Module II

IFRS Converged Indian

Accounting Standards
Concept of IndAS Objective,Scope,Recognition and
Measurement of :Inventories (Ind AS 2), Income tax (IndAS
12), Accounting for tangible non-current assets (IndAS 16),
Borrowing costs( IndAS 23), Provisions, Contingent liabilities
and Contingent assets (IndAS 37), Accounting for intangible
assets ( IndAS 38)
 Indian Accounting Standards – Ind
AS
Applicability and accounting principles of Indian Accounting Standards (Ind
AS)

Presently, the Institute of Chartered Accountants of India (ICAI) has issued 39

Indian Accounting Standards (Ind AS) which have been notified under the
Companies (Indian Accounting Standards) Rules, 2015 (“Ind AS Rules”), of
the Companies Act, 2013.
 (I)ACCOUNTING FOR INVENTORIES– Ind AS 2

Objective
To prescribe the accounting treatment for inventories
Determination of cost and its subsequent recognition as an expense,
including any write-down to net realisable value
Provides guidance on the cost formulas that are used to assign costs to
inventories
Scope

This Standard applies to all inventories, except:

(a) Work in progress under a construction contract(Ind AS 11)
(b) financial instruments (Ind AS 32, Financial Instruments: Presentation and
Ind AS 109, Financial Instruments and ); and
(c) biological assets (i.e. living animals or plants) related to agricultural
activity and agricultural produce at the point of harvest (See Ind AS 41,
Agriculture).
Definition

Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or
(c) in the form of materials or supplies to be consumed in the production
process or in the rendering of services.
Measurement of Inventories

Inventories must be measured at cost or net realizable value, whichever is

less. Thus, the two components are cost and net realizable value.
Net realisable value = Estimated selling price - Estimated costs

Fair value is the price that would be received to sell an asset or paid to
transfer a liability
Measurement of inventories

Inventories shall be measured at the lower of cost

and net realisable value.

Cost of inventories

Add the following costs:

a)Cost of purchase
b)Cost of conversion
c)Other costs
Cost of purchase
The cost of purchase of inventories shall comprise
of :
• Purchase price
• Import duties and other taxes
• Transport cost
• Handling cost
• Other direct costs(acquisition of FG , materials
and services)
Deductibles

• Trade discounts
• Rebates
• Subsidies

Cash discount should not be deducted.

Cost of conversion

Direct costs such as direct labour, and systematic

allocation of production overhead incurred in
converting materials into finished goods.

Production overhead consists of fixed production

overheads and variable production overheads.
Fixed production overheads:

Fixed production overheads are those indirect costs

of production that remain constant irrespective of
the volume of production.

Examples :Depreciation and maintenance of factory

buildings and equipment, cost of factory
management and administration etc.
Variable production overhead:

Indirect cost of production that vary directly with

the volume of production.

Examples are indirect material and indirect labour.

Other Cost

Other cost to be included in the cost of inventory

are those which are incurred in bringing the
inventories to their present location and condition.

Eg: inward transport and storage prior to

completion of production and specific design work
required for a special client.
Cost which are excluded

(a) Abnormal wastage of material, labour and

overhead.
(b) Storage cost, if they are not necessary prior to a
further production process.
(c) Administrative overhead
(d) Selling cost
(e)Interest cost when inventories are purchased on
deferred payment basis
Q.1.F Ltd, manufactures toys. It has incurred the
following expenses:

Cost of raw materials 600000

Depreciation of machinery 20000
Rebate on purchase 30000
Wages 110000
Electricity charges (factory) 16500
Factory supervision charges 10500

Calculate cost of purchase and cost of conversion

Cost of raw material 600000
Less: Rebate 30000
Cost of purchase 570000

Wages 110000
Depreciation on machinery 20000
Factory electricity charges 16500
Factory supervision charges 10500
Cost of conversion 157000
Q.2.How will you value the inventory per kg. of
finished goods which consisted of:

Material cost: 100 per kg

Direct labour cost: 20 per kg
Direct variable production OH: 10 per kg

Fixed production charges for the year on normal

capacity of 10000 kgs. Rs. 100000. At the year end,
2000 kg. of finished goods are in stock.
The allocation of fixed production overheads is
based on the normal capacity of the production
facilities, thus cost per kg. of finished goods may be
calculated as follows:

Material cost 100

Direct labour cost 20
Direct variable production overhead 10
Fixed production overhead 10

Thus, the value of 2000 kgs. of finished goods stock

at the year end will be Rs. 280000 (2000x140).
Cost of Inventories of a Service Provider

Measure them at the costs of their production.

These costs consist primarily of the labour and

other costs of personnel directly engaged in
providing the service, including supervisory
personnel, and attributable overheads.

The cost of inventories of a service provider does

not include profit margins or non-attributable
overheads that are often factored into prices
charged by service providers.
Net Realizable Value

Estimation of net realizable value is necessary in

the valuation of inventories.

Net realizable value is the estimated selling price in

the ordinary course of business, less the estimated
cost of completion and the estimated costs
necessary to make the sale.
Written Down of Inventories

The general rule is that inventories should not be carried in

excess of amounts expected to be realized from their sale
or use.

In some situations, NRV is likely to be less than cost.

Following are the situations

1)An increase in cost

2) Fall in selling price
3) Physical deterioration in the condition of inventory
4) Obsolescence
5) Errors in production or purchasing
Recognition as an Expense

The following treatment is required when inventories are

sold:

(a)The carrying amount of the inventory is recognized as

an expense in the period in which the related revenue is
recognized.
(b) The amount of any write down of inventories to its net
realizable value and all losses of inventories are recognized
as an expense in the period the write down or loss occurs
(c) If an inventory item which was written down previously,
remains unsold and its NRV has subsequently increased,
then in such a case, the previous write down should
reversed and the inventory should be carried at cost.
(d) Some inventories may be allocated or transferred to
other assets account.
Presentation and Disclosure

The financial statements should disclose the following in

respect of inventories

(a) Accounting policies adopted for measuring inventories

and cost formula used.
(b) Total carrying amount of inventories and amount per
category.
(c) Amount of inventory recognized as an expense during
the period
(d) Amount of inventory carried at fair value less costs to
sell.
Presentation and Disclosure

(e) Circumstances led to the reversal of a written down.

(f) Inventory pledged as security for liabilities.
(g) The amount of any written down of inventories
recognized as an expense in the period.
(h)The amount of any reversal of any written down that is
recognized in the period.
The closing inventory at cost of a company amounted to Rs. 2,84,700. The
following items were included at cost in the total:

(a) 400 coats, which had cost Rs. 80 each and normally sold for Rs. 150 each.
Owing to a defect in manufacture, they were all sold after the balance sheet
date at 50% of their normal price. Selling expenses amounted to 5% of the
proceeds.

(b) 800 skirts, which had cost Rs. 20 each. These too were found to be
defective. Remedial work in April cost Rs. 5 per skirt, and selling expenses for
the batch totaled Rs. 800. They were sold for Rs. 28 each. What should the
inventory value be according to Ind AS 2 after considering the above items?
On 1.6.2018, X Ltd. Purchases raw material from
one of its regular supplier at Rs. 60 lakhs. As per
terms of the contract, the entity would pay the
amount after 2 years. Assume Incremental
borrowing rate of X Ltd. is 11%.

1.Find out purchase price applying Ind AS 2?

2. How should the difference be accounted for?

Cost of Inventories of a Service Provider

Measure them at the costs of their production.

These costs consist primarily of the labour and

other costs of personnel directly engaged in
providing the service, including supervisory
personnel, and attributable overheads.

The cost of inventories of a service provider does

not include profit margins or non-attributable
overheads that are often factored into prices
charged by service providers.
 INCOME TAX – (Ind AS 12)

Objectives
Calculate taxes under Ind AS 12

• Describe the recognition criteria for deferred tax

liabilities and assets
• Explain the deferred tax effects on business
combinations.
• Detail the recognition of deferred tax assets arising
from unused tax
• Detail the recognition of deferred tax assets arising
from unused tax losses or credits.
• Detail presentation and disclosure requirements of
income taxes
 INCOME TAX – (Ind AS 12)

Scope
Applied to all income taxes- domestic , foreign and
withholding taxes as well as the income tax consequences
of dividend payments.

Ind AS doesn’t apply to

Accounting for Government grants
Investment tax credits

Applies to temporary differences that may arise from such

grants or investment tax credits.
1. Accounting Profit – Profit or loss for a period per the
books of account.

2. Taxable Profit – The profit (loss) for a period, determined

in accordance with the rules established by the taxation
authorities, upon which income taxes are payable
(recoverable)

3. Tax expense – The aggregate amount included in the

determination of profit or loss for the period in respect of
current tax and deferred tax
4. Current tax – The amount of income taxes payable
(recoverable) in respect of the taxable profit (tax loss) for a
period. The amount of income taxes payable (recoverable)
in respect of the taxable profit (tax loss) for a period. If the
income is positive we have to pay taxes. But if the entity
incurs a loss then taxes are c/f in India.

5. Tax base of asset/liability: It is the amount attributable to

that asset or liability for tax purposes.

6. Carrying amount of asset / liability: It is the amount

attributable to that asset or liability for accounting
purposes.
7. Deductible temporary differences: Carry forward of
unused tax losses and credits. IT gives rise to the recovery
of tax if the asset / liability is settled. à it gives rise to DTA

8. Taxable temporary differences: It results in the payment

of tax when the carrying amount of the asset or liability is
settled à it gives rise to DTL

9. Deferred Tax Assets (DTA): The amounts of income taxes

recoverable in future periods. It is the tax effect on
Deductible temporary difference.

10. Deferred Tax Liabilities (DTL):The amounts of income

taxes payable in future periods. It is the tax effect on
Taxable temporary difference.
Current tax

The amount of income taxes payable or recoverable in

respect of tax profit or tax loss for a period.

Recognition of current tax liabilities and assets:

Unpaid tax in respect of current or prior periods recognized

as liability.

If tax paid in current or prior periods is less than the

amount due
recognized as liability(CURRENT TAX LIABILITY).

If tax paid in current or prior periods exceeds the amount

due
recognized as an asset(CURRENT TAX ASSET).
Recognition of Current tax

• Current tax expense or income item should be

recognized in the income statement.
• A current tax liability should be recognized to the
extent that amounts owing are unpaid to tax
authorities(not being settled).
• A current tax asset should be recognized to the
extent that the amount already paid exceed the
amount due.

Measurement of Current tax

Current tax liabilities and assets are measured at the

amount expected to be paid to or recovered from the
taxation authorities.
Q. In 2022 A ltd had a taxable profit Rs 2,20,000.In
the PY income tax on profits had been estimated as
Rs 60,000.Any under or over payments are not
settled until the following year’s tax payment is
due.

What would be the tax payable and charge for 2022

if PY tax due was subsequently agreed with tax
authorities as
70,000
50,000

Assume 30% tax rate. Calculate tax liability.

Tax base

The amount attributed to that asset or liability for tax

purpose.

Q.1. A machine’s cost is Rs 100.BV of machine is Rs

80(cost of Rs 100 and accumulated depn Rs 20).For tax
purpose depn of Rs 30 has already been deducted in the
current and prior periods and the remaining carrying
amount of Rs 70 will be deductible in future periods,either
as depn or through a deduction on disposal.What is the tax
base of the machine?

Q.2. Interest receivable has a carrying amount of Rs

100.The related interest revenue will be taxed on a cash
basis. What is the tax bases of the interest received?
Q.3. Current liabilities include accrued expenses with a
carrying amount of Rs 100.The related expenses will be
deducted for tax

Q.4. Interest receivable has a carrying amount of Rs

100.The related interest revenue will be taxed on a cash
basis. What is the tax bases of the interest received?
Permanent Differences

Occurs when certain items of revenue or expenses are

excluded from the computation of taxable profits.

Eg: entertainment expenses, Donation under 80G

Temporary Differences

Carrying amount differs from tax base

Deductible Temporary Differences

Deductible in determining taxable profit or loss.

Q. An entity acquired plant and equipment for ₹ 10,00,000
on 1/4/2015. The asset is depreciated at 30% a year on the
straight-line basis, and local tax legislation permits the
management to depreciate the asset at 25% a year for tax
purposes.

At the end of March 2017 the asset was tested for

impairment and the recoverable amount estimated to be ₹
3,00,000.
Calculate the following for each of the
years:31/3/2016,31/3/2017:

1. Carrying amount of the asset

2. Tax base of the asset
3. Taxable temporary difference (TTD)
4. Deductible temporary difference (DTD)
5. DTA / DTL Assuming tax rate of 30%.
Example
An entity has acquired an asset for 10,000. The depreciation rate as per
income tax is 40% on WDV basis. In books of account, entity claims
depreciation on equivalent SLM basis of 16.21%. The entity has accounting
and taxable profits of 20,000 from year 1 to year 4, inclusive, before any
allowance of depreciation in either case.
Assume the tax rate is 30%.
Find out the temporary differences and DTA or DTL
Solution

Year 1 2 3 4
Cost of the asset 10,000 10,000 10,000 10,000
Depreciation rate – WDV 40% 40% 40% 40%
Depreciation amount – WDV 4,000 2,400 1,440 864
Taxable profits before depreciation 20,000 20,000 20,000 20,000
Less: Depreciation (4,000) (2,400) (1,440) (864)
Taxable profits after depreciation 16,000 17,600 18,560 19,136
Tax rate 30% 30% 30% 30%
Tax amount 4,800 5,280 5,568 5,741
Solution
However, in the books of accounts, the situation will be as under:
Year 1 2 3 4
(a) Cost of the asset 10,000 10,000 10,000 10,000
(b) Depreciation rate – SLM 16.21% 16.21% 16.21% 16.21%
(c) Depreciation amount – SLM 1,621 1,621 1,621 1,621
(d) Accounting profits before depreciation 20,000 20,000 20,000 20,000

(e) Less: Depreciation (1,621) (1,621) (1,621) (1,621)

(f) Accounting profits after depreciation 18,379 18,379 18,379 18,379
(g) Tax amount – as above 4,800 5,280 5,568 5,741
(h) Effective tax rate=(g)/(f) 26.12% 28.73% 30.30% 31.24%
(i) Tax @ 30% tax rate {30%*(f)} 5,514 5,514 5,514 5,514
ACCOUNTING FOR TANGIBLE NON-CURRENT
ASSETS – (Ind AS 16)

Scope of Ind AS- 16

Property, plant, and equipment are tangible
assets.

These are not meant for sale , expected to be

used for more than one period.

These include land , building , plant and

machinery ,
vehicles,computers,equipment,furniture,etc
ACCOUNTING FOR TANGIBLE NON-CURRENT
ASSETS – (Ind AS 16)

The requirements of Ind AS 16 are applied to accounting

for all property, plant, and equipment unless another
Standard permits otherwise, except:

▸ Property, plant, and equipment classified as held for

sale in accordance with Ind AS-105

▸ Biological assets relating to agricultural activity

under Ind AS – 41 other than Bearer Plants
▸ Exploration and evaluation assets (As per Ind AS
106 Exploration for and Evaluation of Mineral
Resources)

▸ Mineral rights, mineral reserves, and similar non-

regenerative resources
Definition of PPE

The tangible assets held for use in the

production or supply of goods or services
, or for rental to others , or for
administrative purpose and expected to
use for more than one accounting year.
Measurement for Recognition

Cost in case of purchase in consideration

of cash

An item of property, plant, and

equipment that satisfies the recognition
criteria should be recognized initially at
its cost.
The Standard specifies that cost
comprises:

• Purchase price, including import duties,

non-refundable purchase taxes, less trade
discounts and rebates.

• Costs directly attributable to bringing the

asset to the location and condition
necessary for it to be used in a manner
intended by the entity

• Initial estimates of dismantling, removing,

and site restoration costs.
Examples of directly attributable costs include:

• Employee benefits of those involved in the

construction or acquisition of an asset
• Cost of site preparation
• Initial delivery and handling costs
• Installation and assembly costs
• Costs of testing, less the net proceeds from
the sale of any product arising from test
production (Trial run).
• Borrowing costs to the extent permitted by
Ind AS 23, Borrowing Costs
• Professional fees(architects , engineers)
• The cost of dismantling and removing the
asset and restoring the site on which it is
located.
Cost of asset should include the present value
of dismantling cost
PV = 1/(1+r)^n
r= rate of interest
n= number of years after which the asset is
dismantled

All these costs can be capitalised and included

in the cost of PPE
Ind AS 16 doesn’t apply to

 PPE which are classified as held for sale.

 Biological assets related to agricultural
activities.
 Exploration and evaluation assets
 Mineral rights and reserves such as oil ,
natural gas , non-regenerative
resources
Cost that are not included in the cost of PPE:

• Cost of opening a new facility

• New cost of introducing a new product or
service(advertising and promotional
activities)
• Cost of conducting business in new location
• Administration and general OH
• Costs incurred after an asset is ready for use
but has not yet been used partially or fully
• Initial operating losses
• Relocation or reorganisation costs
• Cost of any abnormal waste related to
materials,labour,ets in case of self
constructed asset
X ltd incurred the following costs in connection with the purchase
of a plant:

Cost of plant 5,00,000

Rebate allowed 2%
Excise duty on purchase(the company can
claim a GST credit of Rs 20,000 on excise duty) 50,000
Transportation costs(delivery to X ltd) 30,000
Technical staff provided by the vendor
for commencing the operation of the plant 40,000
Cost of preparing the site for plant installation 10,000
Cost of promotional activities 18,000

During the installation process trial run was done and sample quantity of
finished goods was manufactured during the period. The cost of
production was Rs 75,000.These samples were sold for Rs 20,000.Compute
Measurement of Elements of cost

Cost: the amount of cash or cash equivalents

paid to acquire an asset at the time of its
acquisition or construction.

When the payment is deferred: if payment is

deferred beyond the credit terms , the difference
between the cash price equivalent and the total
payment is recognised as interest over the
period of credit.
Measurement of Elements of cost

When asset is exchanged: the cost will be

measured at fair value of the asset given up if,

(i)The exchange transaction has commercial

substance

(ii)The fair value of the asset received and asset

given up is reliably measurable.(or measured at
carrying cost)
Self Constructed Asset

Cost is same as the cost of constructing an asset

for sale.

Internal profits are eliminated.

Cost of abnormal amount of wasted material,

labour or other resources not included in the cost
of asset.
Self Constructed Asset
Z ltd is constructing a fixed asset . The cost of project is
given as:

Materials
7,00,000

Direct expenses 1,00,000

Total wages of the company during the year 1,20,000
(1/12 is chargeable to project)
Total administrative expenses of the company during the
year Rs 8,00,000(5% is chargeable to the project)
Depreciation on asset used 12,000
Subsequent Measurement
Two valuation models:

1.Cost Model

 An item of PPE is carried at its cost less any

accumulated depreciation and any impairment loss.
 Entities in India usually use the cost model but
revalue items of PPE from time to time.
Subsequent Measurement
1.Revaluation Model

 PPE carried at an amount i.e. the fair value at the

date of revaluation less any subsequent accumulated
depreciation and subsequent accumulated
impairment losses.

 Fair value - accumulated depreciation -

subsequent accumulated impairment losses
1.Revaluation Model

a) Under the revaluation model , revaluations

should be carried out regularly so that the
carrying amount of an asset doesn’t differ
materially from its fair value in the BS.

b) If an item is revalued the entire class of assets

to which that asset belongs should be revalued.

c) Revalued assets are depreciated in the same

way as under the cost model.
Accounting treatment for Revaluation of assets

Upward Revaluation(Revaluation Increase)

Asset’s carrying amount increased Increased

amount is recognised in OTHER COMPREHENSIVE
INCOME

Recorded under the head REVALUATION

SURPLUS(Equity side)
Q.1. A factory having the carrying value of Rs 20
lakhs has been revalued at Rs 23 lakhs. Write the
journal entry.

Q.2. A factory has a carrying amount of Rs 20

lakhs.Two years ago the company reduced the
carrying value from Rs 22 lakhs. This was taken as
an expense in P&L A/c. In the current year the
factory is now worth Rs 23 lakhs.

Show the accounting treatment for revaluation.

Accounting treatment for Revaluation of assets

Downward Revaluation(Revaluation Decrease)

Asset’s carrying amount decreased decreased

amount is recognised in Profit & Loss
Statement(as expense)
Accounting treatment for Disposal of a Revalued
asset

At the time of disposal , any revaluation surplus(included

in Equity) may be transferred to Retained earnings.

Q.1. A factory had a cost of 28 lakhs.It has been revalued

at Rs 30 lakhs.Later it is sold for Rs 34 lakhs.What is the
accounting treatment?

(Revaluation surplus 2lacs

Cash 34lacs

PL 4lacs)
Q.2. A plant had a cost of 56 lakhs.It has been revalued
at Rs 64 lakhs.Later it is sold for Rs 60 lakhs.What is the
accounting treatment?
Depreciation
Allocated over asset’s useful life.

Systematic allocation of the depreciable amount of an

asset over its useful life.
Depreciation
Allocated over asset’s useful life.

Systematic allocation of the depreciable amount of an

asset over its useful life.

Depreciation= Cost of asset - Residual

value/Salvage value
Depreciation
Notes:

• The residual value and the useful life of an asset

should be reviewed at least at the end of each
accounting period.

• The useful life of an asset is defined as the period

over which an asset is expected to be available for
use by entity or the number of production or similar
units expected to be obtained from the asset by an
Depreciation
Notes:

• Depreciation begins when the asset is available for

use and continues until the asset is derecognised,
even if it is idle.

• Methods: Straight line , Diminishing method and units

of production.

• Depreciation should be charged to the statement of

P&L(as an expense) unless it is included in the
carrying amount of another asset.
Depreciation
Q.1.Vishal ltd purchased a plant for Rs 200 lakhs with a
view to set up a new factory in a backward area.The
company is entitled to GST of 2% along with the Govt.has
agreed to grant 25% subsidy for backward area
development.Estimated residual value at the end of the
useful life is Rs 2 lakhs.Calculate depreciable amount of
the plant.
Depreciation

Purchase price 200 lakhs

Less: GST credit 2% 4 lakhs

196 lakhs

Less: Subsidy 25% 49 lakhs

Less:Estimated residual value 2 lakhs

Depreciable amount 145 lakhs

Depreciation
Q.2. K ltd has an item of land carried in its books at Rs
18,00,000.Two years ago, a slump in land values led the
company to reduce the carrying value from Rs 22,00,000.

This was taken as an expense in P&L.There has been a

surge in land prices in the current year,the land is now
worth Rs 31,00,000.

How do you account for the revaluation in the current

year?
Depreciation

Depreciation 31,00,000-18,00,000=13,00,000
Depreciation of Revalued Assets

Surplus amount = Depreciation on revalued

amount-Depreciation on original cost

Amount is transferred to Retained Earnings

Depreciation of Revalued Assets
Q.2. S ltd purchased an asset of Rs 60,000 at the
beginning of 2020.It had a useful life of 5years.On 1st
January 2022,the asset was revalued to Rs 75,000.The
expected useful life has remained unchanged.Show how
revaluation is accounted.Also state the treatment for
depreciation from 2022 onwards.
BORROWING COSTS (Ind AS 23)
Enterprises may borrow funds to acquire,build, and install
plant,machinery and other assets.These assets may take
time(more than 1 accounting period) to make them usable or
saleable.

Thus enterprises incur interest to acquire and build these

assets.The interest is the borrowing costs on funds needed to
acquire and build assets.

The Ind AS 23 deals with such costs of borrowing.

BORROWING COSTS (Ind AS 23)
Borrowing costs are interest and other costs incurred by an
entity in connection with the borrowing of funds.

Borrowing costs may include:-

• Interest expense calculated using the effective interest

method as described in IND AS 109 Financial Instruments

• Finance charges in respect of finance leases

• Exchange differences arising from foreign currency

borrowings to the extent that they are regarded as an
adjustment to interest costs
BORROWING COSTS (Ind AS 23)
Qualifying Assets:

A qualifying asset is an asset that necessarily takes a

substantial period of time to get ready for its intended use or
sale

Examples include:- - Inventories (that are not produced over a

short period of time) - Manufacturing plants - Power generation
facilities - Intangible assets - Investment properties
BORROWING COSTS (Ind AS 23)
Accounting treatment

1. Borrowing costs to be capitalised

Directly attributable to the acquisition,construction or production

of a qualifying asset should be capitalized (should be treated as
part of cost of the asset).
BORROWING COSTS (Ind AS 23)

A ltd is building a sports stadium.It issues a bond ,

secured on the stadium,to,finance 40% of the cost of
stadium.The funds are used exclusively in the
construction of the stadium.Annual interest costs are Rs
75 lakhs.State whether the interest costs are eligible
borrowing costs.
BORROWING COSTS (Ind AS 23)
Accounting treatment

2. Borrowing costs to be charged as an expense

Other borrowing costs are recognised as expenses and written

off in the Statement of P&L.
BORROWING COSTS (Ind AS 23)
On 30 April 2020 A ltd obtained a loan from SBI for Rs 50 lakhs
to be utilised as under:

Construction of shed Rs 20 lakhs

Purchase of machinery Rs 15 lakhs

Working capital Rs 10 lakhs

Advance for purchase of truck Rs 5 lakhs

In March 2021 construction of shed was completed and

machinery installed.Delivery of truck was not received.The total
interest charged by the Bank for the year ending 31 March 2021
was Rs 9 lakhs.Show the treatment.
BORROWING COSTS (Ind AS 23)
BORROWING COSTS (Ind AS 23)
Measurement

Specific borrowings:

Borrows funds specifically for the purpose of obtaining a

qualifying asset , the actual borrowing costs incurred is
capitalised.

Any investment income on the temporary investment of those

borrowings should be deducted from the borrowing cost.
BORROWING COSTS (Ind AS 23)
Q. On 1st April 2020,A ltd borrowed Rs 30 lakhs to finance
the production of assets A and B,both of which were
expected to take a year to build.Production started
during 2020-2021.The loan facility was drawn on 1 st April
2019, and utilised as follows:

1st April 2020 Asset A-5lakhs Asset B-

10 lakhs

1st October 2020 Asset A-5lakhs Asset B-

10 lakhs

The remaining funds invested temporarily.Interest on

loan 9% and the company can invest surplus fund at 7% .
BORROWING COSTS (Ind AS 23)
Measurement

General borrowings:

Borrows funds generally and uses them for the purpose of

obtaining a qualifying asset , the amount of borrowing costs to
be capitalised should be determined by applying the weighted
average of the borrowing costs to the expenditure on that asset.
BORROWING COSTS (Ind AS 23)
Measurement

General borrowings:

Borrowing cost to be capitalised= Average expenditure on the

Asset* Capitalisation rate

Capitalisation rate=Weighted Average borrowing cost *100

Weighted average borrowing

Jain ltd had the following loans in place at the beginning
and end of the financial year 2019-20.
April 1 2019 April 1 2020

10% Bank loan repayable in 2022 12,00,000

12,00,000

9.5% Bank loan repayable in 2023 8,00,000

8,00,000

8.9% Debenture repayable in 2021

15,00,000

The 8.9% Debentures was issued to fund the

construction of a qualifying asset,construction of which
began 0n 1st January 2020.
BORROWING COSTS (Ind AS 23)

Excess of the carrying amount

The amount capitalised during a period should not

exceed the amount of borrowing costs incurred
during that period.

If the carrying value of an asset(inclusive of

capitalised interest)exceeds the net realisable
value,the asset should be written down to the NRV.
BORROWING COSTS (Ind AS 23)

Accrual basis

Borrowing costs should be calculated on a accrual

basis(not on cash basis).
BORROWING COSTS (Ind AS 23)
Q.1.A ltd has a machine in its factory.If it is sold it would
receive Rs 50,000.It has calculated that it is worth Rs
60,000(value in use)to keep the machine in the business.

a)What is the recoverable amount of the machine?

b)Assume that its carrying cost for the period is Rs

57,000 and Rs 10,000 of the borrowing costs for the
period relate to this machine.Determine the amount to
be capitalised.
PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS(Ind AS 37)
Scope

Applied to all entities in accounting for provisions,contingent

liabilities and contingent assets except:

• Financial instruments carried at fair value (Ind AS 39)

• Executory contracts

• Insurance contracts with policy holders (Ind AS 104)

• Events or transactions covered by another Ind AS

PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS(Ind AS 37)
Definition of Provision

A provision is a liability of uncertain timing or amount.

Eg: Income tax liablility,product warranty,environment

restoration,post employment employee benefits,disputed claim
by customers,disputed claim by the revenue department of the
government.

Here the time is uncertain or the amount is uncertain or both.

PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS(Ind AS 37)
Relationship between Provisions and Contingent
liabilities

All provisions are contingent liabilities as they are uncertain in

timing or amount.

Contingent liabilities- are not recognised in the financial

statements because their existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future
events.

Provisions are recognised as liabilities.

Discounting long term provisions:

Site restoration costs to be capitalized to the cost

of an asset. It is incurred while the asset is
installed.

A provision at present value is required for the site

restoration cost on the other hand. Even other
provisions are required to be discounted.
Q.1. Workers of a company filed a suit against the accident which
recently took place in the premises of the company. One fellow
worker lost a hand in the accident. The company accepted the
obligation but the workers demanded a huge amount hence the case
has been filed in the court.

The company is ready to go to the Supreme Court for exact

compensation. The experts regarding the case suggested a
compensation of Rs. 10,00,000 to be provided.

It is further estimated that SC will dispose off the case over 6 years.
Risk free rate is 6%. Compute the provision for the first year.
Constructive obligation

In accordance with Ind AS – 37, a constructive

obligation derives from an entity’s actions. It
includes the valid expectation on the part of other
parties, past practice, announcements etc.

Ultimately provision is required not only for legal

obligation but also for constructive obligation.
Where else AS-29 considers legal obligation. Even
though it does not specifically excludes
constructive obligation.
Workers of company X Ltd positively expects bonus in the month of November
as the company is highly profit making company.

The company has to make a provision even if no legal obligation arises. This is
constructive obligation.

CSR is not a legal obligation for those companies not falling under the CSR
provisions. Whether it is a constructive obligation depends.
INTANGIBLE ASSETS – IND AS 38

Definition Intangible assets - Identifiable, non-

monetary assets, without physical substance.

Assets - resources, controlled from past events and

with future economic benefits expected.

Research – Original and planned investigation

undertaken with the prospect of gaining new
specific or technical knowledge and understanding.
INTANGIBLE ASSETS – IND AS 38

Development – The application of research findings

or other knowledge to a plan or design for the
production of new or substantially improved
materials, devices, products, processes, systems or
services before the start of commercial production
or use.
INTANGIBLE ASSETS – IND AS 38

Identifiable if either:

• Capable of being separated and sold, licensed,

rented, transferred, exchanged or rented
separately or

• Arise from contractual or other legal rights

INTANGIBLE ASSETS – IND AS 38

Recognition and Measurement

Separate Acquisition:

• Probable – expected future economic benefits

will flow to the entity; and

• Cost can be reliably measured - Recognition at

cost
INTANGIBLE ASSETS – IND AS 38

Acquired Business Combination:

Probable – always met if fair value (FV) can be

determined; FV reflects expectation of future
economic benefits

Cost – FV at acquisition date - Acquirer recognises

it separately from goodwill - Irrespective of whether
the acquiree had recognised it before acquisition
INTANGIBLE ASSETS – IND AS 38

Internally Generated:

 Research phase – expense costs as incurred

INTANGIBLE ASSETS – IND AS 38

Development phase – Capitalise if all criteria are

met:

- Technical feasibility of completion of intangible

asset - Intention to complete
- Ability to use or sell the intangible asset
- Adequate technical, financial and other
resources to complete
- Probable future economic benefits - Expenditure
measured reliably
INTANGIBLE ASSETS – IND AS 38
Exchange of Assets:

- Measure acquired asset at its fair value

- If not possible, at book value of asset given up
INTANGIBLE ASSETS – IND AS 38
Internally Generated Goodwill:

Internally generated goodwill is never recognised

as it is not an identifiable resource that can be
measured reliably.

Examples include: -
Internally generated brands
Customer lists
INTANGIBLE ASSETS – IND AS 38
Government Grant:

Initially recognised at:

- Fair value
- Nominal amount plus directly attributable
expenses for preparing the asset for its
intended use

- Examples include: - License to operate national

lottery - Radio station
INTANGIBLE ASSETS – IND AS 38
Subsequent Measurement (After Recognition)

l. Finite Useful Life – Choose either amortized cost

or revaluation model:

II. Indefinite useful lives  No foreseeable limit to

future expected economic benefits  Not amortised
 Test for impairment annually or when an
indication exists  Review annually if events and
circumstances still support indefinite useful life  If
no longer indefinite change to finite useful life
INTANGIBLE ASSETS – IND AS 38

Amortised Cost Model

 Determine useful life

 Residual value – assumed zero unless active

market exists or a commitment by third party to
purchase the intangible asset exists
INTANGIBLE ASSETS – IND AS 38

 Amortisation method

- Review above annually

- Amortisation begins when available for use -
Rebuttable presumption that revenue based
amortisation is inappropriate
- Should reflect the pattern in which future
economic benefits are expected to be
consumed
- Consistent from period to period
INTANGIBLE ASSETS – IND AS 38

Revaluation Model

 Fair value at revaluation date

 Fair value determined by referring to active

market

 If no active market, use cost model

 Revaluation done regularly

INTANGIBLE ASSETS – IND AS 38

Revaluation Model
The net carrying amount of the asset is adjusted to
the revalued amount and

- The gross carrying amount is adjusted in a

manner consistent with the net carrying amount.
Accumulated amortisation is adjusted to equal the
difference between the gross and net carrying
amount; or
INTANGIBLE ASSETS – IND AS 38

Revaluation Model

- Accumulated amortisation is eliminated against

the gross carrying amount.

- Credit to revaluation surplus net of Deferred Tax

- Transfer to or from retained earnings on

realisation
INTANGIBLE ASSETS – IND AS 38
Disclosure

Entity shall disclose for each class of intangible

assets; distinguishing between internally generated
intangible assets and other intangible assets:

 Whether useful lives are indefinite or finite

 Useful life, amortisation rate and amortisation

method for assets having finite useful lives
INTANGIBLE ASSETS – IND AS 38
Disclosure
 The gross carrying amount of intangible asset
and any accumulated amortisation
 Any amortisation of intangible asset included in
statement of profit and loss
 Reconciliation of the carrying amount at the
beginning and end of period showing additions,
assets classified as sale, increase / decrease
from revaluation, amortisation, any changes in
carrying value
P Ltd. acquired Q Ltd. on April 30, 2019. The
purchase consideration is Rs. 50,00,000. The fair
value of the tangible assets is Rs. 45,00,000. The
company estimates the fair value of "In process
research projects" at Rs. 10,00,000.

No other Intangible asset is acquired by P Ltd. in

the transaction. Further, cost incurred by P Ltd. in
relation to that research project is as follows: (a)
Rs. 5,00,000 - as research expenses (b) Rs.
2,00,000 - to establish technological feasibility (c)
Rs. 7,00,000 - for further development cost after
technological feasibility is established.

At what amount the intangible asset should be

P Ltd. should initially recognise the acquired "In
house research project'' at its fair value i.e., Rs.
10,00,000.

Research cost of Rs. 5,00,000 and cost of Rs.

2,00,000 for establishing technical feasibility
should be charged to profit & loss.

Costs incurred from the point of technological

feasibility/asset recognition criteria until the time
when development costs are incurred are
capitalized.

The intangible asset should be recognized at Rs.

X Ltd. purchased a standardised finance software
at a list price of Rs. 30,00,000 and paid Rs. 50,000
towards purchase tax which is non refundable.

In addition to this, the entity was granted a trade

discount of 5% on the initial list price.

X Ltd. incurred cost of Rs. 7,00,000 towards

customization of the software for its intended use.
X Ltd. purchased a 5 year maintenance contract
with the vendor company of Rs. 2,00,000.

At what cost the intangible asset will be

recognized?
In accordance with Ind AS 38, the cost of a
separately acquired intangible asset is its
purchases price and non refundable purchase
taxes, after deducting trade discounts and rebates
and any directly attributable cost of preparing the
asset for its intended use.