Financial Reporting Merged Compressed
Financial Reporting Merged Compressed
INDEX
1. Financial Reporting
less estimated costs necessary to make the sale as the event of reduction in selling price
took place after 31 st March, 20X2 and the reduced prices were not applicable as on
31 st March, 20X2. Comment on the company’s views.
4. XY Ltd took a large-sized civil construction contract, for a public sector undertaking, valued
at 200 crores. The execution of the project started during 20X1-20X2 and continued in
the next financial year also. During execution of the work on 29 th May, 20X2, the company
found while raising the foundation work that it had met a rocky surface and cost of contract
would go up by an extra 50 crores, which would not be recoverable from the contractee
as per the terms of the contract. The Company’s financial year ended on 31 st March, 20X2,
and the financial statements were considered and approved by the Board of Directors on
15 th June, 20X2. How will you treat the above in the financial statements for the year
ended 31 st March, 20X2?
5. A Ltd. was required to pay a penalty for a breach in the performance of a contract. A Ltd.
believed that the penalty was payable at a lower amount than the amount demanded by the
other party. A Ltd. created provision for the penalty but also approached the arbitrator with
a submission that the case may be dismissed with costs. A Ltd. prepared the financial
statements for the year 20X1-20X2, which were approved in May, 20X2. The arbitrator, in
April, 20X2, awarded the case in favour of A Ltd. As a result of the award of the arbitrator,
the provision earlier made by A Ltd. was required to be reduced. The arbitrator also
decided that cost of the case should be borne by the other party. Now, whether A Ltd. is
required to remeasure its provision and what would be the accounting treatment of the cost
that will be recovered by A Ltd., which has already been charged to the Statement of Profit
and Loss as an expense for the year 20X1-20X2?
6. A company manufacturing and supplying process control equipment is entitled to duty
drawback if it exceeds its turnover above a specified limit. To claim duty drawback, the
company needs to file an application within 15 days of meeting the specified turnover. If
the application is not filed within stipulated time, the Department has discretionary power of
giving duty draw back credit. For the year 20X1-20X2, the company has exceeded the
specified limit of turnover by the end of the reporting period but the application for duty
drawback is filed on 20 th April, 20X2, which is after the stipulated time of 15 days of
meeting the turnover condition.
Duty drawback has been credited by the Department on 28 th June, 20X2 and financial
statements have been approved by the Board of Directors of the company on
26 th July, 20X2. Whether duty drawback credit should be treated as an adjusting event?
7. XYZ Ltd. sells goods to its customer with a promise to give a discount of 5% on list price of
the goods provided that the payments are received from customer within 15 days. XYZ Ltd.
4. In the instant case, the execution of work started during the financial year 20X1-20X2 and
the rocky surface was there at the end of the reporting period, though the existence of
rocky surface is confirmed after the end of the reporting period as a result of which it
became evident that the cost may escalate by 50 crores. In accordance with the
definition of ‘Events after the Reporting Period’, since the rocky surface was there, the
condition was existing at the end of the reporting period, therefore, it is an adjusting event.
The cost of the project and profit should be accounted for accordingly.
5. In the instant case, A Ltd. approached the arbitrator before the end of the reporting period,
who decided the award after the end of the reporting period but before approval of the
financial statements for issue. Accordingly, the conditions were existing at the end of the
reporting date because A Ltd. had approached the arbitrator before the end of the reporting
period whose outcome has been confirmed by the award of the arbitrator. Therefore, it is
an adjusting event.
Accordingly, the measurement of the provision is required to be adjusted for the event
occurring after the reporting period. As far as the recovery of the cost by A Ltd. from the
other party is concerned, this right to recover was a contingent asset as at the end of the
reporting period.
As per para 35 of Ind AS 37, contingent assets are assessed continually to ensure that
developments are appropriately reflected in the financial statements. If it has become
virtually certain that an inflow of economic benefits will arise, the asset and the related
income are recognised in the financial statements of the period in which the change occurs.
If an inflow of economic benefits has become probable, an entity discloses the contingent
asset.
On the basis of the above, a contingent asset should be recognised in the financial
statements of the period in which the realisation of asset and the related income becomes
virtually certain. In the instant case, the recovery of cost became certain when the
arbitrator decided the award during financial year 20X2-20X3.
Accordingly, the recovery of cost should be recognised in the financial year 20X2-20X3.
6. In the instant case, the condition of exceeding the specified turnover was met at the end of
the reporting period and the company was entitled to the duty draw back but the application
for the same has been filed after the stipulated time. Therefore, credit of duty drawback is
discretionary in the hands of the Department. Accordingly, the duty drawback credit is a
contingent asset as at the end of the reporting period, which may be realized if the
Department credits the same.
between the end of the reporting period and the date when the financial statements are
approved by the Board of Directors in case of a company, and, by the corresponding
approving authority in case of any other entity for issue. Two types of events can be
identified:
(a) those that provide evidence of conditions that existed at the end of the reporting
period (adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period)
In the instant case, the demand notice has been received on 15 th June, 20X2, which is
between the end of the reporting period and the date of approval of financial statements.
Therefore, it is an event after the reporting period. This demand for an additional amount
has been raised because of higher rate of excise duty levied by the Excise Department in
respect of goods already manufactured during the reporting period. Accordingly, the
condition exists on 31 st March, 20X2, as the goods have been manufactured during the
reporting period on which additional excise duty has been levied and this event has been
confirmed by the receipt of demand notice. Therefore, it is an adjusting event.
In accordance with the principles of Ind AS 37, the company should make a provision in the
financial statements for the year 20X1-20X2, at best estimate of the expenditure to be
incurred, i.e., 15,00,000.
The weightage average cost of capital of PT Ltd. is 11%. The total debt as on measurement
date is 1,465 crores and the surplus cash & cash equivalent is
106.14 crores.
The total numbers of shares of PT Ltd. as on the measurement date is 8,52,84,223 shares.
Determine value per share of PT Ltd. as per Income Approach.
5. You are a senior consultant of your firm and are in process of determining the valuation of
KK Ltd. You have determined the valuation of the company by two approaches i.e. Market
Approach and Income approach and selected the highest as the final value. However, based
upon the discussion with your partner you have been requested to assign equal weights to
both the approaches and determine a fair value of shares of KK Ltd. The details of the KK
Ltd. are as follows:
Particulars in crore
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9
Determine the Equity value of KK Ltd. as on the measurement date on the basis of above
details.
6. Comment on the following by quoting references from appropriate Ind AS.
(i) DS Limited holds some vacant land for which the use is not yet determined. The land
is situated in a prominent area of the city where lot of commercial complexes are coming
up and there is no legal restriction to convert the land into a commercial land.
The company is not interested in developing the land to a commercial complex as it is not
its business objective. Currently the land has been let out as a parking lot for the
commercial complexes around.
The Company has classified the above property as investment property. It has
approached you, an expert in valuation, to obtain fair value of the land for the purpose of
disclosure under Ind AS.
On what basis will the land be fair valued under Ind AS?
(ii) DS Limited holds equity shares of a private company. In order to determine the fair value'
of the shares, the company used discounted cash flow method as there were no similar
shares available in the market.
Under which level of fair value hierarchy will the above inputs be classified?
What will be your answer if the quoted price of similar companies were available and can
be used for fair valuation of the shares?
7. On 1 st January, 20X1, A Ltd assumes a decommissioning liability in a business combination.
The reporting entity is legally required to dismantle and remove an offshore oil platform at
the end of its useful life, which is estimated to be 10 years. The following information is
relevant:
If A Ltd was contractually allowed to transfer its decommissioning liability to a market
participant, it concludes that a market participant would use all of the following inputs,
probability weighted as appropriate, when estimating the price it would expect to receive:
a. Labour costs
Labour costs are developed based on current marketplace wages, adjusted for
expectations of future wage increases, required to hire contractors to dismantle and
remove offshore oil platforms. A Ltd. assigns probability to a range of cash flow
estimates as follows:
(ii) Based on the facts given in the aforementioned part (i), assume that, Entity A estimates
the fair value of the shares it owns in company XYZ using a net asset valuation
technique. The fair value of company XYZ’s net assets including those recognised in
its balance sheet and those that are not recognised is 8,50,000. Determine the fair
value of Entity A’s investment in XYZ’s shares.
Answers
1. (i) If Market A is the principal market
If Market A is the principal market for the asset (i.e., the market with the greatest volume
and level of activity for the asset), the fair value of the asset would be measured using
the price that would be received in that market, after taking into account transport costs.
Fair Value will be
Price receivable 26
Less: Transportation cost (2)
Fair value of the asset 24
Market A Market B
Price receivable 26 25
Less: Transaction cost (3) (1)
Less: Transportation cost (2) (2)
Fair value of the asset 21 22
Since the entity would maximise the net amount that would be received for the asset in
Market B i.e. 22, the fair value of the asset would be measured using the price in
Market B.
Price receivable 25
Less: Transportation cost (2)
Fair value of the asset 23
2. The highest and best use of the land is determined by comparing the following:
The value of the land as currently developed for industrial use (i.e., an assumption that
the land would be used in combination with other assets, such as the factory, or with
other assets and liabilities); and
The value of the land as a vacant site for residential use, taking into account the costs of
demolishing the factory and other costs necessary to convert the land to a vacant site.
The value under this use would take into account risks and uncertainties about whether
the entity would be able to convert the asset to the alternative use (i.e., an assumption
that the land would be used by market participants on a stand-alone basis).
The highest and best use of the land would be determined on the basis of the higher of these
values. In situations involving real estate appraisal, the determination of highest and best use
might take into account factors relating to the factory operations (e.g., the factory’s operating
cash flows) and its assets and liabilities (e.g., the factory’s working capital).
3. Determination of Enterprise Value of XYZ Ltd.
Particulars in crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320
Particulars in crore
Enterprise Value of XYZ Ltd. 320
ABC Ltd.’s share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & Non-controlling stake discount (5%+5%=10%) (1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd. 14.4
6. (i) As per Ind AS 113, a fair value measurement of a non-financial asset takes into account
a market participant’s ability to generate economic benefits by using the asset in its
highest and best use or by selling it to another market participant that would use the
asset in its highest and best use.
In the given case, DS Limited adopted discounted cash flow method, commonly used
technique to value shares, to fair value the shares of the private company as there were
no similar shares traded in the market. Hence, it falls under Level 3 of fair value hierarchy.
Level 2 inputs include the following:
(a) quoted prices for similar assets or liabilities in active markets.
(b) quoted prices for identical or similar assets or liabilities in markets that are not active.
(c) inputs other than quoted prices that are observable for the asset or liability.
If an entity can access quoted price in active markets for identical assets or liabilities of
similar companies which can be used for fair valuation of the shares without any
adjustment, at the measurement date, then it will be considered as observable input and
would be considered as Level 2 inputs.
7.
Amount
(In Crore)
Expected Labour Cost (Refer W.N.) 131.25
Allocated Overheads (80% x 131.25 Cr) 105.00
Profit markup on Cost (131.25 + 105) x 20% 47.25
Total Expected Cash Flows before inflation 283.50
Inflation factor for next 10 years (4%) (1.04) 10 =1.4802
Expected cash flows adjusted for inflation 283.50 x 1.4802 419.65
Risk adjustment - uncertainty relating to cash flows (5% x 419.64) 20.98
Total Expected Cash Flows (419.65+20.98) 440.63
Discount rate to be considered = risk-free rate +
entity’s non-performance risk 5% + 3.5% 8.5%
Expected present value at 8.5% for 10 years (440.63 / (1.085 10 )) 194.97
Working Note:
Expected labour cost:
Cash Flows Estimates Probability Expected Cash Flows
100 Cr 25% 25 Cr
125 Cr 50% 62.50 Cr
175 Cr 25% 43.75 Cr
Total 131.25 Cr
Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) 8,40,000
As at 31 st March, 20X1, other costs incurred excluding the air conditioners are 6,00,000.
Whether Company X should include cost of the air conditioners in measure of its progress
of performance obligation? How should revenue be recognized for the year ended
March 20X1?
4. An entity G Ltd. enters into a contract with a customer P Ltd. for the sale of a machinery for
20,00,000. P Ltd. intends to use the said machinery to start a food processing unit. The
food processing industry is highly competitive and P Ltd. has very little experience in the
said industry.
P Ltd. pays a non-refundable deposit of 1,00,000 at inception of the contract and enters
into a long-term financing agreement with G Ltd. for the remaining 95 per cent of the
agreed consideration which it intends to pay primarily from income derived from its food
processing unit as it lacks any other major source of income. The financing arrangement is
provided on a non-recourse basis, which means that if P Ltd. defaults then G Ltd. can
repossess the machinery but cannot seek further compensation from P Ltd., even if the full
value of the amount owed is not recovered from the machinery. The cost of the machinery
for G Ltd. is 12,00,000. P Ltd. obtains control of the machinery at contract inception.
When should G Ltd. recognize revenue from sale of machinery to P Ltd. in accordance with
Ind AS 115?
5. Entity I sells a piece of machinery to the customer for 2 million, payable in 90 days.
Entity I is aware at contract inception that the customer might not pay the full contract
price. Entity I estimates that the customer will pay atleast 1.75 million, which is sufficient
to cover entity I's cost of sales ( 1.5 million) and which entity I is willing to accept because
it wants to grow its presence in this market. Entity I has granted similar price concessions
in comparable contracts.
Entity I concludes that it is highly probable that it will collect 1.75 million, and such
amount is not constrained under the variable consideration guidance.
What is the transaction price in this arrangement?
6. On 1 st January 20X8, entity J enters into a one-year contract with a customer to deliver
water treatment chemicals. The contract stipulates that the price per container will be
adjusted retroactively once the customer reaches certain sales volume, defined, as follows:
500 20%
1,000 10%
Determine the transaction price.
10. Construction Company C enters into a contract with Customer E to build an asset.
Depending on when the asset is completed, C will receive either 1,10,000 or 1,30,000.
As per paragraph 47 of Ind AS 115, “An entity shall consider the terms of the contract and
progress in paragraph 39, do not depict the entity’s performance in transferring control of
goods or services to the customer”.
In accordance with the above, Company X assesses whether the costs incurred to procure
the air conditioners are proportionate to the entity’s progress in satisfying the performance
obligation. The costs incurred to procure the air conditioners ( 10,00,000) are significant
relative to the total costs to completely satisfy the performance obligation ( 40,00,000).
Also, Company X is not involved in manufacturing or designing the air conditioners.
Company X concludes that including the costs to procure the air conditioners in the
measure of progress would overstate the extent of the entity’s performance. Consequently,
in accordance with paragraph B19 of Ind AS 115, the entity adjusts its measure of progress
to exclude the costs to procure the air conditioners from the measure of costs incurred and
from the transaction price. The entity recognizes revenue for the transfer of the air
conditioners at an amount equal to the costs to procure the air conditioners (i.e., at a zero
margin).
Company X assesses that as at March, 20X1, the performance is 20 per cent complete
(i.e., 6,00,000 / 30,00,000). Consequently, Company X recognizes the following-
As at 31 st March, 20X1
Amount in
Revenue 18,00,000
Cost of goods sold 16,00,000
Profit 2,00,000
are subsequently met. Depending on the facts and circumstances relating to the contract,
the liability recognized represents the entity’s obligation to either transfer goods or services
in the future or refund the consideration received. In either case, the liability shall be
measured at the amount of consideration received from the customer.
In accordance with the above, in the given case G Ltd. should account for the non-
refundable deposit of 1,00,000 payment as a deposit liability as none of the events
described in paragraph 15 have occurred—that is, neither the entity has received
substantially all of the consideration, nor it has terminated the contract. Consequently, in
accordance with paragraph 16, G Ltd. will continue to account for the initial deposit as well
as any future payments of principal and interest as a deposit liability until the criteria in
paragraph 9 are met (i.e. the entity is able to conclude that it is probable that the entity will
collect the consideration) or one of the events in paragraph 15 has occurred. Further,
G Ltd. will continue to assess the contract in accordance with paragraph 14 to determine
whether the criteria in paragraph 9 are subsequently met or whether the events in
paragraph 15 of Ind AS 115 have occurred.
5. Entity I is likely to provide a price concession and accept an amount less than 2 million in
exchange for the machinery. The consideration is therefore variable. The transaction price
in this arrangement is 1.75 million, as this is the amount which entity I expects to receive
after providing the concession and it is not constrained under the variable consideration
guidance. Entity I can also conclude that the collectability threshold is met for 1.75
million and therefore contract exists.
6. The transaction price is 90 per container based on entity J's estimate of total sales
volume for the year, since the estimated cumulative sales volume of 2.8 million containers
would result in a price per container of 90. Entity J concludes that based on a
transaction price of 90 per container, it is highly probable that a significant reversal in the
amount of cumulative revenue recognized will not occur when the uncertainty is resolved.
Revenue is therefore recognized at a selling price of 90 per container as each container
is sold. Entity J will recognize a liability for cash received in excess of the transaction price
for the first 1 million containers sold at 100 per container (that is, 10 per container) until
the cumulative sales volume is reached for the next pricing tier and the price is
retroactively reduced.
For the quarter ended 31 st March, 20X8, entity J recognizes revenue of 63 million
(700,000 containers x 90) and a liability of 7 million [700,000 containers x ( 100 -
90)].
Entity J will update its estimate of the total sales volume at each reporting date until the
uncertainty is resolved.
7. Entity K records sales to the retailer at a transaction price of 47.50 ( 50 less 25% of
10). The difference between the per unit cash selling price to the retailers and the