CA-Final

New Syllabus

Module-5

The Handwritten Notes

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

CA. PARVEEN JINDAL

As Per ICAI
Syllabus
Applicable
From May 2021
Exam Onwards
 Module-5
Index
Chapter
Particulars Page Range
No.
1 FINANCIAL INSTRUMENTS 1-63
Lecture-Part-I 1
Lecture-Part-II 2-3
Lecture-Part-III 4-6
Lecture-Part-IV 7-9
Lecture-Part-V 10-11
Lecture-Part-VI 12-19
Lecture-Part-VII 20-25
Lecture-Part-VIII 26-33
Lecture-Part-IX 34-38
Lecture-Part-X 39-43
Lecture-Part-XI 44-46
Lecture-Part-XII 47-50
Lecture-Part-XIII 51-55
Lecture-Part-XIV 56-59
Lecture-Part-XV 60-61
Additional Notes For Students 62-63

Thank You
Best of Luck…..!!!!!!
CA. Parveen Jindal
CA-Final Financial Instrument CA Parveen Jindal Classes

Chapter: Financial Instruments

(V.V.Imp)
*Part I*

Ind AS 32 = Presentation (Classification) -> IAS 32

Ind AS 109 = Recognition & Measurement (Accounting) -> IFRS 9
Ind AS 107 = Disclosures -> IFRS 7

Unit I: Introduction Financial Instruments (Ind AS 32)

Concept 1: Meaning of Financial Instruments

As per the provisions of Ind AS 32, Financial Instrument is a contract between 2

parties where It can be a Financial Asset for one party & Financial Liability or Equity
Instrument for other party.

Concept 2: Meaning of Financial Assets (Imp)

As per the provisions of Ind AS-32, Financial Asset means:-

A) Contract to Receive Cash: Trade Receivables, Investment in Redeemable
Debentures/Preference shares, Loans Receivables,
Deposits with Bank for more than 1 year.
OR
B) Cash: Cash in Hand, Balances with Banks, Cash Equivalent(90days) etc.
OR
C) Equity Instrument: Investment in Equity Shares
(i.e; Equity holders have contract to receive Cash/Shares in
Residual Interest of Company on Pro rata basis at the time
of Liquidation of Company.)
OR
D) Contract to receive other Financial Asset:
(i) Debtors= Bills Receivables
(ii) Investment in Convertible Debenture/Pref.= Equity Shares
OR
E) Contract to Exchange Financial Asset/Financial Liabilities under Favourable
conditions:
[Options, futures or forwards which are in profit at Balance Sheet date]

Concept 3: Meaning of Financial Liabilities (Imp)

As per the Provisions of Ind AS-32, Financial Liabilities means:

A) Obligation to deliver Cash: Trade Payables, Borrowings, Redeemable Debentures/
Pref. Shares Capital, Deposits Accepted but Refundable,
overdrafts etc.
OR
B) Obligation to deliver any other Financial Assets:
(i) Endorsement* to Bills Receivables to Creditors, Assignment of Trade

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CA-Final Financial Instrument CA Parveen Jindal Classes

Receivables to Trade Payables etc.

*Payment of liability by transfer of Non-Financial Assets shall not be considered
under this category. i.e; If payment of payables/Debentures/Pref. Shares is to be
made by transferring Building then these payables are not Financial Liability.
OR
C) Obligation to Exchange Financial Asset/Financial Liabities in an Unfavourable
Situation
i.e; i) Options, futures or forwards if all these contracts are in loss at Balance Sheet
date
ii) Re-structuring of Loans at higher amount etc.
OR
D) If settlement of Derivatives/Non-Derivatives is to be made by issuing Entity’s
own equity shares, but no. of shares are VARIABLE
i.e; Convertible Debentures/Pref. Shares/Payables which are to be settled by issue of
own equity shares

Concept 4: Meaning of Equity Instruments

As per the Provisions of Ind AS-32, Equity Instruments means:

A) No Obligation to deliver Cash, other Financial Assets: Irredeemable Pref.Share Cap,
Perpetual Debts etc.
OR
B) No Obligation to exchange Financial Assets/Financial Liability in unfavourable
situation.
OR
C) FIXED No. of Shares shall be issued in settlement

Q.1, 2, 3, 4, 5, 6, 8 & 12
Solution: Discussed in Lecture

*Part II*

Concept 5: Puttable Instruments (V.V.Imp)

As per the provisions of Ind AS-32, Puttable Instrument should always be considered
as “Financial Liability” because holder of Puttable Instrument can throw back it to
company at any time & It will be the obligation of Company to return money to its
holder. It means that Holder of Puttable Instrument has contractual Right to
receive cash by throwing back Puttable Instrument to the company & company has
contractual obligation to deliver cash to holder if the holder surrenders the Puttable
Instrument.

Exception:
It may be possible that classification of Puttable Instrument is required to be made
under “Equity Instruments” instead of treating it as a financial liability. There
should be the following 4 features if Puttable Instrument is classification as an
Equity Instrument:-

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Puttable Instrument

Equity Instrument

Pro-Rata: No Priority Identical Contractual

Puttable Instrument Payment to Features: obligation:
Holder will get his Puttable holder Puttable holders There should
Share in Residual will be made with have rights not be any
Interest at the time last sub-ordinated which are promise with
Of liquidation on class identical to puttable
Pro-rata basis like ordinary shares holders
An ordinary equity i.e; voting rights, regarding
shareholder dividend rights etc. payment
Other than
Pro-rata.
i.e; Redemption
In variable no.
Of shares etc.

EXCEPTION TO EXCEPTION (V.V.Imp)

If company has any other contract with Puttable Instrument holder regarding
Professional services or supply of materials at higher price than market rates then
we ill classify such Instrument as “Financial Liability” even if all features of Equity
Instruments exist.

Q.15
Solution:
Line to be added in notes:- But Class A has share in Residual Interest without any
limit due to which It should be classified as Equity Instruments.

Q.16, 26, 27, 29

Solution: Discussed in Lecture

Concept 6: Entity’s own Equity Instrument (V.V.Imp)

If company has to issue its own Equity Shares under any contract then It will be
classified as Equity Instrument or Financial Liability on the basis of following 2
different cases:

Case I: Fixed To Fixed Test

If consideration which is to be settled is fixed on contract date as well as fair value
per share is also fixed on contract date then such contract should be classified as
Equity Instrument because there will be no impact on Number of Shares due to
change in fair value of consideration or Equity Share.

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CA-Final Financial Instrument CA Parveen Jindal Classes

Fixed
No. of shares to be issued(fixed)= Payable Amount
Fair Value per Share
Fixed
Case II: If Fixed To Fixed Test fails
In case consideration or Fair value per share fluctuates according to market position
then Company will issue variable number of shares in this case. Such contract shall be
taken as “Financial Liability”
I II III
No. of shares to be issued = Payable Amount F V V
Fair Value per Share V F V

Exception to Above Rule

In case variable number of shares are issued due to time factor then It will be
consider as a case of Equity Instrument even if No. of Shares are variable.

Q.17, 18, 19, 20, 21, 22, 23, 25, 30

Solution: Discussed in Lecture

*Part III*

Concept 7: Preference Shares (Imp)

If a company issues Preference Shares then Classification of Preference Share

Capital under the heading of Financial Liability & Equity will be made on the basis of
following Rules:-

Preference Share Capital

Irredeemable Pref. Redeemable Pref.

Share Capital Share Capital

Redeemable after Redeemable at Redeemable at

A specified holder option Issuer option
period

Financial Financial Based on issuer

Liability Liability Intention

Equity or Financial
Liab.

*Preference Dividend: i) Cumulative Feature leads to Financial Liability.

ii) Non-Cumulative feature leads to Equity

Note: It may be possible that Preference Share Capital has different features of

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Financial Liability as well as Equity due to different nature of Principal & Preference
Dividend. Such type of Instrument is called Compound Financial Instrument.

Concept 8: Debentures

I) Principal Amount: If a company issues Debentures then its classification under

Financial Liability or Equity to the extent of its Principal Amount will be made in
the same way as we have discussed in case of Preference Share Capital.

II) Interest on Debentures: a) If payment of Interest is mandatory then it will be

Financial Liability.
b) If payment of Interest is not mandatory then It
will be Equity.

Note: If any debt Instrument has multiple features then It will be considered as a
Compound Financial Instrument.

Q.7, 24, 31, 32, 33

Solution: Discussed in Lecture

Q.11
Solution:
Line to be added in solution at the end- The Second Component is not a contractual
Obligation to deliver cash because Interest is paid at issuer discretion. So it should
be classified as Compound Financial Instrument.

Concept 9: PPE & Intangible Assets

As per the Provisions of Ind AS-32, Tangible & Intangible Assets shall be considered
as Non-Financial Assets because these Assets do not satisfy the conditions of
Financial Assets.

Note: If settlement of a liability is to be made by transferring Non-Financial Assets

then such liability will also be considered as Non-Financial Liability.

Q.14
Solution: Discussed in Lecture

Concept 10: Provision for Tax/Current Tax & Deferred Tax

TAX

Current Tax DTL/DTA

These are Non Financial Liabilities/Assets because these is no Contract to receive or

Pay cash with I.T.Dept.

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CA-Final Financial Instrument CA Parveen Jindal Classes

Concept 11: Prepaid Expenses/ Outstanding Expenses

Expenses

Prepaid Expenses Outstanding Expenses

Non-Financial Financial Liability

Asset

The entity will receive The entity will pay its

Goods/services in obligation in cash in
Consideration of it Future.

Concept 12: Lease Contracts

I) Lease Contract with Lessee

Lessee (Ind AS-116)

Exempted Lease Non Exempted Lease

No Asset ROU Asset Lease Liability

No Liability
Non Financial Financial Liability
Assets (Contractual
Obligation to pay
in cash)

II) Lease Contracts with Lessor

Lease

Operating Lease Finance Lease

No Receivables Receivables

Financial Asset
(Contractual right
To receive cash)

Concept 13: Some Instruments which are out of Scope of Ind AS-32, 109, 107

i) Insurance Liabilities: Ind AS-104

ii) Share Based Contracts: Ind AS-102
iii) Provisions: Ind AS-37
iv) Investments in Subsidiaries, Associates or Joint Venture: Ind AS-110,111,28

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CA-Final Financial Instrument CA Parveen Jindal Classes

*Part IV*

Unit II: Compound Financial Instrument (Imp) (4-6 Marks)

As per the provisions, It may be possible that a Financial Instrument has features
Of Financial Liability & Equity (Both). In the given case, we may need to split off such
Instrument under 2 headings at the time of Initial Recognition as follows:-
i) Liability Component
ii) Equity Component

The following 3 cases can be considered under Compound Financial Instrument:-

Case I: Irredeemable Instrument with mandatory Instrument.
Principal : Equity Interest : Financial Liability

No Obligation to deliver Obligation to deliver Cash

Cash

Case II: Redeemable Instrument with Non-Mandatory Instrument

Principal : Financial Liability Interest : Equity

Obligation to deliver No Obligation to deliver Cash

Cash

Case III: Optionally Convertible Debentures/Pref. Shares

Cash may be OR Shares may be

Given issued

Separation of Instrument under Case I

(Principal: Irredeemable)
(Interest: Mandatory)

Step I: Calculate liability Component as follows

Liability Component= Actual Interest to be paid as per contract

Market Rate of Interest

Step II:
Equity Component= Principal amount – Liability Component

Initial: Bank a/c„„„.Dr xxx Financial Liability

To CFI: Liability xxx
To CFI: Equity xxx
(Being Fund raised by irredeemable Instrument)

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Q.36 (Imp)
Solution:
Calculation of Liability & Equity Components

i) Liability Component= 12 lacs x 8% = Rs.8,00,000

12%

ii) Equity Component= Rs.12,00,000 – Rs.8,00,000 = Rs.4,00,000

Bank a/c„„„„Dr 12,00,0000

To Liability Component 8,00,000
To Equity Component 4,00,000
(Being Loan taken)

Separation of Instrument under Case II

Principal: Redeemable
Interest: At direction of Issuer

Statement showing Calculation of Liability & Equity Component

Particulars Rs.
Total Received Money from Instrument xxxxx
Present Value of Redeemable Principal (Liability) (xxxx)
Equity (Balance) xxxxx

Separation of Instrument under Case III

(Optionally convertible Debentures/Pref. Shares)
Particulars Rs.
Principal Amount ( Initially Received) xxxx
Liability Component: i) Interest x Annuity= xxxx
ii) Principal x PVF = xxxx (xxx)
P.V of maximum
Cash Outflow Equity (Balance) xxxx
Market Rate
We will ignore conversion option here

Q.37
Solution:
Calculation of Liability & Equity Components
A) Calculation of Liability Component
i) P.V. of Interest (10 lacs x 6% x 2.531[9%]) 1,51,860
ii) P.V. of Redeemable Amount at the end of 3rdyr (10lacs x 0.77) 7,72,000
9,23,860

B) Equity Component = Rs.10,00,000 – Rs.9,23,860

= Rs.76,140

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CA-Final Financial Instrument CA Parveen Jindal Classes

Q.38, 42
Solution: Homework

Q.40
Solution:
Calculation of Liability & Equity Components
A) Calculation of Liability Component
i) P.V. of Interest (30 lacs x 6% x 3.170 [10%]) 5,70,600
ii) P.V. of Principal (33lacs x 0.683) 22,53,900
28,24,500
B) Equity Component = Rs.30,00,000 – Rs.28,24,500
= Rs.1,75,500

Q.41
Solution:
Calculation of Liability & Equity Components
A) Calculation of Liability Component
i) P.V. of Interest to be paid (50,00,000 x 6% x 3.17) 9,51,000
ii) P.V. of Redeemable Portion [(50,00,000 x 50%)+10%] x 0.68 18,70,000
Liability 28,21,000

B) Equity Component = Rs.50,00,000 – Rs.28,21,000

= Rs.21,79,000

Bank a/c„„„„Dr 50,00,0000

To Convertible Debentures: Liability Component 28,21,000
To Convertible Debentures: Equity Component 21,79,000
(Being Convertible Debentures issued)

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CA-Final Financial Instrument CA Parveen Jindal Classes

*Part V*

Unit III: Classification & Measurement of Financial Assets (Ind AS-109)

Part A: Classification of Financial Assets

As per the provisions of Ind AS-109, Financial Assets can be classified under 3 main
Headings:-
Financial Assets

Debt Instrument Equity Instrument Derivative Instrument

All Receivables i.e; Invt in Equity shares Options, Futures,

Debtors, B/R, Invt in or Convertible Forwards etc.
Redeemable Bonds, Redeemable Instruments
Debentures or PSC, Fixed
Deposits, Loan Receivable or
Any other contractual right
To receive Cash

Concept 1: Debt Instrument

As per the provisions of Ind AS-109, Debt Instruments can be classified under 3
further headings as follows:-
Sub-Headings

BM I + CCFC BM II + CCFC BM III

Amortised Fair value other FVPL

Methods Comprehensive (Profit & Loss A/c)
Income (FVOCI)

Business Model I & Contractual Cash Flow Characteristics (BM I + CCFC)

If any Financial Asset is to be classified under BM I then the following conditions

Should be satisfied:-
i) The entity’s intention should be to hold such asset till its maturity & Entity will
Not sell it before its maturity.
+
ii) The Cash Flows from such asset shall include Principal & Interest (Both).
+
iii) The conditions of CCFC* should also be satisfied.

*CCFC means Interest should be Normal Interest as per Normal Lending

arrangements. If Interest covers time value of money, credit risk of Instrument
& transaction cost etc. then it will be covered as Normal Interest. In case Interest
Covers leverage** impact then we will consider such Asset under BM III.
**If Rate of Interest fluctuates due to Entity performance or It is a variable Rate
As per Market Conditions then It will be taken as Leveraged Rate.(It can be said

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That we will not apply BM I or BM II in case of leveraged Interest even if all other
conditions are satisfied.)

Exception to Condition I

If any Financial Asset can be sold under Stress scenario, to avoid Risk in decline in
Value of Principal or to Increase to return then It will still be considered under
BM I.

Business Model II & Contractual Cash Flow Characteristics (BM II + CCFC)

If any Financial Asset under Debt Investment is to be classified under BM II then

The following conditions should be satisfied:-
i) The Entity will not hold the Financial Asset till its maturity, but It will recover its
Principal by selling it & till the date of selling it, Interest will be received.
+
ii) Such Financial Asset should have Principal & Interest(Both) features
+
iii) The condition of CCFC of Interest should also be satisfied.

Business Model III

If any Asset/Receivable cannot be classified under BM I or BM II then it will be

Classified under BM III
*If there is no Interest in any Financial Asset or
**Interest has Leverage Impact.

BM I BM II BM III

Invt in Redeemable Invt held for replacement Debtors, B/R,

Deb/PSC, Loans, of Assets, Invt held for Floating Rate
Fixed Deposit etc. Redemption of Invt etc.
Debentures etc.

Q.43, 44, 46, 47, 48, 49, 50, 51, 52

Solution: Discussed in Lecture

Q.45
Solution:
Correction in Solution of Book
In the given case, Contractual Cash Flow from Debtors does not include ant Interest
Due to which we cannot apply amortised method in it. So it will be considered under
BM III: FVPL

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*Part VI*
Concept-2: Equity Instruments
(Investment in equity shares or other equity portions)

Cases

If Equity Investments If Equity Investments

are held for trading are not held for trading

Accounting Model: FVPL Accounting Model

i) Irrevocable OCI
(if OCI is opted)
OR
ii) FVCL
(if OCI is not opted)

Concept 3: Derivative Investments:

(Options, Futures, forwards etc.)

Accounting model : FVCL

(Note: we will discuss in a separate unit)

PART B: MEASUREMENT OF FINANCIAL ASSETS

Initial Subsequent

Concept 1: Debt investments under Amortisation* Cost Method

Hold till Maturity = BMI+CCFC

Amortisation Cost Method

If Transaction is If Transaction is
at market terms at “off market terms”

Situation-I Situation-II

Situation I: Transaction is at Market Terms

If interest Rate in the given transaction is equal to market rate of interest then it

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will be considered as transaction is at market terms. The following steps should be

applied while making initial measurement and subsequent measurement:-

Step I: Initial Recognition will be made at “ Transaction Price”

Transaction Price= Original + Transaction- Recoveries

Invested Cost
Money

Stamp Comm. Legal Up Processing file

Paper fees front fees charge etc.
etc. fees

Debt Invest.--Dr
To Bank

i) Exp. A/c„.Dr i) Bank A/c„„.Dr

To Bank To fees
ii) Debt Invest „.Dr ii) fees A/c„„..Dr
To Exp. To Debt Invest

Note: It means that transaction cost or recoveries shall not be transferred to P&L
but these item shall be adjusted in transaction price.

Step II: subsequent measurement

i) Calculate effective rate of return due to difference between
Transaction price & original invested money.
*it means that transaction cost or recoveries shall be adjusted over the
Maturity terms in ERR.

ii) Interest will be accrued till maturity by ERR

Final View= Transaction price+ Interest at ERR-Actual collection

P&L Cash flow

Example:
i) Loan given by A Ltd to B Ltd. =10,00,000
ii) Interest Rate: 10% p.a.
iii) Term: 3 years
iv) No Transaction cost/No fees
Assuming interest rate at market terns, prepare Loan A/c by Amortised cost method

Solution:
Note: calculation of ERR is not required here because there is no adjustment in
transaction price.

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Loan A/c
st
I year
To Bank 10,00,000 By Bank 1,00,000
To Interest (10%) 1,00,000 By Bal c/d 10,00,000

11,00,000 11,00,000
IInd year
To Bal B/d 10,00,000 By Bank 1,00,000
To Interest (10%) 1,00,000 By Bal c/d 10,00,000

11,00,000 11,00,000

IIIrd year
To Bal B/d 10,00,000 By Bank 11,00,000
To Interest (10%) 1,00,000

11,00,000 11,00,000

Journal Entries
In the Books of A Ltd.
I st year
Loan to B Ltd. A/c„„„„„„„„„.Dr 10,00,0000
To Bank 10,00,0000
(Being loan given to B Ltd.)

Loan to B Ltd. A/c„„„„„„„„„.Dr 1,00,000

To Interest Income 1,00,000
(Being Interest income accrued)

Bank A/c„„„„„„„„„.Dr 1,00,000

To Loan to B Ltd. 1,00,000
(Being Interest collected)

Homework Journal entries for II nd Year & IIIrd year JV

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Example:
With the help of given information in previous example, apply Amortisation method
If transaction cost is Rs.20,000 and recovery from processing fees is Rs.10,000
Solution:
Step I : Transaction Price
10,00,000+20,000-10,000=10,10,000

Step II: Calculation of ERR

Period Cash Inflow PVF 10% PVF 8% NPV 10% NPV

1 1,00,000 0.909 0.926 90,900 92,600
2 1,00,000 0.826 0.857 82,600 85,700
3 11,00,000 0.751 0.794 8,26,100 8,73,400
P.V. of C.I. 9,99,600 10,51,700
P.V. of C.O. 10,10,000 10,10,000
-10,400 41,700

ERR= LR + LRNPV * Difference in Rate

LRNPV-HRNPV

= 8% + 41700 *2
41700-(-10400)

= 8% +1.6%
= 9.6%

Step III: Subsequent Measurement

Loan to B Ltd A/c.

To Bank (T.P.) 10,10,000 By Bank 1,00,000
To Interest (9.6%) 96,960 By Bal C/d 10,06,960

11,06,960 11,06,960

To Bal B/d 10,06,960 By Bank 1,00,000

To Interest (9.6%) 96,668 By Bal C/d 10,03,628

11,03,628 11,03,628

To Bal B/d 10,03,628 By Bank 11,00,000

To Interest (9.6%) (Bal fig) 96,372

11,00,000 11,00,000

I st year

i) Loan to B Ltd. A/c„„„„„„„„„.Dr 10,10,0000 (Refer w.n. I)

To Bank 10,10,0000
(Being Initial Recognition at transaction price made)

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ii) Loan to B Ltd. A/c„„„„„„„„„.Dr 96,960

To Interest Income 96,960
(Being Interest made accrued at IRR)

iii) Bank A/c„„„„„„„„„.Dr 1,00,000

To Loan to B Ltd. 1,00,000
(Being actual collection of interest made)

(iv) Interest A/c„„„„„„„„„„„.Dr 96,960

To P& L 96,960
(Being Income recognized)

Situation II : If Debt Investment is at “off Market Term” (vvv Imp)

If given transaction is not at market terms (i.e. market rate of Interest is not
equal to actual rate) then the following steps should be applied:-

Step I : Calculate fair value of debt Instruments as follows:

Fair Value = Present Value of future cash flows at market Rate Initial
Recog.
Step II: Calculate Diff. between Transaction Price & Fair Value

Transaction price of - Fair Value of = Difference

Debt Instruments Debt Instruments

Ind AS-113

If Market Rate is If Market Rate is

Based on Level I Input not based on Level I Input

Diff: “ It should be Treated

As on expense in P&L A/c”

Prepaid Invest in
Exp. Equity

It will be Amortised It will be held

over the term on as Equity
SLM Basis Investment

i) Staff Advance or loans i) Investment in Interest free Deb/

at concessional Rate PSC by a holding in subsidiary
ii) Lease deposits at ii) Loan given by Holding to its sub.
Lower Rate with without interest.
Lesser etc.
*In the absence of any information, we will always assume the given information is
Other than Level I input.

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Step III: Subsequent Measurement

i) Fair value + Interest at market Rate- Cash Inflows

ii) Diff= We will amortise prepaid exp in PL on SLM basis over the period of Asset.

OR
Apply Rules of Equity instruments if Diff is equity component

Example:
i) Loan given by A Ltd. to B Ltd =10,00,000
ii) Transaction cost = 20,000
iii) Term = 3 years
iv) Actual Rate =10%, Market Rate=12%
v) B Ltd. is a subsidiary if A Ltd.
vi) Interest is payable annually
Apply Amortisation method in the books of A Ltd.

Solution:
Step I: Initial Recognition

A. Fair value of given loan= Present value of F.C.F @Market Rate

Period Cash inflow PVF@12% Present value

1 1,00,000 0.893 89,300
2 1,00,000 0.797 79,700
3 11,00,000 0.712 7,83,200
9,52,200

B. Diff Between T.P &F.V.=(10,00,000+20,000)-9.52,200=67,800

Journal Entries
Loan to B Ltd A/c„„„„„„„„..Dr 9,52,200
Equity investment A/c„„„„..Dr 67,800
To Bank 10,00,000
(Being intimal recognition made)

Step II: Subsequent Measurement

(i) Amortisation Table
Period Opening Balance Int @12% Cash Flow Closing Balance
1 9,52,200 1,14,264 (1,00,000) 9,66,464
2 9,66,464 1,15,976 (1,00,000) 9,82,440
3 9,82,440 1,17,560 (Bal fig) 11,00,000 Nil

Entries for Ist Year

1) Loan to B Ltd „„„„„„„„„„..Dr 1,14,264
To interest 1,14,262
(Being Interest made due)

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2) Bank A/c„„„„„„„„„„„Dr 1,00,000

To Loan to B Ltd. 1,00,000
(Being actual interest due)

3) Interest A/c„„„„„„„Dr 1,14,264

To P&L A/c 1,14,264
(Being income recognition)

Question no. 60
Step I: Initial Recognition
i) Fair value of deposit= P.V. of future cash inflows
= 10,00,000*0.567427
5th year
= 5,67,427
*Actual Rate is not mentioned due to which we have considered it as an interest free
deposit.

ii) Difference as prepaid lease Rent=10,00,000-5,67,427= Rs.4,32,573

Step II: Subsequent measurement

A. Amortisation Table
Period Opening Balance Int @12% Cash Flow Closing Balance
1 5,67,427 68,091 - 6,35,518
2 6,35,518 76,262 - 7,11,780
3 7,11,780 85,414 - 7,97,194
4 7,97,194 95,663 - 8,92,857
5 8,92,857 1,07,143 10,00,000 Nil

B. Journal Entries
X1-X2: 1) Security Deposit „„„„„„Dr 5,67,427
Prepaid Rent „„„„„„„„..Dr 4,32,573
To Bank 10,00,000
(Being Deposits Made)

2) Security Deposit „„„„„„Dr 68,091

To Interest 68,091
(Being Interest made due)

3) Interest A/c„„„. „„„„„„Dr 68,091

To P&L 68,091
(Being Income recognized)

4) P&L A/c„„„. „„„„„„„„„.Dr 86,515 (4,32,573/5)

To Prepaid Rent 86,515
(Being Prepaid rent amortised)

Homework Journal entries for 2nd, 3rd & 4th year

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*Part VII*
Question No 55:
Solution:-
A. Calculation of fair value of staff Loan
i) Calculation of future cash flows:-
Period Opening Interest Principal Closing Total Cash
Balance @5% Repayment Balance Flows
(I) (II) (III) (IV) (V)={II-IV} (VI)=(III+IV)
1 16,00,000 80,000 3,20,000 12,80,000 4,00,000
2 12,80,000 64,000 3,20,000 9,60,000 3,84,000
3 9,60,000 48,000 3,20,000 6,40,000 3,68,000
4 6,40,000 32,000 3,20,000 3,20,000 3,52,000
5 3,20,000 16,000 3,20,000 Nil 3,36,000

ii) Calculation of fair value:-

Period Cash flow P.V.F. @10% Present Value
1 4,00,000 0.909 3,63,600
2 3,84,000 0.826 3,17,568
3 3,68,000 0.751 2,76,368
4 3,52,000 0.683 2,40,416
5 3,36,000 0.620 2,08,320
Fair value 14,06,272

iii) Prepaid expenses/emp. Benefit Exp.= 16,00,000-14,06,272=1,93,728/-

B. Amortisation Table
Period Op. Bal Int@10% Cash Flows Closing Balance
1 14,06,272 1,40,627 (4,00,000) 11,46,899
2 11,46,899 1,14,690 (3,84,000) 8,77,589
3 8,77,589 87,759 (3,68,000) 5,97,348
4 5,97,348 59,735 (3,52,000) 3,05,083
5 3,05,083 30,917 (Bal fig) (3,36,000) NIL

C. Journal Entries (2015)

1.1.2015 staff Loan A/c„„„„„„„„„.Dr 14,06,272
Prepaid E.B. Exp. A/c„„„„„..Dr 1,93,728
To Bank 16,00,000
(Being Loan given to staff)

31.12.2015 i) staff Loan A/c „„„„„„„„„..Dr 1,40,627

To Interest 1,40,627
(Being Interest made due at market rate)

ii) Bank A/c„„„„„„„„„„„„„„Dr 4,00,000

To Staff Loan 4,00,000
(Being Collection Made)

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iii) Interest Income A/c„„„. „Dr 1,40,627

To P&L 1,40,627
(Being Income recognized)

iv) P&L A/c„„„. „„„„„„„„„.Dr 38,746 (1,93,728/5)

To Prepaid Rent 38,746
(Being Prepaid exp. Amortised on SLM Basis)

Question 54: (vvimp)

Solution:
A. Calculation of fair value of loan & prepaid salaries
I. Calculation of Interest (Accumulated):-
Period O.B. Installment C.B. Interest @4%
(O.B. *4%)
1 10,00,000 2,00,000 (10Lakhs/5y) 8,00,000 40,000
2 8,00,000 2,00,000 6,00,000 32,000
3 6,00,000 2,00,000 4,00,000 24,000
4 4,00,000 2,00,000 2,00,000 16,000
5 2,00,000 2,00,000 Nil 8,000
Accu. Interest 1,20,000
2 equal payments of :60,000

II. Calculation of fair value of loan

Period Cash flow PVF@8% Present Value
1 2,00,000 0.926 1,85,200
2 2,00,000 0.857 1,71,400
3 2,00,000 0.794 1,58,800
4 2,00,000 0.735 1,47,000
5 2,00,000 0.681 1,36,200
6 60,000 0.630 37,800
7 60,000 0.583 34,890
F.V 8,71,380

Prepaid Salaries=10,00,000-8,71,380=1,28,620

B. Amortisation Table
Period Opening Bal. Interest@8% Cash Flow Closing Balance
1 8,71,380 69,710 (2,00,000) 7,41,090
2 7,41,090 59,287 (2,00,000) 6,00,377
3 6,00,377 48,030 (2,00,000) 4,48,407
4 4,48,407 35,873 (2,00,000) 2,84,280
5 2,84,280 22,742 (2,00,000) 1.07,023
6 1.07,023 8,562 (60,000) 55,585
7 55,585 4,415 (60,000) Nil
(Bal,fig)
C. Journal Entries (2016)
1.4.2015 staff Loan A/c„„„„„„„„„.Dr 8,71,380
Prepaid E.B. Exp. A/c„„„„„..Dr 1,28,620
To Bank 10,00,000
(Being Loan given to staff)

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31.03.2016 i) staff Loan A/c „„„„„„„„„..Dr 69,710

To Interest 69,710
(Being Interest made due)

ii) Bank A/c„„„„„„„„„„„„„„Dr 2,00,000

To Staff Loan 2,00,000
(Being Collection Made)

iii) Interest Income A/c„„„. „Dr 69,710

To P&L 69,710
(Being Income recognized)

iv) P&L A/c„„„. „„„„„„„„„.Dr 18,374 (1,28,620/7)

To Prepaid Rent 18,374
(Being Prepaid exp. Amortised on SLM Basis)

Question No 61:-
Solution:

A. Calculation of fair value of pref. Shares

i) Fair Value=10,00,000*0.56743= 5,67,43,000

ii) Equity Invest.= 10,00,000-5,67,43,000=4,32,57,000

B. Amortisation Table

Period O.B. Interest@12% CF Closing Balance

1 5,67,43,000 68,09,160 - 6,35,52,160
2 6,35,52,160 76,26,259 - 7,11,78,419
3 7,11,78,419 85,41,410 - 7,97,19,829
4 7,97,19,829 95,66,379 - 8,92,86,208
5 8,92,86,208 1,07,13,792 - 10,00,00,000
(Bal Fig) 533
12%=1,07,14,344

C. Journal Entries (Ist Year)

i) Investment in Pref Shares A/c„„„„..Dr 5,67,43,000
Investment in equity A/c„„„„„„„„.Dr 4,32,57,000
To Bank 10,00,00,000
(Being Amt invested in PSC of Subsidiary)

ii) Investment in Pref Shares A/c„„„„..Dr 68,09,160

To Interest Income 68,09,160
(Being Interest made due at market rate)

iii) Interest Income a/c„„„„„„„„„„„.Dr 68,09,160

To P& L 68,09,160
(Being Income recongnized)

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Homework Journal entries for 2nd, 3rd ,4th & 5th year

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Question no 59 (Discussed at class)

Question no 53:-
Solution:
In the given question, interest rate is equal to market rate due to which initial recog.
Will be made at “Transaction Price”.

Transaction Price= Original Amt +Transaction cost- Fees Upfront

= 100 lacs+ 0.40 lac
= 100.4 lac

Investment in Loan A/c„„„„„„„„.Dr 100.4

To Bank 100.4
(Being Loan given to other company)

Question no 56,57:- Homework

Question no 58 (Discussed at class)

Concept 2:Debt Investments under FVOCI

(BM II+ CCFC)
Under this concept the following steps should be applied for initial & subsequent
measurement.

Step I: Initial Recognition should be made at Transaction price

Financial Assets A/c„„„„„„„„..Dr XXXX
To Bank XXXX
(Being initial recognition made)

Step II: Actual Income will be transferred to P&L A/c directly and we will not consider
IRR or market rate in this case.

1) Bank A/c„„„„„„„„„„„„„„„..Dr XXXX

To Income on F.A. XXXX

2) Income on F.A. A/c„„„„„„„„.Dr XXXX

To P&L XXXX

Step III: B/s Date: On each B/s date, valuation of financial Asset will be made at fair
value. The fluctuation in carrying amt will be recorded as follows:-

i) If fair Value Increases:

a) Financial Asset A/c„„„„„Dr XXXX
To F.V. Gain XXXX

b) F.V. Gain A/c„„„„„„„„„.Dr XXXX

To F.V. OCI Reserve XXXX

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ii) If fair Value decreases:

a) F.V. Loss A/c„„„„„„„„„„„„„.Dr XXXX
To Financial Asset XXXX

b) F.V. OCI Reserve A/c„„„„„„„„Dr XXXX

To F.V. Loss XXXX

Step IV: At the time of sale of F.A.

i) P&L A/c„„„„„„„„„„„„„„„„„.Dr XXXX (Loss on sale)

Bank A/c„„„„„„„„„„„„„„„„..Dr XXXX (Selling price)
To F. Assets XXXX (Book value) –Carrying Amt
To P&L XXXX (Profit on sale)
(Being F.A. sold)

ii) O/s balance in OCI Reserve whether it is positive or negative will be

Transferred to P&L A/c.
Recycling
OCI to P&L

Example:
i) Investment in Deb. Made: 10,00,000
ii) Life of Deb. Is 15y but company will sell this Asset after 2 years
iii) Interest Rate 10% p.a.
iv) FV: Ist Year End 12,00,000
v) Selling Price: 13,00,000
Pass Journal Entries ?
Solution:
1st Year
1) Investment A/c„„„„„„„„„.Dr 10,00,000
To Bank 10,00,0000
(Being Investment made)

2) Bank A/c„„„„„„„„„„„„„„„Dr 1,00,000 (10%)

To Interest 1,00,000

3) Interest A/c„„„„„„„„„„„„Dr 1,00,000

To P&L 1,00,000

4) Investment A/c„„„„„„„„„„Dr 2,00,000

To FV Gain 2,00,000

5) FV Gain A/c„„„„„„„„„„„„„.Dr 2,00,000

To OCI Reserve 2,00,000

2nd Year

Bank A/c„„„„„„„„„„„„„„„Dr 1,00,000 (10%)

To Interest 1,00,000

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Interest A/c„„„„„„„„„„„„Dr 1,00,000

To P&L 1,00,000

Bank A/c„„„„„„„„„„„„„„„Dr 13,00,000

To Invest 12,00,000
To P &L 1,00,000

OCI Reserve A/c„„„„„„„„„„Dr 2,00,000

To P &L 2,00,000

*Part VIII*

Concept 3 :Debt Investments under BM III without CCFC

If any Debt Instruments/ Investment has been made under BMIII (i.e. Debt Invest-
ment without Interest (debtors/ B/R) or Debt Invest. Without CCFC means interest
rate is variable upon market conditions etc,) then we should follow “FVPL Model” for
accounting as follows:-

Step I : Initial Recognition

i) Initial recognition shall be made at original cost but not at Transaction price
ii) Transaction cost/ upfront fees shall be transferred to P& L A/c.

Journal:
1) Financial Assets A/c„„„„Dr XXXX
Transaction cost A/c„„„..Dr XXXX
To Bank XXXX

2) P& L A/c„„„„„„„„„„„„Dr XXXX

To Transaction cost XXXX

Step II: If any interest is received on these instruments then it will be taken to p&L
Directly:-

Journal:
1) Bank A/c„„„„„„„„„„..Dr XXXX
To Interest XXXX

2) Interest A/c„„„„„„„..Dr XXXX

To P&L XXXX

Step III: On B/S date, Asset will be valued at fair value and fluctuation in carrying amt
Will be taken to P&L a/c.
i) Gain: a) Financial Asset A/c„„„Dr XXXX
To F.V. Gain XXXX

b) F.V. Gain A/c„„„„„„„Dr XXXX

To P&L XXXX

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ii) Loss: a) F.V. Loss A/c„„„„„Dr XXXX

To Financial Asset XXXX

b) P&L A/c„„„„„„„„Dr XXXX

To F.V. Loss XXXX

Step IV: At the time of sale, difference between carrying amt and selling price will be
transferred to P&L a/c.

Concept 4: Measurement of Equity Instruments

(Investment in Equity Shares)

Investments

Equity Investments Equity Investments

held for Trading not held for Trading
To be held for sale within 12 months
Model: FVPL Options

Amortized
cost method FVOCI OR FVPL
is not allowed (Irrevocable)
for Equity or
Investments “Without Recycling”

Model :FVPL

Step I : Initial recognition of investments should be made at “Purchase Price”

[ Note Transaction cost will be written off as an expense. It will not be added
To cost of investments]

Step II : If any dividend is received on these investments then it will be transferred

to P&L a/c
i) Bank A/c„„„„Dr XXX
To Dividend XXX

ii) Dividend A/c„..Dr XXX

To P&L XXX

Step III: On B/s date, *fair valuation should be made of equity investments. *Changes
in carrying amt will be transferred to P&L as fair value gain/loss.

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F.V. Gain F.V. Loss

1) Invest in Equity shares Dr„..XX 1) F.V. Loss A/c„„„„..Dr XX
To F.V. Gain XX To Investment in shares XX

2) F.V. Gain A/c„„„„„„„.Dr XX 3) P&L A/c„„„„„„„..Dr XX

To P&L XX To F.V. Loss XX

Step IV: at the time of sale of investments, profit or loss on sale of investment shall
be transferred to P&L A/c.

Bank a/c„„„„„Dr XXX [SP]

To Invest. XXX [Carrying amt]
(Being Investment sold)

Model : FVOCI (Without Recycling)

Step I: Initial recognition will be made at “ Transaction Price”

Financial Assets A/c„„„„„„„„Dr XXXX [P.P. +TC-Fees]

To cash / Bank XXX

Step II: If any dividend is received on these investments then it will be transferred
to “P&L “
i) Bank A/c„„„„„„„..Dr XXX
To Dividends XXX

ii) Dividends A/c„„„„.Dr XXX

To P&L XXX

Step III: B/S Date: Fair Valuation

F.V. Gain F.V. Loss

Invest in Equity shares Dr„..XX F.V. Loss A/c„„„„„„„„„Dr XX
To F.V. Gain XX To Investment in shares XX

F.V. Gain A/c„„„„„„„.Dr XX OCI Reserve A/c„„„„„„„..Dr XX

To OCI Reserve XX To F.V. Loss XX

Step IV: sale of financial Assets: Profit or loss on sale of Assets will be transferred
OCI Reserve.
“OCI Reserve will not be recycled even if investment” has been disposed off.

Question no. 63:-

Solution:
Journal Entries
th
15 March Investment in equity shares A/c„„„„Dr 10,000
Transaction cost A/c„„„„„„„„„„„..Dr 2,00
To Bank 10,200
(Being investment made in equity shares)

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31st March
i) P&L A/c„„„„„„„„„„„„„„..Dr 200
To Transaction cost 200
(Being T. cost written off as an expense)

ii) Investment in equity A/c„„..Dr 2000

To F.V. Gain 2000
(Being appreciation recorded)

iii) F.V. Gain A/c„„„„„„„„„„„.Dr 2000

To P&L 2000
(Being gain recognised)

Question no 64:-
Solution:
Journal Entries
th
15 March Investment in equity shares A/c„„„„Dr 10,200
To Bank 10,200
(Being initial recognition made at transaction cost)

31st March
i) Invest A/c„„„„„„„„„„„„„„..Dr 1800 (12000-10200)
To F.V. Gain 1800
(Being Gain recorded)

ii) F.V. Gain A/c„„„„„„„„„„„.Dr 1800

To OCI Reserve 1800
(Being F.V. gain transferred to irrevocable OCI)

Question no 65 & 66 Homework

Question no 67:-
Solution:
Journal Entries
15th March Investment in equity shares A/c„„„„Dr 10,000
Transaction cost A/c„„„„„„„„„„„..Dr 5,00
To Bank 10,500
(Being investment made in equity shares)

31st March
i) P&L A/c„„„„„„„„„„„„„„..Dr 500
To Transaction cost 500
(Being T. cost written off as an expense)

ii) Investment in equity A/c„„..Dr 1200

To F.V. Gain 1200
(Being appreciation recorded)

iii) F.V. Gain A/c„„„„„„„„„„„.Dr 1200

To P&L 1200
(Being gain recognised)

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Question No 68:-
Solution:
Journal Entries
i) Investment in equity shares A/c„„„„„„„„Dr 5,00,000
To Bank 5,00,000
(Being Investments made)

ii) F.V. Loss A/c„„„„„„„„„„„„„„„„„„„„„„.Dr 50,000

To Investment in equity shares 50,000
(Being fair value declined)

iii) OCI Reserve A/c„„„„„„„„„„„„„„„„„„„„Dr 50,000

To F.V. Loss 50,000
(Being loss transferred to OCI reserve)

Concept 5: If Financial Assets are acquired in “regular way”

Delivery of assets will be made within

SEBI= T+2=3 specified period which is controlled by
regulation
Trade Date Settlement date

If any financial Asset is acquired in regular way trading then the accountings for
acquisition can be made by 2 methods as follows:-
1) Trade date Accounting
2) Settlement date Accounting

*if any financial Asset is acquired in regular way then contract date will be acquisition
date

Method I: Trade date settlement

Financial Assets

Debt Invest. Equity Investment

(Listed Debentures,
Listed Pref Shares etc.)

FVPL OR FVOCI
(Irrevocable)
Amortised FVOCI FVPL
Method

Method I: Amortised Method

Step I : Trade date: Financial Assets A/c„„„„„„„.Dr XXX

To Payables XXX

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Step II: Settlement date: Payables A/c„„„„„„Dr XXX

To Bank XXX

*If B/S date falls between trade date & Settlement date then no fair value will be
Considered at B/S date because fair value is not considered under amortisation method.

Method II: FVPL

Step I: Trade date: F Assets A/c„„„„„„„„„„.Dr XXX
To Payables XXX

Step II: Settlement date: Payables A/c„„„„„„Dr XXX

To Bank XXX

Financial assets Check F.V. Change on settlement date

Will be recorded “F.V. Gain/loss will be transferred to financial Assets to P&L”
On settlement at
Fair value.

*If B/S date falls between trade date & Settlement date then we will value the invest.
at B/S as well. The fluctuation in value will be recorded in financial Assets A/c & P&L A/c.

Method III: FVOCI

Step I : Trade Date: F Assets A/c„„„„„„„„.Dr XXXX
To Payables XXXX

Step II: Settlement date: Payables A/c„„„„„„Dr XXX

To Bank XXX
*If rules for checking fair values are same as in FVPL, but fluctuation will be recorded
in OCI Reserve.

Question no 69:-
Solution
Trade date Accounting
Amortisation Method:
1) 30.03 F. Assets A/c„„„„„„„„.Dr 100
To Payables 100
(Being F. Assets acquired)

2) 2.4 Payables A/c„„„„„„„„„„Dr 100

To Bank 100
(Being Payment made)

FVPL:
1) 30.03 F. Assets A/c„„„„„„„„.Dr 100
To Payable 100

2) 31.03 a) F. Assets A/c„„„„„„„„.Dr 2 (102-100)

To F.V. Gain 2

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b) F.V. Gain A/c„„„„„„„„„..Dr 2

To P&L 2

3) 02.04 a) Payable A/c„„„„„„„„„„„Dr 100

To Bank 100

b) F. Assets A/c„„„„„„„„„„„Dr 1 (103-102)

To F.V. Gain 1

c) F.V. Gain A/c„„„„„„„„„„„„..Dr 1

To P&L 1

FVOCI:
30.03 Financial Assets A/c„„„„„„„„Dr 100
To Payables 100

31.03 1) Financial Assets A/c„„„„„„„„Dr 2

To F.V. Gain 2

2) F.V. Gain A/c„„„„„„„„„„„„„„Dr 2

To OCI Reserve 2

02.04 1) Payables A/c„„„„„„„„„„„„„„„„Dr 100

To Bank 100

2) F. Assets A/c„„„„„„„„„„„„„„„„.Dr 1
To F.V. Gain 1

3) F.V. Gain A/c„„„„„„„„„„„„„„„„„.Dr 1

To OCI Reserve 1

Method II: Settlement Date Accounting

Method I: Amortisation Method

Step I: Trade Date= No entry

Step II: settlement Date= F. Assets „„.Dr XXX
To Bank XXX
(Being F. Assets Acquired)

Method II: FVPL

Step I : Trade date= No entry
Step II: B/S Date= F. Assets A/c„„„Dr PL A/c„„„„.Dr
To PL To F. Assets

Step III: Settlement Date= 1) F. Assets A/c„„„„.Dr

To Bank
2) F. Assets A/c„„„Dr PL A/c„„„„.Dr
To PL To F. Assets
Note: Rules for acquisitions have been shifted from trade date to settlement date
but Rules for fair value are same.

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Method III: FVOCI

Accounting is same as we discussed in Method II(FVPL), but fluctuation in
fair value will be transferred to OCI Reserve.

Question no.69:-
Solution
30.03 -No Entry-

31.03 a) F. Assets A/c„„„„„„„„„„Dr 2

To F.V. Gain 2

b) F.V. Gain A/c„„„„„„„„„„„Dr 2

To P&L 2

02.04 a) F. Assets A/c„„„„„„„„„„„.Dr 100

To Bank 100

b) F. Assets A/c„„„„„„„„„„„Dr 1
To F.V. Gain 1

c) F.V. Gain A/c„„„„„„„„„„„„Dr 1

To P&L 1

FVOCI:
30.03 -No Entry-

31.03 a) F. Assets A/c„„„„„„„„„„Dr 2

To F.V. Gain 2

b) F.V. Gain A/c„„„„„„„„„„„Dr 2

To OCI Reserve 2

02.04 a) F. Assets A/c„„„„„„„„„„„.Dr 100

To Bank 100

b) F. Assets A/c„„„„„„„„„„„Dr 1
To OCI Reserve 1

Question no. 70 Homework

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*Part IX*

Unit IV: Classification & Measurement of Financial Liabilities

Classification

Amortised Cost Model FVPL Model

All liabilities under contractual Derivaties Contingent

Obligation are covered here other Liabilities Consideration
Than those are covered under (Options, futures, under Business
FVPL Forwards etc) Combination
(i.e Debentures, PSC, Creditors, B/R, (Refer unit 6) (Refer 103)
Outstanding Expenses, loans etc.)

There is no Concept of “FVOCI” for Financial Liabilities.

Accounting under Amortisation Model

Situations

If transaction is at If transaction is not at

Market Term Market Term

Situation I: At Market Term

If Actual Interest Rate is equal to Market Rate then It will be assumed that
transaction is at Market Rate. In the given case, the following steps should be
applied:-

Step I: Initial Recognition will be made at “Transaction Price/Net Proceeds”

Transaction Price= Original Borrowed Funds (-) Transaction Cost [Commission/

Brokerage/Marketing Cost/
Processing Fees/upfront Fees]

Step II: Calculate IRR for the given Transaction

Step III: After Initial Recognition, the following working will be done in Financial
Liabilities A/c:-

Transaction Price + Interest @IRR – Actual Payments

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Example
i) Borrowed Fund= Rs.10,00,000
ii) Interest Rate= 10% p.a
iii) Term= 3 Years
iv) Transaction Cost= Rs.1,00,000
Assuming that Market Rate of Interest is also 10%, Show Amortisation table for all
3 years.

Solution:
Step I: Initial Recognition
Transaction Price/Net Proceeds= Rs.10,00,000 - Rs.1,00,000 = Rs.9,00,000

Step II: Calculation of ERR/IRR

Period Cash outflow PVF@10% PVF@15% NPV (10%) NPV

1 1,00,000 0.909 0.870 90,900 87,000
2 1,00,000 0.826 0.756 82,600 75,600
3 11,00,000 0.751 0.658 8,26,100 7,23,800
PV of Cash Outflow 9,99,600 8,86,400
PV of Cash NP (9,00,000) (9,00,000)
99,600 (13,600)

IRR= 10%+ 99,600 x5

99,600 –(-13,600)
= 10% + 4.40%
= 14.40%

Step III: Amortisation Table

Period Opening Bal Int @14.40% Actual Payment Closing Bal.
1 9,00,000 1,29,600 (1,00,000) 9,29,600
2 9,29,600 1,33,862 (1,00,000) 9,63,462
3 9,63,462 1,36,538* (11,00,000) -

Journal Entries
Ist Year
i) Bank a/c„„„„„Dr 9,00,000
To Financial Liabilities 9,00,000
(Being Initial Recognition will be made at Transaction Price)

ii) Finance Cost/Interest„„„„Dr 1,29,600

To Financial Liabilities 1,29,600
(Being Interest made due)

iii) Financial Liabilities„„„„.Dr 1,00,000

To Bank 1,00,000
(Being Interest Paid at Actual Rate)

iv) P&L a/c„„„„„.Dr 1,29,600

To Interest 1,29,600

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(Being Expenses w/off)

Q.79
Solution:
Financial Liabilities A/c
Particular Rs. Particular Rs.
30.6.x1 01.4.x1 9,500
To Bank (10,000 x 12% x 3/12) 300 By Bank (10,000 – 500)

To Bal c/d 9,594 30.6.x1

By Interest 394
(9,500 x 16.6% x 3/12)
9,894 9,894
30.9.x1 01.7.x1
To Bank 2,800 By Bal b/d 9,594
(10,000 x 12% x 3/12) + 2,500
30.9.x1
To Bal c/d 7,192 By Interest 398
(9,594 x 16.6% x 3/12)
9,992 9,992
31.12.x1 01.10.x1
To Bank (7,500 x 12% x 3/12) 225 By Bal b/d 7,192

31.12.x1
To Bal c/d 7,265 By Interest 298
(7,192 x 16.6% x 3/12)
7,490 7,490
31.3.x2 01.1.x2
To Bank 2,725 By Bal b/d 7,265
(225 + 2,500)
31.3.x2
To Bal c/d 4,842 By Interest @16.6%(3mts) 302
7,567 7,567
01.4.x2
By Bal b/d 4,842

Amortisation Table
Period Opening Bal. Int @16.6% pa Actual Closing Bal
(3 months) Payment
1 4,842 201 (150) 4,893
2 4,893 203 (150+2500=2650) 2,446
3 2,446 102 (75) 2,473
4 2,473 102 (75+2500=2575) -

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Situation II: Off Market Term

If Actual Rate of Interest does not match with Market Rate of Interest then It
Will be considered as Financial Liability at Off Market Terms. The following Steps
Should be applied in this concept:-

Step I: Calculate Fair Value of Financial Liability as follows

Fair Value= Present Value of all Future Cash outflows at Market Rate

Step II: Calculate difference between Fair Value & Transaction Price

Difference = Transaction Price – Fair Value

P&L OR Equity Component

(Assuming it as (If it is a Compound
A Loss) Financial Instrument)

Optionally Optionally Conv. Deb./

Conv. Deb. Conv. PSC. PSC with
Mandatory Int
or Dividends etc.

Step III: Subsequent Measurement (Financial Liability)

Fair Value + Market Rate – Actual Outflow

Last Entry: Financial Liab„„„„..Dr Payment Option

To Bank

Financial Liab„„„„....Dr
Equity Component„..Dr Conversion Option
To ESC
To Sec. Prem.
It will be used only if shares are issued in Settlement

Q.74 (Imp)
Solution:
A) Separation of C.F.I
a) Fair Value of Financial Liab. @8% = P.V of all Future cash outflows
= (1 crore x 6% x 5.746) + (1 crore x .540)
= 34,47,600 + 54,00,000
= Rs.88,47,600

b) Equity Component= Rs.1,00,00,000 – Rs.88,47,600 = Rs.11,52,400

Initial: Bank a/c„„.Dr 1,00,00,000
To Financial Liab. 88,47,600
To Equity 11,52,400
(Being Convertible Debentures issued)

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B) Amortisation Table
Period Opening Bal. Int @8% Payment Closing Bal.
1 88,47,600 7,07,808 (6,00,000) 89,55,408
2 89,55,408 7,16,433 (6,00,000) 90,71,841
3 90,71,841 7,25,747 (6,00,000) 91,97,588
4 91,97,588 7,35,807 (6,00,000) 93,33,395
5 93,33,395 7,46,672 (6,00,000) 94,80,067
6 94,80,067 7,58,405 (6,00,000) 96,38,472
7 96,38,472 7,71,077 (6,00,000) 98,09,549
8 98,09,549 7,90,451* (6,00,000) -

C) If Conversion is opted at the end of 3rd year

Financial Liab„„„„Dr 91,97,588 (3rd year)

Equity Component„Dr 11,52,400
To Equity Share Capital (10 lacs shares @10) 1,00,00,000
To Sec. Prem. (Bal.fig) 3,49,988
(Being Conversion of Debentures made into shares at the end of 3rd Year)

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“Part X”

Solution of Q.75 (*Imp)

A. Calculation of Liability component & Equity Component

i. Fair value of Conv. PSC = (1500000 x 10 % P.a x 3.352) 5Y @ 15%

(Liab) = 502800
ii. Equity component = 1500000 – 502800 = 997200

B. Calculation of Liability & Equity comp. after Transaction Cost

Items Fair value Respective Transaction Cost Net Fair Value

Liability 502800 (10056) 492744 IRR
Comp. 15.86 %
Equity 997200 (19944) 977256
Comp.
1500000 30000 1470000

C. Amortisation Table

Period Opening Balance Interest @15.86% Payment Closing Balance

1 492744 78149 (150000) 420893

2 420893 66754 (150000) 337647
3 337647 53551 (150000) 241198
4 241198 38254 (150000) 129452
5 129452 20548 (150000) NIL
(Bal fig)

D. At the end of 5Th year

Equity component a/c Dr 977256

To Equity share capital (5000 x10) 50000
To Security Premium Reserve (Bal fig) 927256
(Being 10000 Pref. shares converted into 5000 equity shares)

Solution of Q.76 (Zero Interest Bond) (*v.v.Imp)

Accounting for Ist Year

O.period : Fair value of Debentures @10%

FV = 15000000 x .751 = 11265000

Diff = 10000000 – 11265000 = 1265000 (Loss)

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Initial = Bank a/c Dr 10000000

P&L a/c Dr 1265000 (Bal fig )
To Debenture 11265000
(Being Deb. Recognised)

At the end of Ist Year :-

i. Interest a/c Dr 1126500 (10%)
To Debenture 1126500
(Being Interest made accrued )
ii. P&L a/c Dr 1126500
To Interest 1126500
(Being Interest written off)

Balance in Liability A/c = 11265000 + 1126500 = 12391500

At the end of IInd Year

i. Interest a/c Dr 1239150
To Debentures 1239150
(Being Int. made Accrued)
ii. P&L a/c Dr 1239150
To Interest 1239150
(Being Int. Written off)

Deb Liability = 12391500 + 1239150 = 13630650

Revised F.V of Liability at 2nd Year End @ 10.5% :-

Revised F.V = 15000000 x 1/1.05 = 13575000``

Deb. Liability a/c Dr 55650

To P&L A/c 55650
(Being Liability reduced due to change in FV)

Net Expense in P&L =1239150 – 55650 = 1183500

(Int)

Accounting in 3rd Year

Interest a/c Dr 1425000 (13575000 x 10.5%)

To Debent. 1425000 (15000000 -13575000)
(Being Interest made due)

P&L a/c Dr 1425000

To Interest 1425000
(Being Interest written off)

Debentures a/c Dr 15000000

To ESC 15000000
(Being Shares issued)

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Unit 6 : Reclassification & Impairment of Financial Assets

(These concepts are not applicable for financial Liability )

Part A Reclassification of F.A

(Change in Business model for held Assets)

If change in Business model takes place then an Entity can reclassify the hold Assets
The following reclassification cases may be considered :-

Situation I : Case I – Amortised cost to FVPL

Case II – FVPL to Amortised cost

Case I : Amortised Cost to FVPL

i. Reclassification should be made at fair value
ii. Difference between amortised cost & FVPL Should be transferred to P&L
Assuming gain or loss on Re-clasification.

F.Assets (FVPL) a/c Dr. xxxx – fair Value

To F.Asset (Amortised value ) xxxx - Carrying Value
(Gain/Loss will be taken to P&L)

Case II : FVPL to Amortised Cost

i. Re-classification From FVPL to Amortised cost shall also be made at fair value
(Note : Calculation of IRR under Amortisation method will be computed on the
Basis of re-classified Amt)
ii. Gain/Loss on Reclassification will be transferred to P&L
F.Asset (Amortisation) a/c Dr xxxx – fair value
To F.Asset (FVPL) xxxx - Book value
(Gain/Loss in P&L A/c)

Solution of Q.89

Journal :-

i. Bonds (Amortised) a/c Dr 90000

Loss on Re-classification a/c Dr 10000
To Bonds (Book value) 100000
(Being Bonds Reclassified from FVPL to Amortised Method)

ii. P&L a/c Dr 10000

To Loss on Re-classification 10000
(Being Loss written Off )

Situation II : Case I : Amortisation

Case II : FVOCI to Amortisation

Case I : Amortisation to FVOCI

i. Re-classification will be made at Fair value
ii. Loss/Gain on Re-classification shall be transferred to OCI Reserve

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Case II: FVOCI to Amortisation (*Imp)

i. Re-classification will be made at fair value
ii. Gain/Loss on Re-classification as well as Accumulated OCI due to previous
Valuations should be reversed to amortised cost instead of transferring it
To P&L.

Solution of Q.91

i. Bonds (Amortised) a/c Dr 90000

OCI Res: Loss a/c Dr 10000
To Bonds (FVOCI) 100000
(Being Re-classification of Bonds from OCI to Amortisation made at Fair value)

ii. Bonds (Amortised) a/c Dr 20000

To OCI Res :Loss 20000
(Being current & accumulated losses written back)

Solution of Q.88

Bonds (FVOCI) a/c Dr 90000

OCI : Loss on Red a/c Dr 10000 (Bal Fig)
To Bonds (Amort) 100000
(Being Reclassification of bonds has been made)

Situation III : Case I = FVPL to FVOCI

Case II = FVOCI to FVPL

Case I : FVPL to FVOCI :

i. Re-classification will be made at fair value
ii. Gain/Loss in OCI

Case II : FVOCI to FVPL : (*Imp)

i. Re-classification will be made at fair value
ii. Gain/Loss in P&L
iii. Accumulated OCI = P&L

Recycling

Solution of Q.90

Bonds (FVOCI) a/c Dr 90000

OCI : Loss a/c Dr 10000
To Bonds (FVPL) 100000
(Being Re-classification made from FVPL to FVOCI)

Solution Q.92

1. Bonds (FVPL) a/c Dr 90000

To Bonds (FVOCI) 90000

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(Being Re-classification made)

2. P&L a/c Dr 10000

To OCI :Loss 10000
(Being OCI Re-cycled)

Part B : Impairment of F.Assets

Impairment

If Financial Asset is Trade Other Financial Assets

Receivable (including Lease ) (Investments in deb/PS/
Receivables Equity/Loans etc.)

Life Time Credit Loss Risk 12 months credit Loss Risk

(Exception : If decline in value
Provision Matrix Is significant then life time
Credit loss risk can also be
Considered

 Entry for risk allowance in Assets : P&L a/c Dr xxxx

To Prov. for Decline in F.A xxxx

Solution Q.93, 94 (Discussed in class)

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*Part XI*

Derivatives & Embedded Derivatives

Concept 1 : Derivatives
As per the Provisions of Ind AS 109, Derivative is a kind of
Speculative contract that has the following 3 features :-
I. It does not require initial Investment or It requires a little
Investment
+
II. It will be Settled on a future date
+
III. Its value Changes as the Underlying variable changes

Example : Underlying Variables

Interest Currency rate Equity Rate Commodity

Rate Rate
i. Int. 1) Swap 1) Swap 1) Swap
Swap
ii. Int. 2) Options 2) Options 2) Options
Options
iii. Int. 3) Futures/ 3) Futures 3) Futures
Futures forwards

Solution of Question No. 81, 82, & 83.

( Discussed in Class )

Accounting For Derivatives :-

1. At Settlement Date :-
 Changes in Value should be transferred to P&L A/c. (FVTPL)

a) If derivative is Favourable : -
i. Derivative Financial Asset a/c Dr xxxx
To P& L a/c xxxx
ii. Bank a/c Dr xxxx
To Derivative Financial Asset xxxx

b) If Derivative is Unfavourable :-
i. P& L a/c Dr xxxx
To Derivative Financial Liability xxxx
ii. Derivative Financial Liability a/c Dr xxxx
To Bank a/c xxxx

2. Valuation of Derivative before its settlement :-

If any Derivative contract remains unsettled at B/S date then we

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need to value at fair value on respective date on M to M basis (Mark to Market basis).
Any Profit or Loss at the time of Valuation will be transferred to P&L.
Note : Listed co. can value unsettled contracts on Quarterly Basis For IFR purposes.

Solution of Q.85 (Accounting for Derivatives)

Journal entries
(In the books of Sam Ltd.)

31.3.x1 P&L a/c Dr 25000

To Derivative Financial Liability 25000
(Being Loss booked on M To M basis )
30.6.x1 Derivative Financial Liability a/c Dr 10000
To P&L 10000
(Being Liab. Reversed due to improvement in prices )
30.9.x1 Derivative Financial Liab. a/c Dr 15000
Derivative Financial Asset a/c Dr 12000
To P& L 27000
(Being Profit booked on Derivative on M TO M basis)
31.12.x1 P&L a/c Dr 52000
To Derivative Financial Asset 12000
To Cash (68-66) x 20000 40000
(Being Contract settled)

Solution of Q. 87 (Accounting for Derivative)

In the books of Sam Ltd

(Put option Seller) Bound to Mature the contract

Journal Entries

31.3.x1 P&L a/c Dr 25000

To Derivative Financial Liab. 25000

30.6.x1 Derivative Financial Liab a/c Dr 10000

To P&L 10000

30.9.x1 Derivative Financial liab. a/c Dr 15000

To P&L 15000

31.12.x1 P&L a/c Dr. 40000 (68-66) x 20000

*To Cash 40000
 JT co. will exercise put option as market rate of USD becomes lower than
Exercise Price.

Concept 2 : Embedded Derivatives (4-6 Marks)

Solution of Q.84

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Journal Entries

30.6.x1 Assets a/c Dr 3250 (5 crore x 65)

To Trade Payables 3250
(Being valuation of Assets has been made at forward rate)

30.6.x1 P&L a/c Dr 5 (66-65) x 5 crore USD

To Derivative Financial Liab. 5
(Being Embedded derivative recognised)

30.6.x1 Derivative Financial Liab. a/c Dr 5

To Trade Payables 5
(Being Trade payable increased)

30.6.x1 Trade Payable a/c Dr 330 (325+5)

To Bank 330
(Being Payment Made)

Solution of Q.86

In the books of A Ltd.

Journal Entries

30.6 Trade Receivable a/c Dr 5500000

To Sales 5500000
(Being Sales booked of 100000 USD at forward Rate of 55)

30.6 Derivative financial Asset a/c Dr 500000 (60-55) x 1 L

To P&L 500000
(Being profit on Embedded derivative Booked)

30.6 Trade Receivable a/c Dr 500000

To Derivative Financial Asset 500000
(Being Receivables increased)

30.6 Bank a/c Dr 6000000

To Trade Receivable 6000000
(being collection made)

As per the Provisions of Ind As-109, the following steps should be applied
to identify an embedded derivative in a Foreign currency contracts which has a feature
of forward derivative but It is not availed by the Entity :-

Step I : Recognise goods/Assets at forward rate which prevails on inception date

Step II : Difference between spot rate at settlement date & forward rate on
inception date will be considered as embedded Derivative.

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*Part XII*

Hedge Accounting
(Ind AS : 109 )

Types of Hedges

Cash Flow Hedge Fair Value Hedge

I. Cash Flow Hedge *Imp

(Hedge means Risk Management Activity)
(Best Example : Forward contracts to manage Risk from Foreign currency
transactions)

Step I : At B/s date, we should value monetary items at closing rate (Ind AS-21)
True & fair presentation even if we have taken forward contracts to manage
the risk. It is relevant for presentation purpose only because this
Fluctuation can never hit P&L a/c after taking Hedge contract. We should
transfer all fluctuations on Hedged Items to a Separate A/c “Cash Flow
Hedge Reserve A/c”. The Following entries should be passed in books of A/c’s :-

Assumption : Foreign currency Loans

Case I : If Liab. is increased Case II : If Liab. is decreased

a) Exchange Fluct. a/c Dr xxxx a) FCL a/c Dr xxxx

To FCL xxx To Exchange Fluct. xxxx
(Being monetary Items valued at (Being monetary items valued at
closing rate under Ind AS 21 ) closing rate under Ind AS 21)
b) Cash Flow Hedge Res. a/c Dr xxxx c) Exchange Fluct. a/c Dr xxxx
To Exchange Fluctuation xxxx To Cash flow Hedge Res. xxxx
(Being Exchange fluctuation (Being Exchange Fluctuation
Transferred ) Transferred )

Step II : At B/s date, we should also value forward contract at fair value because It
is a derivative contract which needs to be presented at fair value as follows :

1) Favourable Valuation : Derivative Financial Asset a/c Dr

To cash Flow Hedge Reserve
2) Unfavourable Valuation : Cash flow Hedge reserve a/c Dr
To Derivative Financial Asset

Step III: At B/s date, we should amortise the amount of premium on Hedged items
on SLM basis over the contract Life. It is our actual Loss and It will Hit
our P&L as Follows :-

Amortisation :- (Forward Rate – Spot Rate) x Units

Contract Period

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Journal :-
P& L a/c Dr xxxx
To Cash Flow Hedge Reserve xxxx
(Being Loss on Hedged Items written off)

(At the end of contract Period, there will be NIL balance in cash flow Hedge Reserve
because all entries shall have perfect offset)

Step VI : At settlement date, Liability will be paid off at current Rate, but Derivative
A/c will be settled as per its nature

Derivative Financial Asset=Collect Derivative Financial Liab. = Pay

Solution of Q.95 *(v.v.Imp)

Journal Entries (GBP)

1.1.x1 Bank a/c Dr 9319500

To Bonds 9319500
(Being Bonds issued having value of USD 15 millions at spot rate of .6213 )

31.12.x1 Step I : Monetary Items

Bonds a/c Dr 942000
To Exchange Fluct. 942000 (.6213- .5585) x 15000000 USD
(Being monetary Liab. Reported at Closing Rate)

Exchange Fluctuation a/c Dr 942000

To Cash flow Hedge Reserve A/c 942000
(Being Gain on reduction in Liab. Transferred)

Step II : Valuation of Derivatives

Cash Flow Hedge Reserve a/c Dr 957205
To Derivative Liab. 957205
(Being Derivative Liab. Booked)

Step III : Amortisation

[9835389 – 9319500] = 515889 = 171963
3 years 3

P&L a/c Dr 171963

To Cash flow Hedge Reserve 171963
(Being premium paid on hedge contract Amortised)

31.12.X2
a) Bonds a/c Dr 564000
To Exchange Fluctuation 564000
[( .5585 - .5209) x 15000000]

b) Exchange Fluctuation a/c Dr 564000

To cash flow Hedge Reserve 564000

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c) Cash flow hedge Reserve a/c Dr 876141

To Derivative Liab. 876141

d) P&L a/c Dr 171963

To cash flow hedge Reserve 171963

31.12.x3
a) Exchange Fluctuation a/c Dr 924000
To Bonds 924000
(.5825 - .5209) x 15000000

b) Cash flow hedge Reserve a/c Dr 924000

To Exchange Fluctuation 924000

c) Derivative Liab. a/c Dr 735557

To cash flow hedge Reserve 735557
(1833346 -1097789)

d) P&L a/c Dr 171963

To cash flow Hedge Reserve 171963

Statement showing CFHR A/c

X1 X2 X3
Opening Balance NIL 156758 Cr 16580 Cr
Monetary Items 942000 Cr 564000 Cr 924000 Dr
Derivatives 957205 Dr 876141 Dr 735557 Cr
Amortisation 171963 Cr 171963 Cr 171963 Cr
Closing Balance 156758 Cr 16580 Cr NIL

Statement Showing Current Value of Liab. & Derivative

a) Foreign Currency Loans

X1 X2 X3
Opening Balance 9319500 8377500 7813500
Exchange Fluctuation (924000) (564000) 924000
Closing Balance 8377500 7831500 8737500

To be paid

b) Derivative Liab = 9835389 – 8737500

= 1097889 to be paid

Journal : - Loan a/c Dr 8737500

Derivative Liab a/c Dr 1097889
To Bank 9835389
(Being forward contract settled)

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Solution of Q.96 (10 Marks)

Case I : Hedge A/c’s

30.12.x1 Bank a/c Dr 50000000

To Borrowings 50000000
(Being 10 Lacs USD @ 50 Borrowed)

31.3.x2 Exchange Fluctuation a/c Dr 2000000

To Borrowings 2000000
(52-50) x 10 Lacs USD

Cash flow Hedge Reserve a/c Dr 2000000

To Exchange Fluctuation 2000000

Derivative Asset a/c Dr 1500000 (25-10)

To cash flow hedge Reserve 1500000

P&L a/c Dr 83333 (10 Lacs/12) Qtrs

To cash flow hedge Reserve 83333

30.6.x2 Exchange fluctuation a/c Dr 3000000

To Borrowings 3000000
(55-52) x 10 L USD

CFHR a/c Dr 3000000

To Exchange Fluctuation 3000000

Derivative Asset a/c Dr 4000000

To CFHR 4000000

P&L a/c Dr 83333

To CFHR 83333

Case II : If No hedge has taken

If there will be no Hedge contract then fluctuation in Borrowings and

Derivative will be written off in same year in P&L instead of accumulatry in CFHR.

Fair value Hedge

(Related with commodities)

Stocks/ Inventories MCX

Example :
i. Inventory : 1 Kg silver
ii. Advance Sale (2m) : 40000
iii. Actual Rate after 2m : 38000

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Solution:
i. Physical Sale : Bank a/c Dr 38000
(after 2m) To sales 38000
(Being goods sold at current Rate)

ii. Fair value Hedge : Bank a/c Dr 2000

To F. V. H. Res 2000
(Being profit realised)
F. V. H. Res. a/c Dr 2000
To P&L 2000
(Being Income recognised)

Example :- What will happen if rate is 41000 after 2m

Solution:-
i. Bank a/c Dr 41000
To sales 41000
ii. FVHR a/c Dr 1000
To Bank 1000
iii. P&L a/c Dr 1000
To FVHR 1000

Under Fair value hedge, we manage our risk to avoid fluctuation in prices of commodities
by advance sale or purchase in MCX. The fluctuation in prices of commodities will be
transferred to P&L A/c

*Part XIII*

Unit 8 : De-Recognition of financial Liability *(v.v.Imp)

Types of De-Recognition of Financial liability

Full Settlement Strategic Debt Early Repayment to

Restructuring Reduce the term of
Repayment

Case I : Full Settlement

If any Financial Liability is repaid in cash, goods, services or any other financial Asset
then it will be removed from Financial statements automatically. It is the normal way
to remove/derecognise financial Assets from the books.

Case II : Strategic Debt Restructuring (*Imp)

Under SDR, Existing Liability is Restructured with New liability due to fall in market
Interest rates or due to financial difficulties for payment of original Liability. We
Have following Accounting model to deal with “SDR” as follows :-

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Accounting for “SDR”

Test : 10% condition

If it is satisfied If it is Failed

Apply : Extinguishment Apply : Modification

Accounting Accounting

Concept 1 : “How 10% condition is Tested”

Under 10% Test, we calculate Fluctuation in carrying amount of existing Liability at
Original “ERR”. If such fluctuation becomes 10% or more in existing liability then we will
Apply “Extinguishment Accounting” otherwise we will go for “Modification Accounting”

Statement showing fluctuation in carrying Amount

Present value of cash outflows under new terms at original ERR xxxx

Interest Principal Transaction cost (if any)

Book Value of Existing liability (xxxx)
Difference xxxx
Carrying Amt

% of Diff = Difference x 100

Carrying Amt

Solution Q.97
Calculation of % of Fluctuation in Carrying Amt

i. Present value of cash outlows under New Terms at original ERR :-

a) Interest (10L x 5% x4.868) (x5-x11@10%) 243400
b) Principal (15L x .513) 769500
c) T.cost (1L x1) 100000
1112900
ii. Existing carrying Amt (1000000)
Diff. 112900

% of Diff. = 112900 x 100 = *11.29%

1000000
 It is more than 10% due to which we will go for extinguishment Accounting

Solution Q.98
Calculation of % of Fluctuation in carrying Amt

Present value of cash outflows under New Terms at original ERR

i. Interest =0

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ii. Principal (1600000 x .621) (5th @10%) = 993600

iii. Legal fees (50000x1) = 50000 1043600
Carrying Amount of Existing Liability (1000000)
Difference 43600

% of Diff. = 43600 x 100 =4.36%

1000000
 % of Difference is Less than 10% due to which we should go for modification
Accounting.

Solution of Q.100 (*Imp)

A. Calculation of carrying amount at 31.12.x2 (SDR)

Amortisation Table

Period Opening Balance Interest Actual Payment Closing

@11.5% Balance
0 500000000 - 5870096 (Fees) 494129904
20x1 494129904 56824939 155000000 395954843
50cr+50cr x 11%
5I
20x2 395954843 45534807 (44000000) 397489650
(40crore x 11%)

B. Calculation of Present value of cash outflow under New Terms @ 11.5%

Period Cash outflow PVF @11.5% Present Value

20x3 (40 Cr x 15%)+4 Cr .897 89700000
20x4 (36 Cr x 15%)+4 Cr .804 75576000
20x5 (32 Cr x 15%)+4 Cr .721 63448000
20x6 (28 Cr x 15%)+4 Cr .647 53054000
20x7 (24 Cr x 15%)+4 Cr .580 44080000
20x8 (20 Cr x 15%)+4 Cr .520 36400000
20x9 (16 Cr x 15%)+4 Cr .467 29888000
20x10 (12 Cr x 15%)+4 Cr .419 24302000
20x11 (8 Cr x 15%)+4 Cr .378 19500000
20x12 (4 Cr x 15%)+4 Cr .337 15502000
P.V of New Terms at 11.5% 451450000

Diff. =451450000 -397489650 = 53960350

% of Diff. = 53960350 x 100 = 13.57 %
397489650

 % of Diff is more than 10% due to which It should be considered as a significant

Change.so we should go for Extinguishment model for de recognition of Liability

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Concept 2 : Rules if extinguishment model is applied under SDR (*IMP)

Step I : De-recognise the carrying amount of Existing Liability.

Step II : Recognise the Fair value of liability under New terms
 Fair value should be calculated at market rate
 Fair value shall not include transaction cost because “Transaction cost will
be written off in P&L directly”
It can be said that T.cost cannot be
Amortised under Extinguishment model
Step III : Step I – Step II = Gain/Loss on Extinguishment

Solution of Q.97
Accounting under Extinguishment Model

A. Calculation of fair value of Liability at 11%

i. Interest (10L x 5%x 4.712) = 235600
ii. Principal (15L x .482) = 723000
958600

B. Journal Entries :
1.1.x5
a) Existing Liab. a/c Dr 1000000
To New Liab. 958600
To Gain on Ext. 41400
(Being Extinguishment of Liab made)
1.1.x5
b) Legal Fees a/c Dr 100000
To Bank 100000
(Being Legal fees paid)

Year End = 41400 (Cr) + 100000 Dr =Net Loss due to Exting =58600

Solution of Q.100

A. Calculation of fair value of new liability

Period Cash outflow PVF @ 15% Present Value

X3 10 Cr (40x15% +40/10I) .870 87000000
X4 9.4 Cr .756 71064000
X5 8.8 Cr .658 57904000
X6 8.2 Cr .572 46904000
X7 7.6 Cr .497 37772000
X8 7 Cr .432 30240000
X9 6.4 Cr .376 24064000
X10 5.8 Cr .327 18966000
X11 5.2 Cr .284 14768000
X12 4.6 Cr .247 11362000
400044000

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B. Journal

Exist. Liability a/c Dr 397489650

Loss on Ext. a/c Dr 2554350 (Bal)
To New Liability 400044000
(Being extinguishment of Liability made)

Concept 3 :Accounting under modification model

Step I : Don’t Derecognise carrying amount of existing liability but It should be

adjusted if transaction cost is incurred under new terms.
Existing Liab – Transaction cost (new terms) = Adjusted carrying amount

It means that transaction cost will be

Amortised over the new Term

Step II : Re-compute “ERR” to match outflows under new terms with adjusted carrying
Amount.

Step III : Prepare Amortisation Table by new ERR for New terms

Solution of Q.98

Journal : -
i. Legal fees a/c Dr 50000
To Bank 50000
ii. Existing Liability a/c Dr 50000
To Legal fees 50000

Amortisation Table

Period Opening balance Interest @ 10.99% Payment Closing Balance

1 950000 104405 - 1054405
2 1054405 115879 - 1170284
3 1170284 128614 - 1298898
4 1298898 142749 - 1441647
5 1441647 158437 - 1600000

Solution of Q.99

A. Calculation of % of change in carrying amount under new terms

Present value of cash outflows under new terms at original IRR 25 Crores
Existing Liability at carrying Amount ( 90 x 1/3) 30 Crores
Difference 5 Crores

% of diff = 5 Crores x 100 = 16.67% Apply Extinguish

30 Crores

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B. Settlement Entries

i. 2/3rd : Bank Loan a/c Dr 60 Crores (90 x 2/3)

To Equity share capital 56 Crores (70 x80%)
To Gain on settlement 4 Crores (Bal)

ii. 1/3rd : Existing Liab. a/c Dr 30 (90 x 1/3)

To new Liability 28 (FV)
To Gain on Ext. 2 (Bal)

*Part XIV*

Case III : Early Payment

If early Payment is made for the settlement of Liabilities then difference
between Actual payment and amortised value of liability on the date of early payment
Will be considered as Profit/loss on settlement.

Journal : Liability a/c Dr xxxx ( carrying amount)

To Bank xxxx (payment)
(Diff = Payment – carrying Amount ) P/L on settlement

“Early Payment in CFI “

Compound Financial Instrument

Step I : Split off the payment on Early Redemption between payment for Liability
Component & Equity component because we will de-recognise the both
Components at the time of early payment as follows :-

Payment to be made

Fair value of Future cash flows Payment for Equity

At current Market Rate component (Bal Fig)

Payment for Liability component

Step II : Difference between carrying amount of Lability & Equity with payment made
For Liability & Equity will be transferred to P&L A/c

Solution of Q. 39

Statement showing liability component & Equity component in Payment

Payment to be made 1100000

Fair value of F>C>F for Liability component (1009120)
(1060000 x .952)
Payment for Equity component (Bal fig) 90880

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Journal Entries :-

i. Liability component a/c Dr 972476

Loss on settlement a/c Dr 36644 (Bal)
To Bank 1009120
(Being early settlement of Liability component made)

ii. Equity component a/c Dr 75939

Loss on settlement a/c Dr 14941 (Bal)
To Bank 90880
(Being early settlement of equity component made)

Unit 9 : De-recognition of Financial Assets

An entity can remove financial asset from its books only if the following conditions
(any one) are satisfied :-
I. If future cash flows from the asset have been ceased OR
II. If entity has transferred its contractual right to receive cash to 3rd party OR
III. If entity has transferred risks & rewards incidental to ownership of an Asset
To 3rd Party.

Meaning : Entity has transferred control over the Asset

If all conditions as specified in above are satisfied on a part of Asset then partial De-
recognition will be made otherwise full de-recognition will be made.

Journal : Bank a/c Dr xxxx (consideration)

To Financial Asset xxxx (carrying Amount)
(Diff. will be transferred to P&L A/c)

Solution of Q.102, 101 (Discussed in class)

“Special cases for understanding”

Case I : Re-purchase Agreements

If financial Asset is sold with Re-purchase agreement then we will not
De-recognise the sold asset subject to some conditions : -
i. Re-purchase price and return on lender money should be fixed on date
Of sale of fixed Asset +
ii. Re-purchase should be of same asset or similar Asset
CCFC
If the specified conditions are not satisfied then we will de-recognise the F.Asset
Even if there is a re-purchase agreement.

Solution of Q.104 (Discussed in class)

Case II : Option contracts for the sold Assets (*Imp)

An Entity can avoid De-recognition of a financial Asset if It sells an Asset in

One contract, but It expects to recognise it again under an option contract. As per

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the rules, De-recognition cannot be avoided if It expects very less chance of

excercising the option.

Solution of Q.105,106 (Discussed in class)

Case III : Continuing Involvement Assets with Associated Liability (*Imp)

(sale of Assets with Guarntee)

If an entity gives guarantee to Buyer of financial Asset for future credit Loss in
Financial Asset then Entity should apply the following steps for de-recognition of
F.Assets :-
Step I : De-recognition of Asset
Bank a/c Dr xxxx (consideration)
To F.Asset xxxx (carrying amount)
(Diff : It will be Gain/Loss)

Step II : Involvement Asset a/c Dr xxxx (Guarntee Amt)

To Associated Liability xxxx (Guarnteed Amt + Fair value
Of Guarntee)
(Diff : Loss will be transferred to P&L A/c )

Future : Credit risk arises Credit risk does not arise

1) Associated Liab a/c Dr Associated Liab a/c Dr
To Bank To Involvement Asset
2) P&L a/c Dr (Reversal)
To Involvement Asset

Solution of Q.107A

Journal Entries :-

i. Bank a/c Dr 90
Loss on Sale a/c Dr 5 (Bal)
To Debtors 95
(Being Assets de-recognised)

ii. Involvement Assets a/c Dr 5

Loss on Guarntee a/c Dr .50
To Associated Liability 5.5
(Being recognition of Guarntee made)

Case IV : Early collection

If any Financial Asset is collected before its due date then we will calculate difference
Between collected amount & amortised value in Books and it will be transferred to P&L
A/c.
Bank A/c Dr xxxx consideration
To F.Asset xxxx amortised value
(Diff = consideration –Amortisation =Gain/Loss)

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Case V : If early collection is made for part of Asset (*Imp)

If any Part collection is made before due date then It should be divided under 2 heading
As Follows
Part Payment

Adjustment against Asset Adjustment against prepaid

Exp (bal. fig)

Carrying Amount in books xxxx

Fair value for Future cash Flows (xxxx)
xxxx

Bank a/c Dr
To FA
To Prepaid Expense

Solution of Q.62 Early part collection (*v.v.Imp)

A. Calculation of fair value of Assets

a) Fair value of Future cash flows @12%

I. 258000 x .893 = 230394
II. 244000 x .797 = 194468
III. 228000 x .712 = 162336
IV. 216000 x .635 = 137160
V. 208000 x .567 = 117936
842294

b) Prepaid salaries = 1000000 – 842294 = 157706

Staff Loan a/c Dr 842294
Prepaid Salaries a/c Dr 157706
To Bank 1000000
(Being Loans given to staff)

B. Calculation of carrying amount in staff Loan & prepaid Exp. At 31.12.x2

1) Amortisation Table upto 31.12.x2

Period Opening balance Interest @12% Payment Closing Balance

20x1 842294 101075 (258000) 685369
20x2 685369 82244 (244000) 523613

2) Prepaid Salaries
Initially recognised 157706
a) Amortisation in 20x1 (157706/5Y) (31541)
b) Amortisation in 20x2 (157706/5Y) (31541)
Balance 94624

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C. Calculation of Fair value of Future cash flows at 31.12.x2

20x3 216000 x .893 = 192888

20x4 208000 x.797 = 165776
358664 we have to continue with it

D. Statement showing De-recognition

Collection = 200000

Reversal in Staff Loan Prepaid Salaries

Carrying Amt Existing = 523613 (Bal : 35051)
To be continued = 358664
Reversal = 164949

Journal : Bank a/c Dr 200000

To staff loan 164949
To Prepaid Salary 35051

E. Revised Amortisation Table

Period Opening Balance Int 12% Payment Closing Balance

20x3 358664 43040 (216000) 185704
20x4 185704 22296 (Bal) (208000) NIL

F. Revised Prepaid = 94624 – 35051 = 29786 P.a

2Y

*Part XV*

Ind AS 107 : Disclosures

Disclosures for Financial Instruments

 Balance sheet
 Profit & Loss A/c
 Other Disclosures xxxx

Case I : Disclosures in Balance Sheet

Concept 1 : Financial Assets

a) Disclosure of each financial Asset should be made separately for each category

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Financial Assets

Debt Instrument Equity Instruments Derivatives

FVPL
7
Amortised FVOCVI FVPL For Not For
Method (Recycling) Trading Trading
1 2 3
FVPL
4 FVPL or FVOCI (Irrevocable)
5 (Non Recycling)
6

b) Cumulative changes in fair value of Assets till current Financial year

c) Changes in fair Value of financial Assets for current Financial Year
d) Re-classifications in category of financial Assets
e) Credit Risk Allowance
f) De-recognition of Financial Assets (wholly or Partly)

Concept 2 : Financial Liability

a) Disclosure for each financial Liability should be made separately for each category

Financial Liability

Amortised Method FVPL

(Contractual obligation ) (Derivatives)

b) Cumulative changes in Fair value/Carrying Amt till current financial Year

c) Changes in values in Current financial Year
d) De-recognition of FL (Partly/wholly)

Case II : Disclosures in P&L A/c

i. Interest Expense/Interest Income at ERR (Market Terms)

ii. Interest Expense/interest Income at Market rate (off Market terms)
iii. Gain/Loss on Re-classification
iv. Gain/loss on changes in fair value on B/s date
v. Gain/Loss on de-recognition of FA & FL
vi. OCI if recycled in P&L on disposal of Assets
vii. Credit Risk allowance if Provided
viii. Amortisation of Prepaid exp. if Assets are not at Market terms

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Off Set of FA & FL

As per Ind AS 32, FA & FL can be set off against each other if :
i. Balances are o/s between same parties &
ii. These Assets & Liability are of Similar Nature
(i.e., debtors, creditors but fixed rate loan can not be set off against variable Loan
Rate)

Additional Notes For Students

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

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