequence of declaration of this debtor as bankrupt.
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INDIAN ACCOUNTING STANDARD 10 4.61 4.61

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 – without taking cognizance of the catastrophic situation of an
earthquake. Accordingly, bankruptcy of the debtor in this case is a non-adjusting
event.

As per para 21 of Ind AS 10, if non-adjusting events after the reporting period are
material, their non-disclosure could influence the economic decisions that users
make based on the financial statements. Accordingly, an entity shall disclose the
following for each material category 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.”
If the amount of bad debt is considered to be material, the nature of this non-
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.
*****
(ii) The sale of inventories after the reporting period may give evidence about their net
realisable value at the end of the reporting period.
While making the valuation of closing inventories, Ind AS 2, Inventories, prescribes
the general principle that the inventories need to be valued at cost or net realisable
value, whichever is less. In cases, where inventories are valued at net realisable
value (and not ‘at cost’), the 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. However, when the inventories are actually sold
during the period after the reporting date (but before approval of financial
statements), the selling price of the actual sale transaction provides the evidence of
net realisable value provided the market conditions remains unchanged. In contrast,
if a change in the market conditions occur (say, due to surplus production, additional
import, etc.), then the resultant changes to the selling price of inventories do not
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4.62 2.62 FINANCIAL REPORTING

reflect the conditions that existed on the reporting date (when the inventories were
valued).

Example 5
Entity A values its inventories at cost or NRV, whichever is less. Entity A has
10 pieces of item A in its stock at the year end. Each item cost ` 500. All these
items are sold subsequently but before the date of approval of financial statements
for the reporting period at ` 450 per piece. The sale of inventories after the
reporting period normally provides evidence about their net realisable value at the
end of the reporting period.

Illustration 6
The company has inventory of 100 finished cars on 31st March, 20X2, which are
having a cost of ` 4,00,000 each. On 30 th April, 20X2, as per the new government
rules, higher road tax and penalties are to be paid by the buyers for such cars
(which were already expected to come) and hence the selling price of a car has
come down and the demand for such cars has dropped drastically. The selling
price has come down to ` 3,00,000 each. The financial statements of the
company for the year 20X1-20X2 are not yet approved. Should the company value
its stock at ` 4,00,000 each or should it value at ` 3,00,000 each? Ignore
estimated costs necessary to make the sale.
Solution
Events after the reporting period provide the evidence about the net realisable
value of the cars at the end of the reporting period and, 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, or the
proceeds from assets sold, before the end of the reporting period.

Same principle can be applied for sale of assets as well.

Example 6
The sale of an asset took place in March, 20X2. However, the actual consideration was
determined and collected after 31 st March, 20X2, i.e., on 10th May, 20X2 (date of approval
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INDIAN ACCOUNTING STANDARD 10 4.63 4.63

of financial statements was 15th May, 20X2). In such a situation, sale value recognised in
the books as on 31 st March, 20X2 should be adjusted.

Illustration 7
ABC Ltd. has purchased a new machinery during the year 20X1-20X2. The asset was
finally installed and made ready for use on 15 th March, 20X2. However, the company
involved in installation and training, which was also the supplier, has not yet submitted
the final bills for the same.
The supplier company sent the bills on 10 th April, 20X2, when the financial statements
were not yet approved. Should the company adjust the amount of capitalisation in the
year 20X1-20X2 or in the year 20X2-20X3?
Solution
As per the provisions of the contract, the cost of installation and training of new machine is
an integral part of the cost of asset purchased. Therefore, even if the details are available
after reporting period, they provide proof about the circumstances that existed at the end of
reporting period. Therefore, the cost of installation and training will be considered for
capitalisation in the year 20X1-20X2.
*****
(d) The determination after the reporting period of the amount of profit-sharing or bonus
payments, 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 before 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 before the year end, one cannot determine the amount of
profit. Unless one determines the final amount of profit, one cannot finalise the amount of
profit sharing as the latter is related to the former. Therefore, such events must be
considered for the adjustments in financial statements, provided, the contract already exists
on the last day of reporting period.
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4.64 2.64 FINANCIAL REPORTING

(e) The discovery of fraud or errors that show that the financial statements are incorrect.
If any error or any fraud related to the reporting period is detected after the reporting period
(but before approval of the financial statements), then the entity must adjust the financial
statements appropriately by rectifying the same. This is because such fraud and errors
provide evidence that the financial statements are not correct as at the reporting date.
Discovery of such fraud and errors are adjusting events under Ind AS 10

2.7 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 as required under paragraph 21 of Ind AS 10.
Recognition, Measurement and Disclosure

Adjusting events after the reporting Non-adjusting events after the reporting period
period

Do not adjust the amounts recognised in

Adjust the amounts recognised in the the financial statements to reflect it
financial statements to reflect it

If non-adjusting events after the reporting period are material, then disclose
• the nature of the event; and
• an estimate of its financial effect, or a statement that such an estimate
cannot be made.
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INDIAN ACCOUNTING STANDARD 10 4.65 4.65

2.8 SPECIAL CASES

2.8.1 Long-term Loan Arrangements
Notwithstanding anything contained in the definition of adjusting events and non-adjusting
events in paragraph 3 of Ind AS 10, where there is a breach of a material provision of a long-
term loan arrangement on or before the end of the reporting period with the effect that the
liability becomes payable on demand on the reporting date, the agreement by lender before the
approval of the financial statements for issue, to not demand payment as a consequence of the
breach, shall be considered as an adjusting event.

Example 7
ABC Ltd., in order to raise funds, has privately placed debentures of ` 1 crore, on
1 st January, 20X1, issued to PQR Ltd. As per the original terms of agreement, the debentures
are to be redeemed on 31st March, 20X9. One of the conditions of the private placement of the
debentures was that debt-equity ratio at the end of any reporting year should not exceed 2:1. If
this condition is not fulfilled, then PQR Ltd., has a right to demand immediate redemption of the
debentures. On 31st March, 20X6, debt-equity ratio of ABC Ltd., exceeds 2:1. Therefore,
PQR Ltd., decides to return the debentures.
Thus, on 31 st March, 20X6, the liability of the ABC Ltd., towards PQR Ltd., (which was originally
a long-term liability) becomes a current liability, since it is now a liability on demand. However,
ABC Ltd. enters into an agreement with PQR Ltd. on 15th April, 20X6 that PQR Ltd., will not
demand the payment immediately. The financial statements are approved by the BOD on
30th April, 20X6.
In this case, the agreement that PQR Ltd., will not demand the money immediately is a
subsequent event. Even though it is a subsequent event not affecting the condition existing at
the balance sheet date, yet because of the specific provisions of paragraph 3 of Ind AS 10, it
has to be given effect in the financial statements for the year 20X5-20X6. Accordingly, though
as per original terms the liability would have been otherwise reclassified as a current liability as
on 31st March, 20X6, by giving effect to the event after the reporting period due to the specific
provisions of paragraph 3 of Ind AS 10, it would continue to be classified as a non-current
liability as on 31 st March, 20X6. In other words, the re-classification of debentures as current
liability as at 31st March, 20X6 will be adjusted and once again classified as a non-current
liability as at that date.
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4.66 2.66 FINANCIAL REPORTING

2.8.2 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 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.

• Ind AS 1 specifies required disclosures if:

(a) the financial statements are not prepared on a going concern basis; or
(b) management is aware 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 events or conditions requiring disclosure may arise after the reporting period.
Going concern approach has a lot of importance in the financial statements. Going concern
approach can be applied if and only if the entity has intentions to continue its operations. The
carrying amount of assets and carrying amount of liabilities will be much different if the entity
has plans to go in for liquidation.

Example 8
A going concern company assumes that the raw material inventory and work in progress will be
completed in due course and the inventories of finished goods would be ready for sale. But, if
the company has no intention to continue with the business, it may take a decision to sell the
raw material and WIP at best available market price, may be at scrap value also.

If a company decides to go into liquidation, then the long-term liabilities of the company will turn
into short-term liabilities as the company will have to pay all its debts before it closes down its
operations. Thus, the overall approach of accounting will change when there is no going concern
approach.
Therefore, Ind AS 10, specifically requires that if after the reporting period but before approval of
the financial statements, there are any signs of not continuing the operations, or the decision is
taken during that period not to continue with the operations, in spite of the fact that the decision
was taken after the reporting period, still the entity should prepare the financial statements with
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INDIAN ACCOUNTING STANDARD 10 4.67 4.67

a different approach and, accordingly, inform the stakeholders clearly that the is planning to
cease operations.
Illustration 8
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
financial year 20X4-20X5 have been approved by the Board of Directors on 10 th July, 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 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.
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.
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 it 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 confirmed on
23rd April, 20X5, (i.e., after the end of the reporting period and before the approval of the
financial statements), that no further contact is secured, it implies that the entity’s operations are
expected to come to an end by 31 st December 20X5. Accordingly, if entity’s operations 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
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4.68 2.68 FINANCIAL REPORTING

alternative of continuing the business, preparation of financial statements for 20X4-20X5 and
thereafter going concern basis may not be appropriate.
*****
Illustration 9
In the plant of PQR Ltd., there was a fire on 10th May, 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 31st March, 20X1 were approved by the Board of
Directors on 12 th 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 event. However, in accordance with paragraph 21 of Ind AS 10, disclosures regarding
material 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 financial year 20X0-20X1 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 st March, 20X1.
*****

2.9 DIVIDENDS
• 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 the end of the reporting period.
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INDIAN ACCOUNTING STANDARD 10 4.69 4.69

• If dividends are declared after the reporting period but before the 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 to accounts in Financial Statements.
• The crux of difference between adjusting event and non-adjusting event depends on the
fact whether the event provides evidence for existence of a condition at the end of
reporting period or not.
Illustration 10
ABC Ltd. declares the dividend on 15 th July, 20X2 as the results of year 20X1-20X2 as well as
Q1 ending 30 th June, 20X2 are better than expected. The financial statements of the company
are approved on 20 th July, 20X2 for the financial year ending 31 st March, 20X2. Will the
dividend be accounted for in the financial year 20X2-20X3 or will it be accounted for in the year
20X1-20X2?
Solution
The dividend was declared in the year 20X2-20X3. Therefore, the obligation towards dividend
did not exist at the end date of reporting period i.e., on 31 st March, 20X2. Therefore, it will be
accounted for in the year 20X2-20X3 and not in 20X1-20X2, even if financial statements for
20X1-20X2 were approved after the declaration of dividend. It will, however, be disclosed in the
notes in the financial statements for the year 20X1-20X2 in accordance with Ind AS 1.
*****
Illustration 11

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
20X1-20X2. 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 of
equity instruments. If an 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 dividends as a liability at the end of the reporting period.
However, Ind AS 10 does not prescribe accounting treatment for dividends declared to
redeemable preference shareholders. As per the principles of Ind AS 32, Financial Instruments:
Presentation, a preference share that provides for mandatory redemption by the issuer for a
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4.70 2.70 FINANCIAL REPORTING

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 expense in the same way as interest on a bond. Since interest will be
charged on time basis, the requirements of Ind AS 10 regarding date of declaration of dividend
is not relevant for its recognition.
*****

2.10 DISCLOSURE REQUIRED UNDER IND AS 10

2.10.1 Date of approval for issue
• An entity shall disclose the date when the financial statements were approved for issue
and who gave that approval. If the entity’s owners or others have the power to amend the
financial statements after issue, the entity shall disclose that fact.
• It is important for users to know when the financial statements were approved for issue,
because the financial statements do not reflect events after this date.
Ind AS 10, underlines the importance of date of approval, by requiring a separate disclosure of
the date of approval of financial statements. Note that this date is important because it gives a
clear idea to the stakeholders about the period, which is covered after the reporting period, for
providing information to the stakeholders. In a way, it determines the scope of the financial
statements in terms of time.
2.10.2 Updating disclosure about conditions at the end of the reporting
period
• If an entity receives information after the reporting period about conditions that existed at
the end of the reporting period, it shall update disclosures that relate to those conditions,
in the light of the new information.

In case of adjusting events, the entity is supposed to make the necessary adjustments in
the financial statements. But just making the changes in the financial statements will not be
sufficient as the stakeholders will not be in a position to understand why the adjustments
are made. Therefore, in addition to adjustments in the financial statements, it is necessary
to make the separate disclosure of the same.
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INDIAN ACCOUNTING STANDARD 10 4.71 4.71

• In some cases, an entity needs to update the disclosures in its financial statements to
reflect information received after the reporting period, even when the information does not
affect the amounts that it recognises in its financial statements. One example of the need
to update disclosures is when evidence becomes available after the reporting period
about a contingent liability that existed at the end of the reporting period. In addition to
considering whether it should recognise or change a provision under Ind AS 37, an entity
updates its disclosures about the contingent liability in the light of that evidence.
2.10.3 Disclosure of Non-adjusting events after the reporting period
If non-adjusting events after the reporting period are material, non-disclosure could reasonably
be expected to influence the decisions that the primary users of general-purpose financial
statements make on the basis of those financial statements., which provide financial information
about a specific reporting entity. Accordingly, an entity shall disclose the following for each
material category 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 generally resulting in
disclosure:
(a) a major business combination after the reporting period (Ind AS 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 after 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);
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4.72 2.72 FINANCIAL REPORTING

(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 assets 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.
Important points to remember
S.No. Item Timing Treatment Reason
1. Dividends Declared after the • Do not recognise it No obligation exists
reporting period as a liability at the at that time
but before end of the
approval of reporting period.
financial • Disclosed in the
statements notes to accounts
2. Going If management • Do not prepare the The deterioration in
concern determines after financial operating results and
the reporting statements on a financial position
period either that going concern after the reporting
it intends to basis; or period may be so
liquidate the entity • Make necessary pervasive that it may
or to cease trading disclosure of not require a
following going fundamental change
concern basis or in the basis of
events or accounting
conditions that
may cast
significant doubt
upon the entity’s
ability to continue
as a going concern
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INDIAN ACCOUNTING STANDARD 10 4.73 4.73

3. Date of Approved after the Disclose the date when Important for users to
approval of reporting period the financial know when the
financial statements were financial statements
statements approved for issue and were approved for
for issue who gave that approval issue because the
financial statements
do not reflect events
after this date
4. Updating Received Update disclosures When the information
disclosure information after that relate to new does not affect the
about the reporting information / conditions amounts that it
conditions at period recognises in its
the end of financial statements,
the reporting disclosures are
period required

An extract from the annual report of JSW Steel Limited for the year ended
31st March, 2021:

2.11 DISTRIBUTION OF NON-CASH ASSETS TO OWNERS

Sometimes an entity distributes non-cash assets as dividends to its equity shareholders, acting
in their capacity as owners. In those situations, an entity may also give equity shareholders a
choice of receiving either non-cash assets or a cash alternative.
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4.74 2.74 FINANCIAL REPORTING

It may be recalled that paragraph 107 of Ind AS 1, inter alia, requires an entity to present the
amount 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.
Appendix A to Ind AS 10, Distribution of Non-cash Assets to Owners is relevant in this regard.
2.11.1 Applicability
• Appendix A to Ind AS 10 applies to the following types of non-reciprocal distributions of
assets by an entity to its 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 assets or a cash
alternative.
• It applies only to distributions in which all owners of the same class of equity instruments
are treated equally.
2.11.2 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 of this Appendix 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, Consolidated Financial Statements.
• This Appendix addresses only the accounting by an entity that makes a non-cash asset
distribution. It does not address the accounting by shareholders who receive such a
distribution.
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INDIAN ACCOUNTING STANDARD 10 4.75 4.75

2.11.3 Issues addressed by Appendix A to Ind AS 10

• When an entity declares a distribution (and hence, has an obligation to distribute the
assets concerned to its owners), it must recognise a liability for the dividend payable.

• Accordingly, this Appendix addresses the following three questions:

o When should the entity recognise the dividend payable?
o How should an entity measure the dividend payable? and
o When an entity settles the dividend payable, how should it account for any
difference between (a) the carrying amount of the assets distributed and (b) the
carrying amount of the dividend payable?

These issues have been discussed in the subsequent paragraphs.

2.11.4 Accounting Principles enunciated by Appendix A to Ind AS 10
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.
2.11.4.1 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
• This 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), if the
jurisdiction does not require further approval.
2.11.4.2 Measurement of a dividend payable
• An entity shall measure a liability to distribute non-cash assets as a 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 of each alternative and the associated probability of owners selecting each
alternative.
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4.76 2.76 FINANCIAL REPORTING

• 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 any changes in the carrying
amount of the dividend payable recognised in equity as adjustments to the amount of the
distribution.
Accounting for any difference between the carrying amount of the assets distributed and
the carrying 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 (a) the carrying amount of the assets distributed and (b) the carrying amount of
the dividend payable - in profit or loss.
2.11.4.3 Presentation and disclosures
An entity shall present the difference between carrying amount of the assets distributed and the
carrying amount of the dividend payable at the time of settlement of the dividend payable 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 or 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 of the end of the reporting period; and
(c) the fair value of the asset to be distributed as of the end of the reporting period, if it is
different from its carrying amount, and the information about the method(s)used to measure
that fair value required to be disclosed by Ind AS 113, Fair Value Measurement.
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INDIAN ACCOUNTING STANDARD 10 4.77 4.77

2.12 EXTRACTS OF FINANCIAL STATEMENT OF LISTED

ENTITIES

An extract from the annual report of JSW Steel Limited for the year ended March 31, 2021:

Subsequent Events

a) On 21 May 2021, the board of directors recommended a final dividend of ` 6.50 (Rupees six and paise
fifty only) per equity share of ` 1 each to be paid to the shareholders for the financial year 2020-21, which
is subject to approval by the shareholders at the Annual General Meeting to be held on 21 July 2021. If
approved, the dividend would result in cash outflow of Rs. 1,571 crores.
b) On 13 April 2021, JSW Steel Italy S.R.L, a wholly owned subsidiary of the Company completed the
acquisition of remaining 840,840 equity shares, representing 30.73% equity share capital of GSI Luchini
S.P.A. for a consideration of EUR 1 million. Consequent to this, GSI Luchini S.P.A. has become a wholly
owned subsidiary of the Company.

(Source: https://www.jswsteel.in/)

2.13 SIGNIFICANT DIFFERENCES BETWEEN IND AS 10

AND AS 4
S. No Particulars Ind AS 10 AS 4
Title Events after the Reporting Period Contingencies and Events
Occurring After the Balance
Sheet Date
1. Material non The standard requires material non- AS 4 requires the same to be
adjusting adjusting events to be disclosed in disclosed in the report of
events the financial statements. approving authority.
2. Impact on If after the reporting date it is AS 4 requires assets and
going determined that the fundamental liabilities to be adjusted for
concern of accounting assumption of going events occurring after the
the entity concern is no longer appropriate, balance sheet date that indicate
Ind AS 10 requires a fundamental that the fundamental accounting
change in the basis of accounting. assumption of going concern is
not appropriate.
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4.78 2.78 FINANCIAL REPORTING

In this regard, Ind AS 10 refers to AS 4 does not require any

Ind AS 1, which requires an entity such disclosure. However,
to make the following disclosures: AS 1 requires the disclosure
• disclose the fact that the of the fact in case going
financial statements are not concern assumption is not
prepared on a going concern followed.
basis together with the basis on
which the financial statements
are prepared.
• state the reason why the entity
is not regarded as a going
concern.
3. Breach of a Consequent to carve-out made in No such guidance is given in
material Ind AS 1, it has been provided in AS 4
provision of the definition of ‘Events after the
a long-term reporting period’ that in case of
loan breach of a material provision of a
arrangement long-term loan arrangement on or
before the end of the reporting
period with the effect that the
liability becomes payable on
demand on the reporting date, if the
lender, before the approval of the
financial statements for issue,
agrees to waive the breach, it shall
be considered as an adjusting
event.
4. Distribution Ind AS 10 includes an Appendix No such guidance is given in
of non-cash Distribution of Non-cash Assets to AS 4
assets to Owners which deals, inter alia, with
owners when to recognise dividends
payable to its owners.
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INDIAN ACCOUNTING STANDARD 10 4.79 4.79

2.14 CARVE OUT IN IND AS 10 FROM IAS 10

Ind AS 10 Carve Out: As a consequence to carve-out made in Ind AS 1, Ind AS 10 provides, in
the definition of ‘Events after the reporting period’ that in case of breach of a material provision
of a long-term loan arrangement on or before the end of the reporting period with the effect that
the liability becomes payable on demand on the reporting date, if the lender, before the approval
of the financial statements for issue, agrees to waive the breach, it shall be considered as an
adjusting event.
However, under IAS 10 ‘Events after the Reporting Period’, an agreement with the lender after
the reporting period but before the approval of the financial statements for issue not to demand
payment (say, arising out of breach of loan covenants) is not considered as an adjusting event.
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4.80 2.80 FINANCIAL REPORTING

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. The AGM of ABC Ltd for the year ended 31st March, 20X2 was held on 10th July, 20X2 and
Board Meeting has been conducted on 15th May, 20X2. Meanwhile, the company had to
disclose certain financial information pertaining to the year ended 31st March, 20X2 to SEBI
as per SEBI regulations on 20th April, 20X2. Since, certain financial information pertaining
to the year ended 31st March, 20X2 is submitted to SEBI before approval of financial
statements by the Board, the management is suggesting that 20th April 20X2 shall be
considered as ‘after the reporting period’. Whether the management view is correct in
accordance with the guidance given in Ind AS 10?
2. ABC Ltd. is in a legal suit against the GST department. The company gets a court order
in its favour on 15 th April, 20X2, which resulted into reducing the tax liability as on
31st March, 20X2. The financial statements for 20X1-20X2 were approved by the board of
directors on 15 th May, 20X2. The management has not considered the effect of the
transaction as the event is favourable to the company. The company’s view is that
favourable events after the reporting period should not be considered as it would hamper
the realisation concept of accounting. Comment on the company’s views in the light of Ind
AS 10.

3. ABC Ltd. trades in laptops. On 31st March, 20X2, the company has 50 laptops which
were purchased at ` 45,000 each. The company has considered the same price for
calculation of closing inventory valuation. On 15 th April, 20X2, advanced version of same
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INDIAN ACCOUNTING STANDARD 10 4.81 4.81

series of laptops is introduced in the market. Therefore, the price of the current laptops
goes down to ` 35,000 each. The financial statements for 20X1-20X2 were approved by
the board of directors on 15 th May, 20X2. The company does not want to value the stock
at ` 35,000 less estimated costs necessary to make the sale as the event of reduction in
selling price took place after 31st March, 20X2 and the reduced prices were not applicable
as on 31 st March, 20X2. Comment on the company’s views.
4. XY Ltd took a large-sized civil construction contract, for a public sector undertaking,
valued at ` 200 crores. The execution of the project started during 20X1-20X2 and
continued in the next financial year also. During execution of the work on 29 th May, 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 15 th June, 20X2. How will you treat the above in the
financial statements for the year ended 31 st March, 20X2?
5. A Ltd. was required to pay a 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 20X1-20X2, which were approved in May, 20X2. The
arbitrator, in April, 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 Statement of Profit and Loss as an expense for the year 20X1-20X2?
Answers
1. As per Ind AS 10, even if partial information has already been published, the reporting
period will be considered as the period between the end of the reporting period and the date
of approval of financial statements. In the above case, the financial statements for the year
20X1-20X2 were approved on 15th May, 20X2. Therefore, for the purposes of Ind AS 10,
‘after the reporting period’ would be the period between 31st March, 20X2 and 15th May,
20X2.
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4.82 2.82 FINANCIAL REPORTING

2. As per Ind AS 10, even favourable events need to be considered. What is important is
whether a condition exists as at the end of the reporting period and there is evidence for the
same.
3. As per Ind AS 10, the decrease in the net realizable value of the stock after the reporting
period should normally be considered as an adjusting event.

4. In the instant case, the execution of work started during the financial year 20X1-20X2 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 became
evident that the cost may escalate by ` 50 crores. In accordance with the definition of
‘Events after the Reporting Period’, since the rocky surface was there, the condition was
existing at the end of the reporting period, therefore, it is an adjusting event. The cost of
the project and profit should be accounted for accordingly.
5. In the instant 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 has 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 became certain when the
arbitrator decided the award during financial year 20X2-20X3.
Accordingly, the recovery of cost should be recognised in the financial year 20X2-20X3.
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INDIAN ACCOUNTING STANDARD 113 4.83 4.83

UNIT 3:
INDIAN ACCOUNTING STANDARD 113: FAIR
VALUE MEASUREMENT

LEARNING OUTCOMES
After studying this unit, you will be able to:
 Understand the need for issuance of Ind AS 113
 Define fair value
 Appreciate the scope and objective of this standard
 Apply the provisions of the standard on ‘non-financial assets’, ‘liabilities’ and
an entity’s ‘own equity instruments’
 Measure fair value at ‘initial recognition’
 Use valuation techniques prescribed in the standard
 Classify the fair value hierarchy under various level
 Disclose the information as per the requirements of the standards
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4.84 2. FINANCIAL REPORTING
84
UNIT OVERVIEW
Ind AS 113
Determine whether the item is in Scope of Ind AS 113
See Below

Establish Parameters
Identify the Item being Identify the Unit of Account Identify the Market Partcipants
Measured and Unit of Valuation and identify the market

Select appropriate Valuation approaches and techniques

Market Approach Income Approach Cost Approach

Determine Inputs to Value Fair Value

Level I Level II Level III

Measure Fair Value

Fair Value at Initial Liabilities and Portfolio
Highest and Inactive
Recognition Own Equity Measurements
Best Use Markets
Instruments Exceptions

Disclose Information about Fair Value Measurements

3.1 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 value 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.
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INDIAN ACCOUNTING STANDARD 113 4.85 4.85

In other words, it is a market-based measurement not an entity specific measurement 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 is an exit price and not a price at which an asset/
liability sells / purchase otherwise.

3.2 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:
• 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 fulfil a liability is
not relevant when measuring fair value.
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4.86 2. FINANCIAL REPORTING
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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.

3.3 SCOPE
There are many Ind AS which require measuring assets / liabilities at fair value
and whenever it is required to be fair valued, one looks at Ind AS 113. It
means that this Standard will cover all such requirements of another standard
where fair value measurement and disclosure is needed. However, there are
some specific scope exclusions. It applies to initial measurement and
subsequent measurement as required by respective Accounting Standard.

Objective and Scope of Ind AS 113

Objective and Scope of Ind AS 113

objective (Para 1) Scope

to set out in a Applicability Non-applicability

define single Ind require
Fair AS Disclosures
Value Framework When another Ind AS Disclosures of
for requires/permits fair Measurement and Ind AS 113
measuring value measurement Disclosure
Fair Value (and measurements, Plan Assets at
such as FVLCTS, SBP - Ind AS 102 FV-Ind AS 19
based on fair value or Leases - Ind AS 116 Assets for
disclosures about Measurement similar which
those measurements) to Fair Value but not recoverable
e.g. Fair Value e.g. NRV amout is FV
in Ind AS 2 or value less costs of
WHEN Ind AS 109 in use in Ind AS 36 disposal - Ind
HOW Ind AS 113 AS 36
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INDIAN ACCOUNTING STANDARD 113 4.87 4.87

Example of items covered under Ind AS 113

• Fair value less cost to sell as required under Ind AS 105 for assets held for sale.
• Fair value through Profit and Loss or through Other Comprehensive Income as required
under Ind AS 109 for Financial Instruments.
• Property, plant & equipment measured using revaluation modal as required under
Ind AS 16.
• Biological assets measure at fair value under Ind AS 41 for biological assets.

3.3.1 What is not covered?

Standard specifically describes the below exceptions which are not covered by this Accounting
Standard and hence one has to look at the respective standards to identify the process to calculate
fair values of the items of that standard. The scope exclusion will be applied on below:
3.3.1.1 Measurement and Disclosure exclusion
(a) share-based payment transactions within the scope of Ind AS 102, Share based Payment;
(b) leasing transactions accounted in accordance with Ind AS 116, 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.
3.3.1.2 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.

3.4 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 In an orderly Between market At the measurement
be received to sell an transaction participants date
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4.88 2. FINANCIAL REPORTING
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asset or paid to
transfer a liability
In order to understand the definition of the fair value, some of the major terms as used in the
definition need to be understood which are as follows:
a. The asset or liability
b. The transaction
c. Market participants
d. The price
Example 1 - Settlement vs Transfer
A bank holds a debt obligation with a face value of ` 1,00,000 and a market value of ` 95,000.
Assume that market interest rates are consistent with the amount in the note; however, there is `
5,000 discount due to market concerns about the risk of non-performance by Counterparty I.
Settlement value
Counterparty I would be required to pay the face value of the note to settle the obligation, because
the bank might not be willing to discount the note by the market discount or the credit risk
adjustment. Therefore, the settlement value would equal the face value of the note.
Transfer value
In order to calculate the transfer value, Counterparty I must construct a hypothetical transaction
in which another counterparty (Counterparty II), with a similar credit profile, is seeking financing
on terms that are substantially the same as the note. Counterparty II could choose to enter into
a new note agreement with the bank or receive the existing note from Counterparty I in a transfer
transaction. In this hypothetical transaction, Counterparty II should be equally willing to obtain
financing through a new bank note or assumption of the existing note in return for a payment of `
95,000. Therefore, the transfer value would be ` 95,000, and thus the fair value.

3.5 ASSET OR LIABILITY SPECIFIC FAIR VALUE

Ind AS 113 states that a fair value measurement takes into account the characteristics of the asset
or liability, e.g. the condition and location of the asset and restrictions, if any, on its sale or use.
The restriction or the condition relating to asset which can affect the future economic benefit from
the asset need to be considered in determining the fair value of the asset.
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INDIAN ACCOUNTING STANDARD 113 4.89 4.89

The standard emphasis that in order to get a fair value of an asset/ liability, the restrictions or
conditions that might be related to a particular entity should not be taken into account because a
fair value will be based on market participant assumptions rather to an entity specific conditions
or restriction which usually will not affect fair valuation of an asset/ liability.
The restrictions could be entity specific or an asset/ liability specific hence all such restrictions
which are asset/liability specific & being transfer to the buyer as it is, then these will be considered
while calculating fair value. In contrast, 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 2: 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 the entity 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 3: 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, hence this condition will be
considered while evaluating fair value of the car.

3.6 UNIT OF ACCOUNT

An Asset or a Liability Is For Recognition

aggregated or disaggregated
Unit of Account
An Asset or a Liability Is For
aggregated or disaggregated Measurement
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4.90 2. FINANCIAL REPORTING
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Ind AS 113 describes how to measure fair value, not what is being measured at fair value. Other
Ind AS specify whether a fair value measurement considers an individual asset or liability or a
group of assets or liabilities (i.e. the unit of account).
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 for recognition or disclosure purposes depends on its
unit of account.
The unit of account for the asset or liability shall be determined 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.
Examples 5 & 6
5. An entity having certain securities which are quoted at market and these are recognized at
fair value in the balance sheet. Quoted prices at individual level will be used in order to
find fair values of these investments.
6. In order to evaluate fair value of assets to identify impairment as per Ind AS 36, which
requires to measure such fair value at CGU (cash generating unit) level, group of assets
will be used to find fair values as per the requirement of such standard.

3.7 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 for different reporting entities even if they belong to the
same group. The principal market / most advantageous market would separately be evaluated for
different assets / liabilities under the fair valuation requirements.
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INDIAN ACCOUNTING STANDARD 113 4.91 4.91

3.7.1 Principal market

Market which is normally the place in which the assets / liabilities are being transacted with highest
volume and with high level of activities comparing with any other market available for similar
transactions.
If there is principal market, the price in the market must be used even if the prices in the other
market are more advantageous.
Because the principal market is the most liquid market for the asset or liability, that market will
provide the most representative input for a fair value measurement.
Example 7
Shares of a company which is listed at BSE and NYSE have different closing prices at the year
end. The price at BSE has greatest volume and activity whereas at NYSE it is less in terms of
volume transacted in the period. Since 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.

3.7.2 Most advantageous market

• This is the market which either maximizes the amount that would be received when an
entity sells an asset or minimize the amount that is to be paid while transferring the liability.
• In the absence of a 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 after deducting expenses
associated with such sale in the most advantageous market.
Example 8
Diamond (a commodity) has got a domestic market where the prices are less compared 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 in the domestic market only i.e. 90% and balance 10% only can be sold
via export. The highest level of activities with the highest volume is being done in the domestic
market. Hence, the principal market for diamond would be the domestic market. Export prices
are more than the prices in the principal market, and it would give the highest return as compared
to the domestic market. Therefore, the export market would be considered as the 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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4.92 2. FINANCIAL REPORTING
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3.8 MARKET PARTICIPANTS

A fair value measurement is a market‑based measurement, not an entity‑specific measurement.
Therefore, a fair value measurement uses the assumptions that market participants would use
when pricing the asset or liability.
An entity shall measure the fair value of an asset or a liability using the assumptions that market
participants would use when pricing the asset or liability, assuming that market participants act in
their economic best interest.
3.8.1 What are market participants?
The parties which eventually transact the assets/ liabilities either in principal market or the most
advantageous market in their best economic interest i.e.
• They should be independent and not related parties. 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 9
A land has legal restriction to use it for commercial purposes in next 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 such 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 a 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.
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INDIAN ACCOUNTING STANDARD 113 4.93 4.93

3.9 THE PRICE

Fair value is the price that 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 price is directly observable
or estimated using another valuation technique.
A fair value is being assessed based on principal market and if principal market is not available
then based on the most advantageous market.
Illustration 1
A Ltd. has invested in certain bonds. The fair value of these bonds in different markets to which
A Ltd. has an access is as follows:
(i) Principal market ` 500
(ii) Highest and best use ` 600

(iii) Net present value of expected cash flows ` 550

(iv) Asset based valuation approach ` 450
What will be the fair value of bond as per Ind AS 113?
Solution
As per para 24 of Ind AS 113, fair value is the price that 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 price is directly observable or estimated using another valuation technique.
Further, para 72 of the standard inter alia states that the fair value hierarchy gives the highest
priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1
inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

According to the above, the value of bond shall be ` 500 based on the principal market.
*****
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3.9.1 Transaction cost

The transaction costs are not a characteristic of an asset or a liability, but a characteristic of the
transaction.
Hence, it would not be appropriate to consider any transaction cost further while assessing fair values
from such principal markets.
Note: Transaction costs do not include transport costs.

3.9.2 Transport cost

Transport costs are different from transaction costs. It is the cost that would be incurred to
transport the asset from its current location to its principal (or most advantageous) market. Unlike
transaction costs, which arise from a transaction and do not change the characteristics of the
asset or liability, transport costs arise from an event (transport) that does change a characteristic
of an asset (its location).

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 10

An entity sells certain commodity which are available actively at location A and which is considered
to be its principal market (being significant volume 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 ` 100. Since the transport cost is not a transaction
cost and it is not specific to any transaction but it is inherent cost which required to be incurred
while bringing such commodity from location A to location B, it will be considered while evaluating
fair value from the principal market.
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INDIAN ACCOUNTING STANDARD 113 4.95 4.95

Access on
measurement date
Price in a different Need not be able to sell
market is potentially on the measurement
favourable date

No exhaustive list of Assumes that

possible markets Fair value transaction takes
required measurement place at that date

3.10 APPLYING FAIR VALUE RULES ON NON-FINANCIAL

ASSETS

The financial assets do not have alternative uses because they have specific contractual terms
and can have a different use only if the characteristics of the financial assets (ie the contractual
terms) are changed.
Fair valuation in case of non-financial assets especially buildings and other property, plant and
equipment often require to look for the best and highest use by its market participants and that
will be the reference point to evaluate fair value of such non-financial assets.
3.10.1 Highest and best use
The highest and best use is a valuation concept used to value many non‑financial assets (eg real
estate). The highest and best use of a non‑financial asset must be physically possible, legally
permissible and financially feasible.
A fair value measurement of a non-financial asset takes into account a market participant's ability
to generate economic benefits by using the asset in its highest and best use or by selling it to
another market participant that would use the asset in its highest and best use.
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The highest and the best use is determined from market participant perspective. It does not matter
whether the entity intends to use the asset differently.
Analysis of Highest and best use for non-financial asset
• The highest and best use would determine an indicative price for a non-financial asset
which usually do not have any frequently traded market unlike for other financial products.
• The concept emphasis that in order to find a fair value of such non-financial products, one
has to define its best possible use which makes the non-financial asset separate from any
specific entity who would like to use such asset in their own specific purposes which may
or may not be its best use.
• To find out the best possible use, one has to identify its market participants and then to find
best legitimate use of this non- financial asset which one would normally do.
• All restrictions specific to any market participant would not be considered while finding out
fair value of the non-financial asset.
• It is imperative to understand the best use while evaluating such fair values, as there is no
need to exhaust all possible uses of such non-financial assets before concluding highest
and best use.
• In the absence of potential best use which is not easily available, its current use would be
considered as best use.

Examples 11, 12 & 13

11. An entity bought some land which is intended to be used for business purposes. However,
the entity now wants to sell this piece of land at its fair value. One has to evaluate all
possible uses of this land before determining its fair value. The land could be used to make
a commercial place, which could be more in value as compared to when it is used for
business purposes. The commercial place value would be considered its highest and best
use if the same is allowed in its near locations and condition.
12. Current use as Highest and Best Use

A Ltd acquires a machine in a business combination by acquiring controlling stake in B Ltd.

The machine will be held and used in A’s operations. The machine was originally
purchased by B Ltd from an outside vendor and, before the business combination, was
customized by B Ltd for use in its operations. However, the customization of the machine
was not extensive.
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INDIAN ACCOUNTING STANDARD 113 4.97 4.97

A Ltd determines that the asset would provide maximum value to market participants
through its use in combination with other assets or with other assets and liabilities (as
installed or otherwise configured for use). There is no evidence to suggest that the current
use of the machine is not its highest and best use. Therefore, the highest and best use of
the machine is its current use in combination with other assets or with other assets and
liabilities.
13. Potential use as Highest and Best Use
A Ltd owns a property, which comprises land with an old warehouse on it. It has been
determined that the land could be redeveloped into a leisure park. The land’s market value
would be higher if redeveloped than the market value under its current use. A Ltd is unclear
about whether the investment property’s fair value should be based on the market value of
the property (land and warehouse) under its current use, or the land’s potential market
value if the leisure park redevelopment occurred.
The property’s fair value should be based on the land’s market value for its potential use.
The ‘highest and best use’ is the most appropriate model for fair value. Under this approach,
the property’s existing-use value is not the only basis considered. Fair value is the highest
value, determined from market evidence, by considering any other use that is physically
possible, legally permissible and financially feasible.
The highest and best use valuation assumes the site’s redevelopment. This will involve
demolishing the current warehouse and constructing a leisure park in its place. Therefore,
none of the market value obtained for the land should be allocated to the building. So, the
market value of the current building on the property’s highest and best use (as a
warehouse), is Nil. As a result, the building’s current carrying amount should be written
down to zero.

3.10.2 Valuation premise

Fair value measurement of non-financial assets would be based on either
1) In combination with other assets, or
2) At standalone basis,
Standard requires to use best used value if such non-financial asset is used in combination with
some other assets and it is demonstrated that the such combination is widely used by other market
participants also in order to find best use for the non-financial asset.
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4.98 2. FINANCIAL REPORTING
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Example 14
To find the fair value of customer relations where a right to receive all future technological updates/
researches is being provided as complementary (which is in a way another intangible asset) i.e.
other than customer relations. The customer relations would be valued together with the right to
receive all the future technological updates / researches, as it is likely to have less or no value for
the customer relations without considering such right to receive all future technological updates/
researches which is being provided free to them.

Physically Possible

Yes No

Legally Permissible Use is not

considered in
Measuring Fair
Yes No Value

Financially Feasible Use is not

considered in
Yes No Measuring Fair
Value
Maximises Value Use is not considered in
Measuring Fair Value
Yes No

Use is Use is not considered

considred in in Measuring Fair
Measuring Fair Value
Value

3.11 APPLYING FAIR VALUE RULES TO LIABILITIES AND AN

ENTITY’S OWN EQUITY INSTRUMENTS
A fair value measurement assumes that a financial or non-financial liability or an entity's own
equity instrument (eg equity interests issued as consideration in a business combination) is
transferred to a market participant at the measurement date.
Many a times a liability or an equity instrument of an entity is being transferred to some other
market participant as part of a transaction e.g. a business combination, where certain liabilities or
equity instruments are being issued in consideration of such acquisitions.
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INDIAN ACCOUNTING STANDARD 113 4.99 4.99

The standard specifies an assumption that liabilities and /or equity instruments so transferred will
remain outstanding on the date of measurement. Standard prescribes to use all observable inputs
(if direct quoted prices are not available) and should minimize any un-observable inputs. The
transaction considered to find fair value should be evaluated in line with an orderly transaction
(not an entity specific).
The standard specifically provides guidance on the respective scenarios while evaluating fair
values of the liabilities and own equity instruments in case direct quoted prices are not available.
Observable Inputs : Inputs that are developed using market data, such as publicly available
information about actual events or transactions, and that reflect the assumptions that market
participants would use when pricing the asset or liability.
Unobservable Inputs : Inputs for which market data are not available and that are developed
using the best information available about the assumptions that market participants would use
when pricing the asset or liability.

3.11.1 When liability and equity instruments are held by other parties as
assets
When directly quoted prices are not available for liabilities or equity instruments, then an entity
should use an identical price of similar liabilities or equity instruments which is held by market
participants as an asset. The quoted prices of such assets at the measurement date should be
used. However, if quoted prices are not available then observable inputs can be used. In the
absence of observable inputs, the valuation techniques such as income approach or market
approach etc. may be used.
3.11.2 When liability and equity instruments are not held by other parties
as assets
When these are not held by other parties then valuation techniques from the perspective of a
market participant that owes the liability or has issued the claim on equity would be used to
evaluate such fair values.

Fair value of liability or equity instrument

Using quoted price in Other observable If (A) or (B) are not

active market (A) inputs (B) available

Income approach Market approach

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3.12 APPLYING FAIR VALUE RULES TO FINANCIAL ASSET &

FINANCIAL LIABILITY WITH OFFSETTING POSITION IN
MARKET RISK OR COUNTERPARTY RISK
Assets and liabilities that are being managed by an entity would be affected by its market risk i.e.
interest rate risk, currency risk etc. and credit risk relating to its respective counterparties.
There are many situations where a group of assets and liabilities are being managed on net basis
rather than individual basis by an entity.

For example, certain contracts of derivatives which are being netted with all existing open
positions from same counterparty etc.

If the entity manages that group of financial assets and financial liabilities on the basis of its net
exposure to either market risks or credit risk, the entity is permitted to apply an exception to this
Ind AS for measuring fair value.
That exception permits an entity to measure the fair value of a group of financial assets and
financial liabilities on the basis of the price that would be received to sell a net long position (ie
an asset) for a particular risk exposure or paid to transfer a net short position (ie a liability) for a
particular risk exposure in an orderly transaction between market participants at the measurement
date under current market conditions. Accordingly, an entity shall measure the fair value of the
group of financial assets and financial liabilities consistently with how market participants would
price the net risk exposure at the measurement date.
Analysis of applying offsetting position in market or credit risk
• This exception is allowed only in case the other market participants also manage the similar
risk on net basis.
• There should ideally be same information and market practice available for making these
assets/ liabilities on net basis.

All open position for derivatives are being normally evaluated on net exposure basis from
each counterparty.

• Once the exception to fair value certain assets/ liabilities on net basis is being used, then
unit of account to measure fair value would be considered as net.
• Market risk should be same while combining any asset/ liability.

An interest rate risk can not be netted with a commodity price risk.
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INDIAN ACCOUNTING STANDARD 113 4.101 4.101

• Duration of a market risk should be identical to use the exception for valuing assets/
liabilities on net basis.

1. An interest rate swap of longer period will only be allowed to value at net basis upto
the duration of financial instrument of the same duration.
2. Certain Interest rate risk from counterparty Z is being managed on net basis
considering the changes in interest rate amount receivable and amounts payable to
counterparty Z from normal sale/ purchase basis. Hence such net exposure would
be used to evaluate fair values as required by this standard. The netting should
normally be followed by other market participants as well and should not be an entity
specific.

3.13 FAIR VALUE AT INITIAL RECOGNITION

When an asset is acquired or a liability is assumed in an exchange
transaction for that asset or liability, the transaction price is the price paid
to acquire the asset or received to assume the liability (an entry price).
In contrast, the fair value of the asset or liability is the price that would be
received to sell the asset or paid to transfer the liability (an exit price).
Entities do not necessarily sell assets at the prices paid to acquire them. Similarly, entities do not
necessarily transfer liabilities at the prices received to assume them.
In many cases the transaction price will equal the fair value (eg that might be the case when on
the transaction date the transaction to buy an asset takes place in the market in which the asset
would be sold).
When determining whether fair value at initial recognition equals the transaction price, an entity
shall take into account factors specific to the transaction and to the asset or liability. For example,
the transaction price might not represent the fair value of an asset or a liability at initial recognition
if any of the following conditions exist:

(a) The transaction is between related parties, although the price in a related party transaction
may be used as an input into a fair value measurement if the entity has evidence that the
transaction was entered into at market terms.
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4.102 2. FINANCIAL REPORTING
102

(b) The transaction takes place under duress or the seller is forced to accept the price in the
transaction. For example, that might be the case if the seller is experiencing financial
difficulty.
(c) The unit of account represented by the transaction price is different from the unit of account
for the asset or liability measured at fair value. For example, that might be the case if the
asset or liability measured at fair value is only one of the elements in the transaction (eg in a
business combination), the transaction includes unstated rights and privileges that are
measured separately in accordance with another Ind AS, or the transaction price includes
transaction costs.
(d) The market in which the transaction takes place is different from the principal market (or most
advantageous market). For example, those markets might be different if the entity is a dealer
that enters into transactions with customers in the retail market, but the principal (or most
advantageous) market for the exit transaction is with other dealers in the dealer market.
If another Ind AS requires or permits an entity to measure an asset or a liability initially at fair
value and the transaction price differs from fair value, the entity shall recognise the resulting gain
or loss in profit or loss unless that Ind AS specifies otherwise.

3.14 VALUATION TECHNIQUES

When measuring fair value, the objective of using a valuation technique is to estimate the price at
which an orderly transaction would take place between market participants at the measurement
date under current market conditions.
An entity shall use valuation techniques that are appropriate in the circumstances and for which
sufficient data are available to measure fair value, maximizing the use of relevant observable
inputs and minimizing 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 data available related to the Asset/ liability which could utilize all
directly observable inputs.

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
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INDIAN ACCOUNTING STANDARD 113 4.103 4.103

appropriate approach is matter of judgment and based on the available inputs related to the asset
/ liability.

Example 15
An unquoted investment can be fair valued either by taking similar entity’s quoted prices with
appropriate adjustments or a valuation of business using DCF or some other technique. This
would purely be dependent upon the available inputs and approach relevant for the asset/ liability.

Maximising the use of

Appropriate in the relevant observable
circumstances inputs
And
Valuation Techniques
For which sufficient
data are available to Minimising the use of
measure Fair value unobservable inputs

Ind AS 113 specifies following three approaches to measure fair values:

Cost Approach

Market Approach Income Approach

Valuation Techniques

1. MARKET APPROACH : The market approach uses prices and other relevant information
generated by market transactions 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 be 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.
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4.104 2. FINANCIAL REPORTING
104

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.

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 adjustments relevant
to the business e.g. there are some specific restrictions to use certain assets for some specific
period being in a specialized industry.

2. INCOME APPROACH: The income approach converts future amounts (e.g. cash flows 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 require to be considered and
would be taken into either in cash flow or discount rate.
Illustration 2
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.
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INDIAN ACCOUNTING STANDARD 113 4.105 4.105

Solution
On the basis of the timing of the contractual payments to be received for Investment 1 relative to
the timing for Investment 2 and Investment 3 (that is, one year for Investment 2 versus two years
for Investment 3), Investment 2 is deemed more comparable to Investment 1. Using the
contractual payment to be received for Investment 1 (` 800) and the 1-year market rate derived
from Investment 2, the fair value of Investment 1 is calculated as under:
Investment 2 Fair Value ` 1,083
Contractual Cash flows in 1 year ` 1,200
IRR = ` 1,083 x (1 + r) = ` 1,200
= (1 + r) = (` 1,200 / ` 1,083) = 1.108
r = 1.108 – 1 = 0.108 or 10.8%
Value of Investment 1 = ` 800 / 1.108 = ` 722
Alternatively, in the absence of available market information for Investment 2, the one-year market
rate could be derived from Investment 3 using the build-up approach. In that case, the 2-year
market rate indicated by Investment 3 would be adjusted to a 1-year market rate using the term
structure of the risk-free yield curve. Additional information and analysis might be required to
determine whether the risk premiums for one-year and two-year assets are the same. If it is
determined that the risk premiums for one-year and two-year assets are not the same, the two-
year market rate of return would be further adjusted for that effect.
*****
Standard defines the below techniques which may be considered while using Income approach
a) Present value techniques
b) Option pricing modals e.g. Black-Scholes Merton modal or Binomial modal

c) The multi period excess earning method.

Example 16
An entity has estimated its next year’s earnings (cash flows) based on certain probability as
mentioned below:
Possible cash flows (`) Probability Probability weighted cash flows
700 20% 140
800 40% 320
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4.106 2. FINANCIAL REPORTING
106

900 40% 360

Total expected cash flow 820
Risk free rate 6%
Present value of cash flow (1 year) 820 / (1.06) = ` 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.

3.15 INPUTS TO VALUATION TECHNIQUES

Valuation techniques used to measure fair value shall maximize the use of relevant observable
inputs and minimize 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 minimize using any unobservable inputs.
Standard describes the below instances where observable inputs are being used in case of certain
Financial Instruments:

Markets (by nature) Prices (observable) Rationale Ind AS 113

compliant
Exchange Markets Closing prices Readily available Yes
Dealer Market Bid & Ask prices Readily available than Yes
closing prices
Brokered Market Buy & Sell order matching, Broker knows better Yes
commercial and prices from both buy &
residential markets Sell side
Principal to principal Negotiated prices with no Little information Yes
Markets intermediary available in market

The inputs refer broadly to the assumptions that market participants would use when pricing the
asset or liability, including assumptions about risk.
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.
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INDIAN ACCOUNTING STANDARD 113 4.107 4.107

Some significant notes about the fair value hierarchy

• The hierarchy has been categorized 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 provides 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 categorized within Level 3 of the fair value hierarchy.

Example 17
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 price 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.

3.15.1 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:
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4.108 2. FINANCIAL REPORTING
108

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 18
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).
3.15.1.1 Adjustment to Quoted Price when it does not reflect the fair price
In certain situations, a quoted price in an active market might not faithfully represent the fair value
of an asset or liability, such as when significant events occur on the measurement date but after
the close of trading. In these situations, companies should adjust the quoted price to incorporate
this new information into the fair value measurement. However, if the quoted price is adjusted,
the resulting fair value measurement would no longer be considered a Level 1 measurement. A
company’s valuation policies and procedures should address how these “after-hour” events will
be identified and assessed. Controls should be put in place to ensure that any adjustments made
to quoted prices are appropriate and are applied in a consistent manner.
Example 19

A Ltd., a large biotech company with shares traded publicly, has developed a new drug that is in
the final phase of clinical trials. B Ltd. has an equity investment in A Ltd.’s shares. B Ltd.
determines that the shares have a readily determinable fair value and accounts for the investment
at fair value through profit and loss. B Ltd. assesses the fair value as of the measurement date
of 31st March 20X3. Consider the following:
(i) On 31st March 20X3, the Drug Approval authority notifies A Ltd.’s management that the
drug was not approved. A Ltd.’s shares closed at ` 36.00 on 31 st March 20X3.
(ii) A Ltd. issued a press release after markets closed on 31st March 20X3 announcing the
failed clinical trial.

(iii) A Ltd.’s shares opened on next working day at ` 22.50.

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INDIAN ACCOUNTING STANDARD 113 4.109 4.109

The drug failure is a condition (or a characteristic of the asset being measured) that existed as of
the measurement date. B Ltd. concludes the ` 36.00 closing price on the measurement date does
not represent fair value of the A Ltd.’s shares at 31st March 20X3 because the price does not
reflect the effect of the Authority’s non-approval.
The subsequent transactions that take place when the market opens are relevant to the fair value
measurement recorded as of the measurement date. The opening price of ` 22.50 indicates how
market participants have incorporated the effect of the non-approval on A Ltd.’s stock price.
B Ltd. adjusts the 31st March 20X3 quoted price for the new information, records the shares at
` 22.50 per share at 31st March 20X3 and discloses the investment as a Level 2 measurement.

3.15.2 Level 2 Inputs

Level 2 inputs are inputs other than quoted prices 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 assets 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.

Examples 20-22
20. 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 techniques which is based on 10 years’
available rates of swap. The fair value of 11 years so derived would be level 2 fair value.
21. 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
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4.110 2. FINANCIAL REPORTING
110

based on either the prices based on the market which is not active or similar traded
investment in an active market. This would be considered as level 2 inputs.
22. X and Y each enter into a contractual obligation to pay ` 500 in cash to D in five years. X
has an AA credit rating and can borrow at 6%. Y has a BBB credit rating and can borrow at
12%. X will receive about ` 374 in exchange for its promise (the present value of ` 500 in
five years at 6%). Y will receive about ` 284 in exchange for its promise (the present value
of ` 500 in five years at 12%).
The fair value of the liability to each entity (that is, the proceeds) incorporates that entity’s
credit standing.

3.15.3 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
participants 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).
Examples 23 and 24
23. 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 data. This would be level 3 input for measurement of fair value.
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INDIAN ACCOUNTING STANDARD 113 4.111 4.111

24. Cash-generating unit

A Level 3 input would be a financial forecast (eg of cash flows or profit or loss) developed
using the entity's own data, if there is no reasonably available information that indicates
usage of different assumptions by market participants.

Is Quoted price for an identical item in an active market

available?

Yes No

Are there any significant unobservable

Is the Price to be Adjusted? inputs?

No Yes Yes No

Level 1 Input Are there any significant

unobservable inputs? Level 3 Input Level 2 Input

Yes No

Level 3 Input Level 2 Input

3.16 DISCLOSURES
An entity shall disclose information that helps users of its financial statements assess both of the
following:
(a) for assets and liabilities that are measured at fair value on a recurring or non-recurring
basis in the balance sheet after initial recognition, the valuation techniques and inputs used
to develop those measurements.

(b) for recurring fair value measurements using significant unobservable inputs (Level 3), the
effect of the measurements on profit or loss or other comprehensive income for the period.
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4.112 2. FINANCIAL REPORTING
112
The disclosure requirements can be summarized as per the below table –

Fair Value Measurement

Disclosure
Recurring Non-recurring
Level Level Level Level Level Level Level Level Level
1 2 3 1 2 3 1 2 3
Fair value at each      
reporting date
Reasons for   
measurement
Level of hierarchy         
Transfers   
Valuation techniques      
If change in valuation      
techniques
Quantitative info about  
significant unobservable
inputs
Reconciliation of 
opening & closing
Unrealized gains/ losses 
from remeasurement
Valuation process &  
policies
Sensitivity to changes 
in unobservable inputs
If highest & best use         
differs from actual
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INDIAN ACCOUNTING STANDARD 113 4.113 4.113

3.17 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITIES
Following is the extract from the financial statements of the listed entity ‘Titan Company Limited’
for the financial year 2021-2022 with respect to ‘Fair Value Measurement’ and accounting policy
adopted by the company with respect to measurement technique.
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4.114 2. FINANCIAL REPORTING
114

(Source: Annual Report 2021-2022 - ‘Titan Company Limited’)

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INDIAN ACCOUNTING STANDARD 113 4.115 4.115

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. An asset is sold in 2 different active markets 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.
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.
You are required to calculate:
(i) The fair value of the asset, if market A is the principal market, and
(ii) The fair value of the asset, if none of the markets is principal market.
2. Company J acquires 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.
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4.116 2. FINANCIAL REPORTING
116

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.
Determine the highest and best use of the land.
3. ABC Ltd. acquired 5% equity shares of XYZ Ltd. for ` 10 crores in the year 20X1-20X2. The
company is in process of preparing the financial statements for the year 20X2-20X3 and is
assessing the fair value at subsequent measurement of the investment made in
XYZ Ltd. Based on the observable input, ABC Ltd. identified a similar nature of transaction
in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for ` 60 crores. 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 crores. 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?
4. UK Ltd. is in the process of acquisition of shares of PT Ltd. as part of business reorganization
plan. The projected free cash flows of PT Ltd. for the next 5 years are as follows:
(` in crores)

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 crores and the surplus cash & cash equivalent is ` 106.14 crores.
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.
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 follows:
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INDIAN ACCOUNTING STANDARD 113 4.117 4.117

Particulars ` in crore
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9
Surplus cash & cash equivalent 106.14
Fair value of surplus assets and Liabilities 312.4
Number of shares of KK Ltd. 8,52,84,223 shares
Determine the Equity value of KK Ltd. as on the measurement date on the basis of above
details.

Answers
1. (i) If Market A is the principal market
If Market A is the principal market for the asset (i.e., the market with the greatest
volume and level of activity for the asset), the fair value of the asset would be
measured using the price that would be received in that market, after taking into
account transport costs.
Fair Value will be

`
Price receivable 26
Less: Transportation cost (2)
Fair value of the asset 24

(ii) If neither of the market is the principal market

If neither of the market is the principal market for the asset, the fair value of the asset
would be measured using the price in the most advantageous market. The most
advantageous market is the market that maximises the amount that would be received
to sell the asset, after taking into account transaction costs and transport costs (i.e.,
the net amount that would be received in the respective markets).

` `
Market A Market B
Price receivable 26 25
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4.118 2. FINANCIAL REPORTING
118

Less: Transaction cost (3) (1)

Less: Transportation cost (2) (2)
Fair value of the asset 21 22

Since the entity would maximise the net amount that would be received for the asset
in Market B i.e. ` 22, the fair value of the asset would be measured using the price in
Market B.
Fair value
`
Price receivable 25
Less: Transportation cost (2)
Fair value of the asset 23
2. The highest and best use of the land is determined by comparing the following:
• The value of the land as currently developed for industrial use (i.e., an assumption
that the land would be used in combination with other assets, such as the factory,
or with other assets and liabilities); and
• The value of the land as a vacant site for residential use, taking into account the costs
of demolishing the factory and other costs necessary to convert the land to a vacant
site. The value under this use would take into account risks and uncertainties about
whether the entity would be able to convert the asset to the alternative use (i.e., an
assumption that the land would be used by market participants on a stand-alone
basis).

The highest and best use of the land would be determined on the basis of the higher of these
values. In situations involving real estate appraisal, the determination of highest and best use
might take into account factors relating to the factory operations (e.g., the factory’s operating
cash flows) and its assets and liabilities (e.g., the factory’s working capital).
3. 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
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INDIAN ACCOUNTING STANDARD 113 4.119 4.119

Determination of subsequent measurement of XYZ Ltd.

Particulars ` in crore
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

4. 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 factor 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
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DIVISON II OF SCHEDULE III A.1 A.1

ANNEXURE

DIVISION II OF SCHEDULE III

TO THE COMPANIES ACT,
2013
Division II
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.
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A.2 FINANCIAL REPORTING

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.
(ii) Each item on the face of the Balance Sheet, Statement of Changes in Equity and
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.
5. Depending upon the Total Income of the company, the figures appearing in the Financial
Statements shall be rounded off as below:

Total Income Rounding off

(i) less than one hundred crore To the nearest hundreds, thousands, lakhs or
rupees millions, or decimals thereof
(li) one hundred crore rupees or To the nearest, lakhs, millions or crores, or
more 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.
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DIVISON II OF SCHEDULE III A.3 A.3

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.
PART I -BALANCE SHEET
Name of the Company....................
Balance Sheet as at ......................
(` in.........)
Particulars Note Figures as Figures as at
No. at the end the end of the
of current 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) Biological Assets other than bearer
plants
(h) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Loans
(i) Deferred tax assets (net)
(j) Other non-current assets
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A.4 FINANCIAL REPORTING

(2) Current assets

(a) Inventories
(b) Financial Assets
(i) Investments
(ii) Trade receivables
(iii) Cash and cash equivalents
(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
LIABILITIES
(1) Non-current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
(ii) Trade Payables:
(A) total outstanding dues of micro
enterprises and small
enterprises; and
(B) total outstanding dues of
creditors other than micro
enterprises and small
enterprises.
(iii) Other financial liabilities (other than
those specified in item (b), to be
specified)
(b) Provisions
(c) Deferred tax liabilities (Net)
(d) Other non-current liabilities
(2) Current liabilities
(a) Financial Liabilities
(i) Borrowings
(ia) Lease liabilities
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DIVISON II OF SCHEDULE III A.5 A.5

(ii) Trade payables:

(A) total outstanding dues of micro
enterprises and small
enterprises; and
(B) total outstanding dues of
creditors other than micro
enterprises and small
enterprises
(iii) Other financial liabilities (other
than those specified in item (c)
(b) Other current liabilities
(c) Provisions
(d) Current Tax Liabilities (Net)
Total Equity and Liabilities
see accompanying notes to the financial statements
STATEMENT OF CHANGES IN EQUITY
Name of the Company..............
A. Equity Share Capital
(1) Current reporting period
Balance at Changes in Restated Changes in Balance at the
the Equity Share balance at the equity share end of the
beginning of Capital due to beginning of the capital during current
the current prior period current the current reporting
reporting errors reporting period year period
period

(2) Previous reporting period

Balance at Changes in Restated Changes in Balance at the
the Equity Share balance at the equity share end of the
beginning of Capital due to beginning of the capital during previous
the previous prior period previous the previous reporting
reporting errors reporting period year period
period
 B.
(1)
Share Equity Reserves and Surplus Debt Equity Effective Revaluation Exchange Other items of Money Total
application component Instruments Instruments portion of Surplus differences Other received
Capital Securities Other Retained
on money of compound through other through Other Cash on Comprehensive against
Reserve Premium Reserves Earnings
pending financial Comprehensive Comprehensive Flow translating Income (specify share
(specify
allotment instruments Income Income Hedges the nature) capital
nature)
financial
A.6

statements
of a foreign
Other Equity

operation
Balance at the
beginning of
the current
reporting period
Current Reporting Period

Changes in
accounting
policy or prior
period errors
Restated
balance at the
beginning of
the current
reporting period
Total
comprehensive
FINANCIAL REPORTING

Income for the

current year
Dividends
Transfer to
retained
earnings
Any other
change (to be
specified)
Balance at the
end of the
current
reporting period
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 Share Equity Reserves and Surplus Debt Equity Effective Revaluation Exchange Other items of Money Total (1)
application component Capital Securities Other Retained Instruments Instruments portion Surplus differences Other received
on money of Reserve Premium Reserves Earnings through other through Other of Cash on Comprehensive against
pending compound (specify Comprehensive Comprehensive Flow translating Income (specify share
allotment financial nature) Income Income Hedges the nature) capital
instruments financial
statements
of a foreign
operation
Balance at
the beginning
of the
previous
reporting
period
Previous Reporting Period

Changes in
accounting
policy or prior
period errors
Restated
balance at the
beginning of
the previous
reporting
period
Total
comprehensi
DIVISON II OF SCHEDULE III

ve
Income for
the previous
year
Dividends
Transfer to
retained
earnings
A.7

Any other
change (to be
specified)
Balance at

alongwith the relevant amounts in the Notes or shall be shown as a separate column under Reserves and Surplus.
the end of the
previous
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A.7

reporting
period

at fair value through profit or loss shall be recognised as a part of retained earnings with separate disclosure of such items
Note: Re-measurement of defined benefit plans and fair value changes relating to own credit risk of financial liabilities designated
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A.8 FINANCIAL REPORTING

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.
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DIVISON II OF SCHEDULE III A.9 A.9

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
(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, amount of change due to
revaluation (if change is 10% or more in the aggregate of the net carrying
value of each class of Property, Plant and Equipment) and other
adjustments and the related depreciation and impairment losses or reversals
shall be disclosed separately.
ll. 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.
III. 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.
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A.10 FINANCIAL REPORTING

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)
(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, amount of change due to
revaluation (if change is 10% or more in the aggregate of the net carrying
value of each class of intangible assets) 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;
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DIVISON II OF SCHEDULE III A.11 A.11

(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 along with
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
(c) Aggregate amount of impairment in value of investment.
VII. Trade Receivables
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and

(d) Trade Receivables - credit impaired

(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
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A.12 FINANCIAL REPORTING

companies respectively in which any director is a partner or a director or a

member should be separately stated.

(iv) For trade receivables outstanding, following ageing schedule shall be given:
Trade Receivables ageing schedule (Amount in `)

Particulars Outstanding for following periods from due

date of payment*
Less 6 1-2 2-3 More Total
than 6 months- years years than 3
months 1 year years
(i) Undisputed Trade
receivables –
considered good
(ii) Undisputed Trade
Receivables – which
have significant
increase in credit risk
(iii) Undisputed Trade
Receivables – credit
impaired
(iv) Disputed Trade
Receivables–
considered good
(v) Disputed Trade
Receivables – which
have significant
increase in credit risk
(vi) Disputed Trade
Receivables – credit
impaired

* similar information shall be given where no due date of payment is specified in that
case disclosure shall be from the date of the transaction.
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DIVISON II OF SCHEDULE III A.13 A.13

Unbilled dues shall be disclosed separately

VIII. Loans

(i) Loans shall be classified as-

(a) Loans to related parties (giving details thereof); and
(b) Other loans (specify nature).

(ii) Loans Receivables shall be sub-classified as:

(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit Risk; and
(d) Loans Receivables - credit impaired;
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(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 persons or amounts due by firms or private
companies respectively in which any director is a partner or a director or a
member should be separately stated.
IX. Other financial assets
(i) Security Deposits
(ii) Bank deposits with more than 12 months maturity

(iii) Others (to be specified)

X. Other non-current asset: Other non-current assets shall be classified as
(i) Capital Advances; and

(ii) Advances other than capital advances;

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A.14 FINANCIAL REPORTING

(1) Advances other than capital advances shall be classified as:

(a) Security deposits;
(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.
(iii) 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;

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DIVISON II OF SCHEDULE III A.15 A.15

(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).
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)

(ii) 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:
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables - credit impaired.
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant
heads separately.
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A.16 FINANCIAL REPORTING

(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.
(iv) For trade receivables outstanding, following ageing schedule shall be given:
Trade Receivables ageing schedule (Amount in Rs.)
Particulars Outstanding for following periods from due
date of payment*
Less 6 1-2 2-3 More Total
than 6 months- years years than 3
months 1 year years
(i) Undisputed Trade
receivables –
considered good
(ii) Undisputed Trade
Receivables – which
have significant
increase in credit risk
(iii) Undisputed
Trade Receivables –
credit impaired
(iv) Disputed Trade
Receivables–
considered good
(v) Disputed Trade
Receivables – which
have significant
increase in credit risk
(vi) Disputed Trade
Receivables – credit
impaired
* similar information shall be given where no due date of payment is specified
in that case disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately

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);
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DIVISON II OF SCHEDULE III A.17 A.17

b. Cheques, drafts on hand;

c. Cash on hand; and
d. Others (specify nature).
V. Loans
(i) Loans shall be classified as:
(a) Loans to related parties (giving details thereof); and
(b) others (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit Risk; and
(d) Loans Receivables - credit impaired.
(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.
VA. Other Financial Assets: This is an all-inclusive heading, which incorporates financial
assets that do not fit into any other financial asset categories, such as, Security
Deposits.
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:
(a) Security Deposits;
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A.18 FINANCIAL REPORTING

(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 respectively in which any director is a partner or a
director or a member should be 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.

(c) Repatriation restrictions, if any, in respect of cash and bank

balances shall be separately stated.
D. Equity
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;
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DIVISON II OF SCHEDULE III A.19 A.19

(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).
(m) A company shall disclose Shareholding of Promoters* as under:

Shares held by promoters at the end of the year % Change during

the year***

S. No Promoter No. of % of total

name Shares** shares

Total
*Promoter here means promoter as defined in the Companies Act, 2013.
**Details shall be given separately for each class of shares

***Percentage change shall be computed with respect to the number at the

beginning of the year or if issued during the year for the first time then with
respect to the date of issue.

II. Other Equity

(i) ‘Other Reserves’ shall be classified in the notes as-
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A.20 FINANCIAL REPORTING

(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);

(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

(lI) from other Parties
(c) Deferred payment liabilities

(d) Deposits
(e) Loans from related parties
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DIVISON II OF SCHEDULE III A.21 A.21

(f) Liability component of compound financial instruments

(g) 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;
(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
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A.22 FINANCIAL REPORTING

(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;
(iv) period and amount of default as on the balance sheet date in repayment of
borrowings and interest, shall be specified separately in each case;
(v) Current maturities of long-term borrowings shall be disclosed separately.
II. Other Financial Liabilities
Other Financial liabilities shall be classified as-
(a) Interest accrued;
(b) Unpaid dividends;
(c) Application money received for allotment of securities to the extent refundable
and interest accrued thereon;

(d) Unpaid matured deposits and interest accrued thereon;

(e) Unpaid matured debentures and interest accrued thereon; and
(f) 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);
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DIVISON II OF SCHEDULE III A.23 A.23

IV. Provisions

The amounts shall be classified as-

(i) provision for employee benefits; and

(ii) others (specify nature)

FA. Trade Payables

The following details relating to micro, small and medium enterprises shall be disclosed in
the notes:

(a) the principal amount and the interest due thereon (to be shown separately) remaining
unpaid to any supplier at the end of each accounting year;

(b) the amount of interest paid by the buyer in terms of section 16 of the Micro, Small and
Medium Enterprises Development Act, 2006 (27 of 2006), along with the amount of
the payment made to the supplier beyond the appointed day during each accounting
year;

(c) the amount of interest due and payable for the period of delay in making payment
(which has been paid but beyond the appointed day during the year) but without adding
the interest specified under the Micro, Small and Medium Enterprises Development
Act, 2006;

(d) the amount of interest accrued and remaining unpaid at the end of each accounting
year; and

(e) the amount of further interest remaining due and payable even in the succeeding
years, until such date when the interest dues above are actually paid to the small
enterprise, for the purpose of disallowance of a deductible expenditure under section
23 of the Micro, Small and Medium Enterprises Development Act, 2006.

Explanation.- The terms ‘appointed day’, ‘buyer’, ‘enterprise’, ‘micro enterprise’, ‘small
enterprise’ and ‘supplier’, shall have the same meaning as assigned to them under clauses
(b), (d), (e), (h), (m) and (n) respectively of section 2 of the Micro, Small and Medium
Enterprises Development Act, 2006.
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A.24 FINANCIAL REPORTING

FB. For trade payables due for payment, following ageing schedule shall be given:
Trade Payables aging schedule (Amount in `)
Particulars Outstanding for following periods from
due date of payment*
Less than 1-2 years 2-3 More Total
1 year years than 3
years
(i) MSME
(ii) Others
(iii) Disputed dues – MSME
(iv) Disputed dues - Others
*Similar information shall be given where no due date of payment is specified in that case
disclosure shall be from the date of the transaction.
Unbilled dues shall be disclosed separately.
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.
(ii) 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).
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
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DIVISON II OF SCHEDULE III A.25 A.25

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.

JA. Where the company has not used the borrowings from banks and financial institutions for the
specific purpose for which it was taken at the balance sheet date, the company shall disclose
the details of where they have been used.
L. Additional Regulatory Information
(i) Title deeds of Immovable Properties not held in name of the Company
The company shall provide the details of all the immovable properties (other than
properties where the Company is the lessee and the lease agreements are duly
executed in favour of the lessee) whose title deeds are not held in the name of the
company in following format and where such immovable property is jointly held with
others, details are required to be given to the extent of the company‘s share.

Relevant Descriptio Gross Title deeds Whether Property Reason for

line item n of item carrying held in the title deed held since not being
in the of property value name of holder is a which date held in the
Balance promoter, name of
sheet director or the
relative# of company**
promoter*/
director or
employee
of
promoter/d
irector

PPE Land - - - - **also

- Building indicate if in
dispute

Investment Land
property- Building
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A.26 FINANCIAL REPORTING

PPE Land
retired Building
from active
use and
held for
disposal

Others
#Relative here means relative as defined in the Companies Act, 2013.
*Promoter here means promoter as defined in the Companies Act, 2013.
(ii) The Company shall disclose as to whether the fair value of investment property (as
measured for disclosure purposes in the financial statements) is based on the
valuation by a registered valuer as defined under rule 2 of Companies (Registered
Valuers and Valuation) Rules, 2017.

(iii) Where the Company has revalued its Property, Plant and Equipment (including Right-
of-Use Assets), the company shall disclose as to whether the revaluation is based on
the valuation by a registered valuer as defined under rule 2 of Companies (Registered
Valuers and Valuation) Rules, 2017.
(iv) Where the company has revalued its intangible assets, the company shall disclose as
to whether the revaluation is based on the valuation by a registered valuer as defined
under rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017.
(v) The following disclosures shall be made where Loans or Advances in the nature of
loans are granted to promoters, directors, KMPs and the related parties (as defined
under Companies Act, 2013), either severally or jointly with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment,
Type of Borrower Amount of loan or advance Percentage to the total
in the nature of loan Loans and Advances in the
outstanding nature of loans
Promoters
Directors
KMPs
Related Parties
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DIVISON II OF SCHEDULE III A.27 A.27

(vi) Capital-Work-in Progress (CWIP)

(a) For Capital-work-in progress, following ageing schedule shall be given:

CWIP aging schedule (Amount in `)

CWIP Amount in CWIP for a period of Total*
Less 1-2 2-3 More than
than 1 years years 3 years
year
Project in progress
Projects
temporarily
suspended
*Total shall tally with CWIP amount in the balance sheet.
(b) For capital-work-in progress, whose completion is overdue or has exceeded its
cost compared to its original plan, following CWIP completion schedule shall be
given**:
(Amount in `)
CWIP To be completed in
Less than 1 1-2 years 2-3 years More than 3
year years
Project 1
Project 2
**Details of projects where activity has been suspended shall be given
separately.
(vii) Intangible assets under development:
(a) For Intangible assets under development, following ageing schedule shall be
given:
Intangible assets under development aging schedule (Amount in `)
Intangible assets Amount in CWIP for a period of Total*
under development Less 1-2 2-3 More
than 1 years years than 3
year years
Project in progress
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A.28 FINANCIAL REPORTING

Projects temporarily
suspended
* Total shall tally with the amount of Intangible assets under development in the
balance sheet.

(b) For Intangible assets under development, whose completion is overdue or has
exceeded its cost compared to its original plan, the following Intangible assets
under development completion schedule shall be given**: (Amount in `)
CWIP To be completed in
Less than 1 1-2 years 2-3 years More than 3 years
year
Project 1
Project 2
**Details of projects where activity has been suspended shall be given
separately.
(viii) Details of Benami Property held

Where any proceeding has been initiated or pending against the company for holding
any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of
1988) and rules made thereunder, the company shall disclose the following:
(a) Details of such property,
(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is in the books, then reference to the item in the Balance Sheet,
(e) If property is not in the books, then the fact shall be stated with reasons,
(f) Where there are proceedings against the company under this law as an abetter
of the transaction or as the transferor then the details shall be provided,
(g) Nature of proceedings, status of same and company’s view on same.
(ix) where the Company has borrowings from banks or financial institutions on the
basis of security of current assets, it shall disclose the following:
(a) whether quarterly returns or statements of current assets filed by the Company
with banks or financial institutions are in agreement with the books of accounts;
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DIVISON II OF SCHEDULE III A.29 A.29

(b) if not, summary of reconciliation and reasons of material discrepancies, if any

to be adequately disclosed.

(x) Wilful Defaulter*

Where a company is a declared wilful defaulter by any bank or financial Institution or
other lender, following details shall be given:

(a) Date of declaration as wilful defaulter,

(b) Details of defaults (amount and nature of defaults)
* wilful defaulter" here means a person or an issuer who or which is categorized as a
wilful defaulter by any bank or financial institution (as defined under the Companies
Act, 2013) or consortium thereof, in accordance with the guidelines on wilful defaulters
issued by the Reserve Bank of India.

(xi) Relationship with Struck off Companies

Where the company has any transactions with companies struck off under
section 248 of the Companies Act, 2013 or section 560 of Companies Act, 1956, the
Company shall disclose the following details, namely:

Name of Nature of transactions Balance Relationship with

struck off with struck off Company Outstanding the Struck off
Company company, if any, to
be disclosed
Investments in securities
Receivables
Payables
Shares held by stuck off
company
Other outstanding
balances (to be specified)
(xii) Registration of charges or satisfaction with Registrar of Companies (ROC)
Where any charges or satisfaction yet to be registered with ROC beyond the statutory
period, details and reasons thereof shall be disclosed.
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A.30 FINANCIAL REPORTING

(xiii) Compliance with number of layers of companies

Where the company has not complied with the number of layers prescribed under
clause (87) of section 2 of the Act read with the Companies (Restriction on number of
Layers) Rules, 2017, the name and CIN of the companies beyond the specified layers
and the relationship or extent of holding of the company in such downstream
companies shall be disclosed.
(xiv) Following Ratios to be disclosed:
(a) Current Ratio,
(b) Debt-Equity Ratio,
(c) Debt Service Coverage Ratio,
(d) Return on Equity Ratio,
(e) Inventory turnover ratio,
(f) Trade Receivables turnover ratio,
(g) Trade payables turnover ratio,
(h) Net capital turnover ratio,
(i) Net profit ratio,
(j) Return on Capital employed,

(k) Return on investment.

The company shall explain the items included in numerator and denominator for
computing the above ratios. Further explanation shall be provided for any change in
the ratio by more than 25% as compared to the preceding year.
(xv) Compliance with approved Scheme(s) of Arrangements
Where the Scheme of Arrangements has been approved by the Competent Authority
in terms of sections 230 to 237 of the Companies Act, 2013, the company shall
disclose that the effect of such Scheme of Arrangements have been accounted for in
the books of account of the Company in accordance with the Scheme and in
accordance with accounting standards‘ and any deviation in this regard shall be
explained.
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DIVISON II OF SCHEDULE III A.31 A.31

(xvi) Utilisation of Borrowed funds and share premium:

(A) Where company has advanced or loaned or invested funds (either borrowed
funds or share premium or any other sources or kind of funds) to any other
person(s) or entity(ies), including foreign entities (Intermediaries) with the
understanding (whether recorded in writing or otherwise) that the Intermediary
shall
(i) directly or indirectly lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the company (Ultimate
Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the Ultimate
Beneficiaries; the company shall disclose the following:
(I) date and amount of fund advanced or loaned or invested in
Intermediaries with complete details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested
by such Intermediaries to other intermediaries or Ultimate
Beneficiaries alongwith complete details of the ultimate
beneficiaries.

(III) date and amount of guarantee, security or the like provided to or

on behalf of the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has
been complied with for such transactions and the transactions are
not violative of the Prevention of Money-Laundering act, 2002 (15
of 2003).
(B) Where a company has received any fund from any person(s) or entity(ies),
including foreign entities (Funding Party) with the understanding
(whether recorded in writing or otherwise) that the company shall
(i) directly or indirectly lend or invest in other persons or entities identified
in any manner whatsoever by or on behalf of the Funding Party (Ultimate
Beneficiaries) or
(ii) provide any guarantee, security or the like on behalf of the Ultimate
Beneficiaries, the company shall disclose the following:
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A.32 FINANCIAL REPORTING

(I) date and amount of fund received from Funding parties with
complete details of each Funding party.

(II) date and amount of fund further advanced or loaned or invested

other intermediaries or Ultimate Beneficiaries alongwith complete
details of the other intermediaries or ultimate beneficiaries.

(III) date and amount of guarantee, security or the like provided to or

on behalf of the Ultimate Beneficiaries
(IV) declaration that relevant provisions of the Foreign Exchange
Management Act, 1999 (42 of 1999) and Companies Act has
been complied with for such transactions and the transactions are
not violative of the Prevention of Money-Laundering act, 2002 (15
of 2003).]
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, plain vanilla 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.
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DIVISON II OF SCHEDULE III A.33 A.33

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 Figures for the

No. the end of previous
current reporting
reporting period
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
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A.34 FINANCIAL REPORTING

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) Items 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
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DIVISON II OF SCHEDULE III A.35 A.35

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
see accompanying notes to the financial statements

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;

(ba) Grants or donations received (relevant in case of section 8 companies only); 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).
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A.36 FINANCIAL REPORTING

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)
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)
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DIVISON II OF SCHEDULE III A.37 A.37

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;
(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;
(l) Undisclosed income
The Company shall give details of any transaction not recorded in the books of
accounts that has been surrendered or disclosed as income during the year in the tax
assessments under the Income Tax Act, 1961 (such as, search or survey or any other
relevant provisions of the Income Tax Act, 1961), unless there is immunity for
disclosure under any scheme and shall also state whether the previously unrecorded
income and related assets have been properly recorded in the books of account during
the year.
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A.38 FINANCIAL REPORTING

(m) Corporate Social Responsibility (CSR)

Where the company covered under section 135 of the Companies Act, the following
shall be disclosed with regard to CSR activities:-
(i) amount required to be spent by the company during the year,
(ii) amount of expenditure incurred,

(iii) shortfall at the end of the year,

(iv) total of previous years shortfall,
(v) reason for shortfall,

(vi) nature of CSR activities,

(vii) details of related party transactions, e.g.,contribution to a trust controlled by the
company in relation to CSR expenditure as per relevant Accounting Standard,
(viii) where a provision is made with respect to a liability incurred by entering into a
contractual obligation, the movements in the provision during the year shall be
shown separately.
(n) Details of Crypto Currency or Virtual Currency
Where the Company has traded or invested in Crypto currency or Virtual Currency
during the financial year, the following shall be disclosed:-
(i) profit or loss on transactions involving Crypto currency or Virtual Currency,
(ii) amount of currency held as at the reporting date,
(iii) deposits or advances from any person for the purpose of trading or investing in
Crypto Currency or virtual currency.
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
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DIVISON II OF SCHEDULE III A.39 A.39

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 comprehensive
Group liabilities income income
As % of Amount As % of Amount As % of Amount As % of total Amount
consolidated consolidated consolidated comprehensive
net assets profit or loss other income
comprehensive
income
Parent
Subsidiaries
Indian
1.
2.
3.
Foreign
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A.40 FINANCIAL REPORTING

1.
2.
3.
Non-
Controlling
Interest in all
subsidiaries
Associates
(Investment as
per the equity
method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
Joint Venture
(Investment as
per the equity
method)
Indian
1.
2.
3.
Foreign
1.
2.
3.
Total
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.
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PRACTICE QUESTIONS
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CHAPTER 3 UNIT-1: IND AS 1

PRESENTATION OF FINANCIAL STATEMENTS

Questions
1. 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 purposes. During the 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 an 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?

2. A company, while preparing the financial statements for financial year 20X1-20X2,
erroneously booked excess revenue of ` 10 crore. The total revenue reported in financial
year 20X1-20X2 was ` 80 crore. However, while preparing the financial statements for
20X2-20X3, it discovered that excess revenue was booked in financial year 20X1-20X2 which
it now wants to correct in the financial statements. However, the management of the company
is not sure whether it need to present the third balance sheet as additional comparative.
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PQ 2 2.2 FINANCIAL REPORTING

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 errors during financial year 20X2-20X3 by giving
impact in the figures of current year only. Is the contention of the management,
correct?
3. XYZ Limited (the ‘Company’) is into construction of turnkey projects and has assessed its
operating cycle to be 18 months. The Company has certain trade receivables and payables
which are receivable and payable within a period of twelve months from the reporting date,
i.e., 31st March, 20X2.
In addition to above there are following items/transactions which took place during financial
year 20X1-20X2:

S. No. Items/transactions
(1) The company has some trade receivables which are due after 15 months from
the date of the balance sheet. So, the company expects that the payment will
be received within the period of operating cycle.
(2) 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 payables within the operating cycle because the nature of
business is such that generally projects get delayed and payments from
customers also get delayed.
(3) The company was awarded a contract of ` 100 crore on 31st March, 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 31 st March, 20X2. The
contract 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.
(4) The company has also given certain contracts to third parties and have received
security deposits from them of ` 2 crore on 31st March, 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.
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INDIAN ACCOUNTING STANDARD3 1 . PQ 3 3

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?
(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 ` 2 crore taken by the company from contractors be
presented as non-current?
4. 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?
5. An entity has the following trial balance line items. How should these items be classified, i.e.,
current or non-current as per Ind AS 1?
(a) Receivables (viz., receivable under a contract of sale of goods in which an entity deals)
(b) Advance to suppliers
(c) Income tax receivables [other than deferred tax]
(d) Insurance spares
6. As per the statutory requirements, exceptional items are required to be disclosed whereas
Ind AS 1 requires separate disclosures of material items and how these are to be presented
in the financial statements. Does that imply that ‘exceptional’ means ‘material’? Give
examples. How should these be presented in the financial statements?
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PQ 4 2.4 FINANCIAL REPORTING

Answers
1. (i) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in
addition to the minimum comparative financial statements required by Ind AS, as long
as that information is prepared in accordance with Ind AS. This comparative
information may consist of one or more statements referred to in paragraph 10 but
need not comprise a complete set of financial statements. When this is the case, the
entity shall present related note information for those additional statements.
(ii) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in
addition to the minimum comparative financial statements required by Ind AS, as long
as that information is prepared in accordance with Ind AS.
(iii) Yes, as per Para 38C of Ind AS 1, an entity may present comparative information in
addition to the minimum comparative financial statements required by Ind AS, as long
as that information is prepared in accordance with Ind AS. This comparative
information may consist of one or more statements referred to in paragraph 10 but
need not comprise a complete set of financial statements. When this is the case, the
entity shall present related note information for those additional statements.
2. (i) No, as per Para 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 required in paragraph 38A if:
(a) it applies an accounting policy retrospectively, makes a retrospective
restatement of items in its financial statements or reclassifies items in its
financial statements; and
(b) the retrospective application, retrospective restatement or the reclassification
has a material effect on the information in the balance sheet at the beginning
of the preceding period.
(ii) No, management need to correct the previous year figures to correct the error but
need not to furnish third balance sheet at the beginning of preceding period. (Refer
Para 40A of Ind AS 1)
3. (i) Yes, but additionally the Company also need to disclose amounts that are receivable
within a period of 12 months and after 12 months from the reporting date. (Refer Para
60 and 61 of Ind AS 1)
(ii) No, the Company cannot disclose these payables as non-current and the Company
also need to disclose amounts that are payable within a period of 12 months and after
12 months from the reporting date. (Refer Para 60 and 61 of Ind AS 1)
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INDIAN ACCOUNTING STANDARD3 1 . PQ 5 5

(iii) No, because the amount will be received after the operating cycle of the Company.
(Refer Para 66 of Ind AS 1)
(iv) No, because the amount may be required to be paid before completion of the contract
in case the contract is cancelled. (Refer Para 69 of Ind AS 1).
4. (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.
5. (a) As per paragraph 66(a) of Ind AS 1, an entity shall classify an asset as current when
it expects to realise the asset, or intends to sell or consume it, in its normal operating
cycle.
Paragraph 68 provides the guidance that current assets include assets (such as
inventories and trade receivables) that are sold, consumed or realised as part of the
normal operating cycle even when they are not expected to be realised within twelve
months after the reporting period.
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PQ 6 2.6 FINANCIAL REPORTING

In accordance with above, the receivables that are considered a part of the normal
operating cycle will be classified as current asset.

If the operating cycle exceeds twelve months, then additional disclosure as required
by paragraph 61 of Ind AS 1 is required to be given in the notes.
(b) As discussed in point (a) above, advances to suppliers for goods and services would
be classified in accordance with normal operating cycle if it is given in relation to the
goods or services in which the entity normally deals. If the advances are considered
a part the normal operating cycle, it would be classified as a current asset. If the
operating cycle exceeds twelve months, then additional disclosure as required by
paragraph 61 of Ind AS 1 is required to be given in the notes
(c) Classification of income tax receivables [other than deferred tax] will be driven by
paragraph 66 (c) of Ind AS 1, i.e., based on the expectation of the entity to realise
the asset. If the receivable is expected to be realised within twelve months after the
reporting period, then it will be classified as current asset else non-current asset.

(d) Para 8 of Ind AS 16 states that 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.
Accordingly, the insurance spares that are treated as an item of property, plant and
equipment would normally be classified as non-current asset whereas insurance spares
that are treated as inventory will be classified as current asset if the entity expects to
consume it in its normal operating cycle.
6. Exceptional items have not been defined in Indian Accounting Standards (Ind AS).
However, paragraph 97 of Ind AS 1 requires that when items of income or expense are
material, an entity shall disclose their nature and amount separately.
As per Ind AS 1, information is material if omitting, misstating or obscuring it could
reasonably be expected to influence decisions that the primary users of general-purpose
financial statements make on the basis of those financial statements, which provide
financial information about a specific reporting entity. Materiality depends on the nature or
magnitude of information, or both and it could be the determining factor.
When items of income and expense within profit or loss from ordinary activities are of such
size, nature or incidence that their disclosure is relevant to explain the performance of the
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INDIAN ACCOUNTING STANDARD3 1 . PQ 7 7

enterprise for the period, the nature and amount of such items should be disclosed
separately.

Generally, items of income or expense fulfilling the abovementioned criteria are classified
as exceptional items and are disclosed separately.
From the above, it appears that all material items are not exceptional items. In other words,
exceptional items are those items which meet the test of ‘materiality’ (size and nature) and
the test of ‘incidence’.
Following are some examples which may give rise to a separate disclosure of items as an
‘exceptional item’ in financial statements if they meet the test of ‘materiality’ and ‘incidence’:
(a) write-downs of inventories to net realisable value or of property, plant and equipment
to recoverable amount, as well as reversals of such write-downs;
(b) restructurings of the activities of an entity and reversals of any provisions for the
costs of restructuring;
(c) disposals of items of property, plant and equipment;
(d) disposals of investments;
(e) discontinued operations;
(f) litigation settlements; and

(g) other reversals of provisions.

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PQ 8 FINANCIAL REPORTING

UNIT 2: IND AS 34: INTERIM FINANCIAL REPORTING

Questions
1. An entity’s accounting year ends is 31st December, but its tax year end is 31 st 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.

2. PQR Ltd. is preparing its interim financial statements for quarter 3 of the year. How the
following transactions and events should be dealt with while preparing its interim financials:
(i) It makes employer contributions to government-sponsored insurance funds that are
assessed on an annual basis. During Quarter 1 and Quarter 2 larger amount of
payments for this contribution were made, while during the Quarter 3 minor
payments were made (since contribution is made upto a certain maximum level of
earnings per employee and hence for higher income employees, the maximum
income reaches before year end).
(ii) The entity intends to incur major repair and renovation expense for the office
building. For this purpose, it has started seeking quotations from vendors. It also
has tentatively identified a vendor and expected costs that will be incurred for this
work.
(iii) The company has a practice of declaring bonus of 10% of its annual operating profits
every year. It has a history of doing so.
3. While preparing interim financial statements for the half-year ended 30 th September 20X2,
an entity discovers a material error (an improper expense accrual) in the interim financial
statements for the period ended 30 th September 20X1 and the annual financial statements
for the year ended 31 st March 20X2. The entity does not intend to restate the comparative
amounts for the prior period presented in the interim financial statements as it believes it
would be sufficient to correct the error by restating the comparatives in the annual financial
statements for the year ended 31st March 20X3.
Is this acceptable? Discuss in accordance with relevant Ind AS.
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INDIAN ACCOUNTING STANDARD 34 PQ 9

4. 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 the interim
financial statements for the first quarter ended 30 th 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 no 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?
Answers
1. Table showing computation of tax charge:

Quarter Quarter Quarter Quarter Year ending

ending ending 30th ending ending 31st 31st
31 March, June, 2019
st 30th December, December,
2019 September, 2019 2019
2019
` ` ` ` `
Profit before tax 10,000 10,000 10,000 10,000 40,000
Tax charge (2,500) (3,000) (3,000) (3,000) (11,500)
7,500 7,000 7,000 7,000 28,500

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.
2. Paragraph 28 of Ind AS 34, Interim Financial Reporting states that an entity shall apply the
same accounting recognition and measurement principles in its interim financial statements
as are applied in its annual financial statements.

Further, paragraphs 32 and 33 of Ind AS 34, Interim Financial Reporting state that for assets,
the same tests of future economic benefits apply at interim dates and at the end of an entity’s
financial year. Costs that, by their nature, would not qualify as assets at financial year-end
would not qualify at interim dates either. Similarly, a liability at the end of an interim reporting
period must represent an existing obligation at that date, just as it must at the end of an
annual reporting period.
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PQ 10 FINANCIAL REPORTING

An essential characteristic of income (revenue) and expenses is that the related inflows and
outflows of assets and liabilities have already taken place. If those inflows or outflows have
taken place, the related revenue and expense are recognised otherwise not. The Conceptual
Framework does not allow the recognition of items in the balance sheet which do not meet
the definition of assets or liabilities.
Considering the above guidance, while preparing its interim financials, the transactions and
events of the given case should be dealt with as follows:
(i) If employer contributions to government-sponsored insurance funds are assessed on
an annual basis, the employer’s related expense is recognised using an estimated
average annual effective contribution rate in its interim financial statements, even
though a large portion of the payments have been made early in the financial year.
Accordingly, it should work out an average effective contribution rate and account for
the same accordingly, in its interim financials.
(ii) The cost of a planned overhaul expenditure that is expected to occur in later part of
the year is not anticipated for interim reporting purposes unless an event has caused
the entity to have a legal or constructive obligation. The mere intention or necessity
to incur expenditure related to the future is not sufficient to give rise to an obligation.
(iii) 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
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 in this regard.
A liability for bonus may arise out of legal agreement or constructive obligation because of
which it has no alternative but to pay the bonus and accordingly, needs to be accrued in the
annual financial statements.

Bonus liability is accrued in interim financial statements on the same basis as they are
accrued for annual financial statements. In the instant case, bonus liability of 10% of operating
profit for the year to date may be accrued.

In the given case, since the company has past record of declaring annual bonus every year,
the same may be accrued using a reasonable estimate (applying the principles of Ind AS 19,
Employee Benefits) while preparing its interim results.
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INDIAN ACCOUNTING STANDARD 34 PQ 11

3. Paragraph 42 of Ind AS 8, inter alia, states that an entity shall correct material prior period
errors retrospectively in the first set of financial statements approved for issue after their
discovery by restating the comparative amounts for the prior period(s) presented in which
the error occurred.
Paragraph 28 of Ind AS 34 requires an entity to 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).

Paragraph 15B of Ind AS 34 cites ‘corrections of prior period errors’ as an example of

events or transactions which need to be explained in an entity’s interim financial report if
they are significant to an understanding of the changes in financial position and
performance of the entity since the end of the last annual reporting period.
Paragraph 25 of Ind AS 34, Interim Financial Statements, states as follows:
“While judgement is always required in assessing materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis of
materiality in relation to interim period data to avoid misleading inferences that might result
from non-disclosure. The overriding goal is to ensure that an interim financial report
includes all information that is relevant to understanding an entity’s financial position and
performance during the interim period.”
In view of the above, the entity is required to correct the error and restate the comparative
amounts in interim financial statements for the half-year ended 30th September 20X2.
4. 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 that while
judgement is always required in assessing materiality, this Standard bases the recognition
and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis of
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PQ 12 FINANCIAL REPORTING

materiality in relation to interim period data to avoid misleading inferences that might result
from non-disclosure. The overriding goal is to ensure that an interim financial report
includes all information that is relevant to understanding an entity’s financial position and
performance during the interim period.
As per the above, while materiality judgements always involve a degree of 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 relation to interim period data.
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INDIAN ACCOUNTING STANDARD 7 3.13
PQ 13

UNIT 3:IND AS 7: STATEMENT OF CASH FLOWS

Questions
1. 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.

2. 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
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PQ 142.14 FINANCIAL REPORTING

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
Depreciation (24,000)
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 income 14,62,000
Income Tax (95,000)
Net Profit 13,67,000
Additional information:
(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.
3. What will be the classification for following items in the statement of cash flows of both (i)
Banks / Financial institutions and (ii) Other Entities?

S. No. Particulars
1 Interest received on loans and advances given
2 Interest paid on deposits and other borrowings
3 Interest and dividend received on investments in subsidiaries, associates
and in other entities
4 Dividend paid on preference and equity shares, including tax on dividend
paid on preference and equity shares by other entities
5 Finance charges paid by lessee under finance lease
6 Payment towards reduction of outstanding finance lease liability
7 Interest paid to vendor for acquiring fixed asset under deferred payment
basis
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INDIAN ACCOUNTING STANDARD 7 3.15
PQ 15

8 Principal sum payment under deferred payment basis for acquisition of fixed
assets
9 Penal interest received from customers for late payments
10 Penal interest paid to suppliers for late payments
11 Interest paid on delayed tax payments
12 Interest received on tax refunds

4. From the following data, identify the nature of activities as per Ind AS 7.

S. No. Nature of transaction

1 Cash paid to employees
2 Cash paid for development of property costs
3 Borrowings repaid
4 Cash paid to suppliers
5 Loan to Director
6 Bonus shares issued
7 Dividends paid
8 Cash received from trade receivables
9 Proceeds from sale of PPE
10 Depreciation of PPE
11 Advance received from customers
12 Purchased goodwill
13 Payment of promissory notes

5. One of the subsidiaries of Buildwell Ltd. submitted to Central Finance its Summarized
Statement of Profit and Loss and Balance Sheet.
Summarized Statement of Profit and Loss for the year ended 31 st March, 20X3

Particulars Amount (`)

Net sales 2,52,00,000
Less: Cash cost of sales (1,92,00,000)
Depreciation (6,00,000)
Salaries & wages (24,00,000)
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PQ 162.16 FINANCIAL REPORTING

Operating expenses (14,00,000)

Provision for taxation (8,80,000)
Net Operating Profit 7,20,000
Non-recurring income – profit on sale of equipment 1,20,000
8,40,000
Retained earnings and profit brought forward 15,18,000
23,58,000
Dividends declared and paid during the year (7,20,000)
Profit & loss balance as on 31st March, 20X3 16,38,000

Summarized Balance Sheet

Assets 31 st March, 20X2 31 st March, 20X3

Property, Plant and Equipment:
Land 4,80,000 9,60,000
Buildings and Equipment 36,00,000 57,60,000
Current Assets
Cash 6,00,000 7,20,000
Inventories 16,80,000 18,60,000
Trade Receivables 26,40,000 9,60,000
Advances 78,000 90,000
Total Assets 90,78,000 1,03,50,000
Liabilities & Equity
Share capital 36,00,000 44,40,000
Surplus in profit & loss 15,18,000 16,38,000
Trade Payables 24,00,000 23,40,000
Outstanding expenses 2,40,000 4,80,000
Income tax payable 1,20,000 1,32,000
Accumulated depreciation on buildings
and equipment 12,00,000 13,20,000
Total 90,78,000 1,03,50,000

The original cost of equipment sold during the year 20X2-20X3 was ` 7,20,000.
Prepare a statement of cashflows the year ended 31st March 20X3.
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INDIAN ACCOUNTING STANDARD 7 3.17
PQ 17

6. Following is the Balance Sheet of Mars Ltd: ` in Lakhs

Particulars 31.3.20X3 31.3.20X2

ASSETS
Non-Current Assets
Property, Plant and Equipment 450 410
Intangible asset 90 90
Deferred Tax Asset (net) 45 45
Other Non-current Asset 95 85
Total Non-current Assets 680 630
Current Assets
Financial Asset
Investments 100 60
Trade Receivables 580 600
Cash and Cash Equivalents 300 300
Inventories 800 700
Other Current Assets 160 120
Total Current Assets 1,940 1,780
Total Assets 2,620 2,410
Equity and Liabilities
Equity
Equity Share Capital 280 250
Other Equity 980 820
Total Equity 1,260 1,070
Non-current Liabilities
Financial Liabilities
Borrowings 360 300
Other Non-current Liabilities 90 80
Total Non-current Liabilities 450 380
Current Liabilities
Financial Liabilities
Trade Payable 455 450
Bank Overdraft 410 420
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PQ 182.18 FINANCIAL REPORTING

Other current liabilities 45 90

Total Current Liabilities 910 960
Total Liabilities 1,360 1,340
Total Equity and Liabilities 2,620 2,410

Additional Information:
(a) Profit before tax for the year is ` 200 lakhs and provision for tax is ` 40 lakhs.
(b) Property, Plant and Equipment purchased during the year ` 100 lakhs.

(c) Current liabilities include Capital creditors of ` 25 lakhs as at 31 st March 20X3 (Nil
– 31 st March 20X2)
(d) Long Term Borrowings raised during the year ` 120 lakhs.

From the information given, prepare a Statement of Cash Flows following the Indirect
Method. Assume that Bank overdraft is an integral part of the entity’s cash management.
Answers
1. 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
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
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INDIAN ACCOUNTING STANDARD 7 3.19
PQ 19

Activity wise Amount (in crore)

Operating Activity 28.5
Investing Activity 80
Financing Activity (22)
Total 86.5

2. Statement Cash Flows from operating activities

of Galaxy Ltd. For the year ended 31st 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 claim) 1,10,000
Net cash generated from operating activities 14,16,000

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

` `
To Bank A/c (balancing 55,75,000 By Balance b/d 2,15,000
figure)
To Balance c/d 1,95,000 By Purchases (W.N. 1) 55,55,000
57,70,000 57,70,000
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PQ 202.20 FINANCIAL REPORTING

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

4. Calculation of tax paid during the year in cash

Provision for tax
` `
To Bank A/c (balancing 1,12,000 By Balance b/d 65,000
figure)
To Balance c/d 48,000 By Profit and Loss A/c 95,000
1,60,000 1,60,000

3. The following are the classification of various activities in the Statement of Cash Flows:

S. Particulars Classification for reporting cash flows

No.
Banks / financial Other entities
institutions
1 Interest received on loans and Operating Activities Investing activities
advances given
2 Interest paid on deposits and Operating Activities Financing activities
other borrowings
3 Interest and dividend received on Investing activities Investing activities
investments in subsidiaries,
associates and in other entities
4 Dividend paid on preference and Financing activities Financing activities
equity shares, including tax on
dividend paid on preference and
equity shares by other entities
5 Finance charges paid by lessee Financing activities Financing activities
under finance lease
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INDIAN ACCOUNTING STANDARD 7 3.21
PQ 21

6 Payment towards reduction of Financing activities Financing activities

outstanding finance lease liability
7 Interest paid to vendor for Financing activities Financing activities
acquiring fixed asset under
deferred payment basis
8 Principal sum payment under Investing activities Investing activities
deferred payment basis for
acquisition of fixed assets
9 Penal interest received from Operating Activities Operating Activities
customers for late payments
10 Penal interest paid to suppliers Operating Activities Operating Activities
for late payments
11 Interest paid on delayed tax Operating Activities Financing Activities
payments
12 Interest received on tax refunds Operating Activities Investing Activities
4.

S. No. Nature of transaction Activity as per Ind AS 7

1 Cash paid to employees Operating activity

2 Cash paid for development costs Investing activity
3 Borrowings repaid Financing activity
4 Cash paid to suppliers Operating activity
5 Loan to Director Investing activity
6 Bonus shares issued Non-cash item
7 Dividends paid Financing activity

8 Cash received from trade receivables Operating activity

9 Proceeds from sale of PPE Investing activity

10 Depreciation of PPE Non-cash item

11 Advance received from customers Operating activity
12 Purchased goodwill Investing activity
13 Payment of promissory notes Financing activity
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PQ 222.22 FINANCIAL REPORTING

5. Statement of Cash Flows for the year ended 31 st March, 20X3 (Indirect method)

Particulars ` `
Cash flow from operating activities:
Net Profit before taxes and extraordinary items 16,00,000
(7,20,000 + 8,80,000)
Add: Depreciation 6,00,000
Operating profit before working capital changes 22,00,000
Increase in inventories (1,80,000)
Decrease in trade receivables 16,80,000
Advances (12,000)
Decrease in trade payables (60,000)
Increase in outstanding expenses 2,40,000
Cash generated from operations 38,68,000
Less: Income tax paid (Refer W.N.4) (8,68,000)
Net cash from operations 30,00,000
Cash from investing activities:
Purchase of land (4,80,000)
Purchase of building & equipment (Refer W.N.2) (28,80,000)
Sale of equipment (Refer W.N.3) 3,60,000
Net cash used for investment activities (30,00,000)
Cash flows from financing activities:
Issue of share capital 8,40,000
Dividends paid (7,20,000)
Net cash from financing activities: 1,20,000
Net increase in cash and cash equivalents 1,20,000
Cash and cash equivalents at the beginning 6,00,000
Cash and cash equivalents at the end 7,20,000
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INDIAN ACCOUNTING STANDARD 7 3.23
PQ 23

Working Notes:
1. Building & Equipment Account

Particulars ` Particulars `
To Balance b/d 36,00,000 By Sale of assets 7,20,000
To Cash / bank By Balance c/d 57,60,000
(purchases)(bal. fig) 28,80,000
64,80,000 64,80,000

2. Building & Equipment Accumulated Depreciation Account

Particulars ` Particulars `
To Sale of asset (acc. By Balance b/d 12,00,000
depreciation) 4,80,000
To Balance c/d 13,20,000 By Profit & Loss A/c
(provisional) 6,00,000
18,00,000 18,00,000

3. Computation of sale price of Equipment

Particulars `
Original cost 7,20,000
Less: Accumulated Depreciation (4,80,000)
Net cost 2,40,000
Profit on sale of assets 1,20,000
Sale proceeds from sale of assets 3,60,000

4. Provision for tax Account

Particulars ` Particulars `
To Bank A/c 8,68,000 By Balance b/d 1,20,000
To Balance c/d 1,32,000 By Profit & Loss
A/c (provisional) 8,80,000
10,00,000 10,00,000
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PQ 242.24 FINANCIAL REPORTING

6. Statement of Cash Flows for the year ended 31 st March, 20X3

(` in lakhs) (` in lakhs)
Cash flows from operating activities
Profit before taxation 200
Adjustments for non-cash items:
Depreciation [410 - (450 - 100)] 60
260
Increase in inventories (800 - 700) (100)
Decrease in trade receivables (600 - 580) 20
Increase in other non-current assets (Refer Note 2) (95 - 85) (10)
Increase in other current assets (160 - 120) (40)
Increase in non-current liabilities (Refer Note 2) (90 - 80) 10
Decrease in trade payables (455 – 25 - 450) (20)
Other current liabilities (Refer Note 1) [(90+40)-45] (85)
Net cash generated from operating activities 35
Cash flows from investing activities
Cash paid to purchase PPE (100-25) (75)
Cash paid to acquire investment (100-60) (40)
Net cash outflow from investing activities (115)
Cash flows from financing activities
Raising of equity share capital (280 - 250) 30
Long-term borrowings raised during the year 120
Long-term borrowings repaid during the year (300 + 120) -
360] (60)
Net cash outflow from financing activities 90
Increase in cash and cash equivalents during the year 10
Cash and cash equivalents at the beginning of the year
(420-300) (120)
Cash and cash equivalents at the end of the year (410-300) (110)

Notes:
1. Other current liabilities are assumed to consist of provision for taxation.
2. Other non-current assets and other non-current liabilities pertain to working capital
items.
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CHAPTER 4 UNIT-1: IND AS 8

ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES AND ERRORS

Questions
1. While preparing the annual financial statements for the year ended 31st March, 20X3, an
entity discovers that a provision for constructive obligation for payment of bonus to selected
employees in corporate office (material in amount) which was required to be recognised in
the annual financial statements for the year ended 31st March, 20X1 was not recognised
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 amount was material?
2. 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 the 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 no 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?
3. 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. The property has a useful life of 10 years and is depreciated
using straight line method. Estimated residual value at the end of 10 year is Nil.
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? For simplicity,
ignore tax effects.
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PQ 26 2.26 FINANCIAL REPORTING

4. 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 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

• 31st March, 20X2 - Increase of ` 15 million
• 31st March, 20X3 - Increase of ` 20 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
Retained earnings at 31st March, 20X1 were ` 423 million
You are required to present the impact of 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.
5. During 20X4-20X5, Cheery Limited discovered that some products that had been sold
during 20X3-20X4 were incorrectly included in inventory at 31st March, 20X4 at ` 6,500.
Cheery Limited’s accounting records for 20X4-20X5 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 20X3-20X4, 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
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PQ 27 4.27
INDIAN ACCOUNTING STANDARD 8

The 20X3-20X4 opening retained earnings was ` 20,000 and closing retained earnings was
` 34,000. Cheery Limited’s income tax rate was 30% for 20X4-20X5 and 20X3-20X4. 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.
6. In 20X3-20X4, after the entity’s 31st 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 ` 1,00,000 of unanticipated
costs for fulfilling its warranty obligation in respect of sales made before 31st 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 31st 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 31st 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.
7. In its financial statements for the year ended 31 st March, 20X2, Y Ltd. reported ` 73,500
revenue (sales), ` 53,500 cost of sales, ` 6,000 income tax expense, ` 20,000 retained
earnings at 1 st April, 20X1 and ` 34,000 retained earnings at 31st March, 20X2.
In 20X2-20X3, after the 20X1-20X2 financial statements were approved for issue, Y Ltd.
discovered that some products sold in 20X1-20X2 were incorrectly included in inventories
at 31st March, 20X2 at their cost of ` 6,500.
In 20X2-20X3, Y Ltd. changed its accounting policy for the measurement of investments
in associates after initial recognition from cost model to the fair value model as per
Ind AS 109. It acquired its only investment in an associate for ` 3,000 many years ago.
The associate’s equity is not traded on a securities exchange (that is, a published price
quotation is not available). The fair value of the investment was determined reliably using
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PQ 28 2.28 FINANCIAL REPORTING

an appropriate equity valuation model on 31 st March, 20X3 at ` 25,000 (20X1-20X2:

` 20,000 and 20X0-20X1: ` 18,000).

At 31 st March, 20X3, as a result of usage of improved lubricants, Y Ltd. reassessed the

useful life of Machine A from four years to seven years. Machine A is depreciated on the
straight-line method to a Nil residual value. It was acquired for ` 6,000 on 1 st April, 20X0.
Inventories of the type manufactured by Machine A were immaterial at the end of each
reporting period.
Y Ltd.’s accounting records for the year ended 31st March, 20X3, before accounting for
change in accounting policy and change in accounting estimate, record ` 1,04,000
revenue (sales), ` 86,500 cost of sales (including ` 6,500 for the error in opening
inventory and ` 1,500 depreciation for Machine A) and ` 5,250 income tax expense.

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

For simplicity, the tax effect of all items of income and expenses should be assumed to
be 30% of the gross amount.
Draft an extract showing how the correction of the prior period error, change in
accounting policy and change in accounting estimate could be presented in the Statement
of Profit and Loss and Statement of Changes in Equity (Retained Earnings) and disclosed
in the Notes of Y Ltd. for the year ended 31st March, 20X3.

Answers

1. As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition,

measurement, presentation or disclosure of elements of financial statements. Financial
statements do not comply with Ind AS if they contain either material errors or immaterial
errors made intentionally to achieve a particular presentation of an entity’s financial
position, financial performance or cash flows. Potential current period errors discovered in
that period are corrected before the financial statements are approved for issue. However,
material errors are sometimes not discovered until a subsequent period, and these prior
period errors are corrected in the comparative information presented in the financial
statements for that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the
beginning of the preceding period in addition to the minimum comparative financial
statements if, inter alia, it makes a retrospective restatement of items in its financial
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PQ 29 4.29
INDIAN ACCOUNTING STANDARD 8

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.
2. 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 materiality, this Standard bases the
recognition and disclosure decision on data for the interim period by itself for reasons of
understandability of the interim figures. Thus, for example, unusual items, changes in
accounting policies or estimates, and errors are recognised and disclosed on the basis of
materiality in relation to interim period data to avoid misleading inferences that might result
from non-disclosure. The overriding goal is to ensure that an interim financial report
includes all information that is relevant to understanding of an entity’s financial position and
performance during the interim period.”
As per the above, while materiality judgements always involve a degree of 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.
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PQ 30 2.30 FINANCIAL REPORTING

Accordingly, the management is required to correct the error in the interim financial
statements since it is assessed to be material in relation to interim period data.

3. The error shall be corrected by retrospectively restating the figures for financial year
20X2-20X3 and also by presenting a third balance sheet as at 1st April, 20X2 which is the
beginning of the earliest period presented in the financial statements.

4. 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 earnings Retained earnings
(Original)
At 1st April, 20X1 423 423
Change in inventory valuation policy 10 -
At 1 st April, 20X1 (Restated) 433 -
Profit for the year 20X1-20X2 63 58
At 31 st March, 20X2 496 481
Profit for the 20X2-20X3 73 68
At 31 st March, 20X3 569 549

5. Cheery Limited
Extract from the Statement of profit and loss
20X4-20X5 (Restated) 20X3-20X4
` `
Sales 1,04,000 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
Basic and diluted EPS 3.36 1.89
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PQ 31 4.31
INDIAN ACCOUNTING STANDARD 8

Cheery Limited
Statement of Changes in Equity
Share Retained Total
capital earnings
Balance at 31 st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31st March, 20X4
as restated 9,450 9,450
Balance at 31 st March, 20X4 50,000 29,450 79,450
Profit for the year ended 31 st March, 20X5 16,800 16,800
Balance at 31 st March, 20X5 50,000 46,250 96,250

Extract from the Notes

Some products that had been sold in 20X3-20X4 were incorrectly included in inventory at
31st March, 20X4 at ` 6,500. The financial statements of 20X3-20X4 have been restated
to correct this error. The effect of the restatement on those financial statements is
summarized below:

Effect on 20X3-20X4
(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.
6. 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
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PQ 32 2.32 FINANCIAL REPORTING

estimate is an outcome of the assessment of the present status of, and expected future
benefits and obligations associated with, assets and liabilities. Changes in accounting
estimates result from new information or new developments and, accordingly, are not
corrections of errors.
Further, the effect of change in an accounting estimate, shall be recognised prospectively
by including it in profit or loss in: (a) the period of the change, if the change affects that
period only; or (b) the period of the change and future periods, if the change affects both.
Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse of, reliable
information that:
(a) was available when financial statements for those periods were approved for issue;
and
(b) could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.

Such errors include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.
On the basis of above provisions, the given situation would be dealt as follows:
The defect was neither known nor reasonably possible to detect at 31st 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
31st March 20X3 financial statements are not prior period errors.
The effects of the latent defect that relate to the entity’s financial position at
31st March 20X3 are changes in accounting estimates.
In preparing its financial statements for 31st 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.
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PQ 33 4.33
INDIAN ACCOUNTING STANDARD 8

Working Note:
Inventory is measured at the lower of cost (i.e. ` 15,000) and fair value less costs to
complete and sell (i.e. ` 18,000 originally estimated minus ` 5,000 costs to rectify latent
defect) = ` 13,000.
7. Extract of Y Ltd.’s Statement of Profit and Loss
for the year ended 31 st March, 20X3
20X2-20X3 Reference 20X1-20X2 Reference
to W.N. Restated to W.N.
` `
Revenue 1,04,000 73,500
Cost of sales (20X1-20X2
previously ` 53,500) (79,100) 1 (60,000) 4
Gross profit 24,900 13,500
Other income — change in
the measurement policy i.e.
the value of investment in
associate at FVTPL
5,000 2 2,000 5
Profit before tax 29,900 15,500
Income tax expense (8,970) 3 (4,650) 6
Profit for the year 20,930 10,850

Extract of Y Ltd.’s Statement of Changes in Equity (Retained Earnings)

for the year ended 31 st March, 20X3
20X2-20X3 Reference 20X1-20X2 Reference
to W.N. Restated to W.N.
` `
Retained earnings, as
restated, at the beginning
of the year
- as previously stated 34,000 20,000
- effect of the -
correction of a prior (4,550) 7
period error
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PQ 34 2.34 FINANCIAL REPORTING

- effect of a change in
accounting policy 11,900 13 10,500 12
41,350 30,500
Profit for the year 20,930 10,850
Retained earnings at the
end of the year 62,280 41,350

Y Ltd.
Extract of Notes to the Financial Statements for the year ended 31st March, 20X3
Note X : Change in Accounting Estimates

Due to usage of improved lubricants the estimated useful life of the machine used for
production was increased from four years to seven years. The effect of the change in the
useful life of the machine is to reduce the depreciation allocation by ` 900 in 20X2-20X3
and 20X3-20X4. The after-tax effect is an increase in profit for the year of ` 630 for each
of the two years.
Depreciation expense in 20X4-20X5 to 20X6-20X7 is increased by ` 600 because of
revision in the useful life of machinery, as under the initial estimate, the asset would have
been fully depreciated at the end of 20X3-20X4. The after-tax effect for these three years
is a decrease in profit for the year by ` 420 per year.
Note Y : Correction of Prior Period Error
In 20X2-20X3 the entity identified that ` 6,500 products that had been sold in 20X1-20X2
were included erroneously in inventory at 31 st March, 20X2. The financial statements of
20X1-20X2 have been restated to correct this error. The effect of the restatement is
` 6,500 increase in the cost of sales and ` 4,550 decrease in profit for the year ended
31st March, 20X2 after decreasing income tax expense by ` 1,950. This resulted in `
4,550 (decrease) restatement of retained earnings at 31st March, 20X2.
Note Z : Change in Accounting Policy
In 20X2-20X3 the entity changed its accounting policy for the measurement of
investments in associates from cost model to fair value model as per Ind AS 109.
Management judged that this policy provides reliable and more relevant information
because dividend income and changes in fair value are inextricably linked as integral
components of the financial performance of an investment in an associate and
measurement at fair value is necessary if that financial performance is to be reported in a
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PQ 35 4.35
INDIAN ACCOUNTING STANDARD 8

more meaningful way. This change in accounting policy has been accounted for
retrospectively. The comparative information has been restated. A new line item, ‘Other
income — change in the fair value of investment in associate’, has been added in the
Statement of Profit and Loss and Retained Earnings. The effect of the restatement has
been to add income of ` 2,000 as a result of the increase in value of the associate during
the year ended 31 st March, 20X2 which resulted in ` 1,400 increase in profit for the year
(after including a resulting increase in income tax expense of ` 600). This, together with
` 10,500 (increase) restatement of retained earnings at 31st March, 20X1, resulted in a `
11,900 increase in retained earnings at 31st March, 20X2. Furthermore, profit for the year
ended 31st March, 20X3 was ` 3,500 higher (after deducting ` 1,500 tax effect) as a
result of recording a further ` 5,000 (W.N.2) increase in the fair value of the investment in
an associate.
Working Notes:
1. ` 86,500 (given) minus ` 6,500 correction of error (now recognised as an expense
in 20X1-20X2) minus ` 900 (W.N.9) effect of the change in accounting estimate.
2. ` 25,000 fair value (20X2-20X3) minus ` 20,000 fair value (20X1-20X2) = ` 5,000
(the effect of applying the new accounting policy (fair value model) in 20X2-20X3).
3. ` 5,250 + ` 1,950 (W.N.8) + 30% (` 900 (W.N.9) reduction in depreciation
resulting from the change in accounting estimate) + 30% (` 5,000 increase in the
fair value of investment property — change in accounting policy) = ` 8,970.
4. ` 53,500 as previously stated + ` 6,500 (products sold and incorrectly included in
closing inventory in 20X1-20X2) = ` 60,000 (that is, the prior period error is
corrected retrospectively by restating the comparative amounts).
5. ` 20,000 fair value (20X1-20X2) minus ` 18,000 fair value (20X0-20X1) = ` 2,000
(the effect in 20X1-20X2 of the change in accounting policy for investments in
associates from the cost model to the fair value model).
6. ` 6,000 as previously stated minus ` 1,950 (W.N.8) correction of prior period error
+ 30% (` 2,000 change in accounting policy) = ` 4,650.

7. ` 6,500 (products sold and incorrectly included in inventory in 20X1-20X2) – `

1,950 (W.N.8) (tax overstated in 20X1-20X2) = ` 4,550.
8. ` 6,500 (products sold and incorrectly included in inventory in 20X1-20X2) x 30%
(income tax rate) = ` 1,950.
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PQ 36 2.36 FINANCIAL REPORTING

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

10. ` 3,000 (W.N.11) carrying amount ÷ 5 years remaining useful life = ` 600
depreciation per year.
11. [` 6,000 cost minus (` 1,500 depreciation x 2 years)] = ` 3,000 carrying amount at
31st March, 20X2.
12. (` 18,000 fair value of investment in associates at 31 st March, 20X1 minus ` 3,000
carrying amount based on the cost model at the same date) x 0.7 (to reflect 30%
income tax rate) = ` 10,500 (effect of a change in accounting policy (from cost
model to fair value model)).
13. ` 10,500 (W.N.12) + [` 2,000 (W.N.5) x 0.7 (to reflect 30% income tax rate)] =
` 11,900.
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INDIAN ACCOUNTING STANDARD 10 PQ 37 4.37

UNIT 2:IND AS 10: EVENTS AFTER THE REPORTING PERIOD

Questions
1. 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 an application within 15 days of meeting the specified turnover. If
the 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 but the application for duty
drawback is filed on 20 th April, 20X2, which is after the stipulated time of 15 days of
meeting the turnover condition.
Duty drawback has been credited by the Department on 28 th June, 20X2 and financial
statements have been approved by the Board of Directors of the company on
26th July, 20X2. Whether duty drawback credit should be treated as an adjusting event?
2. XYZ Ltd. sells goods to its customer with a promise to give a discount of 5% on list price
of the goods provided that the payments are received from customer within 15 days. XYZ
Ltd. sold goods for ` 5 lakhs to ABC Ltd. between 17 th March, 20X2 and 31st March,
20X2. ABC Ltd. paid the dues by 15 th April, 20X2 with respect to sales made between
17th March, 20X2 and 31 st 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.
3. Whether the fraud related to 20X1-20X2 discovered after the end of the reporting period
but before the date of approval of financial statements for 20X3-20X4 is an adjusting
event?
4. X Ltd. was having investment in the form 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 statements 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 20X1-20X2?
5. ABC Ltd. received a demand notice on 15 th June, 20X2 for an additional amount of
` 28,00,000 from the Excise Department on account of higher excise duty levied by the
Excise Department compared to the rate at which the company was creating provision
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PQ 38 2.38 FINANCIAL REPORTING

and depositing the same in respect of transactions related to financial year 20X1-20X2.
The financial statements for the year 20X1-20X2 are approved on 10 th August, 20X2. In
July, 20X2, the company has appealed against the demand of ` 28,00,000 and the
company has expected that the demand would be settled at ` 15,00,000 only. Show how
the above event will have a bearing on the financial statements for the year 20X1-20X2.
Whether these events are adjusting or non-adjusting events and explain the treatment
accordingly.
6. H Ltd. constructed a warehouse at a cost of ` 10 lakhs in 20X1. It first became available
for use by H Ltd. on 1st April, 20X2. On 29 th April, 20X6, H Ltd. discovered that its
warehouse was damaged. During early May 20X6, an investigation revealed that the
damage was due to a structural fault in the construction of the warehouse. The fault
became apparent when the warehouse building leaked severely after heavy rainfall in the
week ended 27 th April 20X6. The discovery of the fault is an indication of impairment.
So, H Ltd. was required to estimate the recoverable amount of its warehouse at
31st March 20X6. This estimate was ` 6,00,000. Furthermore, H Ltd. reassessed the
useful life of its warehouse at 20 years from the date that it was ready for use. Before
discovering the fault, H Ltd. had depreciated the warehouse on the straight-line method to
a nil residual value over its estimated 30-year useful life.

Seepage of rainwater through the crack in the warehouse caused damage to inventory
worth about ` 1,00,000 (cost price) and became un-saleable. The entire damaged
inventory was on hand as at 31st March, 20X6. H Ltd. has not insured against any of the
losses.
It accounts for all its property, plant and equipment under the cost model. H Ltd.’s annual
financial statements for the year ended 31st March, 20X6 were approved for issue by the
Board of Directors on 28 th May, 20X6.
You are required to :
(i) Prepare accounting entries to record the effects of the events after the end of the
reporting period in the accounting records of H Ltd. for the year ended 31st March,
20X6. Kindly ignore tax impact.
(ii) Discuss disclosure requirement in above case as per relevant Ind AS.

(iii) Will your answer be different if there was no structural fault and damage to the
warehouse had been caused by an event that occurred after 31st March, 20X6?
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INDIAN ACCOUNTING STANDARD 10 PQ 39 4.39

7. The company has made sales of ` 60,00,000 to a customer SS LLP on

31st December 20X2. The normal credit is for one month. However, sometimes, it goes
upto 2 months. The company expects to receive payment by 28 th February 20X3.
However, no payment has been received till 31st March 20X3. On 15 th April 20X3, the
sales department of the company became aware that the customer is passing through
financial crisis and has major cash flow problems.
The company has agreed to allow the customer to settle the debt by 31 st March 20X4, by
which time the customer is confident that the cashflow problem will be resolved.
The company expects that an annual interest of 9% (i.e. effective interest rate) can be
received against any money lent out, yet it allowed the customer an interest-free payment
period.
Determine the amount to be shown as 'trade receivable' from SS LLP in the books of the
company as on 31 st March 20X3.
Answers
1. 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 to 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 realized if the
Department credits the same.
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 benefits will arise, asset and the related income
are recognized 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.
In accordance with the above, the duty draw-back credit which was contingent asset for the
financial year 20X1-20X2 should be recognized as asset and related income should be
recognized in the reporting period in which the change occurs. i.e., in the period in which
realization becomes virtually certain, i.e., financial year 20X2-20X3.
2. As per Ind AS 115, if the consideration promised in a contract includes 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.
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PQ 40 2.40 FINANCIAL REPORTING

In the instant case, the condition that sales have been made exists at the end of the
reporting period and the receipt of payment within 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 provided on those sales. 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.
3. In the instant case, the fraud is discovered after the end of the reporting period of 20X3-
20X4, which related to financial year 20X1-20X2. Since the fraud took 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 statements. Therefore, it is an adjusting event.
Moreover, Ind AS 10 in paragraph 9, specifically provides that the discovery of 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.
4. 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.
5. Ind AS 10 defines ‘Events after the Reporting Period’ as follows:
Events after the reporting period are those events, favourable and unfavourable, that occur
between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors in case of a company, and, by the corresponding
approving authority in case of any other entity for issue. Two types of events can be
identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period)
In the instant case, the demand notice has been received on 15 th June, 20X2, which is
between the end of the reporting period and the date of approval of financial statements.
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INDIAN ACCOUNTING STANDARD 10 PQ 41 4.41

Therefore, it is an event after the reporting period. This demand for an additional amount
has been raised because of higher rate of excise duty levied by the Excise Department in
respect of goods already manufactured during the reporting period. Accordingly, the
condition exists on 31st March, 20X2, as the goods have been manufactured during the
reporting period on which additional excise duty has been levied and this event has been
confirmed by the receipt of demand notice. Therefore, it is an adjusting event.
In accordance with the principles of Ind AS 37, the company should make a provision in the
financial statements for the year 20X1-20X2, at best estimate of the expenditure to be
incurred, i.e., ` 15,00,000.
6. (i) Journal Entries on 31 st March, 20X6

` `

Depreciation expense A/c (W.N.1) Dr. 19,608

To Warehouse or Accumulated depreciation A/c 19,608

(Being additional depreciation expense recognised for

the year ended 31 st March 20X6 arising from the
reassessment of the useful life of the warehouse)

Impairment loss A/c (W.N.2) Dr. 2,47,059

To Warehouse or Accumulated depreciation A/c 2,47,059

(Being impairment loss recognised due to discovery of

structural fault in the construction of warehouse at
31st March, 20X6)

(ii) (a) The damage to warehouse is an adjusting event (occurred after the end
of the year 20X6-20X6) for the reporting period 20X5-20X6, since it provides
evidence that the structural fault existed at the end of the reporting period.
It is an adjusting event, in spite of the fact that fault has been discovered
after the reporting date.
The effects of the damage to the warehouse are recognised in the year
20X5-20X6 reporting period. Prior periods will not be adjusted because
those financial statements were prepared in good faith (eg. regarding
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PQ 42 2.42 FINANCIAL REPORTING

estimate of useful life, assessment of impairment indicators etc.) and had

not affected the financials of prior years.

(b) Damage of inventory due to seepage of rainwater ` 1,00,000 occurred

during the year 20X5-20X6. It is a non-adjusting event after the end of
the 20X5-20X6 reporting period since the inventory was in good condition at
31st March 20X6. Hence, no accounting has been done for it in the year
20X5-20X6.
H Ltd. must disclose the nature of the event (i.e. rain-damage to
inventories) and an estimate of the financial effect (i.e. ` 1,00,000 loss) in
the notes to its 31 st March 20X6 annual financial statements.
(iii) If the damage to the warehouse had been caused by an event that occurred after
31st March 20X6 and was not due to structural fault, then it would be considered
as a non-adjusting event after the end of the reporting period 20X5-20X6 as the
warehouse would have been in a good condition at 31 st March 20X6.
Working Notes:
1. Calculation of additional depreciation to be charged in the year 20X5-20X6
Original depreciation as per SLM already charged during the year 20X5-20X6
= ` 10,00,000/ 30 years = ` 33,333.
Carrying value at the end of 20X4-20X5 = 10,00,000 – (` 33,333 x 3 years)
= ` 9,00,000
Revised depreciation = 9,00,000 / 17 years = ` 52,941
Additional depreciation to be recognised in the books in the year 20X5-20X6
= ` 52,941 – ` 33,333 = ` 19,608

2. Calculation of impairment loss in the year 20X5-20X6

Carrying value after charging depreciation for the year 20X5-20X6
= ` 9,00,000 – ` 52,941 = ` 8,47,059

Recoverable value of the warehouse = ` 6,00,000

Impairment loss = Carrying value - Recoverable value
= ` 8,47,059 - ` 6,00,000 = ` 2,47,059
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INDIAN ACCOUNTING STANDARD 10 PQ 43 4.43

7. Ind AS 10 ‘Events after the Reporting Date’, classify an event as adjusting if it provides
additional evidence of conditions existing at the reporting date. In this case the additional
information relates to evidence of impairment of a financial asset since the customer had
financial difficulties prior to 31st March 20X3.
Ind AS 109 ‘Financial Instruments’ requires financial assets to be reviewed at each
reporting date for evidence of impairment. Such evidence exists here because although
the customer is expected to pay the amount due the payment date has been deferred. As
per para B5.5.33 of Ind AS 109, for a financial asset that is credit-impaired at the
reporting date, but that is not a purchased or originated credit-impaired financial asset, an
entity shall measure the expected credit losses as the difference between the asset’s
gross carrying amount and the present value of estimated future cash flows discounted at
the financial asset’s effective interest rate. Any adjustment is recognized in the profit or
loss as an impairment gain or loss. Further, para B5.5.44 of Ind AS 109 provides that
expected credit losses shall be discounted to the reporting date, not to the expected
default or some other date, using the effective interest rate determined at initial
recognition or an approximation thereof.
In such circumstances, Ind AS 109 requires that the financial asset be re-measured to the
present value of the expected future receipt, discounted (in the case of a trade
receivable) using effective interest rate. Therefore, in the financial statements for the
year ended 31st March 20X3, asset should be measured at ` 55,04,587 (` 60,00,000 /
1.09) and an impairment loss of ` 4,95,413 (` 60,00,000 – ` 4,95,413) recognised in
profit and loss.
In the year ended 31 st March 20X4, interest income of ` 4,95,413 (` 55,04,587 x 9%)
should be recognised in the profit and loss.
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PQ 44 2.44 FINANCIAL REPORTING

UNIT 3: IND AS 113: FAIR VALUE MEASUREMENT

Questions
1. You are a senior consultant of your firm and are in process of determining the valuation of
KK Ltd. You have determined the valuation of the company by two approaches i.e. Market
Approach and Income approach and selected the highest as the final value. However, based
upon the discussion with your partner you have been requested to assign equal weights to
both the approaches and determine a fair value of shares of KK Ltd. The details of the KK
Ltd. are as follows:

Particulars ` in crore
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9
Surplus cash & cash equivalent 106.14
Fair value of surplus assets and Liabilities 312.4
Number of shares of KK Ltd. 8,52,84,223 shares
Determine the Equity value of KK Ltd. as on the measurement date on the basis of above
details.
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 property. 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?
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NDIAN ACCOUNTING STANDARD 113 PQ 45 4.45

(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?

3. 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:
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PQ 46 2.46 FINANCIAL REPORTING

A Ltd. estimates the amount of that premium to be 5% of the expected cash flows.
The expected cash flows are ‘real cash flows’ / ‘cash flows in terms of monetary value
today’.
d. Effect of inflation on estimated costs and profits
A Ltd. assumes a rate of inflation of 4 percent over the 10-year period based on
available market data.
e. Time value of money, represented by the risk-free rate: 5%
f. Non-performance risk relating to the risk that Entity A will not fulfill the obligation,
including A Ltd.’s own credit risk: 3.5%
A Ltd. concludes that its assumptions would be used by market participants. In addition, A
Ltd. does not adjust its fair value measurement for the existence of a restriction preventing it
from transferring the liability.
You are required to calculate the fair value of the asset retirement obligation.
4. (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.
Answers
1. Equity Valuation of KK Ltd.
Particulars Weights (` in crore)
As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
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NDIAN ACCOUNTING STANDARD 113 PQ 47 4.47

Enterprise Valuation based on weights (5268.2 x 50%) + 4,251.7

(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

2. (i) As per Ind AS 113, a fair value measurement of a non-financial asset takes into
account a market participant’s ability to generate economic benefits by using the
asset in its highest and best use or by selling it to another market participant that
would use the asset in its highest and best use.
The highest and best use of a non-financial asset takes into account the use of the
asset that is physically possible, legally permissible and financially feasible, as
follows:
(a) A use that is physically possible takes into account the physical characteristics
of the asset that market participants would take into account when pricing the
asset (eg the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the
use of the asset that market participants would take into account when pricing
the asset (eg the zoning regulations applicable to a property).
(c) A use that is financially feasible takes into account whether a use of the asset
that is physically possible and legally permissible generates adequate income
or cash flows (taking into account the costs of converting the asset to that use)
to produce an investment return that market participants would require from an
investment in that asset put to that use.
Highest and best use is determined from the perspective of market participants, even
if the entity intends a different use. However, an entity’s current use of a non-financial
asset is presumed to be its highest and best use unless market or other factors suggest
that a different use by market participants would maximise the value of the asset.
To protect its competitive position, or for other reasons, an entity may intend not to
use an acquired non-financial asset actively or it may intend not to use the asset
according to its highest and best use. Nevertheless, the entity shall measure the fair
value of a non-financial asset assuming its highest and best use by market
participants.
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PQ 48 2.48 FINANCIAL REPORTING

In the given case, the highest best possible use of the land is to develop a commercial
complex. Although developing a business complex is against the business objective
of the entity, it does not affect the basis of fair valuation as Ind AS 113 does not
consider an entity specific restriction for measuring the fair value.
Also, its current use as a parking lot is not the highest best use as the land has the
potential of being used for building a commercial complex.
Therefore, the fair value of the land is the price that would be received when sold to a
market participant who is interested in developing a commercial complex.
(ii) As per Ind AS 113, 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. The unobservable inputs shall reflect the assumptions that market participants
would use when pricing the asset or liability, including assumptions about risk.
In the given case, DS Limited adopted discounted cash flow method, commonly used
technique to value shares, to fair value the shares of the private company as there
were no similar shares traded in the market. Hence, it falls under Level 3 of fair value
hierarchy.
Level 2 inputs include the following:
(a) quoted prices for similar assets 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.
If an entity can access quoted price in active markets for identical assets or liabilities
of similar companies which can be used for fair valuation of the shares without any
adjustment, at the measurement date, then it will be considered as observable input
and would be considered as Level 2 inputs.
3.
Amount
(In Crore)
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
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NDIAN ACCOUNTING STANDARD 113 PQ 49 4.49

Expected cash flows adjusted for inflation 283.50 x 1.4802 419.65

Risk adjustment - uncertainty relating to cash (5% x 419.65) 20.98
flows
Total Expected Cash Flows (419.65+20.98) 440.63
Discount rate to be considered = risk-free rate +
entity’s non-performance risk 5% + 3.5% 8.5%
Expected present value at 8.5% for 10 years (440.63 / (1.085 10)) 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

4. (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 x ` 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 x ` 170 per share).