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Financial Reporting Merged Compressed

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0% found this document useful (0 votes)
22 views363 pages

Financial Reporting Merged Compressed

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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 363

PAPER-1 FINANCIAL REPORTING

INDEX

1. Financial Reporting

● Conceptual Framework—------------------------------------------------------------ 2.7


● Test your knowledge-1………………………………………………………. 11.223
● Test your Knowledge-2 ……………………………………………………… 13.197
● Ind AS 1 “Presentation of Financial Statements”.................................... 3.68
● Ind AS 34 “Interim Financial Reporting”...................................................3.105
● Ind AS 7 “Statement of Cash Flows”........................................................3.156
● Ind AS 8 “Accounting Policies, Changes in Accounting Estimates and
Errors”........................................................................................................4.41
● Ind AS 10 “Events after the Reporting Period”..........................................4.8
● Ind AS 113 “Fair Value Measurement”......................................................4.117
● Ind AS 115 “Revenue from Contracts with Customers”...........................5.146
● Ind AS 2 “Inventories”................................................................................6.36
● Ind AS 16 “Property, Plant and Equipment”..............................................6.87
● Ind AS 23 “Borrowing Costs”.....................................................................6.126
● Ind AS 36 “Impairment of Assets”.............................................................6.198
● Ind AS 38 “Intangible Assets”....................................................................6.276
● Ind AS 40 “Investment Property”...............................................................6.312
● Ind AS 105 “Non-current Assets Held for Sale and Discontinued
Operations”...............................................................................................6.352
● Ind AS 116 “Leases”.................................................................................6.514
● Ind AS 41 “Agriculture”.............................................................................. 7.22
● Ind AS 20 “Accounting for Government Grants and Disclosure of Government
Assistance”..........................................................................................7.5
● Ind AS 102 “Share Based Payment”..................................................7.11
● Ind AS 19 “Employee Benefits”...........................................................8.9
● Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets”...8.113
● Ind AS 12 “Income Taxes”..................................................................9.82
● Ind AS 21 “The Effects of Changes in Foreign Exchange Rates”..............9.122
● Ind AS 24 “Related Party Disclosures”.......................................................10.3
● Ind AS 33 “Earnings per Share”................................................................10.9
● Ind AS 108 “Operating Segments”..............................................................10.129
● Ind AS 103 “Business Combinations”..........................................................12.120
● Ind AS 101 “First-time Adoption of Ind AS”..................................................14.47
● Analysis of Financial Statements……………………………………………….15.33
● Professional and Ethical Duty of a Chartered Accountant…………………..16.43
● Accounting and Technology……………………………………………………..17.33
4.80 a
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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE


Questions
1. The AGM of ABC Ltd for the year ended 31 st March, 20X2 was held on 10 th July, 20X2 and
Board Meeting has been conducted on 15 th May, 20X2. Meanwhile, the company had to
disclose certain financial information pertaining to the year ended 31 st March, 20X2 to SEBI
as per SEBI regulations on 20 th April, 20X2. Since, certain financial information pertaining to
the year ended 31 st March, 20X2 is submitted to SEBI before approval of financial statements
by the Board, the management is suggesting that 20 th April 20X2 shall be considered as ‘after
the reporting period’. Whether the management view is correct in accordance with the
guidance given in Ind AS 10?
2. ABC Ltd. is in a legal suit against the GST department. The company gets a court order in
its favour on 15 th April, 20X2, which resulted into reducing the tax liability as on
31 st March, 20X2. The financial statements for 20X1-20X2 were approved by the board of
directors on 15 th May, 20X2. The management has not considered the effect of the
transaction as the event is favourable to the company. The company’s view is that
favourable events after the reporting period should not be considered as it would hamper
the realisation concept of accounting. Comment on the company’s views in the light of Ind
AS 10.
3. ABC Ltd. trades in laptops. On 31 st March, 20X2, the company has 50 laptops which were
purchased at 45,000 each. The company has considered the same price for calculation
of closing inventory valuation. On 15 th April, 20X2, advanced version of same series of
laptops is introduced in the market. Therefore, the price of the current laptops goes down
to 35,000 each. The financial statements for 20X1-20X2 were approved by the board of
directors on 15 th May, 20X2. The company does not want to value the stock at 35,000

© The Institute of Chartered Accountants of India


INDIAN ACCOUNTING STANDARD 10 4.81

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.

© The Institute of Chartered Accountants of India


4.82 a
2.82 FINANCIAL REPORTING
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sold goods for 5 lakhs to ABC Ltd. between 17 th March, 20X2 and 31 st March, 20X2.
ABC Ltd. paid the dues by 15 th April, 20X2 with respect to sales made between
17 th March, 20X2 and 31 st March, 20X2. Financial statements were approved for issue by
Board of Directors on 31 st May, 20X2.
State whether discount will be adjusted from the sales at the end of the reporting period.
8. Whether the fraud related to 20X1-20X2 discovered after the end of the reporting period but
before the date of approval of financial statements for 20X3-20X4 is an adjusting event?
9. X Ltd. was having investment in the form of equity shares in another company as at the end
of the reporting period, i.e., 31 st March, 20X2. After the end of the reporting period but
before the approval of the financial statements it has been found that value of investment
was fraudulently inflated by committing a computation error. Whether such event should be
adjusted in the financial statements for the year 20X1-20X2?
10. ABC Ltd. received a demand notice on 15 th June, 20X2 for an additional amount of
28,00,000 from the Excise Department on account of higher excise duty levied by the
Excise Department compared to the rate at which the company was creating provision and
depositing the same in respect of transactions related to financial year 20X1-20X2. The
financial statements for the year 20X1-20X2 are approved on 10 th August, 20X2. In
July, 20X2, the company has appealed against the demand of 28,00,000 and the
company has expected that the demand would be settled at 15,00,000 only. Show how
the above event will have a bearing on the financial statements for the year 20X1-20X2.
Whether these events are adjusting or non-adjusting events and explain the treatment
accordingly.
Answers
1. As per Ind AS 10, even if partial information has already been published, the reporting
period will be considered as the period between the end of the reporting period and the
date of approval of financial statements. In the above case, the financial statements for the
year 20X1-20X2 were approved on 15 th May, 20X2. Therefore, for the purposes of
Ind AS 10, ‘after the reporting period’ would be the period between 31 st March, 20X2 and
15 th May, 20X2.
2. As per Ind AS 10, even favourable events need to be considered. What is important is
whether a condition exists as at the end of the reporting period and there is evidence for
the same.
3. As per Ind AS 10, the decrease in the net realizable value of the stock after the reporting
period should normally be considered as an adjusting event.

© The Institute of Chartered Accountants of India


INDIAN ACCOUNTING STANDARD 10 4.83

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.

© The Institute of Chartered Accountants of India


4.84 a
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As per para 35 of Ind AS 37, contingent assets are assessed continually to ensure that
developments are appropriately reflected in the financial statements. If it has become
virtually certain that an inflow of economic benefits will arise, asset and the related income
are recognized in the financial statements of the period in which the change occurs. If an
inflow of economic benefits has become probable, an entity discloses the contingent asset.
In accordance with the above, the duty draw-back credit which was contingent asset for the
financial year 20X1-20X2 should be recognized as asset and related income should be
recognized in the reporting period in which the change occurs. i.e., in the period in which
realization becomes virtually certain, i.e., financial year 20X2-20X3.
7. As per Ind AS 115, if the consideration promised in a contract includes a variable amount,
an entity shall estimate the amount of consideration to which the entity will be entitled in
exchange for transferring the promised goods or services to a customer.
In the instant case, the condition that sales have been made exists at the end of the
reporting period and the receipt of payment within 15 days time after the end of the
reporting period and before the approval of the financial statements confirms that the
discount is to be provided on those sales. Therefore, it is an adjusting event. Accordingly,
XYZ Ltd. should adjust the sales made to ABC Ltd. with respect to discount of 5% on the
list price of the goods.
8. In the instant case, the fraud is discovered after the end of the reporting period of 20X3-
20X4, which related to financial year 20X1-20X2. Since the fraud took place before the
end of the reporting period, the condition was existing which has been confirmed by the
detection of the same after the end of the reporting period but before the approval of
financial statements. Therefore, it is an adjusting event.
Moreover, Ind AS 10 in paragraph 9, specifically provides that the discovery of fraud or
error after the end of the reporting period, that shows that financial statements are
incorrect, is an adjusting event. Such a discovery of fraud should be accounted for in
accordance with Ind AS 8 if it meets the definition of prior period error.
9. Since it has been detected that a fraud has been made by committing an intentional error
and as a result of the same financial statements present an incorrect picture, which has
been detected after the end of the reporting period but before the approval of the financial
statements. The same is an adjusting event. Accordingly, the value of investments in the
financial statements should be adjusted for the fraudulent error in computation of value of
investments.
10. Ind AS 10 defines ‘Events after the Reporting Period’ as follows:
Events after the reporting period are those events, favourable and unfavourable, that occur

© The Institute of Chartered Accountants of India


INDIAN ACCOUNTING STANDARD 10 4.85

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 Institute of Chartered Accountants of India


INDIAN ACCOUNTING STANDARD 113 4.117

FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE


Questions
1. An asset is sold in 2 different active markets at different prices. An entity enters into
transactions in both markets and can access the price in those markets for the asset at the
measurement date.
In Market A:
The price that would be received is 26, transaction costs in that market are 3 and the
costs to transport the asset to that market are 2.
In Market B:
The price that would be received is 25, transaction costs in that market are 1 and the
costs to transport the asset to that market are 2.
You are required to calculate:
(i) The fair value of the asset, if market A is the principal market, and
(ii) The fair value of the asset, if none of the markets is principal market.
2. Company J acquires land in a business combination. The land is currently developed for
industrial use as a factory site. Although the land’s current use is presumed to be its highest
and best use unless market or other factors suggest a different use, Company J considers
the fact that nearby sites have recently been developed for residential use as high-rise
apartment buildings.
On the basis of that development and recent zoning and other changes to facilitate that
development, Company J determines that the land currently used as a factory site could be
developed as a residential site (e.g., for high-rise apartment buildings) and that market

© The Institute of Chartered Accountants of India


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FINANCIAL REPORTING
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participants would take into account the potential to develop the site for residential use when
pricing the land.
Determine the highest and best use of the land.
3. ABC Ltd. acquired 5% equity shares of XYZ Ltd. for 10 crores in the year 20X1-20X2. The
company is in process of preparing the financial statements for the year 20X2-20X3 and is
assessing the fair value at subsequent measurement of the investment made in
XYZ Ltd. Based on the observable input, ABC Ltd. identified a similar nature of transaction
in which PQR Ltd. acquired 20% equity shares in XYZ Ltd. for 60 crores. The price of such
transaction was determined on the basis of Comparable Companies Method (CCM)-
Enterprise Value (EV) / EBITDA which was 8. For the current year, the EBITDA of
XYZ Ltd. is 40 crores. At the time of acquisition, the valuation was determined after
considering 5% of liquidity discount and 5% of non-controlling stake discount. What will be
the fair value of ABC Ltd.’s investment in XYZ Ltd. as on the balance sheet date?
4. UK Ltd. is in the process of acquisition of shares of PT Ltd. as part of business reorganization
plan. The projected free cash flows of PT Ltd. for the next 5 years are as follows:
( in crores)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5


Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965

The weightage average cost of capital of PT Ltd. is 11%. The total debt as on measurement
date is 1,465 crores and the surplus cash & cash equivalent is
106.14 crores.
The total numbers of shares of PT Ltd. as on the measurement date is 8,52,84,223 shares.
Determine value per share of PT Ltd. as per Income Approach.
5. You are a senior consultant of your firm and are in process of determining the valuation of
KK Ltd. You have determined the valuation of the company by two approaches i.e. Market
Approach and Income approach and selected the highest as the final value. However, based
upon the discussion with your partner you have been requested to assign equal weights to
both the approaches and determine a fair value of shares of KK Ltd. The details of the KK
Ltd. are as follows:

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

© The Institute of Chartered Accountants of India


INDIAN ACCOUNTING STANDARD 113 4.119

Surplus cash & cash equivalent 106.14


Fair value of surplus assets and Liabilities 312.4
Number of shares of KK Ltd. 8,52,84,223 shares

Determine the Equity value of KK Ltd. as on the measurement date on the basis of above
details.
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:

© The Institute of Chartered Accountants of India


4.120 2. a
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Cash Flow Estimates: 100 Cr 125 Cr 175 Cr
Probability: 25% 50% 25%

b. Allocation of overhead costs:


Assigned at 80% of labour cost
c. The compensation that a market participant would require for undertaking the activity
and for assuming the risk associated with the obligation to dismantle and remove the
asset. Such compensation includes both of the following:
i. Profit on labour and overhead costs:
A profit mark-up of 20% is consistent with the rate that a market participant would
require as compensation for undertaking the activity
ii. The risk that the actual cash outflows might differ from those expected, excluding
inflation:
A Ltd. estimates the amount of that premium to be 5% of the expected cash flows.
The expected cash flows are ‘real cash flows’ / ‘cash flows in terms of monetary
value today’.
d. Effect of inflation on estimated costs and profits
A Ltd. assumes a rate of inflation of 4 percent over the 10-year period based on
available market data.
e. Time value of money, represented by the risk-free rate: 5%
f. Non-performance risk relating to the risk that Entity A will not fulfill the obligation,
including A Ltd.’s own credit risk: 3.5%
A Ltd, concludes that its assumptions would be used by market participants. In addition, A
Ltd. does not adjust its fair value measurement for the existence of a restriction preventing
it from transferring the liability.
You are required to calculate the fair value of the asset retirement obligation.
8. (i) Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company
XYZ has a total share capital of 5,000 shares with nominal value of 10. Entity XYZ’s
after-tax maintainable profits are estimated at 70,000 per year. An appropriate
price/earnings ratio determined from published industry data is 15 (before lack of
marketability adjustment). Entity A’s management estimates that the discount for the
lack of marketability of company XYZ’s shares and restrictions on their transfer is 20%.
Entity A values its holding in company XYZ’s shares based on earnings. Determine the
fair value of Entity A’s investment in XYZ’s shares.

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INDIAN ACCOUNTING STANDARD 113 4.121

(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

(ii) If neither of the market is the principal market


If neither of the market is the principal market for the asset, the fair value of the asset
would be measured using the price in the most advantageous market. The most
advantageous market is the market that maximises the amount that would be received
to sell the asset, after taking into account transaction costs and transport costs (i.e., the
net amount that would be received in the respective markets).

Market A Market B
Price receivable 26 25
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.

© The Institute of Chartered Accountants of India


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Fair value

Price receivable 25
Less: Transportation cost (2)
Fair value of the asset 23

2. The highest and best use of the land is determined by comparing the following:
 The value of the land as currently developed for industrial use (i.e., an assumption that
the land would be used in combination with other assets, such as the factory, or with
other assets and liabilities); and
 The value of the land as a vacant site for residential use, taking into account the costs of
demolishing the factory and other costs necessary to convert the land to a vacant site.
The value under this use would take into account risks and uncertainties about whether
the entity would be able to convert the asset to the alternative use (i.e., an assumption
that the land would be used by market participants on a stand-alone basis).
The highest and best use of the land would be determined on the basis of the higher of these
values. In situations involving real estate appraisal, the determination of highest and best use
might take into account factors relating to the factory operations (e.g., the factory’s operating
cash flows) and its assets and liabilities (e.g., the factory’s working capital).
3. Determination of Enterprise Value of XYZ Ltd.

Particulars in crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320

Determination of subsequent measurement of XYZ Ltd.

Particulars in crore
Enterprise Value of XYZ Ltd. 320
ABC Ltd.’s share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & Non-controlling stake discount (5%+5%=10%) (1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd. 14.4

© The Institute of Chartered Accountants of India


INDIAN ACCOUNTING STANDARD 113 4.123

4. Determination of equity value of PT Ltd.


( in crore)

Particulars Year 1 Year 2 Year 3 Year 4 Year 5


Cash flows 187.1 187.6 121.8 269 278.8
Terminal Value 3,965
Discount rate factor 0.9009 0.8116 0.7312 0.6587 0.5935
Free Cash Flow available to 168.56 152.26 89.06 177.19 2,518.69
the firm
Total of all years 3,105.76
Less: Debt (1,465)
Add: Cash & Cash equivalent 106.14
Equity Value of PT Ltd. 1,746.90
No. of Shares 85,284,223.0
Per Share Value 204.83

5. Equity Valuation of KK Ltd.


Particulars Weights ( in crore)
As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
Enterprise Valuation based on weights (5268.2 x 50%) + 4,251.7
(3235.2 x 50%)
Less: Debt obligation as on measurement date (1465.9)
Add: Surplus cash & cash equivalent 106.14
Add: Fair value of surplus assets and liabilities 312.40
Enterprise value of KK Ltd. 3204.33
No. of shares 85,284,223
Value per share 375.72

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.

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The highest and best use of a non-financial asset takes into account the use of the asset
that is physically possible, legally permissible and financially feasible, as follows:
(a) A use that is physically possible takes into account the physical characteristics of
the asset that market participants would take into account when pricing the asset
(eg the location or size of a property).
(b) A use that is legally permissible takes into account any legal restrictions on the
use of the asset that market participants would take into account when pricing the
asset (eg the zoning regulations applicable to a property).
(c) A use that is financially feasible takes into account whether a use of the asset that
is physically possible and legally permissible generates adequate income or cash
flows (taking into account the costs of converting the asset to that use) to produce
an investment return that market participants would require from an investment in
that asset put to that use.
Highest and best use is determined from the perspective of market participants, even if
the entity intends a different use. However, an entity’s current use of a non-financial
asset is presumed to be its highest and best use unless market or other factors suggest
that a different use by market participants would maximise the value of the asset.
To protect its competitive position, or for other reasons, an entity may intend not to use
an acquired non-financial asset actively or it may intend not to use the asset according
to its highest and best use. Nevertheless, the entity shall measure the fair value of a
non-financial asset assuming its highest and best use by market participants.
In the given case, the highest best possible use of the land is to develop a commercial
complex. Although developing a business complex is against the business objective of
the entity, it does not affect the basis of fair valuation as Ind AS 113 does not consider
an entity specific restriction for measuring the fair value.
Also, its current use as a parking lot is not the highest best use as the land has the
potential of being used for building a commercial complex.
Therefore, the fair value of the land is the price that would be received when sold to a
market participant who is interested in developing a commercial complex.
(ii) As per Ind AS 113, unobservable inputs shall be used to measure fair value to the extent
that relevant observable inputs are not available, thereby allowing for situations in which
there is little, if any, market activity for the asset or liability at the measurement date. The
unobservable inputs shall reflect the assumptions that market participants would use
when pricing the asset or liability, including assumptions about risk.

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INDIAN ACCOUNTING STANDARD 113 4.125

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

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v
8. (i) An earnings-based valuation of Entity A’s holding of shares in company XYZ could be
calculated as follows:

Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) 8,40,000

Value of a share of XYZ = 8,40,000 ÷ 5,000 shares = 168


The fair value of Entity A’s investment in XYZ’s shares is estimated at 42,000 (that is,
250 shares x 168 per share).
(ii) Share price = 8,50,000 ÷ 5,000 shares = 170 per share.
The fair value of Entity A’s investment in XYZ shares is estimated to be 42,500 (250
shares x 170 per share).

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v

FOR SHORTCUTv TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE


Questions
1. Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for
the same, Q TV allowed Deshabandhu a free advertisement spot, which was duly utilised
by Deshabandu. How revenue for these non-monetary transactions in the area of
advertising will be recognized and measured?
2. A Ltd. a telecommunication company, entered into an agreement with B Ltd. which is
engaged in generation and supply of power. The agreement provided that A Ltd. will
provide 1,00,000 minutes of talk time to employees of B Ltd. in exchange for getting power
equivalent to 20,000 units. A Ltd. normally charges 0.50 per minute and B Ltd. charges
2.5 per unit. How should revenue be measured in this case?
3. Company X enters into an agreement on 1 st January, 20X1 with a customer for renovation
of hospital and install new air-conditioners for total consideration of 50,00,000. The
promised renovation service, including the installation of new air-conditioners is a single
performance obligation satisfied over time. Total expected costs are 40,00,000 including
10,00,000 for the air conditioners.
Company X determines that it acts as a principal in accordance with paragraphs B34-B38
of Ind AS 115 because it obtains control of the air conditioners before they are transferred
to the customer. The customer obtains control of the air conditioners when they are
delivered to the hospital premises.
Company X uses an input method based on costs incurred to measure its progress towards
complete satisfaction of the performance obligation.

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INDIAN ACCOUNTING STANDARD 115 5.147

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:

Price per container Cumulative sales volume


100 1 - 1,000,000 containers
90 1,000,001 - 3,000,000 containers
85 3,000,001 containers and above

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v
Volume is determined based on sales during the calendar year. There are no minimum
v
purchase requirements. Entity J estimates that the total sales volume for the year will be
2.8 million containers, based on its experience with similar contracts and forecasted sales
to the customer.
Entity J sells 700,000 containers to the customer during the first quarter ended
31 st March 20X8 for a contract price of 100 per container.
How should entity J determine the transaction price?
7. Entity K sells electric razors to retailers for C 50 per unit. A rebate coupon is included
inside the electric razor package that can be redeemed by the end consumers for C 10 per
unit.
Entity K estimates that 20% to 25% of eligible rebates will be redeemed, based on its
experience with similar programmes and rebate redemption rates available in the market
for similar programmes. Entity K concludes that the transaction price should incorporate an
assumption of 25% rebate redemption, as this is the amount for which it is highly probable
that a significant reversal of cumulative revenue will not occur if estimates of the rebates
change.
How should entity K determine the transaction price?
8. A manufacturer enters into a contract to sell goods to a retailer for 1,000. The
manufacturer also offers price protection, whereby it will reimburse the retailer for any
difference between the sale price and the lowest price offered to any customer during the
following six months. This clause is consistent with other price protection clauses offered
in the past, and the manufacturer believes that it has experience which is predictive for this
contract.
Management expects that it will offer a price decrease of 5% during the price protection
period. Management concludes that it is highly probable that a significant reversal of
cumulative revenue will not occur if estimates change.
How should the manufacturer determine the transaction price?
9. Electronics Manufacturer M sells 1,000 televisions to Retailer R for 50,00,000 ( 5,000
per television). M provides price protection to R by agreeing to reimburse R for the
difference between this price and the lowest price that it offers for that television during the
following six months. Based on M’s extensive experience with similar arrangements, it
estimates the following outcomes.

Price reduction in next six months ( ) Probability


0 70%

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INDIAN ACCOUNTING STANDARD 115 5.149

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.

Outcome Consideration ( ) Probability


Project completes on time 1,30,000 90%
Project is delayed 1,10,000 10%
Determine the transaction price.
11. Franchisor Y Ltd. licenses the right to operate a store in a specified location to Franchisee
F. The store bears Y Ltd.’s trade name and F will have a right to sell Y Ltd.’s products for
10 years. F pays an up-front fixed fee. The franchise contract also requires Y Ltd. to
maintain the brand through product improvements, marketing campaigns etc. Determine
the nature of license.
Answers
1. Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the
same line of business to facilitate sales to customers or potential customers. For example,
this Standard would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfil demand from their customers in different specified locations on a
timely basis.
In industries with homogenous products, it is common for entities in the same line of
business to exchange products in order to sell them to customers or potential customers
other than parties to exchange. The current scenario, on the contrary, will be covered
under Ind AS 115 since the same is exchange of dissimilar goods or services because both
of the entities deal in different mode of media, i.e., one is print media and another is
electronic media and both parties are acting as customers and suppliers for each other.
Further, in the current scenario, it seems it is for consumption by the said parties and
hence it does not fall under paragraph 5(d). It may also be noted that, even if it was to
facilitate sales to customers or potential customers, it would not be scoped out since the
parties are not in the same line of business.

As per paragraph 47 of Ind AS 115, “An entity shall consider the terms of the contract and

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5.150 2. a
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v
its customary business practices to determine the transaction price. The transaction price
v
is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall
measure the non-cash consideration (or promise of non-cash consideration) at fair value.
In accordance with the above, Q TV and Deshabandhu should measure the revenue
promised in the form of non-cash consideration as per the above referred principles of
Ind AS 115.
2. Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the
same line of business to facilitate sales to customers or potential customers. For example,
this Standard would not apply to a contract between two oil companies that agree to an
exchange of oil to fulfil demand from their customers in different specified locations on a
timely basis.
However, the current scenario will be covered under Ind AS 115 since the same is
exchange of dissimilar goods or services.
As per paragraph 47 of Ind AS 115, “an entity shall consider the terms of the contract and
its customary business practices to determine the transaction price. The transaction price
is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on
behalf of third parties (for example, some sales taxes). The consideration promised in a
contract with a customer may include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall
measure the non-cash consideration (or promise of noncash consideration) at fair value.
On the basis of the above, revenue recognized by A Ltd. will be the consideration in the
form of power units that it expects to be entitled for talktime sold, i.e. 50,000 (20,000
units x 2.5). The revenue recognized by B Ltd. will be the consideration in the form of
talk time that it expects to be entitled for the power units sold, i.e., 50,000 (1,00,000
minutes x 0.50).
3. Paragraph B19 of Ind AS 115 inter alia, states that, “an entity shall exclude from an input
method the effects of any inputs that, in accordance with the objective of measuring

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INDIAN ACCOUNTING STANDARD 115 5.151

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

Revenue recognized is calculated as (20 per cent × 40,00,000) + 10,00,000.


( 40,00,000 = 50,00,000 transaction price – 10,00,000 costs of air conditioners.)
Cost of goods sold is 6,00,000 of costs incurred + 10,00,000 costs of air conditioners.
4. As per paragraph 9 of Ind AS 115, “An entity shall account for a contract with a customer
that is within the scope of this Standard only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in
accordance with other customary business practices) and are committed to perform
their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be
transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;

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v
(d) the contract has commercial substance (ie the risk, timing or amount of the entity’s
v
future cash flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in
exchange for the goods or services that will be transferred to the customer. In
evaluating whether collectability of an amount of consideration is probable, an entity
shall consider only the customer’s ability and intention to pay that amount of
consideration when it is due. The amount of consideration to which the entity will be
entitled may be less than the price stated in the contract if the consideration is
variable because the entity may offer the customer a price concession”.
Paragraph 9(e) above, requires that for revenue to be recognized, it should be probable
that the entity will collect the consideration to which it will be entitled in exchange for the
goods or services that will be transferred to the customer. In the given case, it is not
probable that G Ltd. will collect the consideration to which it is entitled in exchange for the
transfer of the machinery. P Ltd.’s ability to pay may be uncertain due to the following
reasons:
(a) P Ltd. intends to pay the remaining consideration (which has a significant balance)
primarily from income derived from its food processing unit (which is a business
involving significant risk because of high competition in the said industry and P Ltd.'s
little experience);
(b) P Ltd. lacks sources of other income or assets that could be used to repay the
balance consideration; and
(c) P Ltd.'s liability is limited because the financing arrangement is provided on a non-
recourse basis.
In accordance with the above, the criteria in paragraph 9 of Ind AS 115 are not met.
Further, para 15 states that when a contract with a customer does not meet the criteria in
paragraph 9 and an entity receives consideration from the customer, the entity shall
recognize the consideration received as revenue only when either of the following events
has occurred:
(a) the entity has no remaining obligations to transfer goods or services to the customer
and all, or substantially all, of the consideration promised by the customer has been
received by the entity and is non-refundable; or
(b) the contract has been terminated and the consideration received from the customer is
non-refundable.
Para 16 states that an entity shall recognize the consideration received from a customer as
a liability until one of the events in paragraph 15 occurs or until the criteria in paragraph 9

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INDIAN ACCOUNTING STANDARD 115 5.153

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

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transaction price is recorded as a liability for cash consideration expected to be paid to the
end customer. Entity K willv update its estimate of the rebate and the transaction price at
each reporting date if estimates of redemption rates change.
8. The transaction price is 950, because the expected reimbursement is 50. The
expected payment to the retailer is reflected in the transaction price at contract inception,
as that is the amount of consideration to which the manufacturer expects to be entitled
after the price protection. The manufacturer will recognize a liability for the difference
between the invoice price and the transaction price, as this represents the cash that it
expects to refund to the retailer. The manufacturer will update its estimate of expected
reimbursement at each reporting date until the uncertainty is resolved.
9. After considering all relevant facts and circumstances, M determines that the expected
value method provides the best prediction of the amount of consideration to which it will be
entitled. As a result, it estimates the transaction price to be 4,800 per television – i.e.
( 5,000 x 70%) + ( 4,500 x 20%) + ( 4,000 x 10%).
10. Because there are only two possible outcomes under the contract, C determines that using
the most likely amount provides the best prediction of the amount of consideration to which
it will be entitled. C estimates the transaction price to be 1,30,000, which is the single
most likely amount.
11. The licence provides F access to the IP as it exists at any point in time in the licence
period. This is because:
– Y Ltd. is required to maintain the brand, which will significantly affect the IP by
affecting F’s ability to obtain benefit from the brand;
– any action by Y Ltd. may have a direct positive or negative effect on F; and
– these activities do not transfer a goods or service to F.
Therefore, Y Ltd. recognizes the up-front fee over the 10-year franchise period.

© The Institute of Chartered Accountants of India

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