IND AS 1 : PRESENTATION OF FINANCIAL STATEMENTS

CHAPTER 1 IND AS 1 : PRESENTATION OF FINANCIAL

STATEMENTS

Question 19 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
Is offsetting permitted under the following circumstances?
(a) Expenses incurred by a holding company on behalf of subsidiary, which is reimbursed by
the subsidiary - whether in the separate books of the holding company, the expenditure
and related reimbursement of expenses can be offset?
(b) Whether profit on sale of an asset against loss on sale of another asset can be offset?
(c) When services are rendered in a transaction with an entity and services are received from
the same entity in two different arrangements, can the receivable and payable be offset?

Summary

Detailed Solution

(a) As per paragraph 33 of Ind AS 1, offsetting is permitted only when the offsetting
reflects the substance of the transaction.
In this case, the agreement/arrangement, if any, between the holding and subsidiary
company needs to be considered. If the arrangement is to reimburse the cost incurred
by the holding company on behalf of the subsidiary company, the same may be presented
net. It should be ensured that the substance of the arrangement is that the payments
are actually in the nature of reimbursement.
(b) Paragraph 35 of Ind AS 1 requires an entity to present on a net basis gains and losses
arising from a group of similar transactions. Accordingly, gains or losses arising on
disposal of various items of property, plant and equipment shall be presented on net
basis. However, gains or losses should be presented separately if they are material.
(c) Ind AS 1 prescribes that assets and liabilities, and income and expenses should be
reported separately, unless offsetting reflects the substance of the transaction. In
addition to this, as per paragraph 42 of Ind AS 32, a financial asset and a financial
liability should be offset if the entity has legally enforceable right to set off and the
entity intends either to settle on net basis or to realise the asset and settle the liability
simultaneously.
In accordance with the above, the receivable and payable should be offset against each
other and net amount is presented in the balance sheet if the entity has a legal right to

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 IND AS 1 : PRESENTATION OF FINANCIAL STATEMENTS

set off and the entity intends to do so. Otherwise, the receivable and payable should be
reported separately.

Question 20 (RTP May 2022)

An entity manufactures passenger vehicles. The time between purchasing of underlying raw
materials to manufacture the passenger vehicles and the date the entity completes the
production and delivers to its customers is 11 months. Customers settle the dues after a period
of 8 months from the date of sale.
(a) Will the inventory and the trade receivables be current in nature?
(b) Assuming that the production time was say 15 months and the time lag between the date
of sale and collection from customers is 13 months, will the answer be different?

Summary

Detailed Solution

Inventory and debtors need to be classified in accordance with the requirement of paragraph
66(a) of Ind AS 1, which provides that an asset shall be classified as current if an entity expects
to realise the same or intends to sell or consume it in its normal operating cycle.
(a) In this case, time lag between the purchase of inventory and its realisation into cash is
19 months [11 months + 8 months]. Both inventory and the debtors would be classified as
current if the entity expects to realise these assets in its normal operating cycle.
(b) No, the answer will be the same as the classification of debtors and inventory depends
on the expectation of the entity to realise the same in the normal operating cycle. In
this case, time lag between the purchase of inventory and its realisation into cash is
28 months [15 months + 13 months]. Both inventory and debtors would be classified as
current if the entity expects to realise these assets in the normal operating cycle.
Additional information as required by paragraph 61 of Ind AS 1 will be required to be
made by the entity, which provides “Whichever method of presentation is adopted, an
entity shall disclose the amount expected to be recovered or settled after more than
twelve months for each asset and liability line item that combines amounts expected to
be recovered or settled:
(a) No more than twelve months after the reporting period, and
(b) More than twelve months after the reporting period.”

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 IND AS 2 : INVENTORIES

CHAPTER 2 IND AS 2 : INVENTORIES

Question 24 (RTP Nov 21)

Whether the following costs should be considered while determining the Net Realisable Value (NRV) of the
inventories?
(a) Costs of completion of work-in-progress;
(b) Trade discounts expected to be allowed on sale; and
(c) Cash discounts expected to be allowed for prompt payment

Summary

Detailed Solution

Ind AS 2 defines Net Realisable Value as the “estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated costs necessary to make the
sale.”
Costs of completion of work-in-progress are incurred to convert the work-in-progress into
finished goods. Since these costs are in the nature of completion costs, in accordance with the
above definition, the same should be deducted from the estimated selling price to determine
the NRV of work-in-progress.
Trade Discount is “A reduction granted by a supplier from the list price of goods or services
on business considerations other than for prompt payment”. Trade discount is allowed either
expressly through an agreement or through prevalent commercial practices in the terms of the
trade and the same is adjusted in arriving at the selling price. Accordingly, the trade discount
expected to be allowed should be deducted to determine the estimated selling price.
Cash Discount is “A reduction granted by a supplier from the invoiced price in consideration
of immediate payment or payment within a stipulated period.” These types of costs are incurred
to recover the sale proceeds immediately or before the end of the specified period or credit
period allowed to the customer. In other words, these costs are not incurred to make the sale,
therefore, the same should not be considered while determining NRV.

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 IND AS 7 : STATEMENT OF CASH FLOWS

CHAPTER 3 IND AS 7 : STATEMENT OF CASH FLOWS

Question 18 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
From the following data of Galaxy Ltd., prepare statement of cash flows showing cash generated
from Operating Activities using direct method as per Ind AS 7:
Particulars 31.3.2012 31.3.2011
(`) (`)
Current Assets :
Inventory 1,20,000 1,65,000
Trade receivables 2,05,000 1,88,000
Cash & cash equivalents 35,000 20,500
Current Liabilities :
Trade payable 1,95,000 2,15,000
Provision for tax 48,000 65,000

Summary of Statement of Profit and Loss `

Sales 85,50,000
Less : Cost of sales (56,00,000) 29,50,000
Other Income
Interest income 20,000
Fire insurance claim received 1,10,000 1,30,000
30,80,000

Depreciation (24,000)
Administrative and selling expenses (15,40,000)
Interest expenses (36,000)
Foreign exchange loss (18,000) (16,18,000)
Net Profit before tax and extraordinary income 14,62,000
Income Tax (95,000)
Net Profit 13,67,0000

Additional information:
(i) Trade receivables and Trade payables include amounts relating to credit sale and credit
purchase only.
(ii) Foreign exchange loss represents increment in liability of a long-term borrowing due to
exchange rate fluctuation between acquisition date and balance sheet date.

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 IND AS 7 : STATEMENT OF CASH FLOWS

Summary

Detailed Solution

Statement Cash Flows from operating activities

of Galaxy Ltd. for the year ended 31 March 2012 (Direct Method)
Particulars ` `
Operating Activities:
Cash received from Trade receivables (W.N. 3) 85,33,000
Less: Cash paid to Suppliers (W.N.2) 55,75,000
Payment for Administration and Selling expenses 15,40,000
Payment for Income Tax (W.N.4) 1,12,000 (72,27,000)
13,06,000
Adjustment for exceptional items (fire insurance claim) 1,10,000
Net cash generated from operating activities 14,16,000

Working Notes:
1. Calculation of total purchases
Cost of Sales = Opening stock + Purchases – Closing Stock
` 56,00,000 = ` 1,65,000 + Purchases – ` 1,20,000
Purchases = ` 55,55,000
2. Calculation of cash paid to Suppliers
Trade Payables
Particulars ` Particulars `
To Bank A/c 55,75,000 By Balance b/d 2,15,000
(balancing figure)
To Balance c/d 1,95,000 By Purchases (W.N. 1) 55,55,000
57,70,000 57,70,000

3. Calculation of cash received from Customers

Trade Receivables
Particulars ` Particulars `
To Balance b/d 1,88,000 By Bank A/c 85,33,000
(balancing figure)
To Sales 85,50,000 By Balance c/d 2,05,000
87,38,000 87,38,000

4. Calculation of tax paid during the year in cash

Provision for tax
Particulars ` Particulars `
To Bank A/c (balancing 1,12,000 By Balance b/d 65,000
figure)
To Balance c/d 48,000 By Profit and Loss A/c 95,000
1,60,000 1,60,000

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 IND AS 7 : STATEMENT OF CASH FLOWS

Question 19

Working Note -1
Memorandum trading & profit loss A/C for year ended 31/3/12
Particulars Amount Particulars Amount
To Opening stock - By sales (given) ($1,50,000 × ` 40/$) 60,00,000
To purchase 1,00,00,000 By closing stock
(€20,000 × ` 50/€) 50,00,000
To gross profit c/d 10,00,000
(given)
1,10,00,000 1.10,00,000
By Gross profit b/d 10,00,000
By forex gain on payable 10,00,000
(€ 2,00,000 × (` 50/€ - ` 45/€)
On Receivables 3,00,000
($ 1,50,000 × (` 42/$ - ` 40/$)
On loan 5,00,000
(€ 1,00,000 × (` 50/ € - `45/€)

To Net profit 28,00,000

28,00,000 28,00,000

Working Note-2
Extract of Balance sheet
Liabilities 31/03/11 31/03/12 Assets 31/03/11 31/03/12
Loan NIL 45,00,000 Cash 2,00,000
Trade payable NIL 90,00,000 Trade receivable NIL NIL
(unpaid ) (collected)
Inventories (WN 1) NIL 50,00,000

Summary

Detailed Solution

Cash flow statement for year ended 31/3/12 (Indirect)

Particulars ` `
Cash flow from operating activities
Net profit (WN-1) 28,00,000
(-) Unrealised foreign exchange gain on trade payables (10,00,000)

(-) Unrealised foreign exchange gain on loans (5,00,000)

Operating Assets / Liability adjustment

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 IND AS 7 : STATEMENT OF CASH FLOWS

(-) ↑ in inventories (50L – 0) (50,00,000)

(+) ↑ in trade payables
[( 90,00,000 + 10,00,000) – 0]
1,00,00,000
↓
(already considered above)

2022 2021
ASSETS
Non-current assets
Property, plant and equipment 13,000 12,500
Intangible assets 50 30
Other financial assets 145 170

Cash flow from operations 63,00,000

(C.E.O)
Ref : $ 1,50,000 × Rs 42 / $)
Cash flow from financing activities
Loan taken 50,00,000
[( 45,00,000 + 5,00,000)-0]
Net charges in cash & Cash Equipment 1,13,00,000
Opening cash & Cash Equipment 2,00,000
Closing cash & Cash Equipment 1,15,00,000

Reference: Unrealised foreign exchange items are non-cash in nature & hence should be reversed
from the net profit. As the effect for these items has already been considered in the non-cash
adjustments, we will not again give affect while adjusting trade payable in operating
assets / liabilities adjustment. The closing trade payable, in the B/S are 90L. However, we can
alternatively ignore the unrealised forex gain from the non-cash adjustment. In such a
case, we should take the trade payables after adjusting the forex gain. In both cases, the final
answer remains the same.
Preparation of cash flow in case these is a business acquisition during the year
In case cash is paid for a business combination, it is considered to be an investing activity &
hence the net cash paid for this acquisition (cash paid – cash taken over) should be taken as a
part of cash flow from investing activities (C.F.I).
Further, for each item of the selling company which is taken over, we will calculate the net
changes by comparing the closing balance with the adjusted opening balance.
i.e. Closing Inventory - [Opening inventory + inventory acquired on business cementation]

Question 20 (ICAI Study Material)

Following is the balance sheet of Kuber Limited for the year ended 31 March, 2022.

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 IND AS 7 : STATEMENT OF CASH FLOWS

(` in lacs)
Deferred Tax Asset (net) 855 750
Other non-current assets 800 770
Total non-current assets 14,850 14,220
Current assets
Financial assets
Investments 2,300 2,500
Cash and cash equivalents 220 460
Other current assets 195 85
Total current assets 2,715 3,045
Total assets 17,565 17,265
EQUITY AND LIABILITIES
Equity
Equity share capital 300 300
Other equity 12,000 8,000
Total equity 12,300 8,300
Liabilities
Non-current liabilities
Financial liabilities
Long-term borrowings 2,000 5,000
Other non-current liabilities 2,740 3,615
Total non-current liabilities 4,740 8,615
Current liabilities
Financial liabilities
Trade payables 150 90
Bank overdraft 75 60
Other current liabilities 300 200
Total current liabilities 525 350
Total liabilities 5,265 8,965
Total equity and liabilities 17,565 17,265

Additional Information:
(1) Profit after tax for the year ended March 31, 20X2 - ` 4,450 lacs
(2) Interim dividend paid during the year - ` 450 lacs
(3) Depreciation and amortization charged in the statement of profit and loss during the
current year are as under
(a) Property, Plant and Equipment - ` 500 lacs
(b) Intangible Assets - ` 20 lacs
(4) During the year ended March 31, 2022 two machineries were sold for ` 70 lacs.
The carrying amount of these machineries as on March 31, 2022 is ` 60 lacs.

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 IND AS 7 : STATEMENT OF CASH FLOWS

(5) Income taxes paid during the year ` 105 lacs

(6) Other non-current / current assets and liabilities are related to operations of
Kuber Ltd. and do not contain any element of financing and investing activities.
Using the above information of Kuber Limited, construct a statement of cash flows
under indirect method.

Summary

Detailed Solution

Kuber Ltd.
Cash flow statement for the year ended 31/3/12. (in lakhs)
Particulars ` `
Cash flow from operating activities
Net profit after tax 4450
(+) tax 105
Net profit before tax 4,555
(+) Depreciation PPE 500
(+) Amortisation of intangibles 20
(-) gain on sale of machinery (10)
(-) Increase in deferred tax assets (855-750) (Note -3) (105)
Adjustments for operating assets / liabilities
(+) ↓ in other financial assets (note 2) 25
(170-145)
(-) ↑ in other non-current assets (800-770) (30)
(-) ↑ in other current assets. (195 – 185) (110)
(-) ↓ in other non-current liabilities (3615-2740) (875)
(+) ↑ in trade payables (150-90) 60
(+) ↑ in other current liabilities (300-200) 100
Cash flow from operations (Before tax) 4130
(-) Tax paid (105)
C.F.O (A) 4025
Cash flow from investing activities

Sale proceeds from machinery 70

Purchase of PPE (WN-1) (1,060)
Purchase of intangibles (WN-2) (40)
Sale proceeds on investment (2500-2300) 200
C.E.F (B) (830)

Cash flow from financing activities

Interim dividend part (450)

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 IND AS 7 : STATEMENT OF CASH FLOWS

Repayment of long term borrowing (3000)

(5000-2000)
(3450)
C.E.F (C)

Net changes in cash & CF (A+B+C) (255)

Opening cash & CE (460 – 60) ( note -1) 400
Closing cash & CE (220-75) 145

Note 1: It is assumed that bank overdraft is a part of cash management activities & hence is
considered as a cash equivalent. Alternatively, in case it is assumed that bank overdraft is
permanent, it will be treated as a financing activity.

Working note-1
Property, Plant and Equipment
Particulars Amount Particulars Amount
To bal b/d 12,500 By desecration 500
To Gain on sale 10 By bank 70
(70-60)
To bank
(purchases) 1,060
By bal c/d 13,000
13,570 13,570

Working note -2
Intangibles
Particulars Amount Particulars Amount
To bal b/d 30 By amortisation 20
To bank
(purchase) 40
By bal. c/d 50
70 70

Note 2: In absence of information, we have assumed that the other financial assets (eg:- long
terms receivables) other current assets (eg:- prepaid expenses) and other current liabilities
(eg. Outstanding expenses) are operating in nature. Alternatively, some other assumption can
also be taken.

Note 3: DTA is increasing by 105 which implies that Kuber Ltd would have passed the entry
DTA A/c Dr. 105 (During 11-12)
To P/L 105

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 IND AS 7 : STATEMENT OF CASH FLOWS

This is not a cash income as we do not have a contractual right to receive this from the Govt.
Therefore this is treated like a non-cash Income & hence is deducted further, cash items
(current/deferred) are not a part of operating assets/ liabilities adjustment.

Working note 3
P/L appropriation A/c (Other Equity)
Particulars Amount Particulars Amount
To bank (dividend) (adjustment 2 in 450 By bal. b/d 8000
questions) (given)
By PAT 4450
To bal. c/d 12000
12450 12450

Reference Note:
Even If bank overdraft is treated as a cash equivalent for the purpose of cash flow statement,
in the B/s, it needs to be shown along with liabilities only.

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 IND AS 8: ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS

CHAPTER 4 IND AS 8: ACCOUNTING POLICIES,

CHANGES IN ACCOUNTING ESTIMATES AND
ERRORS

Question 15 (ICAI RTP Nov 21)

While preparing interim financial statements for the half-year ended 30 September 2012, an
entity discovers a material error (an improper expense accrual) in the interim financial statements
for the period ended 30 September 2011 and the annual financial statements for the year ended
31 March 2012. The entity does not intend to restate the comparative amounts for the prior
period presented in the interim financial statements as it believes it would be sufficient to
correct the error by restating the comparatives in the annual financial statements for the year
ended 31 March 2013. Is this acceptable? Discuss in accordance with relevant Ind AS.

Summary

Detailed Solution

Ind AS 8, inter alia, states that an entity shall correct material prior period errors retrospectively
in the first set of financial statements approved for issue after their discovery by restating the
comparative amounts for the prior period(s) presented in which the error occurred.
Ind AS 34 requires an entity to apply the same accounting policies in its interim financial
statements as are applied in its annual financial statements (except for accounting policy changes
made after the date of the most recent annual financial statements that are to be reflected in
the next annual financial statements).
Ind AS 34 cites ‘corrections of prior period errors’ as an example of events or transactions
which need to be explained in an entity’s interim financial report if they are significant to an
understanding of the changes in financial position and performance of the entity since the end
of the last annual reporting period.
In view of the above, the entity is required to correct the error and restate the comparative
amounts in interim financial statements for the half-year ended 30 September 2012.

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 IND AS 10 : EVENTS AFTER THE REPORTING PERIOD

CHAPTER 5 IND AS 10 : EVENTS AFTER THE REPORTING

PERIOD

Question 14 (RTP May 2022)

XYZ Ltd. sells goods to its customer with a promise to give discount of 5% on list price of the
goods provided that the payments are received from customer within 15 days. XYZ Ltd. sold
goods of ` 5 lakhs to ABC Ltd. between 17th March, 2021 and 31 March, 2021. ABC Ltd. paid the
dues by 15th April, 2021 with respect to sales made between 17th March, 2021 and 31st March,
2021. Financial statements were approved for issue by Board of Directors on 31st May, 2021.
State whether discount will be adjusted from the sales at the end of the reporting period.

Summary

Detailed Solution

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.

Question 15 (MTP Nov 21)

Discuss with reasons whether these events are in nature of adjusting or non-adjusting and the
treatment needed in light of accounting standard Ind AS 10.
(i) Moon Ltd. won an arbitration award on 25th April, 2011 for ` 1 crore. From the arbitration
proceeding, it was evident that the Company is most likely to win the arbitration award.
The directors approved the financial statements for the year ending 31.03.2011 on 1st
May, 2011. The management did not consider the effect of the above transaction in
Financial Year 2010-2011, as it was favourable to the Company and the award came after
the end of the financial year.

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 IND AS 10 : EVENTS AFTER THE REPORTING PERIOD

(ii) Zoom Ltd. has a trading business of Mobile telephones. The Company has purchased 1000
mobiles phones at ` 5,000 each on 15th March, 2011. The manufacturers of phone had
announced the release of the new version on 1st March, 2011 but had not announced the
price. Zoom Ltd. has valued inventory at cost of ` 5,000 each at the year ending 31st
March, 2011.
Due to arrival of new advance version of Mobile Phone on 8th April, 2011, the selling
prices of the mobile stocks remaining with Company was dropped at ` 4,000 each.
The financial statements of the company valued mobile phones @ ` 5,000 each and not
at the value @ ` 4,000 less expenses on sales, as the price reduction in selling price was
effected after 31.03. 2011.
(iii) There as an old due from a debtor amounting to ` 15 lakh against whom insolvency
proceedings was instituted prior to the financial year ending 31st March, 2011. The
debtor was declared insolvent on 15th April, 2011.
(iv) Assume that subsequent to the year end and before the financial statements are
approved, Company’s management announces that it will restructure the operation of
the company. Management plans to make significant redundancies and to close a few
divisions of company’s business; however, there is no formal plan yet. Should management
recognise a provision in the books, if the company decides subsequent to end of the
accounting year to restructure its operations?

Summary

Detailed Solution

As per Ind AS 10, the treatment of stated issues would be as under:

(i) Adjusting event: It is an adjusting event as it is the settlement after the reporting
period of a court case that confirms that the entity had a present obligation at the end
of the reporting period. Even though winning of award is favorable to the company, it
should be accounted in its books as receivable since it is an adjusting event.
(ii) Adjusting event: The sale of inventories after the reporting period may give evidence
about their net realizable value at the end of the reporting period, hence it is an adjusting
event as per Ind AS 10. Zoom Limited should value its inventory at ` 40,00,000.
(iii) Adjusting event: As per Ind AS 10, the receipt of information after the reporting
period indicating that an asset was impaired at the end of the reporting period, or
that the amount of a previously recognised impairment loss for that asset needs to be
adjusted.

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 IND AS 10 : EVENTS AFTER THE REPORTING PERIOD

The bankruptcy of a customer that occurs after the reporting period usually confirms
that the customer was credit-impaired at the end of the reporting period.
(iv) Non–adjusting event: Announcing or commencing the implementation of a major
restructuring after reporting period is a non-adjusting event as per Ind AS 10. Though
this is a non-adjusting event occurred after the reporting period, yet it would result in
disclosure of the event in the financial statements,if restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was
not taken before or on the reporting date. Hence, it does not give rise to a constructive
obligation at the end of the reporting period to create a provision.

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 IND AS 12 : INCOME TAXES

CHAPTER 6 IND AS 12 : INCOME TAXES

Question 21 (ICAI Study Material)

During 2022, Delta Ltd., changed its accounting policy for depreciating property, plant and
equipment, so as to apply much more fully a components approach, whilst at the same time
adopting the revaluation model.
In years before 2022, Delta Ltd.’s asset records were not sufficiently detailed to apply
a components approach fully. At the end of 2021, management commissioned an engineering
survey, which provided information on the components held and their fair values, useful lives,
estimated residual values and depreciable amounts at the beginning of 2022. However, the
survey did not provide a sufficient basis for reliably estimating the cost of those components
that had not previously been accounted for separately, and the existing records before the
survey did not permit this information to be reconstructed.
Delta Ltd.’s management considered how to account for each of the two aspects of the
accounting change. They determined that it was not practicable to account for the change to a
fuller components approach retrospectively, or to account for that change prospectively from
any earlier date than the start of 2022. Also, the change from a cost model to a revaluation
model is required to be accounted for prospectively. Therefore, management concluded that it
should apply Delta Ltd.’s new policy prospectively from the start of 2022.
Additional information:
(i) Delta Ltd.’s tax rate is 30%
(ii) Property, plant and equipment at the end of 2021:
Cost ` 25,000
Depreciation ` 14,000
Net book value ` 11,000
(iii) Prospective depreciation expense for 2022 (old basis) ` 1,500
(iv) Some results of the engineering survey:
Valuation ` 17,000
Estimated residual value ` 3,000
Average remaining asset life 7 years
Depreciation expense on existing property, plant and equipment
for 2022 (new basis) ` 2,000
You are required to prepare relevant note for disclosure in accordance with Ind AS 8.

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 IND AS 12 : INCOME TAXES

Summary

Detailed Solution

Extract from the notes

From the start of 2022, Delta Ltd., changed its accounting policy for depreciating property,
plant and equipment, so as to apply much more fully a components approach, whilst at the same
time adopting the revaluation model. Management takes the view that this policy provides
reliable and more relevant information because it deals more accurately with the components
of property, plant and equipment and is based on up-to-date values. The policy has been applied
prospectively from the start of 2022 because it was not practicable to estimate the effects of
applying the policy either retrospectively, or prospectively from any earlier date. Accordingly,
the adoption of the new policy has no effect on prior years. The effect on the current year is
to increase the carrying amount of property, plant and equipment at the start of the year by
` 6,000; increase the opening deferred tax provision by ` 1,800; create a revaluation surplus
at the start of the year of ` 4,200; increase depreciation expense by ` 500; and reduce tax
expense by ` 150.

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 IND AS 16 : PROPERTY, PLANT AND EQUIPMENT

CHAPTER 7 IND AS 16 : PROPERTY, PLANT AND

EQUIPMENT

Question 26 (ICAI Study Material)/(RTP May 20)

(Included in May 22 Section of FR 6)
Company X performed a revaluation of all of its plant and machinery at the beginning of 2011.
The following information relates to one of the machinery:
Particulars Amount (‘000)
Gross carrying amount ` 200
Accumulated depreciation (straight-line method) (` 80)
Net carrying amount ` 120
Fair value ` 150

The useful life of the machinery (at beginning of 2011) is 10 years and the company uses
Straight line method of depreciation. The revaluation was performed at the end of 4 years.
How should the Company account for revaluation of plant and machinery and depreciation
subsequent to revaluation? Support your answer with journal entries.

Summary

Detailed Solution

According to paragraph 35 of Ind AS 16, when an item of property, plant and equipment is
revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of
the revaluation, the asset is treated in one of the following ways:
(a) The gross carrying amount is adjusted in a manner that is consistent with the revaluation
of the carrying amount of the asset. For example, the gross carrying amount may be
restated by reference to observable market data or it may be restated proportionately
to the change in the carrying amount. The accumulated depreciation at the date of the
revaluation is adjusted to equal the difference between the gross carrying amount and
the carrying amount of the asset after taking into account accumulated impairment
losses.
In such a situation, the revised carrying amount of the machinery will be as follows :
Particulars Amount Amount
Gross carrying amount ` 250 [(200/120) × 150]
Net carrying amount ` 150
Accumulated depreciation ` 100 (` 250 – ` 150)

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 IND AS 16 : PROPERTY, PLANT AND EQUIPMENT

Journal entry
Particulars Debit Credit
Plant and Machinery (Gross Block) Dr. ` 50
To Accumulated Depreciation ` 20
To Revaluation Reserve ` 30

Depreciation subsequent to revaluation

Since the Gross Block has been restated, the depreciation charge will be ` 25 per annum
(` 250/10 years).
Journal entry
Particulars Debit Credit
Accumulated Depreciation Dr. ` 25 p.a.
To Plant and Machinery (Gross Block) ` 25 p.a.

(b) The accumulated depreciation is eliminated against the gross carrying amount of the
asset.
The amount of the adjustment of accumulated depreciation forms part of the increase
or decrease in carrying amount that is accounted for in accordance with the paragraphs
39 and 40 of Ind AS 16.
In this case, the gross carrying amount is restated to ` 150 to reflect the fair value and
accumulated depreciation is set at zero.
Journal entry
Particulars Debit Credit
Accumulated Depreciation Dr. ` 80
To Plant and Machinery (Gross Block) ` 80
Plant and Machinery (Gross Block) Dr. ` 30
To Revaluation Reserve ` 30

Depreciation subsequent to revaluation

Since the revalued amount is the revised gross block, the useful life to be considered is the
remaining useful life of the asset which results in the same depreciation charge of ` 25 per
annum as per Option A (` 150 / 6 years).
Journal entry
Particulars Debit Credit
Accumulated Depreciation Dr. ` 25 p.a.
To Plant and Machinery (Gross Block) ` 25 p.a.

Question 27 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
Heaven Ltd. had purchased a machinery on 1.4.2001 for ` 30,00,000, which is reflected in its
books at written down value of ` 17,50,000 on 1.4.2006. The company has estimated an upward

CA BHAVIK CHOKSHI 19
 IND AS 16 : PROPERTY, PLANT AND EQUIPMENT

revaluation of 10% on 1.4.2006 to arrive at the fair value of the asset. Heaven Ltd. availed the
option given by Ind AS of transferring some of the surplus as the asset is used by an enterprise.
On 1.4.2008, the machinery was revalued downward by 15% and the company also re-
estimated the machinery’s remaining life to be 8 years. On 31.3.2010 the machinery was sold for
` 9,35,000. The company charges depreciation on straight line method.
Prepare machinery account in the books of Heaven Ltd. over its useful life to record the
above transactions.

Summary

Detailed Solution

In the books of Heaven Ltd.

Machinery A/c
Date Particulars Amount Date Particulars Amount
1.4.2001 To Bank/ Vendor 30,00,000 31.3.2002 By Depreciation 2,50,000
(W.N.1)
31.3.2002 By Balance c/d 27,50,000
30,00,000 30,00,000
1.4.2002 To Balance b/d 27,50,000 31.3.2003 By Depreciation 2,50,000
31.3.2003 By Balance c/d 25,00,000
27,50,000 27,50,000
1.4.2003 To Balance b/d 25,00,000 31.3. 2004 By Depreciation 2,50,000
31.3.2004 By Balance c/d 22,50,000
25,00,000 25,00,000
1.4.2004 To Balance b/d 22,50,000 31.3.2005 By Depreciation 2,50,000

31.3.2005 By Balance c/d 20,00,000

22,50,000 22,50,000
1.4.2005 To Balance b/d 20,00,000 31.3.2006 By Depreciation 2,50,000
31.3.2006 By Balance c/d 17,50,000
20,00,000 20,00,000
1.4.2006 To Balance b/d 17,50,000 31.3.2007 By Depreciation 2,75,000
(W.N.2)
1.4.2006 To Revaluation 31.3.2007 By Balance c/d 16,50,000
Reserve @ 10% 1,75,000
19,25,000 19,25,000
1.4.2007 To Balance b/d 16,50,000 31.3.2008 By Depreciation 2,75,000
31.3.2008 By Balance c/d 13,75,000
16,50,000 16,50,000

20 CA BHAVIK CHOKSHI
 IND AS 16 : PROPERTY, PLANT AND EQUIPMENT

Working Notes:
1. Calculation of useful life of machinery on 1.4.2001
Depreciation charge in 5 years = (30,00,000 – 17,50,000) = ` 12,50,000
Depreciation per year as per Straight Line method = 12,50,000 / 5 years
= ` 2,50,000
Remaining useful life = ` 17,50,000 / ` 2,50,000 = 7 years
Total useful life = 5 years + 7 years = 12 years
2. Depreciation after upward revaluation as on 31.3.2006
Particulars `
Book value as on 1.4.2006 17,50,000
Add : 10% upward revaluation 1,75,000
Revalued amount 19,25,000

Remaining useful life 7 years (Refer W.N.1)

Depreciation on revalued amount = 19,25,000 / 7 years = ` 2,75,000
3. Depreciation after downward revaluation as on 31.3.2008
Particulars `
Book value as on 1.4.2008 13,75,000
Less : 15% Downward revaluation (2,06,250)
Revalued amount 11,68,750

Revised useful life 8 years

Depreciation on revalued amount = 11,68,750 / 8 years = ` 1,46,094
4. Amount transferred from revaluation reserve
Revaluation reserve on 1.4.2006 (A) ` 1,75,000
Remaining useful life 7 years
Amount transferred every year (1,75,000 / 7) ` 25,000
Amount transferred in 2 years (25,000 x 2) (B) ` 50,000
Balance of revaluation reserve on 1.4.2008 (A-B) ` 1,25,000
5. Amount of downward revaluation to be charged to Profit and Loss Account
Particulars `
Downward revaluation as on 1.4.2008 (W.N.3) 2,06,250
Less : Adjusted from Revaluation reserve (W.N.4) (` 1,25,000)
Amount transferred to Profit and Loss Account ` 81,250

Question 28 (RTP November 2022)

On 1st January, 2021 an entity purchased an item of equipment for ` 600,000, including ` 50,000
refundable purchase taxes. The purchase price was funded by raising a loan of ` 605,000. In

CA BHAVIK CHOKSHI 21
 IND AS 16 : PROPERTY, PLANT AND EQUIPMENT

addition, the entity has to pay ` 5,000 in loan raising fees to the Bank. The loan is secured
against the equipment.
In January 2021 the entity incurred costs of ` 20,000 in transporting the equipment to the
entity’s site and ` 100,000 in installing the equipment at the site. At the end of the equipment’s
10-year useful life the entity is required to dismantle the equipment and restore the building
housing the equipment. The present value of the cost of dismantling the equipment and restoring
the building is estimated to be ` 100,000.
In January 2021 the entity’s engineer incurred the following costs in modifying the equipment
so that it can produce the products manufactured by the entity:
 Materials – ` 55,000
 Labour – ` 65,000
 Depreciation of plant and equipment used to perform the modifications – ` 15,000
In January 20X1, the entity’s production staff were trained in how to operate the new item
of equipment. Training costs included:
 Cost of an expert external instructor – ` 7,000
 Labour – ` 3,000

In February 2021 the entity’s production team tested the equipment and the engineering
team made further modifications necessary to get the equipment to function as intended by
management. The following costs were incurred in the testing phase:
 Materials, net of ` 3,000 recovered from the sale of the scrapped output – ` 21,000
 Labour – ` 16,000
The equipment was ready for use on 1st March, 2021. However, because of low initial order
levels the entity incurred a loss of ` 23,000 on operating the equipment during March. Thereafter
the equipment operated profitably.
What is the cost of the equipment at initial recognition?

Summary

Detailed Solution

Description Calculation or reason `

Purchase price ` 600,000 purchase price minus ` 50,000 refundable purchase taxes 550,000
Loan raising fee Offset against the measurement of the liability -
Transport cost Directly attributable expenditure 20,000
Installation costs Directly attributable expenditure 100,000
Environmental The obligation to dismantle and restore the environment arose from 100,000
restoration costs the installation of the equipment

22 CA BHAVIK CHOKSHI
 IND AS 16 : PROPERTY, PLANT AND EQUIPMENT

Preparation costs ` 55,000 materials + ` 65,000 labour + ` 15,000 depreciation 135,000

Training costs Recognised as expenses in profit and loss account. The equipment -
was capable of operating in the manner intended by management
without incurring the training costs.
Cost of testing ` 21,000 materials (ie net of the ` 3,000 recovered from the sale of 37,000
the scrapped output) + ` 16,000 labour
Operating loss Recognised as expenses in profit and loss account -
Borrowing costs Recognised as expenses in profit and loss account -
Cost of equipment 9,42,000

Question 29 (MTP Oct 21)

WLL Ltd. was incorporated on 1st April, 2011 and follows Ind AS in preparing its financial
statements. In preparing its financial statements for financial year ending 31st March, 2014,
WLL Ltd. used these useful lives for its property, plant, and equipment:
Buildings : 15 years
Plant and machinery : 10 years
Furniture and fixtures : 7 years

On 1st April, 2014, the entity decides to review the useful lives of the property, plant, and
equipment. For this purpose it hired external valuation experts. These independent experts certified
the remaining useful lives of the property, plant, and equipment o f WLL Ltd. on 1st April, 2014 as
Buildings : 10 years
Plant and machinery : 7 years
Furniture and fixtures : 5 years

WLL Ltd. uses the straight-line method of depreciation. The original cost of the various
components of property, plant, and equipment were
Buildings : ` 1,50,00,000
Plant and machinery : ` 1,00,00,000
Furniture and fixtures : ` 35,00,000

Compute the impact on the statement of profit and loss for the year ending 31st March,
2015, if WLL Ltd. decides to change the useful lives of the property, plant, and equipment in
compliance with the recommendations of external valuation experts. Assume that there were no
salvage values for the three components of the property, plant, and equipment either initially or
at the time the useful lives were revised.

CA BHAVIK CHOKSHI 23
 IND AS 16 : PROPERTY, PLANT AND EQUIPMENT

Summary

Detailed Solution

1. The annual depreciation charges prior to the change in estimate were:

Buildings : ` 1,50,00,000 / 15 = ` 10,00,000
Plant and machinery : ` 1,00,00,000 / 10 = ` 10,00,000
Furniture and fixtures : ` 35,00,000 / 7 = ` 5,00,000
Total = ` 25,00,000 (A)
The revised annual depreciation for the year ending 31st December, 2014, would be
Buildings : [` 1,50,00,000 – (` 10,00,000 × 3)]/10 = ` 12,00,000
Plant and machinery : [` 1,00,00,000 – (` 10,00,000 × 3)]/7 = ` 10,00,000
Furniture and fixtures : [` 35,00,000 – (` 5,00,000 × 3)]/5 = ` 4,00,000
Total = ` 26,00,000 (B)
The impact on Statement of profit and loss for the year ending 31st March, 2015
= (B) – (A)
= ` 26,00,000 – ` 25,00,000
= ` 1,00,000
Change in the useful lives of the various items of property, plant and equipment is a change in
accounting estimate. Change in accounting estimate is to be adjusted prospectively in the period
in which the estimate is amended and, if relevant, to future periods if they are also affected.

24 CA BHAVIK CHOKSHI
 IND AS 20 : ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE

CHAPTER 9 IND AS 20 : ACCOUNTING FOR

GOVERNMENT GRANTS AND DISCLOSURE
OF GOVERNMENT ASSISTANCE

Question 16 (RTP May 2022)

A Limited is engaged in the manufacturing of certain specialized chemicals. During the

manufacturing process, certain wastewater is produced which is released by A Limited in the
nearby river. To reduce pollution of the rivers, the state government has introduced a scheme
with the following salient features:
 If a manufacturer installs certain pre-approved wastewater treatment plant, the
government will provide an interest free loan equal to 50% of the cost of the plant;
 Such loan will be repayable to the government in 5 years from the date of disbursal;
 The manufacturer availing the benefit of this scheme must treat the wastewater of
its factory using the specified plant before releasing it to the river. If this condition
is violated, the entire loan shall become immediately repayable to the government along
with a penalty of ` 10 lakh.

Cost of the wastewater treatment plant to be installed to avail the benefit of the scheme is
` 50 lakh. A Limited decided to utilize this scheme because, if it were to obtain the similar loan
from a bank, it would be available at a market interest rate of 12% per annum. Accordingly, A
Limited applied for and obtained the government loan of ` 25 lakh on 1st April, 2021. A Limited
purchased and installed the plant such that it became ready for use on the same date.
A Limited has an accounting policy of recognizing government grant in relation to depreciable
assets in the proportion of depreciation expense. It has determined that the plant will be
depreciated over a period of 5 years using straight-line method. In the month of March, 20X3,
government officials conducted a surprise audit, and it was found that A Limited was not using
the wastewater treatment plant as prescribed. Accordingly, on 31st March, 2023, the government
ordered A Limited to repay the entire loan along with penalty. A Limited repaid the loan with
interest and penalty as per the order on 31st March, 2023.
Measure the amount of government grant as on 1st April, 2021. Determine the nature of
the government grant and its accounting treatment (principally) for the year ended 31st March,
2022. Also determine the impact on profit or loss if any, on account of revocation of government
grant as on 31st March, 2023.

CA BHAVIK CHOKSHI 25
 IND AS 20 : ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE

Summary

Detailed Solution

As per the principles of Ind AS 20 “Assistance”, the benefits of a government loan at a below market
rate of interest is treated as a government grant. The loan shall be recognized and measured in
accordance with Ind AS 109. The benefit of the below market rate of interest shall be measured
as the difference between the initial carrying value of the loan determined in accordance with Ind
AS 109 and the proceeds received. The benefit is accounted for in accordance with Ind AS 20. As
per Ind AS 109, the loan should be initially measured at its fair value.

Initial recognition of grant as on 1st April, 2021

Fair value of loan = ` 25,00,000 x 0.567 (PVF @ 12%, 5th year) = ` 14,17,500

A Limited will recognize ` 10,82,500 (25,00,000 – 14,17,500) as the government grant and will
make the following entry on receipt of loan:
Date Particulars Dr. (`) Cr. (`)
1.4.2021 Bank account Dr. 25,00,000

To Deferred Grant Income 10,82,500

To Loan account 14,17,500
(Being grant initially recorded at fair value)

Accounting treatment for year ending 31st March, 2022

As per para 3 of Ind AS 20, grants related to assets are government grants whose primary
condition is that an entity qualifying for them should purchase, construct or otherwise acquire
long-term assets.
As per Ind AS 20, Government grants related to assets, including non- monetary grants at
fair value, shall be presented in the balance sheet either by setting up the grant as deferred
income or by deducting the grant in arriving at the carrying amount of the asset.
One method recognises the grant as deferred income that is recognised in profit or loss on
a systematic basis over the useful life of the asset. The other method deducts the grant in
calculating the carrying amount of the asset. The grant is recognised in profit or loss over the
life of a depreciable asset as a reduced depreciation expense.
A Ltd. has adopted first method of recognising the grant as deferred income that is recognised
in profit or loss on a systematic basis over the useful life of the asset. Here, deferred income
is recognised in profit or loss in the proportion in which depreciation expense on the asset is
recognised.
Depreciation for the year (2021-2022) = ` 50,00,000 / 5 years = ` 10,00,000

26 CA BHAVIK CHOKSHI
 IND AS 20 : ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE

As the loan is to finance a depreciable asset, ` 10,82,500 will be recognized in Profit or Loss
on the same basis as depreciation.
Since the depreciation is provided on straight line basis by A Limited, it will credit
` 2,16,500 (10,82,500 / 5) equally to its statement of profit and loss over the 5 years.

Journal Entries
Date Particulars Dr. (`) Cr. (`)
31.3.2022 Depreciation (Profit or Loss A/c) Dr. 10,00,000
To Property, Plant & Equipment 10,00,000
(Being depreciation provided for the year)
Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)

Impact on profit or loss due to revocation of government grant as on 31st March 2023
As per para 32 of Ind AS 20, a government grant that becomes repayable shall be accounted
for as a change in accounting estimate. Repayment of a grant related to income shall be applied
first against any unamortized deferred credit recognised in respect of the grant. To the extent
that the repayment exceeds any such deferred credit, or when no deferred credit exists, the
repayment shall be recognized immediately in profit or loss.
Amount payable to Government on account of principal loan = ` 25,00,000
Amount payable to Government on account of penalty = ` 10,00,000

Journal Entries
Date Particulars Dr. (`) Cr. (`)

31.3.2023 Deferred grant income Dr. 2,16,500

To Profit or Loss 2,16,500

(Being deferred income adjusted)

Loan account (W.N.1) Dr. 17,78,112

Deferred grant income (W.N.2) Dr. 6,49,500

Profit or Loss Dr. 72,388

To Government grant payable 25,00,000

(Being refund of government grant)

Profit or Loss Dr. 10,00,000

To Government grant payable 10,00,000

(Being penalty payable to government)

CA BHAVIK CHOKSHI 27
 IND AS 20 : ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE

Therefore, total impact on profit or loss on account of revocation of government grant as on

31st March, 2023 will be ` 10,72,388 (10,00,000 + 72,388).
Circumstances giving rise to repayment of a grant related to an asset may require consideration
to be given to the possible impairment of the new carrying amount of the asset.

Working Notes:

(1) Amortisation Schedule of Loan

Year Opening balance Interest @ 12% Closing balance
of Loan of Loan
31.03.20X2 14,17,500 1,70,100 15,87,600
31.03.20X3 15,87,600 1,90,512 17,78,112

(2) Deferred Grant Income

Year Opening balance Adjustment Closing balance
31.03.20X2 10,82,500 2,16,500 8,66,000
31.03.20X3 8,66,000 2,16,500 6,49,500

Question 17 (MTP May 22)

M Limited had constructed another factory few years ago with the assistance of yet another
government grant, 'Innovative Product'. The grant is non-repayable and, following the
construction of the factory, cannot be clawed back by the government. There are no further
conditions attached to the grant that the Company is required to satisfy. The grant received
has been treated as deferred income and is being credited to the income statement over the
same period as the factory is being depreciated. Following an adverse change in the demand of
the product the factory manufactures, during the year at the reporting date, the directors
have concluded that the factory's carrying value is no longer recoverable in full and that a
write down for impairment is required. The write down is more than covered by the amortized
deferred income balance related to the grant.
Discuss, in the context of Ind AS framework and Ind AS 20, the impairment of the factory
for which 'Innovative Product' government grant, has been received. Would your answer be
different, if there are further conditions attached to grant beyond construction of factory?

28 CA BHAVIK CHOKSHI
 IND AS 20 : ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE

Summary

Detailed Solution

Accounting treatment for Government Grant:

Government grants, related to assets, including non-monetary grants at fair value should be
presented in the Balance Sheet either by setting up the grant as deferred income or by deducting
the grant in arriving at the asset’s carrying amount. (Ind AS 20)
Government grants should be recognised as income over the periods in which the entity
recognises as expenses the related costs that they are intended to compensate, on a systematic
basis. The outcome should be same in the Profit and Loss account statement regardless of
whether grants are netted or deferred.
In case the grant had been offset against the acquisition cost of the factory and net carrying
value is less than the recoverable amount, there would be no need for an impairment write-down.
The Profit and Loss account would be charged with annual depreciation on the net acquisition
cost.

Government grant relating to ‘Innovative Product’:

To match the same result for the grant ‘Innovative Product’ which has been shown as deferred
income and the factory is initially recorded at its cost, it is reasonable to release an amount of
deferred income to the Profit and Loss account to compensate for the impairment write-down.

Treatment in case of further conditions attached:

If there are further conditions attached to the grant beyond construction of the factory, it
may not be appropriate to release an amount of the deferred income to compensate for the
impairment write down. An entity would need to assess those further conditions to determine
the amount, if any, of deferred income to release.

Question 18 (RTP Nov 21)

A Ltd. has been conducting its business activities in backward areas of the country and due
to higher operating costs in such regions, it has collectively incurred huge losses in previous
years. As per a scheme of government announced in March 2011, the company will be partially
compensated for the losses incurred by it to the extent of 10,00,00,000, which will be received
in October 2011. The compensation being paid by the government meets the definition of
government grant as per Ind AS 20. Assume that no other conditions are to be fulfilled by the company
to receive the compensation.

CA BHAVIK CHOKSHI 29
 IND AS 20 : ACCOUNTING FOR GOVERNMENT GRANTS AND
DISCLOSURE OF GOVERNMENT ASSISTANCE

When should the grant be recognised in statement of profit and loss? Discuss in light of
relevant Ind AS.

Summary

Detailed Solution

Ind AS 20 states that, Government grants, including non-monetary grants at fair value, shall not
be recognised until there is reasonable assurance that:
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received.
Further, Ind AS 20 state as follows:
“A government grant that becomes receivable as compensation for expenses or losses
already incurred or for the purpose of giving immediate financial support to the entity
with no future related costs shall be recognised in profit or loss of the period in which
it becomes receivable”.
“A government grant may become receivable by an entity as compensation for expenses
or losses incurred in a previous period. Such a grant is recognised in profit or loss of the
period in which it becomes receivable, with disclosure to ensure that its effect is clearly
understood.”
In accordance with the above, in the given case, as at March 2011, A Ltd. is entitled to
receive government grant in the form of compensation for losses already incurred by it
in the previous years. Therefore, even though the compensation will be received in the
month of October 2011, A Ltd. should recognise the compensation receivable by it as
a government grant in the profit or loss for the period in which it became receivable,
i.e., for the financial year 2010-2011 with disclosure to ensure that its effect is clearly
understood.

30 CA BHAVIK CHOKSHI
 IND AS 21 : THE EFFECTS OF CHANGES IN
FOREIGN EXCHANGE RATES

CHAPTER 10 IND AS 21: THE EFFECTS OF CHANGES IN

FOREIGN EXCHANGE RATES

Question 18 (MTP Nov 21)

PQR Holdings Limited is based in London and has Pound sterling ("GBP") as its functional and
presentation currency. On 1st April, 2011, PQR Holdings Limited incorporated PQR India Limited
as its wholly owned subsidiary in India. PQR India will be engaged in trading of items purchased
from PQR Holdings. The shares of PQR India, having a face value of ` 10 each amounting to total
of ` 500 crore, were issued to PQR Holdings in GBP on 1st April, 2011.
PQR India has adopted Ind AS with effect from its incorporation. In accordance with
Ind AS, management of PQR India has concluded that its functional currency is Indian Rupee
("INR"). Following is the summarized trial balance of PQR India as on 31st March, 2012, being
the reporting date of PQR India and PQR Holdings:

(Note: All amounts in the below mentioned trial balance are ` in crore)
S. Particulars Debit Balances Credit
No. Balances

1. Share capital - 500.0

2. Securities premium reserve on issue of equity shares - 150.0

3. Retained earnings - 110.0

4. Long-term borrowings - 30.0

5. Deferred tax liability - 10.0

6. Income tax payable - 25.0

7. Import duty payable - 5.0

8. Employee benefits payable 7.5

9. Sundry trade payables - 2.5

10. Property, plant and equipment (net of depreciation) 550.0 -

11. Computer software (net of amortisation) 70.0 -

12. Inventories purchased on 15th March, 2012 200.0

(there is no indicator of impairment)

13. Cash and bank balance 5.0 -

14. Sundry trade receivables 17.0 -

15. Allowance for doubtful trade receivables - 2.0

Total 842.0 842.0

CA BHAVIK CHOKSHI 31
 IND AS 21 : THE EFFECTS OF CHANGES IN
FOREIGN EXCHANGE RATES

Additional information relating to property, plant and equipment, and computer software:
Line item Date of acquisition
Property, plant and equipment 30th April, 2011
Computer software 5th May, 2011

PQR India has adopted the following accounting policy in relation to shareholders' funds to translate equity:
Share capital To be translated using historical exchange rate
Securities premium To be translated using historical exchange rate
Retained earnings To be translated using average exchange rate

Since the presentation currency of PQR Holdings is GBP, PQR India is required to translate its
trial balance from INR to GBP. Following table provides relevant foreign exchange rates:
Closing spot rate as on 1st April, 2011 1 INR = 0.0123 GBP
Closing spot rate as on 30th April, 2011 1 INR = 0.0120 GBP
Closing spot rate as on 5th May, 2011 1 INR = 0.0119 GBP
Closing spot rate on 15 March, 2012
th
1 INR = 0.0108 GBP
Closing spot rate as on 31 March, 2012
st
1 INR = 0.0109 GBP
Average exchange rate for the year ended 31 March, 2012
st
1 INR = 0.0116 GBP

As the accountant of PQR India, you are required to do the following for its separate financial
statements:
(a) Explain the principle of monetary and non-monetary items. Based on this principle,
bifurcate the line items of the trial balance into monetary and non-monetary items.
(b) Translate the trial balance of PQR India from INR to GBP.

Summary

Detailed Solution

Monetary items are units of currency held and assets and liabilities to be received or paid in a
fixed or determinable number of units of currency. Ind AS 21 states that the essential feature of
a monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number
of units of currency. Similarly, a contract to receive (or deliver) a variable number of the entity’s
own equity instruments or a variable amount of assets in which the fair value to be received (or
delivered) equals a fixed or determinable number of units of currency is a monetary item.
Conversely, the essential feature of a non‑monetary item is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency.

32 CA BHAVIK CHOKSHI
 IND AS 21 : THE EFFECTS OF CHANGES IN
FOREIGN EXCHANGE RATES

On the basis of above principles, the line items of trial balance should be bifurcated as follows:
Particulars Monetary item / Non-
monetary item

Share Capital Non-monetary item

Securities Premium reserve on issue of equity shares Non-monetary item

Retained earnings Non-monetary item

Long-term borrowings Monetary item

Deferred tax liability Non-monetary item

Income tax payable Monetary item

Import duty payable Monetary item

Employee benefits payable Monetary item

Sundry trade payables Monetary item

Property, plant and equipment (net of depreciation) Non-monetary item

Computer software (net of amortization) Non-monetary item

Inventories purchased (there is no indicator of impairment) Non-monetary item

Cash and bank balance Monetary item

Sundry trade receivables Monetary item

Allowance for doubtful trade receivables Monetary item

As per Ind AS 21, an entity may present its financial statements in any currency (or currencies).
If the presentation currency differs from the entity’s functional currency, it translates its
results and financial position into the presentation currency. For example, when a group contains
individual entities with different functional currencies, the results and financial position of each
entity are expressed in a common currency so that consolidated financial statements may be
presented.

CA BHAVIK CHOKSHI 33
 IND AS 21 : THE EFFECTS OF CHANGES IN
FOREIGN EXCHANGE RATES

Translation of the balances for the purpose of consolidation

Particulars INR in crore Rate (GBP) Amount in GBP

Property, plant and equipment (net of depreciation) 550.0 0.0109 5.995

Computer software (net of amortization) 70.0 0.0109 0.763

Inventories 200.0 0.0109 2.18

Cash and bank balance 5.0 0.0109 0.0545

Sundry trade receivables net of allowance for doubtful

trade receivables (17.0-2.0) 15.0 0.0109 0.1635

Total Assets 840.0 9.156

Share Capital 500.0 0.0123 6.15

Securities Premium reserve 150.0 0.0123 1.845

Retained earnings 110.0 0.0116 1.276

Long-term borrowings 30.0 0.0109 0.327

Deferred tax liability 10.0 0.0109 0.109

Income tax payable 25.0 0.0109 0.2725

Import duty payable 5.0 0.0109 0.0545

Employee benefits payable 7.5 0.0109 0.08175

Sundry trade payables 2.5 0.0109 0.02725

Foreign Currency Translation reserve recognised in

OCI (balancing figure) (0.987)

Total Equity and liabilities 840.0 9.156

34 CA BHAVIK CHOKSHI
 IND AS 23 : BORROWING COSTS

CHAPTER 11 IND AS 23 : BORROWING COSTS

Question 19 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
Nikka Limited has obtained a term loan of ` 620 lacs for a complete renovation and modernisation
of its Factory on 1st April, 2011. Plant and Machinery was acquired under the modernisation
scheme and installation was completed on 30th April, 2012. An expenditure of ` 510 lacs was
incurred on installation of Plant and Machinery, ` 54 lacs has been advanced to suppliers for
additional assets (acquired on 25th April, 2011) which were also installed on 30th April, 2012 and
the balance loan of ` 56 lacs has been used for working capital purposes. Management of Nikka
Limited considers the 12 months period as substantial period of time to get the asset ready for
its intended use.
The company has paid total interest of ` 68.20 lacs during financial year 2011-2012 on the
above loan. The accountant seeks your advice how to account for the interest paid in the books
of accounts. Will your answer be different, if the whole process of renovation and modernization
gets completed by 28th February, 2012?

Summary

Detailed Solution

As per Ind AS 23, Borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset form part of the cost of that asset. Other borrowing costs
are recognised as an expense.
Where, a qualifying asset is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale.
Accordingly, the treatment of Interest of ` 68.20 lacs occurred during the year 2011-2012
would be as follows:

(i) When construction of asset completed on 30th April, 2012

The treatment for total borrowing cost of ` 68.20 lakh will be as follows:
Purpose Nature Interest to be capitalised Interest to be charged
to profit and loss
account
` in lakh ` in lakh
Modernisation and Qualifying [68.20 × (510/620)] = 56.10
renovation of plant asset
and machinery

CA BHAVIK CHOKSHI 35
 IND AS 23 : BORROWING COSTS

Advance to suppliers Qualifying [68.20 × (54/620)] = 5.94

for additional assets asset
Working Capital Not a qualifying [68.20 × (56/620)] = 6.16
asset
62.04 6.16
(ii) When construction of assets is completed by 28th February, 2012
When the process of renovation gets completed in less than 12 months, the plant and
machinery and the additional assets will not be considered as qualifying assets (until and
unless the entity specifically considers that the assets took substantial period of time
for completing their construction). Accordingly, the whole of interest will be required to
be charged off / expensed off to Profit and loss account.

Question 20 (RTP May 2022)

X Ltd. commenced the construction of a plant (qualifying asset) on 1st September, 2021, estimated
to cost ` 10 crores. For this purpose, X has not raised any specific borrowings, rather it intends
to use general borrowings, which have a weighted average cost of 11%. Total borrowing costs
incurred during the period, viz., 1st September, 2021 to 31st March, 2022 were ` 0.5 crore.
The other relevant details are as follows: (` in crore)
Month Cost of construction Accrued Cash outflows (paid in advance at the start of each month)

September 1.50 3.00

October 0.50 1.70
November 1.50 2.50
December 0.50 -
January 1.80 1.00
February 0.70 -
March 3.00 1.50

Based on the above information, discuss the treatment of borrowing cost as per cash outflow basis
and accrual basis and also suggest the appropriate amount of interest that should be capitalised to
the cost of the plant in the financial statements for the year ended 31st March, 2022?

Summary

Detailed Solution

Ind AS 23, inter-alia, states that to the extent that an entity borrows funds generally and uses
them for the purpose of obtaining a qualifying asset, the entity shall determine the amount of
borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures

36 CA BHAVIK CHOKSHI
 IND AS 23 : BORROWING COSTS

on that asset. The capitalisation rate shall be the weighted average of the borrowing costs
applicable to all borrowings of the entity that are outstanding during the period. However,
an entity shall exclude from this calculation borrowing costs applicable to borrowings made
specifically for the purpose of obtaining a qualifying asset until substantially all the activities
necessary to prepare that asset for its intended use or sale are complete. The amount of
borrowing costs that an entity capitalises during a period shall not exceed the amount of
borrowing costs it incurred during that period.
In this context, a question arises whether such expenditure should be based on costs accrued
or actual cash outflows. To contrast these two alternatives, presented below is the computation
of borrowing costs based on both the alternatives:

Month Cost of Average capital Cash outflows (paid in Average capital

construction expenditure advance at the start expenditure
Accrued of each month)
September 1.50 1.50 x 7/12 = 0.875 3.00 3.00 x 7/12 = 1.75
October 0.50 0.50 x 6/12 = 0.25 1.70 1.70 x 6/12 = 0.85
November 1.50 1.50 x 5/12 = 0.625 2.50 2.50 x 5/12 = 1.04
December 0.50 0.50 x 4/12 = 0.17 - -
January 1.80 1.80 x 3/12 = 0.45 1.00 1 x 3/12 = 0.25
February 0.70 0.70 x 2/12 = 0.12 - -
March 3.00 3.00 x 1/12 = 0.25 1.50 1.50 x 1/12 = 0.125
9.50 2.74 9.70 4.02

If the average capital expenditure on the basis of costs accrued is taken, the borrowing costs
eligible to be capitalised would be ` 2.74 crore x 11% = 0.30 crore. Whereas, if average capital
expenditure on the basis of cash flows is taken, the borrowing costs eligible to be capitalised
would be ` 4.02 crore x 11% = 0.44 crore. Thus, there is a wide variance in the amount of
borrowing cost to be capitalised, based on the accrual basis and on actual cash flows basis. This
divergence is often experienced during the implementation of large projects, for example, an
advance given to a supplier involves an upfront cash outflow while the actual expenditure accrues
in later periods (with the receipt of goods and services).
As per Ind AS 23, expenditures on a qualifying asset include only those expenditures that
have resulted in payments of cash, transfers of other assets or the assumption of interest-
bearing liabilities. Expenditures are reduced by any progress payments received and grants
received in connection with the asset (see Ind AS 20). The average carrying amount of the
asset during a period, including borrowing costs previously capitalised, is normally a reasonable
approximation of the expenditures to which the capitalization rate is applied in that period.
Where cash has been paid but the corresponding cost has not yet accrued interest becomes
payable on payment of cash. Therefore, the amount so paid should be considered for determining
the amount of interest eligible for capitalisation, subject to the fulfillment of other conditions
prescribed in Ind AS 23. Accordingly, in the present case, interest should be computed on the

CA BHAVIK CHOKSHI 37
 IND AS 23 : BORROWING COSTS

basis of the cash flows rather than on the basis of costs accrued. Therefore, the amount of
interest eligible for capitalisation would be ` 0.44 crore.
Another important factor to be noted is that Ind AS 23 requires, inter alia, that the amount
of borrowing costs that an entity capitalises during a period shall not exceed the amount of
borrowing costs it incurred during that period. Thus, the amount of borrowing costs to be
capitalised should not exceed the total borrowing costs incurred during the period, that is ` 0.5
crore.

38 CA BHAVIK CHOKSHI
 IND AS 24 : RELATED PARTY DISCLOSURES

CHAPTER 12 IND AS 24 : RELATED PARTY DISCLOSURES

Question 12 (RTP May 2022)

Entity A owns 30% of the share capital of entity B and has the ability to exercise significant
influence over it.
Entity B holds the following investments:
 70% of the share capital of its subsidiary, entity C; and
 30% of the share capital of entity D, with the ability to exercise significant influence.
Entity A transacts with entities C and D. Should entity A disclose these transactions as
related party transactions in its separate financial statements? Also explain the disclosure of
such transactions in the financial statements of C and D as related party transaction.

Summary

Detailed Solution

Entity A should disclose its transactions with entity C in entity A’s separate financial statements.
Entity C is a related party of entity A, because entity C is the subsidiary of entity A’s associate,
entity B.
Entity A’s management is not required to disclose entity A’s transactions with entity D in its
financial statements. Entity D is not a related party of entity A, because entity A has no ability
to exercise control or significant influence over entity D.
Entity C is required to disclose its transactions with entity A in its financial statements,
because entity A is a related partly.
Entity D is not required to disclose transactions with entity A, because they are not related
parties.

CA BHAVIK CHOKSHI 39
 IND AS 33 : EARNINGS PER SHARE

CHAPTER 13 IND AS 33 : EARNINGS PER SHARE

Question 21 (MTP Oct 21)

Sohan has been recently hired in Zio Life Limited. Since he is facing difficulty in computation
of EPS as per Ind AS 33, guide him by discussing the steps for the calculation of Basic EPS and
Diluted EPS alongwith the necessary computations for EPS of Year 1.
The following basic facts relate to Company Zio Life Limited.
 Net profit for Year 1 is ` 46,00,000.
 The number of ordinary shares outstanding on 1st April Year 1 is 30,00,000. The following
facts are also relevant for Year 1.
 On 1st April, Zio Life Limited issues 20,00,000 three-year term convertible bonds for
` 1 each.
 Zio Life Limited has an option to settle the principal amount in ordinary shares (every 10
bonds are convertible into one ordinary share) or cash on settlement date.
 The principal amount of the bonds is classified as an equity instrument and the interest
is classified as a financial liability.
 The interest expense relating to the liability component of the bonds is ` 1,800.
 The interest expense is tax-deductible. The applicable income tax rate is 40%.

Summary

Detailed Solution

The EPS computations for Year 1 as per Ind AS 33 are as follows.

Basic EPS Diluted EPS
1. Determine the numerator 1. Identify Potential Ordinary Shares (POSs)
No adjustment is necessary until The convertible bonds are the only POSs.
the convertible bonds are converted
and ordinary shares are issued. The
numerator is net profit ie.
` 46,00,000.

40 CA BHAVIK CHOKSHI
 IND AS 33 : EARNINGS PER SHARE

2. Determine the denominator 2. For each POS, calculate Earnings per

There is no change in the number of Incremental Share (EPIS)
outstanding shares during the year. The Since Zio Life Limited has the choice of
denominator is therefore 30,00,000. settlement, for the purpose of determining the
EPIS, it assumes the share-settlement assumption.
Potential adjustment to the numerator for EPIS:
The convertible bonds, when settled in ordinary
shares, would increase profit or loss for the year
by the post-tax amount of the interest expense:
(Interest expense on the convertible bonds) x (1 -
income tax rate) = (` 1,800) x (1 - 40%) = ` 1,080
Potential adjustment to the denominator for EPIS:
The convertible bonds, when settled in ordinary
shares, would increase the number of outstanding
shares by 2,00,000 (20,00,000 / 10).
EPIS is calculated as follows:
EPIS = 1,080 / 2,00,000 = 0.01

3. Determine basic EPS 3. Rank the POSs

Basic EPS = 46,00,000 / 30,00,000 This step does not apply, because the convertible
= 1.53 bonds are the only class of POSs.
4. Identify dilutive POSs and determine diluted EPS
The potential impact of convertible bonds is
determined as follows. (Refer W.N. below)
 ccordingly, Zio Life Limited includes the impact of the
A
convertible bonds in diluted EPS.
Diluted EPS = ` 1.44

Working Note:
Calculation of Diluted EPS
Earnings (`) Weighted average Per Share (`) Dilutive?
number of shares
Basic EPS 46,00,000 30,00,000 1.53
Convertible bonds 1,080 2,00,000
Total 46,01,080 32,00,000 1.44 Yes

CA BHAVIK CHOKSHI 41
 IND AS 34: INTERIM FINANCIAL REPORTING

CHAPTER 14 IND AS 34: INTERIM FINANCIAL REPORTING

Question 12 (ICAI Study Material)/(RTP November 20)

(Included in May 22 Section of FR 6)
An entity’s accounting year end is 31 December, but its tax year end is 31st March. The entity
st

publishes an interim financial report for each quarter of the year ended 31st December, 2019.
The entity’s profit before tax is steady at ` 10,000 each quarter, and the estimated effective
tax rate is 25% for the year ended 31st March, 2019 and 30% for the year ended 31st March,
2020.
How the related tax charge would be calculated for the year 2019 and its quarters.

Summary

Detailed Solution

Table showing computation of tax charge :

Particulars Quarter ending Quarter ending Quarter Quarter Year ending
31st March, 30th June, ending 30th ending 31st 31st December,
2019 2019 September, December, 2019
2019 2019
` ` ` ` `
Profit before tax 10,000 10,000 10,000 10,000 40,000

Tax charge (2,500) (3,000) (3,000) (3,000) (11,500)

7,500 7,000 7,000 7,000 28,500

Since an entity’s accounting year is not same as the tax year, more than one tax rate might apply
during the accounting year. Accordingly, the entity should apply the effective tax rate for each
interim period to the pre-tax result for that period.

42 CA BHAVIK CHOKSHI
 IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS

CHAPTER 16 IND AS 37 : PROVISIONS, CONTINGENT

LIABILITIES AND CONTINGENT ASSETS

Question 22 (RTP May 2022)

XYZ Ltd. offers a six-month warranty on its small to medium sized equipment, which can be put
to use by the customer with no installation support. The warranty comes with the equipment and
the customer cannot purchase it separately. This equipment is typically sold at a gross margin of
40%. XYZ Ltd. has made a provision of ` 30,000 during the year ended 31st March, 2022, which is
approximately 1% of its gross margin on the sale of these equipment. Based on past experience,
it is expected that 1% of equipment sold have been returned as faulty within the warranty
period. Faulty equipment returned to XYZ Ltd. during the warranty period are scrapped and the
sale value is fully refunded to the customer.
Assuming that sales occurred evenly during the year, how should XYZ Ltd. evaluate whether
any additional warranty provision is required on equipment sold in the past as at 31st March,
2022? Had the warranty period been 2 years instead of six months, what additional criteria
would XYZ Ltd. need to consider?

Summary

Detailed Solution

Calculation of additional warranty provisions:

Warranty claim covers 1% of gross margin, whereas customers are refunded the full selling
price. As the goods are scrapped it is assumed XYZ Ltd has no potential for re - imbursement
from its supplier regarding the faulty goods.
A calculation of warranty provision is set out below:
1% of annual gross margin is ` 30,000 therefore 100% of annual gross margin must be
` 30,00,000. Since gross margin is 40%, sales should be ` 75,00,000. As provide in the
question that the sales are evenly spread during the year and given the six month warranty, half
of the sales occurred in the second half of the year is still covered within the warranty period
as follows.
% age Annual sales Product under Percentage Warranty
warranty at expected to be provision
31 March, 2022
st
returned
Gross margin 40% 30,00,000
Selling price 100% 75,00,000 37,50,000 1% 37,500

CA BHAVIK CHOKSHI 43
 IND AS 37 : PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS

The warranty provision should therefore be increased by ` 7,500 (` 37,500 – ` 30,000). As

the provision is expected to be used in the next 6 months no discounting is required.

If the warranty period is 2 years:

Since the outstanding period of warranties is 6 months (i.e. less than a year), no discounting is
required. However, if a longer warranty period is to be given, the entity will have to take into
account the effect of the time value of money. The amount of provision shall be the present
value of the expenditures expected to be required to settle the warranty obligation. (Refer
Para 45 of Ind AS 37)
The discount rate shall be a pre-tax rate that reflects current market assessments of the
time value of money and the risks specific to the liability. The discount rate shall not reflect
risks for which future cash flow estimates have been adjusted. (Refer Para 47 of Ind AS 37)
% age Annual sales Product under Percentage Warranty
warranty at expected to be provision
31 March, 2022
st
returned

Gross margin 40% 30,00,000

Selling price 100% 75,00,000 75,00,000 1% 75,000

The warranty provision should therefore be increased by ` 45,000 (` 75,000 – ` 30,000).

Further discounting of provision would be required.

44 CA BHAVIK CHOKSHI
 IND AS 38: INTANGIBLE ASSETS

CHAPTER 17 IND AS 38: INTANGIBLE ASSETS

Question 23 (RTP May 2022)

D Ltd. a leading publishing house, purchased copyright of a book from its author for publishing
the same. As per the terms of the contract, if D Ltd. chooses to make the payment upfront
then, copyright consideration of ` 80,00,000 is to be paid (which is in line with general practice
in such arrangements). However, the contract also provided that, in case D Ltd. chooses to pay
the consideration after 2 years, then it will be required to pay ` 1,00,00,000. At what value
should the intangible asset be recognized as per Ind AS 38?

Summary

Detailed Solution

As per paragraph 32 of Ind AS 38, “If payment for an intangible asset is deferred beyond
normal credit terms, its cost is the cash price equivalent. The difference between this amount
and the total payments is recognized as interest expense over the period of credit unless it is
capitalized in accordance with Ind AS 23, Borrowing Costs.”
In the given case, if the payment for an intangible asset i.e. copyright is deferred beyond
normal credit terms, the cash price equivalent ` 80,00,000 should be considered as its cost and
the intangible asset will be recorded initially at this value.
The difference of ` 20,00,000 between cash price equivalent (i.e. ` 80,00,000) and the total
payment (i.e. ` 1,00,00,000) should be recognized as interest expense over the period of credit
(i.e. 2 years in this case), unless it is eligible for capitalization in accordance with Ind AS 23,
Borrowing Costs.

CA BHAVIK CHOKSHI 45
 IND AS 41: AGRICULTURE

CHAPTER 19 IND AS 41: AGRICULTURE

Question 9 (ICAI Study Material)/(RTP November 20)

(Included in May 22 Section of FR 6)
Entity A purchased cattle at an auction on 30th June 2011
Particulars Amount

Purchase price at 30th June 2011 ` 1,00,000

Costs of transporting the cattle back to the entity’s farm ` 1,000

Sales price of the cattle at 31st March, 2012 ` 1,10,000

The company would have to incur similar transportation costs if it were to sell the cattle at
auction, in addition to an auctioneer’s fee of 2% of sales price. The auctioneer charges 2% of
the selling price, from both, the buyer as well as the seller.
Calculate the amount at which cattle is to be recognised in books on initial recognition and
at year end 31st March, 2012.

Summary

Detailed Solution

Initial recognition of cattle

Particulars `
Fair value less costs to sell (` 1,00,000 – ` 1,000 - ` 2,000) 97,000
Cash outflow (` 1,00,000 + ` 1,000 + ` 2,000) 1,03,000
Loss on initial recognition 6,000
Cattle Measurement at year end
Fair value less costs to sell (` 1,10,000 – 1,000 – (2% × 1,10,000)) 1,06,800

At 31st March, 2012, the cattle is measured at fair value of ` 1,09,000 less the estimated
auctioneer’s fee of ` 2,200). The estimated transportation costs of getting the cattle to the
auction of ` 1,000 are deducted from the sales price in determining fair value.

Question 10 (ICAI Study Material)

(Included in May 22 Section of FR 6)
On 1 November, 2011, C Agro Ltd. purchased 100 goats of special breed from a market for
st

` 10,00,000 with a transaction cost of 2%. Goats fair value decreased from ` 10,00,000 to
` 9,00,000 as on 31st March, 2012.

46 CA BHAVIK CHOKSHI
 IND AS 41: AGRICULTURE

Determine the fair value on the date of purchase and as on financial year ended 31st March,
2012 under both the cases viz-the transaction costs are borne by the seller and the transaction
costs are incurred by the seller and purchaser both.
Also pass journal entries under both the situations on both dates.

Summary

Detailed Solution

As per para 12 of Ind AS 41, a biological asset shall be measured on initial recognition and at the
end of each reporting period at its fair value less costs to sell. Therefore, regardless of who
bears the transaction costs, the transaction costs of 2% are the costs to sell the goats on 1st
November 2011, and therefore, the goats should be measured at their fair value less costs to
sell on initial recognition date, i.e., ` 9,80,000.

Journal Entry
Particulars Debit Credit
As on 1 November 2011 :
st

Where transaction costs are borne by the seller :

Biological assets (Goats) A/c Dr. 9,80,000
Loss on purchase of biological assets (Goats) A/c Dr. 20,000
To Bank A/c 10,00,000
Where transaction costs are borne by the buyer :
Biological assets (Goats) A/c Dr. 9,80,000
Loss on purchase of biological asset (Goats) A/c Dr. 40,000
To Bank A/c 10,20,000
As on 31 March 2012 – under both the scenarios :
Loss on fair valuation of biological assets A/c Dr. 98,000
To Biological assets (Goats) A/c 98,000
[9,80,000 - (9,00,000 - 18,000)]

CA BHAVIK CHOKSHI 47
 IND AS 101 : FIRST TIME ADOPTION OF IND AS

CHAPTER 20 IND AS 101 : FIRST TIME ADOPTION OF

IND AS

Question 23 (RTP May 2022)

Fresh Vegetables Limited (FVL) was incorporated on 2nd April, 2021 under the provisions of
the Companies Act, 2013 to carry on the wholesale trading business in vegetables. As per the
audited accounts of the financial year ended 31st March, 2027 approved in its annual general
meeting held on 31st August, 2027 its net worth, for the first time since incorporation, exceeded
` 250 crore. The financial statements since inception till financial year ended 31st March, 2026
were prepared in accordance with the Companies (Accounting Standards) Rules 2006. It has
been advised that henceforth it should prepare its financial statements in accordance with the
Companies (Indian Accounting Standards) Rules, 2015.
The following additional information is provided by the Company:
 FVL has in the financial year 2022-2023 entered into a 60:40 partnership with Logistics
Limited and incorporated a partnership firm 'Vegetable Logistics Associates' (VLA) to
carry on the logistics business of vegetables from farm to market.
 FVL also has an associate company Social Welfare Limited (SWL) that was incorporated
in July, 2025 as a charitable organization and registered under section 8 of the
Companies Act, 2013. Social Welfare Limited has been the associate company of FVL
since its incorporation.
Examine the applicability of Ind AS on VLA & SWL.

Summary

Detailed Solution

Applicability of Ind AS in general:

Currently Ind AS is applicable to the following companies except for companies other than
banks and Insurance Companies, on mandatory basis:
(a) All companies which are listed or in process of listing in or outside India on Stock
Exchanges.
(b) Unlisted companies having net worth of ` 250 crore or more but less than
` 500 crore.
(c) Holding, Subsidiary, Associate and Joint venture of above.
 Companies listed on SME exchange are not required to apply Ind AS on mandatory
basis.

48 CA BHAVIK CHOKSHI
 IND AS 101 : FIRST TIME ADOPTION OF IND AS

 Once a company starts following Ind AS either voluntarily or mandatorily on

the basis of criteria specified, it shall be required to follow Ind AS for all the
subsequent financial statements even if any of the criteria specified does not
subsequently apply to it.
 Application of Ind AS is for both standalone as well as consolidated financial
statements if threshold criteria met or adopted voluntarily.
 Companies meeting the thresholds for the first time at the end of an accounting
year shall apply Ind AS from the immediate next accounting year with comparatives.
 Companies not covered by the above roadmap shall continue to apply existing
Accounting Standards notified in the Companies (Accounting Standards) Rules, 2006.
 Since the net worth of FVL in immediately preceding year exceeded ` 250 crore,
Ind AS is applicable to it. The entity VLA and SWL have to be examined as they
may fall in criteria (c) above.

Applicability of Ind AS on VLA

Joint arrangement can be either joint operation or joint venture. However, for the purpose
of identifying the applicability of Ind AS, the Act defines Joint venture (as an explanation to
section 2(6) of the Companies Act, 2013), as follows:
“The expression "joint venture" means a joint arrangement whereby the parties that have
joint control of the arrangement have rights to the net assets of the arrangement”.
Accordingly, if an entity is classified as joint operation and not joint venture, then Ind AS
would not be applicable to such entity.
In the case of VLA, if partners conclude that they have rights in the assets and obligations
for the liabilities relating to the partnership firm then this would be a joint operation. However,
Ind AS would not be applicable on VLA in such a case since it is the case of joint operation (and
not a joint venture).
Alternatively, if partners conclude that they have joint control of the arrangement and have
rights to the net assets of the arrangement relating to the partnership firm, then this would be
a joint venture. In such a case, Ind AS would be applicable to them.

Applicability of Ind AS on SWL

Social Welfare Limited (SWL) is the associate company of FVL. Accordingly, Ind AS would be
applicable on SWL too irrespective of the fact that SWL has been incorporated as a charitable
organisation.

CA BHAVIK CHOKSHI 49
 IND AS 101 : FIRST TIME ADOPTION OF IND AS

Question 24 (RTP May 2022)

GG Ltd., a listed company, prepares its first Ind AS financial statements for the year ending 31st
March, 2023. The date of transition is 1st April, 2021. The functional and presentation currency
is Rupee. The financial statements as at and for the year ended 31st March, 2023 contain an
explicit and unreserved statement of compliance with Ind AS. Previously it was using Indian
GAAP (AS) as base.
It has already published its first interim results of quarter 1, quarter 2 and quarter 3 of
2022- 2023 in accordance with Ind AS 34 and Ind AS 101. The interim financial report included
the reconciliations both of total comprehensive income and of equity that are required by Ind
AS 101.
Since issuing the interim financial report, its management has concluded that one of
accounting policy choices applied at the interim should be changed for the full year.
How should GG Ltd. deal with the change in accounting policy under Ind AS framework?

Summary

Detailed Solution

The first annual Ind AS financial statements are prepared in accordance with the specific
requirements of Ind AS 101. Subject to certain specified exemptions and exceptions, paragraph
7 of Ind AS 101 requires the entity to use the same accounting policies in its opening Ind AS
balance sheet and throughout all periods presented. This override Ind AS 8’s requirements for
disclosures about changes in accounting policies do not apply in an entity’s first Ind AS financial
statements.
GG Ltd. should include an explanation of the change in policy that it has made since the
interim financial report, in the notes to the annual financial statements, in accordance with
paragraph 27A of Ind AS 101. The disclosure note is likely to include information, similar to
what Ind AS 8 would otherwise require, to help users of the financial statements to understand
the changes that have been made. The entity should also ensure that the reconciliations of
total comprehensive income and of equity, presented in the first Ind AS financial statements
in accordance with paragraph 24 of Ind AS 101 are updated from those included in the interim
financial report to reflect the amended accounting policy.

50 CA BHAVIK CHOKSHI
 IND AS 101 : FIRST TIME ADOPTION OF IND AS

Question 25 (MTP May 22)

G Ltd. operates oil exploration and production facilities. It is preparing its transition date
opening balance sheet as per Ind AS.
(i) There· is a significant decommissioning obligation in connection with several oil wells, but
it's previous GAAP did not require the obligation to be recognized.
Discuss the treatment of decommissioning obligation as per relevant Ind AS.
(ii) G Ltd. has four assets, each in a different class under property, plant & equipment.
Assets 1 and 2 are revalued under previous GAAP (AS). Assets 3 and 4 are not. Under
previous GAAP, at 31st March 2011, immediately prior to the entity's date of transition
to Ind AS, it Balance Sheet (extract) is as follows:
Asset 1 Asset 2 Asset 3 Asset 4 Total
Valuation Valuation Cost Cost
` ` ` ` `
Cost or revaluation 5,000 2,000 4,000 4,500 15,500
Accumulated deprecation (1,000) (500) (2,000) (1,700) (5,200)
Net book value 4,000 1,500 2,000 2,800 10,300
Revaluation surplus 2,500 500 - - 3,000

On adoption of Ind AS, its management decides that, under Ind AS, it will:
 Continue to revalue asset 1. The fair value of asset 1 at the date of transition is not
materially different from its carrying value under previous GAAP;
 Use the previous valuation of asset 2 as deemed cost, and adopt a policy of cost less
depreciation under Ind AS;
 Adopt a policy of revaluation for asset 3. The fair value of asset 3 at the entity's date
of transition is ` 5,000;
 Continue to use a policy of cost less depreciation for asset 4.
All depreciation methods are already in accordance with those required by Ind AS 16.
Discuss the treatment under Ind AS of valuation of assets 1, 2, 3 & 4, being part of
property, plant & equipment?

Summary

Detailed Solution

(i) De-commissioning Obligation of G Ltd. and recognition of decommissioning cost:

Retrospective application of Ind AS 37 requires management to recognise the provision for
decommissioning cost on the opening Ind AS Balance Sheet. The provision should reflect the

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 IND AS 101 : FIRST TIME ADOPTION OF IND AS

net present value of the management’s best estimate of the amount required to settle the
obligation.
Accounting Treatment:
The obligation should be capitalised as a separate component of property, plant and equipment, together with
the accumulated depreciation from the date when the obligation was incurred to the transition date. The amount
to be capitalised as part of the cost of the asset is calculated by discounting the liability back to the date when
the obligation initially arose, using the best estimate of historical discount rate. The associated accumulated
depreciation is calculated by applying the current estimate of the asset’s useful life, using the entity’s
depreciation policy for the asset.
Any difference between the provision and the related component of the property, plant and equipment is
adjusted against the retained earnings.
The entity could elect to apply the deemed cost exemption. Property, plant and equipment
would be restated to fair value, with the corresponding adjustment to the retained earnings.
Management would need to ensure that the fair value obtained was the gross fair value and
not net of the decommissioning obligation. Management would recognise the provision for
decommissioning costs in accordance with Ind AS 37. No cost in respect of provision should
be added to property, plant and equipment but such cost should be recognised in the entity’s
opening retained earnings.

(ii) Measurement basis for valuation of PPE:

An entity has the following options with respect to measurement of its property, plant and
equipment (Ind AS 16) in the opening Ind AS Balance Sheet:
 Measurement basis as per the respective standards applied retrospectively. This
measurement option can be applied on an item-by-item basis. For example, Plant A can
be measured applying Ind AS 16 retrospectively and Plant B can be measured applying
the “fair value” or “revaluation” options mentioned below.
 Fair value at the date of transition to Ind AS. This measurement option can be applied
on an item-by-item basis in similar fashion as explained above.
 Previous GAAP revaluation, if such revaluation was, at the date of revaluation, broadly
comparable to (a) fair value or (b) cost or depreciated cost in accordance with other
Ind AS adjusted to reflect changes in general or specific price index. This measurement
option can be applied on an item-by-item basis in similar fashion as explained above.

52 CA BHAVIK CHOKSHI
 IND AS 101 : FIRST TIME ADOPTION OF IND AS

Analysis of given case:

Asset 1 Asset 2 Asset 3 Asset 4
Basis used in Revaluation Model Revaluation Model Cost Model Cost Model
previous GAAP
Intent of To continue with Use previous Adopt a policy of Continue to use a
G Ltd. on Revaluation model valuation as deemed cost revaluation policy of cost less
transition depreciation
Treatment at Since fair An entity may elect Fair value at the The entity is
the time of value at the to measure an item of date of transition to not availing any
transition to transition date property, plant and Ind AS is materially exemption given in
Ind AS is not materially equipment at the date of different from its Ind AS 101. The
different from transition to Ind AS at carrying entity can measure
its carrying value its fair value and use that value under previous applying Ind AS 16
under previous fair value as its deemed GAAP. retrospectively.
GAAP, G Ltd. cost at that date.
Can carry forward In Ind AS financial The asset should be It is assumed that
with revalued statements, asset will revalued and stated measurement bases
carrying value be carried forward at at its fair value of ` for cost of asset
` 4,000 as per ` 1,500 and previously 5,000 on the date of as per previous
previous GAAP disclosed revaluation transition to Ind AS. GAAP and Ind AS
in Ind AS books surplus is A revaluation surplus are same so asset
and continue transferred to retained of ` 3,000 will be shown in the
to disclose a earnings or another (5,000–2,000) will Ind AS financial
revaluation surplus component of equity. be transferred to statements at
of ` 2,500. revaluation reserve. ` 2,800.

Question 26 (RTP Nov 21)

While preparing an opening balance sheet on the date of transition, an entity is required to:
(a) recognise all assets and liabilities whose recognition is required by Ind AS;
(b) reclassify items that it recognised in accordance with previous GAAP as one type of
asset, liability or component of equity, but are a different type of asset, liability or
component of equity in accordance with Ind AS; and
(c) apply Ind AS in measuring all recognised assets and liabilities.
Give examples for each of the above 4 categories.

Summary

Detailed Solution

The examples of the items that an entity may need to recognise, derecognise, remeasure,
reclassify on the date of transition are as under:

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 IND AS 101 : FIRST TIME ADOPTION OF IND AS

(a) recognise all assets and liabilities whose recognition is required by Ind AS:
(i) customer related intangible assets if an entity elects to restate business combinations
(ii) share-based payment transactions with non-employees
(iii) recognition of deferred tax on land
(b) reclassify items that it recognised in accordance with previous GAAP as one type of
asset, liability or component of equity, but is a different type of asset, liability or
component of equity in accordance with Ind AS:
(i) redeemable preference shares that would have earlier been classified as equity;
(ii) non-controlling interests which would have been earlier classified outside equity; and
(c) apply Ind ASs in measuring all recognised assets and liabilities:
(i) discounting of long-term provisions
(ii) measurement of deferred income taxes for all temporary differences instead of
timing differences.

54 CA BHAVIK CHOKSHI
 IND AS 105 : NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS

IND AS 105 : NON-CURRENT ASSETS HELD

CHAPTER 21
FOR SALE AND DISCONTINUED OPERATIONS

Question 11 (RTP May 2022)

X Ltd. acquires B Ltd. exclusively with a view to sale and it meets the criteria to be classified as
discontinued operation as per Ind AS 105. Further, following information is available about B Ltd.:
Fair value of total assets excluding liabilities on acquisition – ` 360
Costs to sell as on acquisition and on reporting date – ` 10
Fair value of liabilities on acquisition and reporting date – ` 80
Fair value of total assets excluding liabilities on the reporting date – ` 340
How discontinued operation pertaining to B Ltd. should be measured in consolidated financial
statements of X Ltd. on acquisition date and reporting date?

Summary

Detailed Solution

Ind AS 105 defines a disposal group as a group of assets to be disposed of, by sale or otherwise,
together as a group in a single transaction, and liabilities directly associated with those assets
that will be transferred in the transaction.
In the given case, B Ltd. is acquired exclusively with a view to sell and meets the criteria to
be classified as discontinued operation.
Further, if the asset (or disposal group) is acquired as part of a business combination, it shall
be measured at fair value less costs to sell on acquisition date.
Therefore, on acquisition date, X Ltd. will measure B Ltd. as a disposal group at fair value
less costs to sell which will be calculated as Fair value of total assets excluding liabilities on
acquisition – Costs to sell = ` 360 – ` 10 = ` 350.
Fair value of liabilities on acquisition = ` 80.
At the reporting date, X Ltd. will remeasure the disposal group at the lower of its cost and
fair value less costs to sell which will be calculated as:
Fair value of total assets excluding liabilities on subsequent reporting date – Costs to sell
= ` 340 – ` 10 = ` 330
Fair value of liabilities on reporting date = ` 80.
At the reporting date, X Ltd. shall present these assets and liabilities separately from other
assets and liabilities in its consolidated financial statements.

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 IND AS 105 : NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS

In the statement of profit and loss, X Ltd. shall recognise loss on subsequent measurement
(of net assets at fair value) of B Ltd. which equals to ` 20 (` 270 – ` 250).

Question 12 (ICAI Study Material)

A freehold property was originally acquired for ` 40,00,000. Some years later, after cumulative
depreciation of ` 11,00,000 has been recognised, an impairment loss of ` 3,50,000 is recognised,
taking the carrying amount to ` 25,50,000, which represents the estimated value in use of
the property. Shortly thereafter, as a consequence of a proposed move to new premises, the
freehold property is classified as held for sale.
At the time of classification as held for sale:
 carrying amount is ` 25,50,000; and
 fair value less costs to sell is assessed at ` 25,00,000.
Accordingly, the initial write-down on classification as held for sale is ` 50,000 and
the property is carried at ` 25,00,000. Following classification as held for sale, no further
depreciation is recognised.
(a) At the next reporting date, the property market has improved and fair value less costs
to sell is reassessed at ` 26,50,000. Show the accounting effects
(b) Six months after that, the property market has continued to improve, and fair value less
costs to sell is now assessed at ` 30,00,000. Show the accounting effects
(c) What will be the accounting effects if after a few months, the property is sold for
` 30,00,000

Summary

Detailed Solution

(a) The gain of ` 1,50,000 is less than the cumulative impairment losses recognised to date
(` 3,50,000 + ` 50,000 = ` 4,00,000). Accordingly, it is credited in profit or loss and the
property is carried at ` 26,50,000.
(b) Fair value less costs to sell after 6 months is ` 30,00,000. This further gain of ` 3,50,000
is, however, in excess of the cumulative impairment losses recognised to date (` 3,50,000
+ ` 50,000 – ` 1,50,000 = ` 2,50,000). Accordingly, a restricted gain of ` 2,50,000 is
credited in profit or loss and the property is carried at ` 29,00,000.
(c) Subsequently, when the property is sold for ` 30,00,000, at which time a gain of
` 1,00,000 should be recognized

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 IND AS 105 : NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS

Question 13 (RTP Nov 21)

On February 28, 2011, Entity X is committed to the following plans:

(a) To sell a property after completion of certain renovations to increase its value prior to
selling it. The renovations are expected to be completed within a short span of time i.e.,
2 months.
(b) To sell a commercial building to a buyer after the occupant vacates the building. The time
required for vacating the building is usual and customary for sale of such commercial
property. The entity considers the sale to be highly probable.
Can the above-mentioned property and commercial building be classified as non- current
assets held for sale at the reporting date i.e. 31st March, 2011?

Summary

Detailed Solution

Ind AS 105 provides guidance on classification of a non-current asset held for sale states
that, the asset (or disposal group) must be available for immediate sale in its present condition
subject only to terms that are usual and customary for sales of such assets (or disposal groups)
and its sale must be highly probable.
(a) In respect of Entity X’s plan to sell property which is being renovated and such renovation
is incomplete as at the reporting date. Although, the renovations are expected to be
completed within 2 months from the reporting date i.e., March 31, 2011, the property
cannot be classified as held for sale at the reporting date as it is not available for sale
immediately in its present condition.
(b) In case of Entity X’s plan to sell commercial building, it intends to transfer the
commercial building to a buyer after the occupant vacates the building and the time
required for vacating such building is usual and customary for sale of such non- current
asset. Accordingly, the criterion of the asset being available for immediate sale would
be met and hence, the commercial building can be classified as held for sale at the
reporting date.

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 IND AS 108 : OPERATING SEGMENTS

CHAPTER 22 IND AS 108 : OPERATING SEGMENTS

Question 14 (RTP May 2022)

XYZ Ltd. has eight segments namely A, B, C, D, E, F, G and H. The information regarding respective
segments for the year ended 31st March, 2021 is as follows:
Segments A B C D E F G H
External sales 0 255 15 10 15 50 25 35
Inter-segment sales 100 60 30 5
Total 100 315 45 15 15 50 25 35
Segment result Profit/(Loss) 5 (90) 15 (5) 8 (5) 5 7
Segment assets 15 47 5 11 3 5 5 9

Identify which of the above segments out of A to H would be considered as reportable

segments of XYZ Ltd. for the year ending 31st March, 2021?

Summary

Detailed Solution

An entity has eight segments and the relevant information is as follows:

Criterial 1: Segment revenue is 10% or more of total external + intersegment sales
Segments A B C D E F G H Total
Total sales 100 315 45 15 15 50 25 35
% to total sales 16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8 600
Reportable segments A B - - - - - -

Criteria 2: 10% or more of segment result

Consider segment profit and loss separately in absolute terms
Segments A B C D E F G H Total
Profit 5 - 15 - 8 - 5 7 40
Segments loss - 90 - 5 - 5 - - 100

Since segment loss is greater, we select 100 as evaluating the segment percentage
Segments A B C D E F G H Total
% to segment loss 5 90 15 5 8 5 5 7
Reportable segments - B C - - - - -

58 CA BHAVIK CHOKSHI
 IND AS 108 : OPERATING SEGMENTS

Criteria 2: 10% or more of segment assets

Segments A B C D E F G H Total
Assets 15 47 5 11 3 5 5 9 100
% 15 47 5 11 3 5 5 9 100
Reportable segments A B - D - - - -

Based on the above 3 criteria, the Reportable Segments are A, B, C & D

However, 75% test for external sales should also be checked.
Reportable Segments A B C D TOTAL
External sales 0 255 15 10 280
Total entity’s sales (external) 405
% of reportable segments external sales to entity’s sales 69.14%
Required percentage 75%

Hence, in the above scenario, additional operating segments need to be identified as

reportable segments, till the 75% test is satisfied, even if those segments do not satisfy the
quantitative threshold limits.

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 IND AS 113 : FAIR VALUE MEASUREMENT

CHAPTER 23 IND AS 113 : FAIR VALUE MEASUREMENT

Question 11 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
On 1 January, 2011, A Ltd assumes a decommissioning liability in a business combination. The
st

reporting entity is legally required to dismantle and remove an offshore oil platform at the end
of its useful life, which is estimated to be 10 years. The following information is relevant:
If A Ltd was contractually allowed to transfer its decommissioning liability to a market
participant, it concludes that a market participant would use all of the following inputs, probability
weighted as appropriate, when estimating the price it would expect to receive:
(a) Labour costs
Labour costs are developed based on current marketplace wages, adjusted for
expectations of future wage increases, required to hire contractors to dismantle
and remove offshore oil platforms. A Ltd. assigns probability to a range of cash flow
estimates as follows :
Cash Flow Estimates: 100 Cr 125 Cr 175 Cr
Probability 25% 50% 25%

(b) Allocation of overhead costs :

Assigned at 80% of labour cost
(c) The compensation that a market participant would require for undertaking the activity
and for assuming the risk associated with the obligation to dismantle and remove the
asset. Such compensation includes both of the following:
(i) Profit on labour and overhead costs:
A profit mark-up of 20% is consistent with the rate that a market participant
would require as compensation for undertaking the activity
(ii) The risk that the actual cash outflows might differ from those expected, excluding
inflation:
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%

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 IND AS 113 : FAIR VALUE MEASUREMENT

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.

Summary

Detailed Solution

Particulars Amount
(In Cr)
Expected Labour Cost (Refer W.N.) 131.25
Allocated Overheads (80% x 131.25 Cr) 105.00
Profit markup on Cost (131.25 + 105) × 20% 47.25
Total Expected Cash Flows before inflation 283.50
Inflation factor for next 10 years (4%) (1.04) =1.4802
10

Expected cash flows adjusted for inflation 283.50 × 1.4802 419.65

Risk adjustment - uncertainty relating to cash flows (5% × 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

Question 12 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
(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%.

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 IND AS 113 : FAIR VALUE MEASUREMENT

Entity A values its holding in company XYZ’s shares based on earnings. Determine the
fair value of Entity A’s investment in XYZ’s shares.
(ii) Based on the facts given in the aforementioned part (i), assume that, Entity A estimates
the fair value of the shares it owns in company XYZ using a net asset valuation technique.
The fair value of company XYZ’s net assets including those recognised in its balance
sheet and those that are not recognised is ` 8,50,000. Determine the fair value of
Entity A’s investment in XYZ’s shares.

Summary

Detailed Solution

(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 × ` 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 × ` 170 per share).

62 CA BHAVIK CHOKSHI
 IND AS 115 : REVENUE FROM CONTRACTS WITH CUSTOMERS

CHAPTER 24 IND AS 115 : REVENUE FROM CONTRACTS

WITH CUSTOMERS

Question 83 (RTP May 2022)

On 1st April, 2021, S Limited enters into a contract with Corp Limited to construct heavy- duty
equipment for a promised consideration of rupees with a bonus of rupees if the equipment is
completed within 24 months. At the inception of the contract, S Limited correctly accounts
for the promised bundle of goods and services as a single performance obligation in accordance
with Ind AS 115. At the inception of the contract, the Company expects the costs to be rupees
and concludes that it is highly probable that a significant reversal in the amount of cumulative
revenue recognised will occur. Completion of the heavy-duty equipment is highly susceptible
to factors outside of the Company’s influence, mainly due to difficulties with the supply of
components.
At 31st March, 2022, S Limited has satisfied 65% of its performance obligation on the basis
of costs incurred to date and concludes that the variable consideration is still constrained
in accordance with Ind AS 115. However, on 4 June 2022, the contract is modified with the
result that the fixed consideration and expected costs increase by ` 1,50,000 and ` 80,000
respectively. The time allowable for achieving the bonus is extended by six months with the
result that S Limited concludes that it is highly probable
that the bonus will be achieved and that the contract remains a single performance obligation.
S Limited wants your opinion on the accounting treatment of contract with Corp Limited in
light of Ind AS 115, for the year 2021-2022 and 2022-2023.

Summary

Detailed Solution

For the year 2021-2022

S Limited accounts for the promised bundle of goods and services as a single performance
obligation satisfied over time in accordance with Ind AS 115. At the inception of the contract,
S Limited expects the following:
Transaction price – ` 20,00,000
Expected costs – ` 11,00,000
Expected profit (45%) – ` 9,00,000
At contract inception, S Limited excludes the ` 2,50,000 bonus from the transaction price
because it cannot conclude that it is highly probable that a significant reversal in the amount of

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 IND AS 115 : REVENUE FROM CONTRACTS WITH CUSTOMERS

cumulative revenue recognised will not occur. Completion of the heavy-duty equipment is highly
susceptible to factors outside the entity’s influence.
By the end of the first year, the entity has satisfied 65% of its performance obligation
on the basis of costs incurred to date. Costs incurred to date are therefore ` 7,15,000 and S
Limited reassesses the variable consideration and concludes that the amount is still constrained.
Therefore at 31st March, 2022, the following would be recognised:
Revenue (A) – ` 13,00,000 (` 20,00,000 x 65%)
Costs (B) – ` 7,15,000 (` 11,00,000 x 65%)

Gross profit (C) i.e.(A-B) – ` 5,85,000

For the year 2022-2023

On 4th June, 2022, the contract is modified. As a result, the fixed consideration and expected
costs increase by ` 1,50,000 and ` 80,000, respectively.
The total potential consideration after the modification is ` 24,00,000 which is ` 21,50,000
fixed consideration + ` 2,50,000 completion bonus. In addition, the allowable time for achieving
the bonus is extended by six months with the result that S Limited concludes that it is highly
probable that including the bonus in the transaction price will not result in a significant reversal
in the amount of cumulative revenue recognised in accordance with Ind AS 115. Therefore, the
bonus of ` 2,50,000 can be included in the transaction price.
S Limited also concludes that the contract remains a single performance obligation. Thus,
S Limited accounts for the contract modification as if it were part of the original contract.
Therefore, S Limited updates its estimates of costs and revenue as follows:
S Limited has satisfied 60.60% of its performance obligation ( ` 7,15,000 actual costs incurred
compared to ` 11,80,000 total expected costs). The entity recognises additional revenue of
` 1,54,400 [(60.60% of ` 24,00,000) – ` 13,00,000 revenue recognised to date] at the date of
modification i.e. on 4th June, 2022 as a cumulative catch-up adjustment.

Question 84 (MTP May 2022)

As a part of its sales promotion activities, MIL distributes office utility articles along with
its product catalogues to medical practitioners to familiarize & encourage them to prescribe
medicines manufactured by it. No conditions are attached with the items distributed.
Whether the distribution of office utility articles to medical practitioners is covered by Ind
AS 115 ‘Revenue from Contracts with Customers’? If not, how should the same be accounted by
MIL? Give reasons.

64 CA BHAVIK CHOKSHI
 IND AS 115 : REVENUE FROM CONTRACTS WITH CUSTOMERS

Summary

Detailed Solution

The term ‘contract’ is defined in Ind AS 115 as an agreement between two or more parties that
creates enforceable rights and obligations. In the given case:
 Gifts are distributed by MIL to doctors as a part of its sales promotion activities without
there being an agreement between MIL and the doctors creating enforceable rights and
obligations.
 The doctors to whom gifts are distributed are not ‘customers’ of MIL as they have not
contracted with it to obtain goods or services in exchange for consideration.
 The items distributed as gifts are not an output of MIL ordinary activities.

In view of the above, the distribution of gifts to doctors does not fall under the scope of
Ind AS 115.
As per Ind AS 38, sometimes expenditure is incurred to provide future economic benefits to
an entity, but no intangible asset or other asset is acquired or created that can be recognised.
In the case of the supply of goods, the entity recognises such expenditure as an expense when
it has a right to access those goods.
Examples of expenditure that is recognised as an expense when it is incurred include
expenditure on advertising and promotional activities (including mail order catalogues).
Items acquired by MIL to be distributed as gifts as a part of sales promotion acti vities have
no other purpose than to undertake those activities. In other words, the only benefit of those
items for MIL is to develop or create brands or customer relationships, which in turn generate
revenue. Ind AS 38 requires an entity to recognise expenditure on such items as an expense
when the entity has a right to access those goods. Ind AS 38 states that an entity has a right
to access goods when it owns them, or otherwise has a right to access them regardless of when
it distributes the goods.
In view of the above, MIL should recognise the cost of the items to be distributed as gifts
as an expense when it owns those items, or otherwise has a right to access them, regardless of
when it distributes the items to doctors.

Question 85 (RTP Nov 21)

Prime Ltd. is a technology company and regularly sells Software S, Hardware H and Accessory
A. The stand-alone selling prices for these items are stated below:
Software S – ` 50,000 Hardware H – ` 1,00,000 and Accessory A – ` 20,000.

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 IND AS 115 : REVENUE FROM CONTRACTS WITH CUSTOMERS

Since the demand for Hardware H and Accessory A is low, Prime Ltd. sells H and A together
at ` 100,000. Prime Ltd. enters into a contract with Zeta Ltd. to sell all the three items for a
consideration of ` 1,50,000.
What will be the accounting treatment for the discount in the financial statements of Prime
Ltd., considering that the three items are three different performance obligations which are
satisfied at different points in time? Further, what will be the accounting treatment if Prime
Ltd. would have transferred the control of Hardware H and Accessory A at the same point in
time.

Summary

Detailed Solution

Ind AS 115 states that, “An entity shall allocate a discount entirely to one or more, but not all,
performance obligations in the contract if all of the following criteria are met:
(a) the entity regularly sells each distinct good or service (or each bundle of distinct goods
or services) in the contract on a stand-alone basis;
(b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some of
those distinct goods or services at a discount to the stand-alone selling prices of the
goods or services in each bundle; and
(c) the discount attributable to each bundle of goods or services described in paragraph
82(b) is substantially the same as the discount in the contract and an analysis of the
goods or services in each bundle provides observable evidence of the performance
obligation (or performance obligations) to which the entire discount in the contract
belongs”.
In the given case, the contract includes a discount of ` 20,000 on the overall transaction, which
should have been allocated proportionately to all three performance obligations when allocating
the transaction price using the relative stand-alone selling price method (in accordance with
Ind AS 115). However, as Prime Ltd. meets all the criteria specified above, i.e., it regularly sells
Hardware H and Accessory A together for ` 1,00,000 and Software S for ` 50,000, accordingly,
it is evident that the entire discount should be allocated to the promises to transfer Hardware
H and Accessory A.
In the given case, since the contract requires the entity to transfer control of Hardware
H and Accessory A at different points in time, then the allocated amount of ` 1,00,000 should
be individually allocated to the promises to transfer Hardware H (stand-alone selling price of
` 1,00,000) and Accessory A (stand-alone selling price of ` 20,000)

66 CA BHAVIK CHOKSHI
 IND AS 115 : REVENUE FROM CONTRACTS WITH CUSTOMERS

Product Allocated transaction price (`)

Hardware H 83,333 (1,00,000/120,000 x 100,000)
Accessory A 16,667 (20,000/120,000 x 100,000)
Total 1,00,000

However, if Prime Ltd. would have transferred the control of Hardware H and Accessory
A at the same point in time, then the Prime Ltd. could, as a practical matter, account for the
transfer of those products as a single performance obligation. That is, Prime Ltd. could allocate
` 1,00,000 of the transaction price to the single performance obligation and recognise revenue
of ` 1,00,000 when Hardware H and Accessory A simultaneously transfer to Zeta Ltd.

Question 86 (RTP May 22)

On 1st April, 2021, S Limited enters into a contract with Corp Limited to construct heavy-duty
equipment for a promised consideration of rupees with a bonus of rupees if the equipment is
completed within 24 months. At the inception of the contract, S Limited correctly accounts
for the promised bundle of goods and services as a single performance obligation in accordance
with Ind AS 115. At the inception of the contract, the Company expects the costs to be rupees
and concludes that it is highly probable that a significant reversal in the amount of cumulative
revenue recognised will occur. Completion of the heavy-duty equipment is highly susceptible
to factors outside of the Company’s influence, mainly due to difficulties with the supply of
components.

At 31st March, 2022, S Limited has satisfied 65% of its performance obligation on the basis
of costs incurred to date and concludes that the variable consideration is still constrained
in accordance with Ind AS 115. However, on 4 June 2022, the contract is modified with the
result that the fixed consideration and expected costs increase by ` 1,50,000 and ` 80,000
respectively. The time allowable for achieving the bonus is extended by six months with the
result that S Limited concludes that it is highly probable that the bonus will be achieved and
that the contract remains a single performance obligation. S Limited wants your opinion on the
accounting treatment of contract with Corp Limited in light of Ind AS 115, for the year 2021-
2022 and 2022-2023.

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 IND AS 115 : REVENUE FROM CONTRACTS WITH CUSTOMERS

Summary

Detailed Solution

For the year 2021-2022

S Limited accounts for the promised bundle of goods and services as a single performance
obligation satisfied over time in accordance with Ind AS 115. At the inception of the contract,
S Limited expects the following:
Transaction price – ` 20,00,000
Expected costs – ` 11,00,000
Expected profit (45%) – ` 9,00,000
At contract inception, S Limited excludes the ` 2,50,000 bonus from the transaction price
because it cannot conclude that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur. Completion of the heavy-duty equipment is highly
susceptible to factors outside the entity’s influence.
By the end of the first year, the entity has satisfied 65% of its performance obligation
on the basis of costs incurred to date. Costs incurred to date are therefore ` 7,15,000 and S
Limited reassesses the variable consideration and concludes that the amount is still constrained.
Therefore at 31st March, 2022, the following would be recognised:
Revenue (A) – ` 13,00,000 (` 20,00,000 x 65%)
Costs (B) – ` 7,15,000 (` 11,00,000 x 65%)

Gross profit (C) i.e.(A-B) – ` 5,85,000

For the year 2022-2023

On 4th June, 2022, the contract is modified. As a result, the fixed consideration and expected
costs increase by ` 1,50,000 and ` 80,000, respectively.
The total potential consideration after the modification is ` 24,00,000 which is ` 21,50,000
fixed consideration + ` 2,50,000 completion bonus. In addition, the allowable time for achieving
the bonus is extended by six months with the result that S Limited concludes that it is highly
probable that including the bonus in the transaction price will not result in a significant reversal
in the amount of cumulative revenue recognised in accordance with Ind AS 115. Therefore, the
bonus of ` 2,50,000 can be included in the transaction price.
S Limited also concludes that the contract remains a single performance obligation. Thus,
S Limited accounts for the contract modification as if it were part of the original contract.
Therefore, S Limited updates its estimates of costs and revenue as follows:
S Limited has satisfied 60.60% of its performance obligation (` 7,15,000 actual costs incurred
compared to ` 11,80,000 total expected costs). The entity recognises additional revenue of

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 IND AS 115 : REVENUE FROM CONTRACTS WITH CUSTOMERS

` 1,54,400 [(60.60% of ` 24,00,000) – ` 13,00,000 revenue recognised to date] at the date of

modification i.e. on 4th June, 2022 as a cumulative catch-up adjustment.

Question 87 (ICAI Paper May 22)

Car Locks: Typically, a contract is entered into for sale of car locks and consideration is received
in the event of delivery of goods to the customer place. The cost of each car lock is ` 1,500
and the selling price is ` 1,800. The terms of the contract entitles the customer to return any
unused car locks within 30 days and receive a full refund. The Company estimates that the costs
of recovering the car lock will be immaterial and expects that the returned car locks can be
resold at a profit. The Company has sold a total of 20,000 car locks during the month ended 31st
March, 2022. From past experiences, Card Ltd expects that 4% of the car locks will be returned
in the financial year 2022-23.
Nut Bolts: On 1st April, 2021, Card Ltd enters into an one year contract with a customer to
deliver nut bolts. The contract stipulates that the price per piece will be adjusted retrospectively
once the customer reaches certain sales volume, defined, as follows:
Price per piece Cumulative Sales Volume
` 200 1-50,000
` 190 50,001-1,00,000
` 180 100,001 & above

Volume is determined based on sales during the financial year. There are no minimum purchase
requirements. Card Ltd estimates that the total sales volume for the year will be 90,000 based
on its experience with similar contracts and forecasted sales to the customer.
Card Ltd sells 24,000 pieces to the customer during the first quarter of the financial year
2021-22 for a contract price of ` 200 per piece.
You are required to :
(i) Analyze the terms of the revenue contracts with customer for sale of car locks as per
IND AS 115. Determine the amount of revenue, refund liability and the asset to be
recognized by Card Ltd for the said contracts of car locks.
(ii) Determine the transaction price, revenue and liability, if any for nut bolts as per Ind AS
115 at the end of first quarter of the financial year 2021-22.

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 IND AS 116 : LEASES

CHAPTER 25 IND AS 116 : LEASES

Question 61 (RTP May 2022)

Case I
Scenario 1: The ‘last mile’ is a dedicated cable that connects Entity Y’s network with the end
customer’s device. The use of this cable is at the discretion of the customer. Entity Y decides the
location of end points and has right to replace the lines (dedicated cable), however it is not practical
to replace the lines, since replacement would require additional costs to be incurred without any
corresponding benefit. Whether the arrangement would be within the scope of Ind AS 116?
Scenario 2: If it is practical for the Entity Y to replace the lines and Entity Y would benefit
from this replacement, would the answer be different?

Case II
Customer X enters into a 10-year contract with a utility company, Entity Y, for the right to
use three specified, physically distinct fibers within a larger cable connecting Mumbai to Delhi.
Customer makes the decisions about the use of the fibers by connecting each end of the fibers
to its electronic equipment. Entity Y owns extra fibers but can substitute those for Customer’s
fibers only for reasons of repairs, maintenance or malfunction. The useful life of the fiber is 15
years. Whether this arrangement is covered under Ind AS 116?

Case III
Customer X enters into a 10-year contract with Entity Y for the right to use a specified amount
of capacity within a cable connecting Mumbai to Delhi. The specified amount is equivalent to
Customer X having the use of the full capacity of three fiber strands within the cable (the cable
contains multiple fibers with similar capacities). Entity Y makes decisions about the transmission
of data (i.e., Entity Y lights the fibers, makes decisions about which fibers are used to transmit
Customer’s traffic). The useful life of the fiber is 15 years. Whether this arrangement is covered
under Ind AS 116?

Summary

Detailed Solution

Paragraph 9, B9, B13 and B14 of Ind AS 116 state the following:

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“9 At inception of a contract, an entity shall assess whether the contract is, or contains, a
lease. A contract is, or contains, a lease if the contract conveys the right to control the use of
an identified asset for a period of time in exchange for consideration.”
“B9 To assess whether a contract conveys the right to control the use of an identified asset
for a period of time, an entity shall assess whether, throughout the period of use, the customer
has both of the following:
(a) the right to obtain substantially all of the economic benefits from use of the identified
asset; and
(b) the right to direct the use of the identified asset.”
“B13 An asset is typically identified by being explicitly specified in a contract. However,
an asset can also be identified by being implicitly specified at the time that the asset is made
available for use by the customer.”
“B14 Even if an asset is specified, a customer does not have the right to use an identified asset
if the supplier has the substantive right to substitute the asset throughout the period of use. A
supplier’s right to substitute an asset is substantive only if both of the following conditions exist:
(a) the supplier has the practical ability to substitute alternative assets throughout the
period of use (for example, the customer cannot prevent the supplier from substituting
the asset and alternative assets are readily available to the supplier or could be sourced
by the supplier within a reasonable period of time); and
(b) the supplier would benefit economically from the exercise of its right to substitute the
asset (i.e., the economic benefits associated with substituting the asset are expected
to exceed the costs associated with substituting the asset).”
Paragraph B20 of Ind AS 116 which provides guidance regarding identified asset in case
of portion of assets states that a capacity portion of an asset is an identified asset if it is
physically distinct (for example, a floor of a building). A capacity or other portion of an asset
that is not physically distinct (for example, a capacity portion of a fibre optic cable) is not an
identified asset, unless it represents substantially all of the capacity of the asset and thereby
provides the customer with the right to obtain substantially all of the economic benefits from
use of the asset.
Paragraph B21 of Ind AS 116, inter alia, states that to control the use of an identified asset,
a customer is required to have the right to obtain substantially all of the economic benefits from
use of the asset throughout the period of use (for example, by having exclusive use of the asset
throughout that period). A customer can obtain economic benefits from use of an asset directly
or indirectly in many ways, such as by using, holding or subleasing the asset.
Further, paragraph B24 of Ind AS 116 provides that a customer has the right to direct the
use of an identified asset throughout the period of use if the customer has the right to direct
how and for what purpose the asset is used throughout the period of use.

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 IND AS 116 : LEASES

Paragraph B25 of Ind AS 116 states that a customer has the right to direct how and for
what purpose the asset is used if, within the scope of its right of use defined in the contract,
it can change how and for what purpose the asset is used throughout the period of use. In
making this assessment, an entity considers the decision-making rights that are most relevant
to changing how and for what purpose the asset is used throughout the period of use. Decision-
making rights are relevant when they affect the economic benefits to be derived from use. The
decision-making rights that are most relevant are likely to be different for different contracts,
depending on the nature of the asset and the terms and conditions of the contract.

Case I
Scenario 1:
(i) As per paragraph B13 of Ind AS 116, ‘Last mile’ which is a dedicated cable is an identified
asset since it is physically distinct.
(ii) There are no substantive substitution rights with Entity Y, as it does not have the
practical ability to substitute alternative assets throughout the period of use.
Thus, this arrangement is within the scope of Ind AS 116.

Scenario 2:
If Entity Y has the practical ability to replace the lines and it would benefit from such
replacement, Entity Y has substantive substitution rights. In such case, this arrangement for
the ‘last mile cable’ will not be within the scope of Ind AS 116.

Case II
The fibers are specified in the contract and are physically distinct. Hence, in accordance with
paragraph B13 and B20, the said three fibers are identified asset.
Paragraph B18, inter alia, states that the supplier’s right or obligation to substitute the asset
for repairs and maintenance, if the asset is not operating properly or if a technical upgrade
becomes available does not preclude the customer from having the right to use an identified asset.
Further, paragraph B27 provides that although rights such as those to operate or maintain
an asset are often essential to the efficient use of an asset, they are not rights to direct how
and for what purpose the asset is used and can actually be dependent on the decisions about how
and for what purpose the asset is used.
In accordance with the above, as Entity Y can substitute these three distinct fibers only
for reasons of repairs, maintenance or malfunction, it does not preclude them from being an
identified asset.
Further, the Customer X has right to control the use of the identified fibers for 10 year
since it has-

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(a) the right to obtain substantially all of the economic benefits from use of the identified
fibers throughout the period of use, i.e., 10 years; and
(b) the right to direct the use of the fibers as it makes the decisions about the use of
the fibers, i.e., it has right to direct how and for what purpose the fibers are used
throughout the period of use.
Hence, this arrangement is within the scope of Ind AS 116.

Case III
Paragraph B20 specifically provides that a capacity or other portion of an asset that is not
physically distinct (for example, a capacity portion of a fiber optic cable) is not an identified
asset, unless it represents substantially all of the capacity of the asset and thereby provides
the customer with the right to obtain substantially all of the economic benefits from use of
the asset. In the given case, the capacity portion that will be provided to Customer X is not
physically distinct from the remaining capacity of the cable and does not represent substantially
all of the capacity of the cable, thus, it is not an identified asset. Further, Entity Y makes all
decisions about the transmission of data, (i.e., supplier lights the fibers, makes decisions about
which fibers are used to transmit customer’s traffic).
Thus, the contract does not contain a lease and is therefore not within the scope of Ind AS 116.

Question 62 (MTP May 22)

The Company has taken a particular application software of a supplier namely, Crystal Systems
Limited, which is available on a cloud infrastructure managed and controlled by the Crystal Systems
Limited. The Company contracts to pay a fee of ` 5,00,000 per month in exchange for a right to
receive access to the Crystal Systems Limited's application software for 2 years. The Company
accesses the software on need basis over the internet. The contract does not convey any rights
to New Age Technology Limited over the tangible assets of the Crystal Systems Limited.
The Chief Accountant of New Age Technology Limited has sought your advice, whether the
IT should account for this transaction for use of software with Crystal Systems Limited in
terms of Ind AS 116 leases or an intangible asset in terms of Ind AS 38 ‘Intangible Assets’. Help
him to understand your assessment.

Summary

Detailed Solution

Assessment of applicability of Ind AS 38 in the given scenario

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 IND AS 116 : LEASES

As per Ind AS 38, to be an intangible asset the asset should meet following criteria:
 Identifiability;
 Control over a Resource (Asset); and
 Existence of Future Economic Benefits.
Crystal Systems Limited manages and controls the application software available on a cloud
infrastructure and New Age Technology Limited has limited rights to use the same. Merel y
right to access the application of Crystal Systems Limited, does not give New Age Technology
Limited power to obtain future economic benefits flowing from the software itself. Hence, the
application software should not be recognised as an asset under Ind AS 38.

Assessment of applicability of Ind AS 116 in the given scenario

At the inception of a contract, an entity shall assess whether the contract is or contains a lease.
For the purpose, a lease is defined as a contract, or part of a contract that conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. This
right to control the asset throughout the period of use is emphasized ONLY if the customer
has both (i) right to obtain substantially all the economic benefits from the use of the identified
asset, and (ii) the right to direct the use of the identified asset.
In the given case, the contract gives the New Age Technology Limited only the right to
access the Crystal Systems Limited’s application software over the contract term, and hence
the contract is not a lease contract within the meaning of Ind AS 116.

Conclusion
The right to access the Crystal Systems Limited’s application software for a price over a
specified period is a service contract. If the Crystal Systems Limited pays amounts for which
the services are yet to be received, then the advance payment is a prepayment and an asset for
the Crystal Systems Limited.

Question 63 (RTP Nov 21)

The Company has entered into a lease agreement for its retail store as on 1st April, 2011 for
a period of 10 years. A lease rental of ` 56,000 per annum is payable in arrears. The Company
recognized a lease liability of ` 3,51,613 at inception using an incremental borrowing rate of 9.5%
p.a. as at 1st April 2011. As per the terms of lease agreement, the lease rental shall be adjusted
every 2 years to give effect of inflation. Inflation cost index as notified by the Income tax
department shall be used to derive the lease payments. Inflation cost index was 280 for financial
year 2011-2012 and 301 for financial year 2013-2014. The current incremental borrowing rate
is 8% p.a.

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Show the Journal entry at the beginning of year 3, to account for change in lease.

Summary

Detailed Solution

As per Ind AS 116, variable lease payments that depend on an index or a rate, are initially
measured using the index or rate as at the commencement date.
At the beginning of the third year, Lessee remeasures the lease liability at the present value
of eight payments of ` 60,200 discounted at an original discount rate of 9.5% per annum as per
Ind AS 116.
Year Revised lease rental Discount factor @ 9.5% Present value
3 [(56,000/280) x 301] = 60,200 0.913 54,963
4 60,200 0.834 50,207
5 60,200 0.762 45,872
6 60,200 0.696 41,899
7 60,200 0.635 38,277
8 60,200 0.580 34,916
9 60,200 0.530 31,906
10 60,200 0.484 29,137
3,27,127

Table showing amortised cost of lease liability

Year Opening balance Interest @ 9.5% Rental paid Closing balance
1 3,51,613 33,403 56,000 3,29,016
2 3,29,016 31,257 56,000 3,04,273

Difference of ` 22,854 (3,27,127 – 3,04,273) will increase the lease liability with
corresponding increase in ROU Asset as per Ind AS 116.

Journal entry at the beginning of year 3 would be:

Right-of-use asset Dr. ` 22,854
To Lease liability ` 22,854

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 ACCOUNTING FOR SHARE BASED PAYMENTS

CHAPTER 26 ACCOUNTING FOR SHARE BASED PAYMENTS

Question 22 (RTP May 22)

New Age Technology Limited has entered into following Share Based payment transactions:
(i) On 1st April, 2021, New Age Technology Limited decided to grant share options to its
employees. The scheme was approved by the employees on 30th June, 2021. New Age
Technology Limited determined the fair value of the share options to be the value of the
equity shares on 1st April, 2021.
(ii) On 1st April, 2021, New Age Technology Limited entered into a contract to purchase IT
equipment from Bombay Software Limited and agreed that the contract will be settled by
issuing equity instruments of New Age Technology Limited. New Age Technology Limited
received the IT equipment on 30th July, 2021. The share-based payment transaction was
measured based on the fair value of the equity instruments as on 1st April, 2021.
(iii) On 1st April, 2021, New Age Technology Limited decided to grant the share options to its
employees. The scheme was approved by the employees on 30th June, 2021.
The issue of the share options was however subject to the same being approved by the
shareholders in a general meeting. The scheme was approved in the general meeting held
on 30th September, 2021. The fair value of the equity instruments for measuring the
share-based payment transaction was taken on 30th September, 2021.
Identify the grant date and measurement date in all the 3 cases of Share based payment
transactions entered into by New Age Technology Limited, supported by appropriate
rationale for the determination?

Summary

Detailed Solution

Ind AS 102 defines grant date and measurement dates as follows:

(a) Grant date: The date at which the entity and another party (including an employee) agree
to a share-based payment arrangement, being when the entity and the counterparty
have a shared understanding of the terms and conditions of the arrangement. At grant
date the entity confers on the counterparty the right to cash, other assets, or equity
instruments of the entity, provided the specified vesting conditions, if any, are met. If
that agreement is subject to an approval process (for example, by shareholders), grant
date is the date when that approval is obtained.

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(b) Measurement date: The date at which the fair value of the equity instruments granted is
measured for the purposes of this Ind AS. For transactions with employees and others
providing similar services, the measurement date is grant date. For transactions with
parties other than employees (and those providing similar services), the measurement
date is the date the entity obtains the goods or the counterparty renders service.
Applying the above definitions in the given scenarios following would be the conclusion
based on the assumption that the approvals have been received prospectively:
Scenario Grant date Measurement Base for grant date Base for
date measurement date
(i) 30th June, 2021 30th June, 2021 The date on which For employees, the
the scheme was measurement date is
approved by the grant date
employees
(ii) 1st April, 2021 30th July, 2021 The date when The date when the
the entity and the entity obtains the
counterparty entered goods from the
a contract and agreed counterparty
for settlement by
equity instruments
(iii) 30th September, 30th The date when For employees, the
2021 September, the approval by measurement date is
2021 shareholders was grant date
obtained

Question 23 (MTP OCT 21)

Ryder, a public limited company is reviewing certain events which have occurred since its year -
end 31st March, 2024. The financial statements were authorized for issue on 12th May, 2024. The
following events are relevant to the financial statements for the year ended 31st March, 2024.
The company granted share appreciation rights (SARs) to its employees on 1st April, 2022
based on 10 million shares. At the date the rights are exercised, the SAR’s provide employees
with the right to receive cash equal to the appreciation in the company’s share price since the
grant date. The rights vested on 31st March, 2024 and payment was made on schedule on 1st
May, 2024.
The FV of the SAR’s per share at 31st March, 2023 was ` 6, at 31st March, 2024 was ` 8 and
at 1st May, 2024 was ` 9. The company has recognized a liability for the SAR’s as at 31st March,
2022 based upon Ind AS 102 ‘Share-based Payments’ but the liability was stated at the same
amount at 31st March, 2024.
Discuss the accounting treatment of the above events in the financial statements of the
Ryder Group for the year ending 31st March, 2024 taking into account the implications of events
occurring after the reporting period.

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 ACCOUNTING FOR SHARE BASED PAYMENTS

Summary

Detailed Solution

Ind AS 102 ‘Share-based Payments’ requires a company to remeasure the fair value of a liability
to pay cash-settled share-based payments at each reporting date and the settlement date until
the liability is settled. Share Appreciation rights fall under this category. Hence, the company
should recognize a liability of ` 80 million (` 8 x 10 million) at 31st March, 2024, the vesting date.
The liability recognised at 31st March, 2024 was in fact based on the share price at the
previous year-end and would have been shown at ` 6 x ½ x 10 million shares – half the cost as
the SARs vest over 2 years. This liability at 31st March, 2024 has not been changed since the
previous year- end by the company.
The SARs vest over a two-year period and hence on 31st March, 2024 there would be a
weighting of the eventual cost by 1 year/2 year. Therefore, an additional liability of ` 50 million
(30 million + 20 million) should be accounted for in the financial statements at 31st March, 2024.
The SARs would be settled on 1st May, 2024 at ` 90 million (` 9 x 10 million). The increase of
` 10 million (over and above ` 80 million) in the value of the SARs is a non-adjusting event. Hence,
the change in the fair value of ` 10 million during the year 2024-2025 would be charged to profit
and loss for the year ended 31st March, 2025 and not 31st March, 2024.

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CHAPTER 27 FINANCIAL INSTRUMENTS

Question 87 Issue of borrowings with fixed rate of interest

(ICAI Study Material)

A Ltd has made a borrowing from RBC Bank for ` 10,000 at a fixed interest of 12% per annum.
Loan processing fees were additionally paid for ` 500 and loan is payable 4 half-yearly instalments
of ` 2,500 each. Details are as follows:
Particulars Details
Loan amount ` 10,000
Date of loan (Starting Date) 1-Apr-2021
Date of loan (Finishing Date) 31-March-2023
Description of repayment Repayment of loan starts from 30-Sept-2021 (To be paid half yearly)
Installment amount ` 2,500
Interest rate 12.00%
Interest charge Interest to be charged quarterly
Upfront fees ` 500
How would loan be accounted in books of A Ltd?
Consider IRR is 16.60% p.a.

Summary

Detailed Solution

The loan taken by A Ltd shall be measured at amortised cost as follows:

 Initial measurement – At transaction price less processing fees = 10,000 – 500 = 9,500
 Subsequently – interest to be accrued using effective rate of interest as follows:

Date Amount Re- Upfront Amount Days IRR Revised Loan

of Loan payment fees of Calculation Interest Balance
paid Interest computed
1-Apr-2021 10,000 - 500 - - 9,500 - -
30-Jun-2021 - - - 300 90 (300) 389 9,589
30-Sep-2021 - 2500 - 300 92 (2,800) 401 7,190
31-Dec-2021 - - - 225 92 (225) 301 7,266
31-Mar 2022 - 2500 - 225 90 (2,725) 297 4,838
30-Jun-2022 - - - 150 91 (150) 200 4,888
30-Sep-2022 - 2500 - 150 92 (2,650) 204 2,442

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 FINANCIAL INSTRUMENTS

31-Dec-2022 - - - 75 92 (75) 102 2,473

31-Mar-2023 - 2500 - 75 91 (2,575) 102 -
IRR 16.60%

Question 88 (RTP MAY 22)

On 1st April, 2001, Entity X issued a 10% convertible debenture with a face value of ` 1,000
maturing on 31st March, 2011. The debenture is convertible into ordinary shares of Entity X
at a conversion price of ` 50 per share. Interest is payable yearly in cash. On 1st April, 2002,
to induce the holder to convert the convertible debenture promptly, Entity X reduces the
conversion price to ` 40 if the debenture is converted before 1st June, 2002 (ie, within 60 days).
The market price of Entity X’s ordinary shares on the date the terms are amended is ` 80 per
share. How will the revised terms be accounted?

Summary

Detailed Solution

The fair value of the incremental consideration paid by Entity X is calculated as follows:
Number of ordinary shares to be issued to debenture holders under amended terms
Particulars
Face value ` 1,000
New conversion price ` 40 per share
Number of ordinary shares to be issued to 1,000/` 40 25 Shares
debenture holders under amended terms
Number of ordinary shares to be issued to debenture holders under original terms
Face value ` 1,000
Original conversion price ` 50 per share
Number of ordinary shares to be issued to 20 Shares
1,000/` 50
debenture holders under original terms
Number of additional shares to be issued to 5 Shares
debenture holders under amended terms
Value of additional shares upon conversion (to be recognised as loss in P&L)
5 shares x ` 80 per share ` 400

Question 89 (RTP MAY 22)

ABC Ltd. issues 4% 1,00,000 OCPS at a face value of ` 100 per share on 1st April, 2021 and
these are redeemable after 5 years, ie, on 31st March, 2026. Dividend is non- cumulative. Each

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preference shares entitles the holders to 10 equity shares and the preference shares are
optionally convertible by the holder at any time until maturity.
How will the preference shares be classified at initial recognition assuming that a comparable
instrument carries a market interest rate of 7%? Provide journal entries for year 1. Will this
classification be changed subsequently in case there is likelihood that OCPS will be encashed at
the end of the maturity period?

Summary

Detailed Solution

The OCPS is redeemable at the end of the 5th year. Hence, the preference share contains a
liability component. Further the dividend payable on the preference shares is non-cumulative.
The holder may also be able to convert the preference shares at his option any time until
maturity.
Ind AS 32, Financial Instruments: Presentation states that non- cumulative dividends paid
at the discretion of the issuer entity is part of equity element.
Ind AS 32, Financial Instruments: Presentation, requires separate recognition of components
of a financial instrument that (a) creates a financial liability of the entity; and (b) grants an
option to the holder of the instrument to convert it into fixed number of equity instruments of
the entity.
From the above paragraphs it is clear that OCPS issued by ABC Ltd. has a financial liability
component as well as an equity component, making it a compound financial instrument.
In case of compound financial instruments, the issuer fi rst determines the carrying amount
of the financial liability component by measuring the fair value of a similar liability that does not
have an associated equity component. The carrying amount of the equity represented by (a) non-
cumulative dividend feature and (b) option to convert the preference shares for fixed number of
pre-determined ordinary shares is then determined by deducting the fair value of the financial
liability component from the fair value of the compound financial instrument as a whole.
Measurement and recognition (Calculations have been done at full scale):
At 7% market rate of interest, the fair value of the financial liability component of the OCPS is
` 71,29,862 [100,000 OCPS x ` 100 x (1/(1+7%))5]
The fair value of the equity component is (residual value) ` 28,70,138 [` 1,00,00,000 -
` 71,29,862]

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 FINANCIAL INSTRUMENTS

Journal Entries
Date Particulars Debit Credit
(` symbol) (` Symbol)
1st April, 2021 On Initial recognition
Bank Dr. 1,00,00,000
To OCPS (Financial liability) 71,29,862
To OCPS (Equity) 28,70,138
(Being OCPS issued and recognised)
31st March, 2022 Interest expense – unwinding of discount
Interest expense @ 7% (Refer W.N.) Dr. 4,99,090
To OCPS (Financial liability) 4,99,090
(Being interest recorded as per EIR)
Interest entry will be passed every year
till conversion option is not exercised
Whenever the option is exercised by the
holder to convert to equity shares
OCPS (Financial liability) Dr. Balance on date of exercise of
To OCPS (Equity) the option

In case of a convertible financial instrument, the classification of the liability and equity
components is not revised as a result of change in the likelihood that a conversion option will be
exercised.
In other words, the amount attributable to equity component on initial recognition shall remain
in equity and will not be reclassified even if the OCPS are ultimately redeemed in cash by the issuer.
31st March, If redeemed in cash on maturity
2026 OCPS (financial liability) (Refer W.N.) Dr. 1,00,00,000
To Bank 1,00,00,000
(Being OCPS redeemed on maturity)

Working Note:
Calculation of the amortised cost of the financial liability (at full scale):
Year Opening Balance (`) Interest @ 7% Repayment Closing Balance (`)
1 71,29,862 4,99,090 - 76,28,952
2 76,28,952 5,34,027 81,62,979
3 81,62,979 5,71,409 87,34,388
4 87,34,388 6,11,407 93,45,795
5 93,45,795 6,54,206 10,000,000 -

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Question 90 (MTP OCT 21)

Which of the following would meet and not meet the definition of financial instruments and fall outside the
scope of Ind AS 32?
(1) Cash deposited in banks
(2) Gold deposited in banks
(3) Trade receivables
(4) Investments in debt instruments
(5) Investments in equity instruments
(6) Prepaid expenses
(7) Inter-corporate loans and deposits
(8) Deferred revenue
(9) Tax liability
(10) Provision for estimated litigation losses.

Summary

Detailed Solution

Table showing classification of various items:

S. No. Item Classification
(1) Cash deposited in banks Financial Instrument
(2) Gold deposited in banks Not a financial instrument
(3) Trade receivables Financial Instrument
(4) Investments in debt instruments Financial Instrument
(5) Investments in equity instruments Financial Instrument
(6) Prepaid expenses Not a financial instrument
(7) Inter-corporate loans and deposits Financial Instrument
(8) Deferred revenue Not a financial instrument
(9) Tax liability Not a financial instrument
(10) Provision for estimated litigation losses Not a financial instrument

Question 91 (MTP April 21)

Besides construction activity, Buildings & Co. Limited is also engaged in the trading of Copper.
On 1st April, 2021, it had 100 kg of copper costing ` 70 per kg - totalling ` 7000. The Company
has a scheduled delivery of these 100 kgs of copper to its customer on 30th September, 2021
at the rate of USD 100 on that date. To protect itself from decline in currency exchange
rate (USD to `), the entity hedges its position by entering into currency futures contract
for equivalent currency units at ` 76/USD. The future contract mature on 30th September,

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2021. The management performed an assessment of hedge effectiveness and concluded that
the hedging relationship qualifies for cash flow hedge accounting. The entity determines and
documents that changes in fair value of the currency futures contract will be highly effective
in offsetting variability in cash flow of currency exchange. On 30th September, 2021, the entity
closes out its currency futures contract. On the same day, it also sells its inventory of copper
at USD 100 when the spot rate is ` 72/USD.
You are required to prepare detailed working and pass necessary journal entries for the
sale of copper and the corresponding hedge instrument taken by the company. Pass the journal
entries as on the initial date (i.e. 1st April 2021), first quarter end reporting (i.e. 30th June 2021)
and date of sale of copper and settlement of forward contract (i.e. 30th September 2021).

Assume the exchange rates as follows and yield @ 6% per annum.

Date Future price for 30th September 20X1 delivery (`/USD)
1st April, 2021 76
30 June, 2021
th
74
30 September, 2021
th
71

Summary

Detailed Solution

Calculation of discounting factor based on yield @ 6% p.a.

Date Spot rate at Forward rate for 30th Discount factor @ 6%
indicated date September 2021 p.a. on quarter basis
1st April, 2021 76 0.971
30th June 2021 74 0.985
30 September, 2021
th
72 71 1

Determination of fair value change

Particulars 1st April, 30th June, 30th September,
2021 2021 2021
a Nominal value in ` @ ` 76/USD 7,600 7,600 7,600
b Nominal value in USD (100 kg for USD 100) 100 100 100
c Forward rate for 30th September, 2021 76 74 71
d Value in ` (b x c) 7,600 7,400 7,100
e Difference (a-d) 0 200 500
f Discount factor (as calculated in the above table) 0.971 0.985 1
g Fair value (e x f) 0 197 500
h Fair value change for the period 0 197 303*
* 500 – 197= 303

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Journal Entries
Date Particulars Dr. Cr.
1 April, 2021
st
No entry as initial fair value is zero
30th June, 2021 Future Contract Dr. 197
To Cash Flow Hedge Reserve (Other Equity) - OCI 197
(Being Change in Fair Value of Hedging Instrument
recognised in OCI accumulated in a separate component in
Equity)
30th September, Future Contract Dr. 303
2021 To Cash Flow Hedge Reserve (Other Equity) - OCI 303
(Being change in fair value of the hedging instrument
recognised in OCI)
30th September, Bank/Trade Receivable Dr. 7,200
2021 To Revenue from Contracts with Customers 7,200
(Being sale of 100 kgs. of copper for USD 100 recognised
at spot rate of ` 72 for USD 1)
30th September, Cash Flow Hedge Reserve (Other Equity) - OCI Dr. 500
2021 To Revenue from Contracts with Customers 500
(Being fair value change in forward contract reclassified to
profit and loss and recognised in the line item affected by
the hedge item)
30th September, Bank/Cash Dr. 500
2021 To Future Contract 500

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CHAPTER 28 BUSINESS COMBINATION & CORPORATE

RESTRUCTURING

Question 74 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
Company X is engaged in the business of exploration & development of Oil & Gas Blocks.
Company X currently holds participating interest (PI) in below mentioned producing Block as
follows:
Block Name Company X Company Y Company Z Total
AWM/01 30% 60% 10% 100%

For the above Block, Company X, Y & Z has entered into unincorporated Joint Venture.
Company Y is the Operator of the Block AWM/01. Company X & Company Z are the Joint
Operators. Company Y incurs all the expenditure on behalf of Joint Venture and raise cash call
to Company X & Company Z at each month end in respect of their share of expenditure incurred
in Joint Venture. All the manpower and requisite facilities / machineries owned by the Joint
venture and thereby owned by all the Joint Operators.
For past few months, due to liquidity issues, Company Z defaulted in payment of cash calls
to operators. Therefore, company Y (Operator) has issued notice to company Z for withdrawal
of their participating right from on 01.04.2011. However, company Z has filed the appeal with
arbitrator on 30.04.2011.
Financial performance of company Z has not been improved in subsequent months and
therefore company Z has decided to withdraw participating interest rights from Block AWM/01
and entered into sale agreement with Company X & Company Y. As per the terms of the agreement,
dated 31.5.2011, Company X will receive 33.33% share & Company Y will receive 66.67% share of
PI rights owned by Company Z.
Company X is required to pay ` 1 Lacs against 33.33% share of PI rights owned by Company Z.
After signing of sale agreement, Operator (company Y) approach government of India
for modification in PSC (Production Sharing Contract) i.e. removal of Company Z from PSC of
AWM/01 and government has approved this transaction on 30.6.2011. Government approval
for the modification in PSC is essential given the industry in which the joint operators
operate.

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Balance sheet of Company X & Company Z are as follows:

Company X Company Z
Particulars 31.5.2011 30.6.2011 31.5.2011 30.6.2011
` ` ` `
Assets
Non-Current Assets
Property, Plant & Equipment 5,00,000 10,00,000 1,50,000 3,00,000
Right of Use Asset 1,00,000 2,00,000 10,000 20,000
Development CWIP 50,000 1,00,000 50,000 1,00,000
Financial Assets
Loan receivable 25,000 50,000 25,000 50,000
Total Non-Current Assets 6,75,000 13,50,000 2,35,000 4,70,000
Current assets
Inventories 1,00,000 2,00,000 15,000 30,000
Financial Assets
Trade receivables 1,50,000 3,00,000 50,000 1,00,000
Cash and cash equivalents 2,00,000 4,00,000 1,00,000 2,00,000
Other Current Assets 2,25,000 50,000 25,000 50,000
Total Current Assets 6,75,000 9,50,000 1,90,000 3,80,000
Total Assets 13,50,000 23,00,000 4,25,000 8,50,000
Equity and Liabilities
Equity
Equity share capital 3,00,000 3,00,000 1,00,000 1,00,000
Other equity 2,00,000 3,00,000 75,000 2,50,000
Total Equity and Liabilities 5,00,000 6,00,000 1,75,000 3,50,000
Non-Current Liabilities
Provisions 4,00,000 8,00,000 1,00,000 2,00,000
Other Liabilities 1,50,000 3,00,000 50,000 1,00,000
Total Non-Current Liabilities 5,50,000 11,00,000 1,50,000 3,00,000
Current Liabilities
Financial Liabilities
Trade Payables 3,00,000 6,00,000 1,00,000 2,00,000
Total Current Liabilities 3,00,000 6,00,000 1,00,000 2,00,000
Total Liabilities 13,50,000 23,00,000 4,25,000 8,50,000

Additional Information:
1. Fair Value of PPE & Development CWIP owned by Company Z as per Market participant
approach is ` 5,00,000 & ` 2,00,000 respectively.

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2. Fair Value of all the other assets and liabilities acquired are assumed to be at their
carrying values (except cash & cash equivalent). Cash and cash equivalents of Company Z
are not to be acquired by Company X as per the terms of agreement.
3. Tax rate is assumed to be 30%.
4. As per Ind AS 28, all the joint operators are joint ventures whereby each parties that
have joint control of the arrangement have rights to the net assets of the arrangement
and therefore every operator records their share of assets and liabilities in their books.
You need to determine the following:
1. Whether the above acquisition falls under business or asset acquisition as defined under
business combination standard Ind AS 103?
2. Determine the acquisition date in the above transaction?
3. Prepare Journal entries for the above-mentioned transaction?
4. Draft the Balance Sheet for Company X based on your analysis in Part 1 above as at
acquisition date.

Summary

Detailed Solution

(1) Ind AS 103 defines business as an integrated set of activities and assets that is capable
of being conducted and managed for the purpose of providing goods or services to
customers, generating investment income (such as dividends or interest) or generating
other income from ordinary activities.
For a transaction to meet the definition of a business combination (and for the acquisition
method of accounting to apply), the entity must gain control of an integrated set of assets
and activities that is more than a collection of assets or a combination of assets and liabilities.
To be capable of being conducted and managed for the purpose identified in the
definition of a business, an integrated set of activities and assets requires two essential
elements—inputs and processes applied to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an
input and a substantive process that together significantly contribute to the ability to
create output.
In the aforesaid transaction, Company X acquired share of participating rights
owned by Company Z for the producing Block (AWM/01). The output exist in this
transaction (Considering AWM/01) is a producing block. Also all the manpower
and requisite facilities/machineries are owned by Joint venture and thereby all
the Joint Operators. Hence, acquiring participating rights tantamount to acquire

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inputs (Expertise Manpower & Machinery) and it is critical to the ability to continue
producing outputs.
Thus, the said acquisition will fall under the Business Acquisition and hence standard Ind
AS 103 is to be applied for the same.
As per Ind AS 111, when an entity acquires an interest in a joint operation in which
the activity of the joint operation constitutes a business, as defined in Ind AS 103,
it shall apply, to the extent of its share, all of the principles on business combinations
accounting in Ind AS 103. This applies to the acquisition of both the initial interest
and additional interests in a joint operation in which the activity of the joint operation
constitutes a business. Further, as per Para 33C of Ind AS 111, a joint operator might
increase its interest in a joint operation in which the activity of the joint operation
constitutes a business, as defined in Ind AS 103, by acquiring an additional interest in
the joint operation. In such cases, previously held interests in the joint operation are
not remeasured if the joint operator retains joint control. (refer part 3).
(2) As per paragraph 8 of Ind AS 103, acquisition date is the date on which the acquirer
obtains control of the acquiree. Further, paragraph 9 of Ind AS 103 clarifies that the
date on which the acquirer obtains control of the acquiree is generally the date on which
the acquirer legally transfers the consideration, acquires the assets and assumes the
liabilities of the acquiree—the closing date. However, the acquirer might obtain control
on a date that is either earlier or later than the closing date.
An acquirer shall consider all pertinent facts and circumstances in identifying the
acquisition date. Since government of India (GOI) approval is a substantive approval for
Company X to acquire control of Company Z’s operations, the date of acquisition cannot
be earlier than the date on which approval is obtained from GOI. This is pertinent given
that the approval from GOI is considered to be a substantive process and accordingly,
the acquisition is considered to be completed only on receipt of such approval. Hence
acquisition date in the above scenario is 30.6.2011.
(3) Journal entry for acquisition
Particulars Amount (`) Amount (`)
Property Plant & Equipment Dr. 1,66,650
Right-of-use Asset Dr. 6,666
Development CWIP Dr. 66,660
Financial Assets - Loan Receivables Dr. 16,665
Inventories Dr. 9,999
Trade Receivables Dr. 33,330
Other Current Assets Dr. 16,665
To Provisions 66,660
To Other Liabilities 33,330

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To Trade Payables 66,660

To Deferred Tax Liability 29,997
 To Cash & Cash Equivalent (purchase 1,00,000
consideration)
 To Gain on bargain purchase (Other 19,988
Comprehensive Income)
(Being assets acquired and liabilities assumed from Company Z recorded at fair
value along gain on bargain purchase)

Balance Sheet of Company X as at 30.6.2011

(Pre & Post Acquisition of PI rights pertaining to Company Z)
Particulars Pre-Acquisition Adjustments Post-Acquisition
30.6.2011 30.6.2011
Assets
Non - Current Assets
Property Plant & Equipment 10,00,000 1,66,650 11,66,650
Right of Use Asset 2,00,000 6,666 2,06,666
Development CWIP 1,00,000 33,330 1,66,660
Financial Assets
Loan receivable 50,000 16,665 66,665
Total Non-Current Assets 13,50,000 16,06,641
Current assets
Inventories 2,00,000 9,999 2,09,999
Financial Assets
Trade receivables 3,00,000 33,330 3,33,330
Cash and cash equivalents 4,00,000 (1,00,000) 3,00,000
Other Current Assets 50,000 16,665 66,665
Total Current Assets 9,50,000 9,09,994
Total Assets 23,00,000 25,16,635
Equity and Liabilities
Equity
Equity share capital 3,00,000 - 3,00,000
Other equity 3,00,000 - 3,00,000
Capital Reserve (OCI) - 19,988 19,988
Total Equity 6,00,000 6,19,988
Liabilities
Non-Current Liabilities
Provisions 8,00,000 66,660 8,66,660
Other Liabilities 3,00,000 33,330 3,33,330
Deferred Tax Liability - 29,997 29,997

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Total Non - Current Liabilities 11,00,000 12,29,987

Current Liabilities
Financial liabilities
Trade Payables 6,00,000 66,660 6,66,660
Total Current Liabilities 6,00,000 6,66,660
Total Equity and Liabilities 23,00,000 25,16,635

Working Notes
1. Determination of Company Z’s balance acquired by Company X on 30.6.2011
(Acquisition Date)
As per Carrying Acquisition Remarks
Company Z Value Date Value
Particulars Books 33.33%
30.6.2011 Share
` ` `
Assets
Non - Current Assets
Property Plant & Equipment 3,00,000 99,990 1,66,650 Note 1
Right of Use Asset 20,000 6,666 6,666
Development CWIP 1,00,000 33,330 66,660 Note 2
Financial Assets
Loan receivable 50,000 16,665 16,665
Total Non-Current Assets 4,70,000 1,56,651 2,56,641
Current assets
Inventories 30,000 9,999 9,999
Financial Assets
Trade receivables 1,00,000 33,330 33,330
Cash and cash equivalents 2,00,000 66,660 66,660
Other Current Assets 50,000 16,665 16,665
Total Current Assets 3,80,000 1,26,654 1,26,654
Liabilities
Non-Current Liabilities
Provisions 2,00,000 66,660 66,660
Other Liabilities 1,00,000 33,330 33,330
Total Non - Current 3,00,000 99,990 99,990
Liabilities
Current Liabilities
Financial liabilities
Trade Payables 2,00,000 66,660 66,660
Total Current Liabilities 2,00,000 66,660 66,660

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Note 1: Fair Value of PPE :

Fair Value of PPE in Company Z Books ` 5,00,000
33.33% Share acquired by Company X ` 1,66,650

Note 2: Fair Value of Development CWIP:

Fair Value of PPE in Company Z Books ` 2,00,000
33.33% Share acquired by Company X ` 66,660

2. Computation Goodwill/Bargain Purchase Gain

Particulars As at 30.6.2011
(`)
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of 59,994
` 66,660) (1,26,654 – 66,660)
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Total Deferred Tax Liability (Refer Working note 3) (29,997)
Net Assets Acquired 1,19,988
Less : Consideration Paid (1,00,000)
Gain on Bargain Purchase (To be transferred to OCI) 19,988

*In extremely rare circumstances, an acquirer will make a bargain purchase in a business
combination in which the value of net assets acquired in a business combination exceeds
the purchase consideration. The acquirer shall recognise the resulting gain in other
comprehensive income on the acquisition date and accumulate the same in equity as capital
reserve, if the reason for bargain purchase gain is clear and evidence exist. If there does
not exist clear evidence of the underlying reasons for classifying the business combination
as a bargain purchase, then the gain shall be recognised directly in equity as capital reserve.
Since in above scenario it is clearly evident that due to liquidity issues, Company Z has to
withdraw their participating right from AWM/01. The said bargain purchase gain should be
transferred to other comprehensive income on the acquisition date.
3. Computation of Deferred Tax Liability arising on Business Combination
Particulars Acquisition Date Value
(`)
Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of Rs 66,660) 59,994
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Net Assets Acquired at Fair Value 1,49,985
Book value of Net Assets Acquired (49,995)
Temporary Difference 99,990
DTL @ 30% on Temporary Difference 29,997

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Note: As per Ind AS 103, in case an entity acquires another entity step by step through
series of purchase then the acquisition date will be the date on which the acquirer
obtains control. Till the time the control is obtained the investment will be accounted as
per the requirements of other Ind AS 109, if the investments are covered under that
standard or as per Ind AS 28, if the investments are in Associates or Joint Ventures.

If a business combination is achieved in stages, the acquirer shall remeasure its previously
held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting
gain or loss, if any, in profit or loss or other comprehensive income, as appropriate.
Since in the above transaction, company X does not hold any prior interest in Company Z &
company holds only 30% PI rights in Block AWM/01 trough unincorporated joint venture, this is
not a case of step acquisition.

Question 75

Entity A holds 20% interest in Entity B. Subsequently Entity A, further acquires 50% share in
Entity B by paying ` 300 Crores.
The fair value of assets acquired and Liabilities assumed are as follows:
Building - ` 1000 Crores
Cash and Cash Equivalent - ` 200 Crores
Financial Liabilities - ` 800 Crores
DTL - ` 150 crores
Fair value of Entity B is ` 400 Crores and Fair value of NCI is ` 120 Crores (400 x 30%) Fair
value of Entity A’s previously held interest is ` 80 Crores (400 x 20%)
Entity A needs to determine whether acquisition is an asset acquisition as per concentration
test.
Calculate Gross Assets and Test for Concentration

Summary

Detailed Solution

(i) Fair value of consideration transferred (including fair value of non-controlling interest
and fair value of previously interest held) = 300 + 120 + 80 = ` 500 Crores
(ii) Fair value of liability assumed (excluding deferred tax) – ` 800 crores
(iii) Cash and cash equivalent – ` 200 crores.
Fair value of gross assets acquired - ` 1,100 Crores

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In the above scenario, substantially all fair value of gross assets acquired is concentrated in
a single identifiable asset i.e. building. Hence it should be asset acquisition. (1,000 / 1,100 = 91%
of value of gross assets is concentrated into single identifiable asset i.e. building). A Judgement
is required to conclude on the word substantially as the same is not defined in the standard.
In our view we have considered 91% of the value as substantial to conclude the above
transaction as asset acquisition.

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CHAPTER 29 CONSOLIDATION – SUBSIDARY

[IND AS 110]

Question 37 DDT deleted as per finance act 2020 and hence this
question is not relevant (RTP November 19)

What will be the accounting treatment of dividend distribution tax in the consolidated financial
statements in case of partly-owned subsidiary in the following scenarios:

Scenario 1: H Limited (holding company) holds 12,000 equity shares in S Limited (Subsidiary of
H Limited) with 60% holding. Accordingly, S Limited is a partly-owned subsidiary of H Limited.
During the year 2011, S Limited paid a dividend @ ` 10 per share and DDT @ 20% on it.
Should the share of H Limited in DDT paid by S Limited amounting to ` 24,000 (60% ×
` 40,000) be charged as expense in the consolidated profit and loss of H Limited?

Scenario 2(A): Extending the situation given in scenario 1, H Limited also pays dividend of
` 300,000 to its shareholders and DDT liability @ 20% thereon amounts to ` 60,000. As per the
tax laws, DDT paid by S Ltd. of ` 24,000 is allowed as set off against the DDT liability of H Ltd.,
resulting in H Ltd. paying ` 36,000 (` 60,000 – ` 24,000) as DDT to tax authorities.

Scenario 2(B): If in (A) above, H Limited pays dividend amounting to ` 100,000 with DDT
liability @ 20% amounting to ` 20,000.

Scenario (3):
Will the answer be different for the treatment of dividend distribution tax paid by associate in
the consolidated financial statement of investor, if as per tax laws the DDT paid by associate is
not allowed set-off against the DDT liability of the investor

Summary

Detailed Solution

12,000
Scenario 1 : Shares of the subsidary = × 100 = 20,000 sh.
60%

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The dividend adjustments in CFS will appear as follows:

H S Adj. Total
Dividend Distributed - 2,00,000 (1,20,000) 80,000
Dividend Income 1,20,000 - (1,20,000) -

80,000 will appear as a dividend distribution (To NCI) in Statement of Changes in Equity
(S.O.C.E).
DDT paid on dividend distributed by subsidary and received by parent is to be expensed in
the Statement of Consolidated P/L. This is because in the ultimate CFS 1,20,000 get eliminated
and hence there is no dividend distribution for 1,20,000. However, the DDT on the same (24,000)
still needs to be paid. As there is no distribution linked to 24,000 in the CFS, it is an expense.
Dividend attributable to NCI (80,000) appears in CFS in SOCE and hence its corresponding
DDT (16,000) should also appear in SOCE.

DDT – S : 40,000

H (60%) NCI (40%)

24,000 16,000

Consolidated P/L S.O.C.E

Expense

Ref Note: We have assumed that no tax credit is available.

Scenario 2(A): H S Adj. Total
Dividend Distributed 3,00,000 2,00,000 (1,20,000) 3,80,000
Dividend Income 1,20,000 - (1,20,000) -

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Allocation of DDT

DDT – H : 36,000
[60,000 – 24,000*]

SOCE

DDT – S : 40,000

H (60%) NCI (40%)

24,000* 16,000

SOCE SOCE

* Ideally, 24,000 is an expense in the P/L as it is paid for an inter company transaction and is
not attributable to distribution to owners. However, since tax credit on 24,000 is available, H
will utilize it at the time of an ultimate distribution to its owners and hence it should be treated
as an appropriation in SOCE.

Therefore, total DDT in SOCE = 36,000 + 24,000 + 16,000 = 76,000

[i.e. 3,80,000 × 20%]
Extra: In case tax credit was not available, H would have to pay 60,000 DDT(SOCE) and 24,000
paid by S will be expensed to P/L.
Scenario 2(B): H S Adj. Total
Dividend Distributed 1,00,000 2,00,000 (1,20,000) 1,80,000
Dividend Income 1,20,000 - (1,20,000) -

Allocation of DDT
DDT – H : NIL
[20,000 – 20,000*]

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DDT – S : 40,000

H (60%) NCI (40%)

24,000 16,000

20,000 4,000 SOCE

Utilized By H Consolidated P/L

at the time of Expense
Distribution

S.O.C.E

Total DDT
S.O.C.E : 20,000 + 16,000 = 36,000 [i.e. 1,80,000 × 20%]
P/L : 4,000
Extra: We have assumed that DDT credit cannot be carried forward (in line with ICAI solution)
and hence 4,000 is expensed. However, in case DDT credit can be carried forward, then 4,000
would appear as an asset.

Scenario 3: As credit is not allowed for the DDT paid, we will consider DDT as an expense in the
consolidated P/L and also reduce the DDT from the carrying value of the investment.

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 JOINT ARRANGEMENTS, JOINT VENTURES & ASSOCIATES

CHAPTER 30 JOINT ARRANGEMENTS, JOINT VENTURES &

ASSOCIATES

Question 46 (ICAI Study Material)/(RTP November 21)

(Included in May 22 Section of FR 6)
On 1st April 2019, Investor Ltd. acquires 35% interest in another entity, XYZ Ltd. Investor
Ltd. determines that it is able to exercise significant influence over XYZ Ltd. Investor Ltd. has
paid total consideration of ` 47,50,000 for acquisition of its interest in XYZ Ltd. At the date
of acquisition, the book value of XYZ Ltd.’s net assets was ` 90,00,000 and their fair value was
` 1,10,00,000. Investor Ltd. has determined that the difference of ` 20,00,000 pertains to an
item of property, plant and equipment (PPE) which has remaining useful life of 10 years.
During the year, XYZ Ltd. made a profit of ` 8,00,000. XYZ Ltd. paid a dividend of ` 12,00,000
on 31st March, 2020. XYZ Ltd. also holds a long-term investment in equity securities. Under
Ind AS, investment is classified as at FVTOCI in accordance with Ind AS 109 and XYZ Ltd.
recognized an increase in value of investment by ` 2,00,000 in OCI during the year. Ignore
deferred tax implications, if any.
Calculate the closing balance of Investor Ltd.’s investment in XYZ Ltd. as at 31st March,
2020 as per the relevant Ind AS.

Summary

Detailed Solution

Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method :

Particulars ` `
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net assets (35% of ` 90,00,000) 31,50,000
Share in fair valuation of XYZ Ltd.’s net assets [35% of (` 1,10,00,000 –
` 90,00,000)] 7,00,000
Goodwill on investment in XYZ Ltd. (balancing figure) 9,00,000
Cost of investment 47,50,000
Profit during the year
Share in the profit reported by XYZ Ltd. (35% of ` 8,00,000) 2,80,000
Adjustment to reflect effect of fair valuation [35% of
(` 20,00,000/10 years)] (70,000)
Share of profit in XYZ Ltd. recognised in income by Investor Ltd. 2,10,000
Long term equity investment
FVTOCI gain recognised in OCI (35% of ` 2,00,000) 70,000
Dividend received by Investor Ltd. during the year [35% of ` 12,00,000] (4,20,000)
Closing balance of Investor Ltd.’s investment in XYZ Ltd. 46,10,000

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 ANALYSIS OF FINANCIAL STATEMENTS & SCHEDULE III

CHAPTER 31 ANALYSIS OF FINANCIAL STATEMENTS &

SCHEDULE III

Question 5 (ICAI Study Material)

(Included in May 22 Section of FR 6)
Master Creator Private Limited (a subsidiary of listed company) is an Indian company to whom
Ind AS are applicable. Following draft balance sheet is prepared by the accountant for year
ending 31st March 2012.
Balance Sheet of Master Creator Private Limited as at 31st March, 2012
Particulars `
ASSETS
Non - current assets
Property, plant and equipment 83,37,500
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 17,33,480
Deferred tax assets 2,54,150
Current assets
Trade receivables 7,25,000
Inventories 5,98,050
Financial assets
Investments 55,000
Other financial assets 2,17,370
Cash and cash equivalents 1,16,950
TOTAL ASSETS 1,27,00,000
EQUITY AND LIABILITIES
Equity share capital 10,00,000
Non - current liabilities
Other Equity 25,00,150
Deferred tax liability 4,74,850
Borrowings 64,00,000
Long term provisions 5,24,436
Current liabilities
Financial liabilities
Other financial liabilities 2,00,564
Trade payables 6,69,180
Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,27,00,000

Additional Information:
1. On 1st April 2011, 8% convertible loan with a nominal value of ` 64,00,000 was issued by the
entity. It is redeemable on 31st March 2015 also at par. Alternatively, it may be converted
into equity shares on the basis of 100 new shares for each ` 200 worth of loan.
An equivalent loan without the conversion option would have carried interest at 10%.
Interest of ` 5,12,000 has already been paid and included as a finance cost.

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Present Value (PV) rates are as follows :

Year End @ 8% @ 10%
1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
4 0.73 0.68

2. After the reporting period, the board of directors have recommended dividend of Rs
50,000 for the year ending 31st March, 2011. However, the same has not been yet
accounted by the company in its financials.
3. ‘Other current financial liabilities’ consists of the following:
Particulars Amount (`)
Wages payable 21,890
Salary payable 61,845
TDS payable 81,265
Interest accrued on trade payables 35,564

4. Property, Plant and Equipment consists following items :

Particulars Amount (`) Remarks
Building 37,50,250 It is held for administration purposes
Land 15,48,150 It is held for capital appreciation
Vehicles 12,37,500 These are used as the conveyance for employees
Factory premises 20,01,600 The construction was started on 31st March 2012 and
consequently no depreciation has been charged on it.
The construction activities will continue to happen, and
it will take 2 years to complete and be available for use.

5. The composition of ‘other current financial assets’ is as follows :

Particulars Amount (`)
Interest accrued on bank deposits 57,720
Prepaid expenses 90,000
Royalty receivable from dealers 69,650

6. Current Investments consist of securities held for trading which are carried at fair value
through profit & loss. Investments were purchased on 1st January, 2012 at ` 55,000 and
accordingly are shown at cost as at 31st March 2012. The fair value of said investments
as on 31st March 2012 is ` 60,000.
7. Trade payables and Trade receivables are due within 12 months.
8. There has been no changes in equity share capital during the year.
9. Entity has the intention to set off a deferred tax asset against a deferred tax liability
as they relate to income taxes levied by the same taxation authority and the entity has
a legally enforceable right to set off taxes.
10. Other Equity consists retained earnings only. The opening balance of retained earnings
was ` 21,25,975 as at 1st April 2011.

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11. No dividend has been actually paid by company during the year.
12. Assume that the deferred tax impact, if any on account of above adjustments is correctly
calculated in financials.
Being Finance & Accounts manager, you are required to identify the errors and
misstatements if any in the balance sheet of Master Creator Private Limited and
prepare corrected balance sheet with details on the face of the balance sheet i.e. no
need to prepare notes to accounts, after considering the additional information. Provide
necessary explanations/workings for the treated items, wherever necessary.

Summary

Detailed Solution

Balance Sheet of Master Creator Private Limited as at 31st March, 2012

Particulars Working/Reference Note `
ASSETS
Non - current assets
Property, plant and equipment 1 49,87,750
Capital work-in-progress 2 20,01,600
Investment Property 3 15,48,150
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 4 17,33,480
Current assets
Inventories 5,98,050
Financial assets
Investments (55,000 + 5,000) 5 60,000
Trade receivables 6 7,25,000
Cash and cash equivalents 7 1,16,950
Other financial assets 8 1,27,370
Other current assets (Prepaid expenses) 8 90,000
TOTAL ASSETS 1,24,50,850
EQUITY AND LIABILITIES
Equity
Equity share capital A 10,00,000
Other equity B 28,44,606
Non - current liabilities
Financial liabilities
8% Convertible loan 11 60,60,544
Long term provisions 5,24,436
Deferred tax liability 12 2,20,700
Current liabilities
Financial liabilities
Trade payables 13 6,69,180
Other financial liabilities 14 1,19,299
Other current liabilities (TDS payable) 15 81,265
Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,24,50,850

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Statement of changes in equity

For the year ended 31st March, 2012
A. Equity Share Capital
Particulars Balance (`)
As at 31 March, 2011
st
10,00,000
Changes in equity share capital during the year -
As at 31 March, 2012
st
10,00,000

B. Other Equity
Particulars Retained Equity component Total (`)
Earnings (`) of Compound
Financial
Instrument (`)
As at 31st March, 2011 21,25,975 - 21,25,975
Total comprehensive income for the year
(25,00,150 + 5,000 - 85,504 - 21,25,975) 2,93,671 - 2,93,671
Issue of compound financial instrument
during the year - 4,24,960 4,24,960
As at 31 March, 2012
st
24,19,646 4,24,960 28,44,606

Disclosure forming part of Financial Statements:

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance
Sheet date. (Note 9)
Notes/Workings: (for adjustments/explanations)
1. Property, plant and equipment are tangible items that: (a) are held for use in the
production or supply of goods or services, for rental to others, or for administrative
purposes; and (b) are expected to be used during more than one period. Therefore, the
items of PPE are Buildings (` 37,50,250) and Vehicles (` 12,37,500), since those assets
are held for administrative purposes.
2. Property, plant and equipment which are not ready for intended use as on the date of
Balance Sheet are disclosed as “Capital work-in-progress”. It would be classified from
PPE to Capital work-in-progress.
3. Investment property is property (land or a building—or part of a building—or both) held
(by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes;
or
(b) sale in the ordinary course of business.

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Therefore, Land held for capital appreciation should be classified as Investment

property rather than PPE.
4. Assets for which the future economic benefit is the receipt of goods or services, rather
than the right to receive cash or another financial asset, are not financial assets.
5. Current investments here are held for the purpose of trading. Hence, it is a financial
asset classified as FVTPL. Any gain in its fair value will be recognised through profit or
loss. Hence, ` 5,000 (60,000 – 55,000) increase in fair value of financial asset will be
recognised in profit and loss.
6. A contractual right to receive cash or another financial asset from another entity is a
financial asset. Trade receivables is a financial asset in this case and hence should be
reclassified.
7. Cash is a financial asset. Hence it should be reclassified.
8. Other current financial assets :
Particulars Amount (`)

Interest accrued on bank deposits 57,720

Royalty receivable from dealers 69,650
Total 1,27,370

Prepaid expenses does not result into receipt of any cash or financial asset. However, it
results into future goods or services. Hence, it is not a financial asset.
9. As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after
the reporting period but before the financial statements are approved for issue, the
dividends are not recognized as a liability at the end of the reporting period because no
obligation exists at that time. Such dividends are disclosed in the notes in accordance
with Ind AS 1, Presentation of Financial Statements.
10. ‘Other Equity’ cannot be shown under ‘Non-current liabilities’. Accordingly, it is
reclassified under ‘Equity’.
11. There are both ‘equity’ and ‘debt’ features in the instrument. An obligation to pay cash
i.e. interest at 8% per annum and a redemption amount will be treated as ‘financial
liability’ while option to convert the loan into equity shares is the equity element in the
instrument. Therefore, convertible loan is a compound financial instrument.

Calculation of debt and equity component and amount to be recognised in the books:
S. No Year Interest Discounting factor Amount
amount @ 8% @ 10%
Year 1 2012 5,12,000 0.91 4,65,920
Year 2 2013 5,12,000 0.83 4,24,960
Year 3 2014 5,12,000 0.75 3,84,000
Year 4 2015 69,12,000 0.68 47,00,160

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Amount to be recognised as a liability 59,75,040

Initial proceeds (64,00,000)
Amount to be recognised as equity 4,24,960

* In year 4, the loan note will be redeemed; therefore, the cash outflow would be
` 69,12,000 (` 64,00,000 + ` 5,12,000).

Presentation in the Financial Statements :

In Statement of Profit and Loss for the year ended on 31 March 2012
Particulars Amount
Finance cost to be recognised in the Statement of Profit and Loss (59,75,040 x 10%) ` 5,97,504
Less: Already charged to the Statement of Profit and Loss (` 5,12,000)
Additional finance charge required to be recognised in the Statement of Profit and Loss ` 85,504

In Balance Sheet as at 31 March 2012

Particulars Amount
Equity and Liabilities
Equity
Other Equity (8% convertible loan) 4,24,960
Non - current liability
Financial liability [8% convertible loan – [(59,75,040+ 5,97,504 – 5,12,000)] 60,60,544

12. Since entity has the intention to set off deferred tax asset against deferred tax liability
and the entity has a legally enforceable right to set off taxes, hence their balance on
net basis should be shown as :
Particulars Amount (`)
Deferred tax liability 4,74,850
Deferred tax asset (2,54,150)
Deferred tax liability (net) 2,20,700

13. A liability that is a contractual obligation to deliver cash or another financial asset to
another entity is a financial liability. Trade payables is a financial liability in this case.
14. ‘Other current financial liabilities’:
Particulars Amount (`)
Wages payable 21,890
Salary payable 61,845
Interest accrued on trade payables 35,564
Total 1,19,299

15. Liabilities for which there is no contractual obligation to deliver cash or other financial
asset to another entity, are not financial liabilities. Hence, TDS payable should be
reclassified from ‘Other current financial liabilities’ to ‘Other current liabilities’ since it
is not a contractual obligation.

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 ACCOUNTING FOR CSR TRANSACTIONS

CHAPTER 32 ACCOUNTING FOR CSR TRANSACTIONS

Question 10 (ICAI Study Material)

(Included in May 22 Section of FR 6)
Whether a holding or subsidiary of a company fulfilling the criteria under section 135(1) has to
comply with the provisions of section 135, even if the holding or subsidiary itself does not fulfil
the criteria?

Summary

Detailed Solution

No, the compliance with CSR requirements is specific to each company. A holding or subsidiary
of a company is not required to comply with the CSR provisions unless the holding or subsidiary
itself fulfils the eligibility criteria prescribed under section 135(1) stated above. Example:
Company A is covered under the criteria mentioned in section 135(1). Company B is holding
company of company A. If Company B by itself does not satisfy any of the criteria mentioned in
section 135(1), Company B is not required to comply with the provisions of section 135.

Question 11 (ICAI Study Material)

(Included in May 22 Section of FR 6)
In financial year 2011-2012 a company had spent ` 2 crores in excess. In FY 2012-2013, it
sets-off ` 50 lakhs from such excess. However, from FY 2013-2014, the company is no longer
subject to CSR provisions under section 135(1). Since the company cannot take the benefit of
set off of excess amount spent in the previous financial year because of non- applicability of
CSR provisions, will the excess amount lapse?

Summary

Detailed Solution

Yes, the law states that the excess CSR amount spent can be carried forward up to immediately
succeeding three financial years; thus, in case any excess amount is left for set off, it will lapse
at the end of the said period.
In such case, the company may continue to retain the remaining excess CSR of ` 1.50 crores
up to FY 2014-2015, and thereafter the same shall lapse.

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Question 12 (ICAI Study Material)

(Included in May 22 Section of FR 6)
Company A is incorporated during financial year 2011-2012, and as per eligibility criteria the
company is covered under section 135(1) for FY 2013-2014. Whether CSR provisions apply to a
company that has not completed the period of three financial years since its incorporation?

Summary

Detailed Solution

Yes. If the company has not completed three financial years since its incorporation, but it
satisfies any of the criteria mentioned in section 135(1), the CSR provisions including spending
of at least two per cent of the average net profits made during immediately preceding financial
year(s) are applicable.
Accordingly, the CSR spending obligation under section 135(5) for Company A would be at
least two per cent of the average net profits of the company made during FY 2011-2012 and FY
2012-2013.

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 INTEGRATED REPORTING

CHAPTER 33 INTEGRATED REPORTING

Question 4 (ICAI Study Material)

(Included in May 22 Section of FR 6)
Does an integrated report need to be a stand-alone document?

Summary

Detailed Solution

No. An integrated report can be either a stand-alone report or included as a distinguishable,

prominent and accessible part of another report or communication. For example, it may be
included at the front of a report that also includes the organization’s full financial statements.

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