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Learn to become CA, Not to pass CA Exams

EXPECTED QUESTION

CA FINAL

May 2020 EXAMS

Applicable for New syllabus

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ABOUT THE FACULTY

CA Chiranjeev Jain has qualified Chartered Accountancy Course in

2005 and has completed all the levels of this course in his very first attempt. He is
among the top rank holders Delhi University having done his graduation from Sri
Ram College of Commerce. He scored more than 90% in accounts at all levels of CA
and university examinations. He has done Diploma in Information System Audit
conducted by the ICAI. He has also done Masters in Business Administration (MBA)
with specialization in Finance.

After completing Academic & Professional Education, he has worked with Deloitte
Haskin & Sells as a chartered accountant and developed immense skills in the
practical application of various accounting standards. Finally he exposed himself
to the practice as chartered accountant and adapted to teaching accounts (the
subject he loves the most) as his career.

He possesses a vast experience in teaching accountancy to students of CA CPT, IPCC

& Final. He is also into Corporate Training in the industry and has addressed a
number of courses and seminars organized by Professional Institutions. He has
served as an examiner of accounts at CA IPCC and Final level. He is an expert in both
Indian Accounting Standards and IFRS.

He has conducted face to face classes at Hyderabad, Bangalore, Kolkata and

Ahmadabad apart from VSAT classes in the Southern region with ETEN CA. His easy
way of teaching Accountancy from the very basic and his motivational lectures are
very famous among CA students' fraternity.

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Think Beyond 90+ IN Accounts/Financial Reporting

STOP Memorizing Without Understanding the CONCEPTS

It’s Time To Learn Accounts Conceptually

For Upcoming batches and Fee details

Visit: http://www.cachiranjeevjain.com

STUDENTS WHO WANTS

PEN DRIVE CLASSES
PLEASE WHATSAPP YOUR FOLLOWING DETAILS
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POSITIVE FEEDBACK ABOUT SIR’S CLASSES

Shalaka Tiwari - Shastri, Hyderabad Amit Jain, Kolkata

I have taken the classes for CA Final FR from Chiranjeev Jain sir and Hi Students, I am CA Amit Kumar Jain, practicing in Gurgaon. I am
I believe he is an great teacher and a amazing mentor. one of the old students of CA Chiranjeev Sir, and belong to his
His methodology of teaching is unique, while in class there's no first CA final batch in kolkata. Today, on Teacher's Day, I would
concept untaught. He teaches whole heartedly and makes sure that love to convey my gratitude to him for his wonderful coaching
you get your basics right. classes. The learnings shared by him both related to course and
I have no other words to express this better. related to practical life after CA, has been very useful in my
I will say, just join him and u will see the results !! journey. He is one of the best CA Final teacher in India and I
CJ sir ROCKS !!!!! recommend all students to join him.
Navneet Singh, Hyderabad Obaid Khan, Hyderabad
When I started my journey to become a Chartered accountant, the To begin with a quote "It takes a big heart to help shape little
only fear I had was will I be able to have that conceptual knowledge minds.”
which is needed the most in a profession like ours.!! Thank You Sir, for being an Amazing faculty throughout CA
Now after completing my CA I can tell you that starting from journey. Now that I completed my journey, I feel immensely
Accounts in CPT then with Accounts in IPCC and to end with honoured for being your student and learning the concepts
Financial reporting in CA Final, the conceptual understanding of the precisely in a manner that helps in application too.
subject which I gained from you helped me become what I am now.. Words might fall short to express the gratitude, for you have
Thank you Sir once again to be available whenever asked for and been an Amazing teacher, mentor and a friend.
help me achieve my dream of becoming a CA. Just a small appreciation post from a student, moreover from a
Fan of your ideas and teaching.
Isan Singh, Kolkata Arihant Kothari, Hyderabad
i have taken FR classes from CA Chiranjeev Jain Sir….He is best in Thanks to the man with great caps,a perfect guide who has really
this subject…. It’s because of Sir I get to know so much about helped us at every point and gave his helpful hands without any
accounts especially IND AS, complaints .. You be the best sir 😊😊😊
I have also taken accounts from him in CA IPCC and I scored very It is to thankyou for those priceless teachings 😊I m really
good marks in IPCC even though I was average in accounts subject. thankfull for all you good words that kept me motivated and
He teach from base which makes easy for average students to score focussed towards my goal . I feel lucky to get a place under your
high in exams. He gives through conceptual knowledge do that umbrella .. Whatever be the results your imprints will always be
students will able to write worst paper in exams with ease. there sir .Thanks a lot sir !😊
Thanks sir for ur valuable teaching.
Ashutosh Lahoti, Hyderabad Niharika Phalod, Hyderabad
Thank you sir for providing us the best lectures with an ease. It was "A good teacher can inspire hope, ignite the imagination and
an amazing time spending with you. I'm very lucky to learn the instill a love of learning"
subject of Accountancy that too of IPCC level under your guidance. I would truly like to appreciate the great effort you have put into
You made this subject very easy with your experience and teaching tutoring and enlightening my way. Because of your guidance and
quality. Actually your friendly nature towards the students made it patience, I've come this far in my CA journey. Thankyou for
more easier to understand the subject. Even your scoldings were always being there in all my confusions and helping me deal with
like roses without thornes. all the stress during ipcc days!
Thank you so much sir for helping us get through our targets. Will Accounts couldn't be more easier and all the credit goes to your
be missing those class fun but hope to see you soon in CA final easy techniques.
classes. Thankyou for being my mentor. I'm truly blessed to be your
😇Proud to be CHIRANJEEVIAN 😇 student! Wish you a very happy teachers day Sir. 😊
Nikita Simran, Hyderabad Shalaka Tiwari - Shastri, Hyderabad
I'm so grateful to be your student. Thank you for instilling in me the I have taken the classes for CA Final FR from Chiranjeev Jain sir
passion for learning. You've put in selfless efforts in shaping our and I believe he is an great teacher and a amazing mentor.
career! We're truly blessed to have a mentor like you 😊 Lastly I His methodology of teaching is unique, while in class there's no
would like to say-Now I see the world in a different light concept untaught. He teaches whole heartedly and makes sure
I can discriminate between wrong and right, I perceive things in a that you get your basics right.
different style, I have learnt to go the extra mile, I have a deeper I have no other words to express this better.
understanding of things Dear teacher you have truly given me wings I will say,just join him and u will see the results !!
CJ sir ROCKS !!!!!
Thank you for everything sir

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Chinna Poojari , Bangalore Venkata Sumanth, Vijaywada

Sir,. It's very glad to have these words to you..u r d person who Teachers usually make us study... Chiranjeev Jain sir made us
stands with me not only as my guru but as a family member during enjoy the subject...We stepped out of the class with tonnes of
my tough times.. The way you teach us makes ourself to Mold confidence and belief .....
towards subject conceptually...Coz of u only I have got AIR's in IPCC Thank you very much sir....
and CMA.... Being ur student makes me proud...gives me confidence We never found in your class, a teacher- student
that I can achieve all thru success.....finally thank you is not enough relationship...We always felt that we are being taught by a best
for ur services...Just will show thanks in the form of results in our friend and well-wisher...
exams.... We will be grateful forever sir....
Not only the subject your personality as a Chartered Accountant tis With tonnes of love...
the Perfect Example for all Budding CA's. One word about Chiranjeevi Jain sir ....
One word about my guru ."CA Chiranjeevi sir is the BAADSHAH OF You taught us from your Heart...not from book...
IND AS " in india.
Afsar Shaik, Hyderabad Chaitanya, Hyderabad
Sir...trust me...before starting of this batch....I wondered how ur Your way of teaching is something different that we will be in a
gonna complete this in 70 days...wr as other faculies r taking for 3 thought that you are teaching slow but we’ll get to know your
or 4 mnths....but finally I got my answer....u gave us the main thing fast once we missed your class and seeing the notes the next day.
what we want actually i.e, conceptual clarity....thank u soo much Really loved the class very much sir. Thankuuuuu so much sir.
sir The real life stories you teaches in class are inspired. Sir, we will
Ashish Soni, Hyderabad go through many teachers in life sir. But only few we can
Sir you can inspire hope, ignite the imagination, and instill a love of remember lifelong. You’re one among them and one you got the
learning..motivating...Thank You Sir ## CJ Sir the Best# position with 70 days time while with everyone I spent not less
than 2 years. Once again Thank you sir.
Ankitha Baldwa, Hyderabad Sir, I may not score 90+ in exam, But I’m sure I’ll give my 200% for
Thank you so much sir u be the best lecturer of my life Apka getting 90+. Because we have only two options. Either 90+ or 90+.
padane ka style baat karne ka style Apki shyaris Kya baat sir,
missing all my memorable moments of ur class 😊

Sakshi Sharma, Hyderabad Soujanya V M, Bangalore

I have been taught by so many teachers but amongst them all you I have attended his classes and he is very knowledgeable..He
made the greatest impact by not only teaching by guiding us too. teaches the complex things in a very simple manner...He is a good
The loving ways of teachers like you is difference between teaching guide for a student ...Because of him I got exemption in IPCC
and educating thanks for teaching us, educating us, and accounts...Students who are interested in conceptual learning
empowering us thanks a lot sir can join his classes without any second thought...!
Khushi Srivastava, Hyderabad The chart prepared by him is simple and easily
I pursued 61 in accounting just because of Chiranjeev Jain Sir. His understandable...Very much useful for the students for last
notes are not less than a face to face teaching...he covers each and minute revision...
every minute stuff...lucky to be his student. Thank you sir for all the teaching and guidance...!!
Rakhi Jha, Hyderabad Shams Afaq, Hyderabad
#SIR Ji # THANK YOU, I joined Yeshas just because you were I have done my schooling from science stream,so at the start of
teaching us ACCOUNTS #Your the most coolest & friendly faculty CPT only I was nervous, if I will be able to do accounts. But my
#You always motivated us #You always guided us on right path whole nervousness was transformed into interest of learning by
#Yet I can't believe that today was our last IPCC class # I personally Chiranjeev Sir. He created a strong foundation for me with
never ever saw a great faculty like YOU # We all gonna miss you so conceptual clarity. It was his easy going approach even when the
much #You always helped us SIR JI # You were just like our concepts were challenging, I scored 44/60 in CPT and then 76/100
friend's #A BIG BIG THANK YOU SIR JI # See you soon in CA-FINAL in IPCC. I will always be grateful to you. You are phenomenal.
Keep up the good work!
#WILL MISS YOU SIR JI #LOVE YOU TONS & TONS
Nithin Mundada, Hyderabad Naveen Pspk , Hyderabad
The way you teach.. The knowledge you share.. The care you Scored 75 in Accounts..its just because of Mr.CA chiranjeevjain
take..The love you shower..Makes you.. The world's best sir....It's sir...initially I was bothered about DAT subject as I was from
my pleasure to have such a nice sir with charming smile..and I have science background... But then I met with sir classes it changed
never seen such a sir like..... whole scenario ....&d result is dis....tq sir tq so much....
Jaya Chandra, Visakhapatnam
Sir's notes is very helpful during revision and he teaches from basics
on which we generally don't pay much attention. The way he links
each topic is good and he has much clarity in how to teach complex
topics.

For more Feedback Visit www.cachiranjeevjain.com

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EXPECTED QUESTIONS FOR MAY 2020

IND AS 2
Question 1
Inventories (lower of cost and net realisable value)8.00XYZ Limited has a plant with the normal
capacity to produce 10,00,000 units of a product per annum and the expected fixed overhead is Rs.
30,00,000, Fixed overhead, therefore based on normal capacity is Rs. 3 per unit.
Determine Fixed overhead as per Ind AS 2 'Inventories' if
(i) Actual production is 7,50,000 units.
(ii) Actual production is 15,00,000 units.
Ans: Actual production is 7,50,000 units: Fixed overhead is not going to change with the change in
output and will remain constant at Rs. 30,00,000, therefore, overheads on actual basis is Rs.
4 per unit (30,00,000 / 7,50,000).
Hence, by valuing inventory at Rs. 4 each for fixed overhead purpose, it will be overvalued
and the losses of Rs. 7,50,000 will also be included in closing inventory leading to a higher
gross profit then actually earned.
Therefore, it is advisable to include fixed overhead per unit on normal capacity to actual
production (7,50,000 x 3) Rs. 22,50,000 and balance Rs. 7,50,000 shall be transferred to Profit
& Loss Account.
Actual production is 15,00,000 units: Fixed overhead is not going to change with the change
in output and will remain constant at Rs. 30,00,000, therefore, overheads on actual basis is
Rs. 2 (30,00,000 / 15,00,000).
Hence by valuing inventory at Rs. 3 each for fixed overhead purpose, we will be adding the
element of cost to inventory which actually has not been incurred. At Rs. 3 per unit, total fixed
overhead comes to Rs. 45,00,000 whereas, actual fixed overhead expense is only Rs.
30,00,000. Therefore, it is advisable to include fixed overhead on actual basis (15,00,000 x 2)
Rs. 30,00,000.
Question 2
Mars Fashions is a new luxury retail company located in Lajpat Nagar, New Delhi. Kindly advise the
accountant of the company on the necessary accounting treatment for the following items:
(a) One of Company’s product lines is beauty products, particularly cosmetics such as
lipsticks, moisturizers and compact make-up kits. The company sells hundreds of different
brands of these products. Each product is quite similar, is purchased at similar prices and
has a short lifecycle before a new similar product is introduced. The point of sale and
inventory system is not yet fully functioning in this department. The sales manager of the
cosmetic department is unsure of the cost of each product but is confident of the selling
price and has reliably informed you that the Company, on average, make a gross margin
of 65% on each line.

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(b) Mars Fashions also sells handbags. The Company manufactures their own handbags as
they wish to be assured of the quality and craftsmanship which goes into each handbag.
The handbags are manufactured in India in the head office factory which has made
handbags for the last fifty years. Normally, Mars manufactures 100,000 handbags a year
in their handbag division which uses 15% of the space and overheads of the head office
factory. The division employs ten people and is seen as being an efficient division within
the overall company.
In accordance with Ind AS 2, explain how the items referred to in a) and b) should be
measured.
Answer:
(a) The retail method can be used for measuring inventories of the beauty products. The cost of
the inventory is determined by taking the selling price of the cosmetics and reducing it by the
gross margin of 65% to arrive at the cost.
(b) The handbags can be measured using standard cost especially if the results approximate cost.
Given that The company has the information reliably on hand in relation to direct materials,
direct labour, direct expenses and overheads, it would be the best method to use to arrive at
the cost of inventories.
Question 3
Night Ltd. sells beer to customers; some of the customers consume the beer in the bars run by Night
Limited. While leaving the bars, the consumers leave the empty bottles in the bars and the company
takes possession of these empty bottles. The company has laid down a detailed internal record
procedure for accounting for these empty bottles which are sold by the company by calling for
tenders. Keeping this in view:
(i) Decide whether the stock of empty bottles is an asset of the company;
(ii) If so, whether the stock of empty bottles existing as on the date of Balance Sheet is to be
considered as inventories of the company and valued as per IND AS 2 or to be treated as
scrap and shown at realizable value with corresponding credit to ‘Other Income’?
Ans: Tangible objects or intangible rights carrying probable future benefits, owned by an
enterprise are called assets. Night Ltd. sells these empty bottles by calling tenders. It means
further benefits are accrued on its sale. Therefore, empty bottles are assets for the company.
As per IND AS 2 “Valuation of Inventories”, inventories are assets held for sale in the ordinary
course of business. Stock of empty bottles existing on the Balance Sheet date is the inventory
and Night Ltd. has detailed controlled recording and accounting procedure which duly signify
its materiality. Hence stock of empty bottles cannot be considered as scrap and should be
valued as inventory in accordance with IND AS 2.
Question 4
On 5th April, 20X2, fire damaged a consignment of inventory at one of the Jupiter’s Ltd.’s warehouse.
This inventory had been manufactured prior to 31st March 20X2 costing Rs. 8 lakhs. The net
realisable value of the inventory prior to the damage was estimated at Rs. 9.60 lakhs. Because of

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the damage caused to the consignment of inventory, the company was required to spend an
additional amount of Rs. 2 lakhs on repairing and re- packaging of the inventory. The inventory was
sold on 15th May, 20X2 for proceeds of Rs. 9 lakhs.
The accountant of Jupiter Ltd. treats this event as an adjusting event and adjusted this event of
causing the damage to the inventory in its financial statement and accordingly re-measures the
inventories as follows: Rs. lakhs
Cost 8.00
Net realisable value (9.6 -2) 7.60
Inventories (lower of cost and net realisable value) 7.60
Analyse whether the above accounting treatment made by the accountant in regard to
financial year ending on 31.0.20X2 is in compliance of the Ind AS. If not, advise the correct
treatment along with working for the same.
Ans: The above treatment needs to be examined in the light of the provisions given in Ind
AS 10 ‘Events after the Reporting Period’ and Ind AS 2 ‘Inventories’.
Para 3 of Ind AS 10 ‘Events after the Reporting Period’ defines “Events after the reporting
period are those events, favourable and unfavourable, that occur between the end of the
reporting period and the date when the financial statements are approved by the Board of
Directors in case of a company, and, by the corresponding approving authority in case of
any other entity for issue. Two types of events can be identified:
(a) those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
(b) those that are indicative of conditions that arose after the reporting period (non-
adjusting events after the reporting period).
Further, paragraph 10 of Ind AS 10 states that:
“An entity shall not adjust the amounts recognised in its financial statements to reflect non-
adjusting events after the reporting period”.
Further, paragraph 6 of Ind AS 2 defines:
“Net realisable value is 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”.
Further, paragraph 9 of Ind AS 2 states that:
“Inventories shall be measured at the lower of cost and net realisable value”.
Accountant of Jupiter Ltd. has re-measured the inventories after adjusting the event in
its financial statement which is not correct and nor in accordance with provision of Ind
AS 2 and Ind AS 10.
Accordingly, the event causing the damage to the inventory occurred after the reporting date
and as per the principles laid down under Ind AS 10 ‘Events After the Reporting Date’ is a
non-adjusting event as it does not affect conditions at the reporting date. Non-adjusting

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events are not recognised in the financial statements, but are disclosed where their effect is
material.
Therefore, as per the provisions of Ind AS 2 and Ind AS 10, the consignment of inventories
shall be recorded in the Balance Sheet at a value of Rs. 8 lakhs calculated below:
Rs.’ lakhs

Cost 8.00
Net realisable value 9.60
Question 5:
In a manufacturing process of Vijoy Limited, one by-product BP emerges besides two main products
MP1 and MP2 apart from scrap. Details of cost of production process are here under:
Item Unit Amount Output (unit) Closing stock as
(Rs.) on 31-03-2012
Raw material 15,000 1,60,000 MP1-6,250 800
Wages - 82,000 MP2- 5,000 200
Fixed overhead - 58,000 BP-1,600 -
Variable overhead - 40,000 -
Average market price of MP1 and MP2 is Rs. 80 per unit and Rs. 50 per unit respectively, by
product is sold @ Rs. 25 per unit. There is a profit of Rs. 5,000 on sale of by-product after
incurring separate processing charges of Rs. 4,000 and packing charges of Rs. 6,000, Rs. 6,000
was realised from sale of scrap.
Calculate the value of closing stock of MP1 and MP2 as on 31-03-2012.
Ans: As per IND AS 2 ‘Inventories’, most by-products as well as scrap or waste materials, by their
nature, are immaterial. They are often measured at net realizable value and this value is
deducted from the cost of the main product.
1. Calculation of net realizable value of by-product, BP Rs
Selling price of by-product BP (1,600 units x RRs. 25 per unit) 40,000
Less: Separate processing charges of by- product BP (4,000)
Packing charges (6,000)
Net realizable value of by-product BP 30,000
2. Calculation of cost of conversion for allocation between joint products MP1 and
MP2
Rs. Rs.
Raw material 1,60,000
Wages 82,000
Fixed overhead 58,000

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Variable overhead 40,000

3,40,000
Less: NRV of by-product BP ( See calculation 1) (30,000)
Sale value of scrap (6,000) (36,000)
Joint cost to be allocated between MP1 and MP2 3,04,000
3. Determination of “basis for allocation” and allocation of joint cost to MP1 and
MP2
MP1 MP2
Output in units (a) 6,250 units 5,000 units
Sales price per unit (b) Rs. 80 Rs. 50
Sales value (a x b) Rs. 5,00,000 Rs.2,50,000
Ratio of allocation 2 1
Joint cost of Rs. 3,04,000 allocated in the ratio of 2:1 Rs. 2,02,667 Rs. 1,01,333
(c)
Cost per unit [c/a] Rs. 32.43 Rs. 20.27
4. Determination of value of closing stock of MP1 and
MP2
MP1 MP2
Closing stock in units 800 units 200 units
Cost per unit Rs. 32.43 Rs. 20.27
Value of closing stock Rs. 25,944 Rs.4,054
Question 6
On 31 March 20X1, the inventory of ABC includes spare parts which it had been supplying to a number
of different customers for some years. The cost of the spare parts was Rs. 10 million and based on
retail prices at 31 March 20X1, the expected selling price of the spare parts is Rs. 12 million. On 15
April 20X1, due to market fluctuations, expected selling price of the spare parts in stock reduced to
Rs. 8 million. The estimated selling expense required to make the sales would Rs. 0.5 million. Financial
statements were authorised by Board of Directors on 20th April 20X1.
As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in the warehouse
of the company. Directors believe that inventory is in a saleable condition and active marketing would
result in an immediate sale. Since the market conditions have improved, estimated selling price of
inventory is Rs. 11 million and estimated selling expenses are same Rs. 0.5 million.
What will be the value inventory at the following dates:
(a) 31st March 20X1
(b) 31st March 20X2
Ans: As per Ind AS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’.
Further, as per Ind AS 10: ‘Events after Balance Sheet Date’, decline in net realisable value
below cost provides additional evidence of events occurring at the balance sheet date and
hence shall be considered as ‘adjusting events’.
(a) In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory would be
Rs. 10 million and net realisable value would be Rs. 7.5 million (i.e. Expected selling price Rs.
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8 million- estimated selling expenses Rs. 0.5 million). Accordingly, inventory shall be measured
at Rs. 7.5 million i.e. lower of cost and net realisable value. Therefore, inventory write down
of Rs. 2.5 million would be recorded in income statement of that year.
(b) As per para 33 of Ind AS 2, a new assessment is made of net realizable value in each
subsequent period. It Inter alia states that if there is increase in net realizable value because
of changed economic circumstances, the amount of write down is reversed so that new
carrying amount is the lower of the cost and the revised net realizable value. Accordingly, as
at 31 March 20X2, again inventory would be valued at cost or net realisable value whichever
is lower. In the present case, cost is Rs. 1 million and net realisable value would be Rs. 10. 5
million (i.e. expected selling price Rs. 11 million – estimated selling expense Rs. 0.5 million).
Accordingly, inventory would be recorded at Rs. 10 million and inventory write down carried
out in previous year for Rs. 2.5 million shall be reversed.

IND AS 16
Question 7:
On 1st April 20X1, an item of property is offered for sale at Rs. 10 million, with payment terms being
three equal installments of Rs. 33,33,333 over a two years period (payments are made on 1st April
20X1, 31st March 20X2 and 31st March 20X3).
The property developer is offering a discount of 5 percent (i.e. Rs0.5 million) if payment is made in
full at the time of completion of sale. Implicit interest rate of 5.36 percent p.a.
Show how the property will be recorded in accordance of Ind AS 16.
Ans: Ind AS 16 requires that the cost of an item of PPE is the cash price equivalent at the recognition
date. Hence, the purchaser that takes up the deferred payment terms will recognise the
acquisition of the asset as follows:
On 1st April 20X1 (INR) (INR)
Property, Plant and Equipment Dr. 95,00,000
To Cash 33,33,333
To Accounts Payable 61,66,667
(Initial recognition of property)
On 31st March 20X2
Interest Expense Dr. 3,30,533
Accounts payable Dr. 30,02,800
To Cash 33,33,333
(Recognition of interest expense and payment of second
installment)
On 31st March 20X3
Interest Expense Dr. 1,69,467
Accounts payable Dr. 31,63,867
To Cash 33,33,334
(Recognition of interest expense and payment of final
installment)

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Question 8:
An entity has a nuclear power plant and a related decommissioning liability. The nuclear power plant
started operating on April 1, 20X1. The plant has a useful life of 40 years. Its initial cost was Rs.
1,20,000.; This included an amount for decommissioning costs of Rs. 10,000, which represented Rs.
70,400 in estimated cash flows payable in 40 years discounted at a risk-adjusted rate of 5 per cent.
The entity’s financial year ends on March 31. Assume that a market-based discounted cash flow
valuation of Rs. 1,15,000 is obtained at March 31, 20X4. It includes an allowance of Rs. 11,600 for
decommissioning costs, which represents no change to the original estimate, after the unwinding of
three years’ discount. On March 31, 20X5, the entity estimates that, as a result of technological
advances, the present value of the decommissioning liability has decreased by Rs. 5,000. The entity
decides that a full valuation of the asset is needed at March 31, 20X5, in order to ensure that the
carrying amount does not differ materially from fair value. The asset is now valued at Rs. 1,07,000,
which is net of an allowance for the reduced decommissioning obligation.
How the entity will account for the above changes in decommissioning liability if it adopts revaluation
model?
Ans: At March 31, 20X4: Rs.
Asset at valuation (1) 1,26,600
Accumulated depreciation Nil
Decommissioning liability (11,600)
Net assets 1,15,000
Retained earnings (2) (10,600)
Revaluation surplus (3) 15,600
Notes:
(1) Valuation obtained of Rs. 1,15,000 plus decommissioning costs of Rs. 11,600, allowed
for in the valuation but recognised as a separate liability = Rs. 1,26,600.
(2) Three years’ depreciation on original cost Rs. 1,20,000 × 3/40 = Rs. 9,000 plus
cumulative discount on Rs. 10,000 at 5 per cent compound = Rs. 1,600; total Rs.
10,600.
(3) Revalued amount Rs. 1,26,600 less previous net book value of Rs. 1,11,000 (cost Rs.
120,000 less accumulated depreciation Rs. 9,000).
The depreciation expense for 20X4-20X5 is therefore Rs. 3,420 (Rs. 1,26,600 × 1/37) and the
discount expense for 20X5 is Rs. 600. On March 31, 20X5, the decommissioning liability
(before any adjustment) is Rs. 12,200. However, as per estimate of the entity, the present
value of the decommissioning liability has decreased by Rs. 5,000. Accordingly, the entity
adjusts the decommissioning liability from Rs. 12,200 to Rs. 7,200.
The whole of this adjustment is taken to revaluation surplus, because it does not exceed the
carrying amount that would have been recognised had the asset been carried under the cost

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model. If it had done, the excess would have been taken to profit or loss. The entity makes
the following journal entry to reflect the change:
Rs. Rs.
Decommissioning liability Dr. 5,000
To Revaluation surplus 5,000
As at March 31, 20X5, the entity revalued its asset at Rs. 1,07,000, which is net of an allowance
of Rs. 7,200 for the reduced decommissioning obligation that should be recognised as a
separate liability. The valuation of the asset for financial reporting purposes, before deducting
this allowance, is therefore Rs. 1,14,200. The following additional journal entry is needed:
Notes:
Rs. Rs.
Accumulated depreciation (1) Dr. 3,420
To Asset at valuation 3,420
Revaluation surplus (2) Dr. 8,980
To Asset at valuation (3) 8,980
Note:
(1) Eliminating accumulated depreciation of Rs. 3,420 in accordance with the entity’s
accounting policy.
(2) The debit is to revaluation surplus because the deficit arising on the revaluation does
not exceed the credit balance existing in the revaluation surplus in respect of the asset.
(3) Previous valuation (before allowance for decommissioning costs) Rs. 1,26,600, less
cumulative depreciation Rs. 3,420, less new valuation (before allowance for
decommissioning costs) Rs. 1,14,200.
Following this valuation, the amounts included in the balance sheet are:
Asset at valuation 1,14,200
Accumulated depreciation Nil
Decommissioning liability (7,200)
Net assets 1,07,000
Retained earnings (1) (14,620)
Revaluation surplus (2) 11,620
Notes:
(1) Rs. 10,600 at March 31, 20X4, plus depreciation expense of Rs. 3,420 and discount
expense of Rs. 600 = Rs. 14,620.

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(2) Rs. 15,600 at March 31, 20X4, plus Rs. 5,000 arising on the decrease in the liability,
less Rs. 8,980 deficit on revaluation = Rs. 11,620.
Question 9
X limited started a construction on a building for it sown use on 1st april 2010 . The following costs
are incurred :
Rs.
Purchase price of land 30,00,000
Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Materials 10,00,000
Direct labour cost 4,00,000
General overheads 1,00,000
Other relevant information: Material costing Rs. 1,00,000 had been spoiled and therefore wasted and
a further Rs. 1,50,000 was spent on account of faulty design work. As a result of these problems, work
on the building was stopped for two weeks during November, 2010 and it is estimated that 22,000
of the labour cost relate to that period. The building was completed on 1st January, 2011 and brought
in use 1st April, 2011. X Limited had taken a loan of Rs. 40,00,000 on 1st April, 2010 for construction
of the building. The loan carried an interest rate of 8% per annum and is repayable on 1st April, 2012.
Calculate the cost of the building that will be included in tangible non-current asset as an addition?
Solution:
Only those costs which are directly attributable to bringing the asset into working condition for its
intended use should be included. Administration and general costs cannot be included. Cost of
abnormal amount of wasted material/ labour or other resources is not included as per para 22 of Ind
AS 16. Here, the cost of spoilt materials and faulty designs are assumed to be abnormal costs. Also it
is assumed that the wastages and labour charges incurred are abnormal in nature. Hence, same are
also not included in the cost of PPE.
Amount to be included in Property, Plant and Equipment (PPE):
Rs.
Purchase price of land 30,00,000
Stamp duty & legal fee 2,00,000
Architect fee 2,00,000
Site preparation 50,000
Material (10,00,000 – 2,50,000) 7,50,000

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Direct labour cost (4,00,000 – 22,000) 3,78,000

General overheads Nil
Interest* Nil
Total to be capitalized 45,78,000
*Period for Construction of building is not a substantial period (i.e. 9 months), borrowing cost are not
eligible for capitalisation.
Question 10
Company X performed a revaluation of all of its plant and machinery at the beginning of 2018-2019.
The following information relates to one of the machinery:
Amount (‘000)
Gross carrying amount Rs. 200
Accumulated depreciation (straight-line method) Rs. 80
Net carrying amount Rs. 120
Fair value Rs. 150
The useful life of the machinery is 10 years and the company uses Straight line method of
depreciation. The revaluation was performed at the end of the 4th year.
How should the Company account for revaluation of plant and machinery and depreciation
subsequent to revaluation? [RTP May 2019]
Answer
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; or
(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.
If the Company opts for the treatment as per option (a), then the revised carrying amount
of the machinery will be:
Gross carrying amount Rs. 250 [(200/120) x 150]

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Net carrying amount Rs.150

Accumulated depreciation Rs. 100 (Rs. 250 – Rs. 150)
Journal entry
Plant and Machinery A/c (Gross Block) Dr. Rs. 50
To Accumulated Depreciation Rs. 20
To Revaluation Reserve Rs. 30
If the balance of accumulated depreciation is eliminated as per option (b), then the revised
carrying amount of the machinery will be as follows:
Gross carrying amount is restated to Rs.150 to reflect the fair value and Accumulated
depreciation is set at zero.
Journal entry
Accumulated Depreciation Dr. Rs. 80
To Plant and Machinery A/c (Gross Block) Rs. 80
Plant and Machinery A/c (Gross Block) Dr. Rs.30
To Revaluation Reserve Rs. 30
Depreciation
Option (a) –Since the Gross Block has been restated, the depreciation charge will be Rs. 25
per annum (Rs. 250 / 10 years).
Option (b) – 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 Rs. 25 per annum as per Option A (Rs. 150 / 6 years).

IND AS 38
Question 11
Sun Ltd acquired a software from Earth Ltd. in exchange for a telecommunication license. The
telecommunication license is carried at Rs. 5,00,000 in the books of Sun Ltd. The Software is carried
at Rs. 10,000 in the books of the Earth Ltd which is not the fair value.
Advise journal entries in the following situations in the books of Sun Ltd and Earth Ltd:-
1) Fair value of software is Rs. 5,20,000 and fair value of telecommunication license is Rs.
5,00,000.
2) Fair Value of Software is not measureable. However similar Telecommunication
license is transacted by another company at Rs. 4,90,000.
3) Neither Fair Value of Software nor Telecommunication license could be reliably
measured.
Ans: INR in ‘000
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Situation Sun Ltd. Earth Ltd.

1
If an entity is able to measure reliably If an entity is able to measure reliably
the fair value of either the asset the fair value of either the asset
received or the asset given up, then received or the asset given up, then
the fair value of the asset given up is the fair value of the asset given up is
used to measure cost unless the fair used to measure cost unless the fair
value of the asset received is more value of the asset received is more
clearly evident. clearly evident.
If the fair value of Telecommunication If the fair value of Software is clearly
license is clearly evident evident
Dr. Software 500 Dr. Telecommunication license 520
Cr. Telecommunication license 500 Cr. Software 10
If the fair value of Telecommunication Cr. Profit on Exchange 510
license is not clearly evident
If the fair value of Software not is
Dr. Software 520 clearly evident
Cr. Telecommunication license 500
Dr. Telecommunication license 500
Cr. Profit on Exchange 20
Cr. Software 10
Cr. Profit on Exchange 490
2 Dr. Software 490 Dr. Telecommunication license 490
Dr. Loss on Exchange 10 Cr. Software 10
Cr. Telecommunication license 500 Cr. Profit on Exchange 480
Note: The company may first recognise
Impairment loss and then pass an entry.
The effect is the same as impairment loss
will also be charged to Income Statement.
3 Dr. Software 500 Cr. Software 10
Cr. Telecommunication license 500 Dr. Telecommunication license 10

Question 12
Mercury Ltd is preparing its accounts for the year ended 31 March 20X2 and is unsure about how to
treat the following items.
1. The company completed a grand marketing and advertising campaign costing Rs. 4.8
Lakh. The finance director had authorised this campaign on the basis that it would
create Rs. 8 lakh of additional profits over the next three years.
2. A new product was developed during the year. The expenditure totalled Rs. 3 lakh of
which Rs. 1.5 lakh was incurred prior to 30 September 20X1, the date on which it
became clear that the product was technically viable. The new product will be
launched in the next four months and its recoverable amount is estimated at Rs. 1.4
lakh.
3. Staff participated in a training programme which cost the company Rs. 5 lakh. The
training organisation had made a presentation to the directors of the company

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outlining that incremental profits to the business over the next twelve months would
be Rs. 7 lakh.
What amounts should appear as intangible assets in accordance with Ind AS 38 in Mercury’s
balance sheet as on 31 March 20X2?
Ans: The treatment in Mercury’s financials as at 31 March 20X2 will be as follows:
1. Marketing and advertising campaign: no intangible asset will be recognised, because it is not
possible to identify future economic benefits that are attributable only due to this campaign.
All of the expenditure should be expensed in the statement of profit and loss.
2. New product: development expenditure appearing in the balance sheet will be valued at Rs.
1.5 lakh. The expenditure prior to the date on which the product becomes technically feasible
is recognised in the statement of profit and loss.
3. Training programme: no asset will be recognised, because there is no control of the company
over the staff and when staff leaves the benefits of the training, whatever they may be, also
departs.
Question 13
Expenditure on a new production process in 20X1-20X2: INR
1st April to 31st December 2,700
1st January to 31st March 900
3,600
The production process met the intangible asset recognition criteria for development on 1st
January 20X2. The amount estimated to be recoverable from the process is Rs. 1,000.
What is the carrying amount of the intangible asset at 31st March 20X2 and the charge to
profit or loss for 20X1-20X2?
Expenditure incurred in FY 20X2-20X3 is Rs. 6,000.
At 31st March 20X3, the amount estimated to be recoverable from the process (including
future cash outflows to complete the process before it is available for use) is Rs. 5,000.
What is the carrying amount of the intangible asset at 31st March 20X3 and the charge to
profit or loss for 20X2-X3?
Ans: Expenditure to be transfer to profit or loss in 20X1-20X2 INR
Total Expenditure 3,600
Less. Expenditure during Development phase 900
Expenditure to be transfer to profit or loss 2,700
1) Carrying Amount of Intangible Asset on 31st March 20X2
Expenditure during Development Phase will be capitalised Rs. 900
(Recoverable amount is higher being Rs. 1,000, hence no impairment)

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2) Expenditure to be charged to profit or loss in 20X2-20X3 INR

Opening balance of Intangible Asset 900
Add. Further expenditure during development phase 6,000
Expenditure for development phase 6,900
Recoverable Amount 5,000
Amount charged to profit or loss (Impairment Loss) 1,900
3) Carrying Amount of Intangible Asset on 31st March 20X3
Value of Intangible Asset will be recoverable amount i.e. Rs. 5,000
Question 14
X Ltd. acquired a patent right of manufacturing drug from Y Ltd. In exchange X Ltd. gives its intellectual
property right to Y Ltd. Current market value of the patent and intellectual property rights are Rs.
20,00,000 and Rs. 18,00,000 respectively. At what value patent right should be initially recognised in
the books of X Ltd. in following two situations?
(a) X Ltd. did not pay any cash to Y Ltd.
(b) X Ltd. pays Rs. 2,00,000 to Y Ltd.
Ans: If an entity is able to determine reliably the fair value of either the asset received or the asset
given up, then the fair value of the asset given up is used to measure cost unless the fair value
of the asset received is more clearly evident.
The transaction at the fair value of the asset received adjusted for any cash received or paid.
Therefore in case (a) patent is measured at Rs. 18,00,000, in case (b) it is measured at Rs.
20,00,000 (18,00,000 + 2,00,000).
Question 15
A Ltd. intends to open a new retail store in a new location in the next few weeks. It has spent a
substantial sum on a series of television advertisements to promote this new store. It has paid for
advertisements costing Rs. 8,00,000 before 31st March, 2018. Rs. 7,00,000 of this sum relates to
advertisements shown before 31st March, 2018 and Rs. 1,00,000 to advertisements shown in April,
2018. Since 31st March, 2018, A Ltd. has paid for further advertisements costing Rs. 4,00,000. The
accountant charged all these costs as expenses in the year to 31 March 2018. However, CFO of A Ltd.
does not want to charge Rs.12,00,000 against 2017-2018 profits. He believes that these costs can be
carried forward as intangible assets because the company’s market research indicates that this new
store is likely to be highly successful.
Examine and justify the treatment of these costs of Rs. 12,00,000 in the financial statements for the
year ended 31st March, 2018 as per Ind AS.
Ans: Ind AS 38 specifically prohibits recognising advertising expenditure as an intangible asset.
Irrespective of success probability in future, such expenses have to be recognized in profit or
loss. Therefore, the treatment given by the accountant is correct since such costs should be
recognised as expenses.

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However, the costs should be recognised on an accruals basis.

Therefore, of the advertisements paid for before 31st March, 2018, Rs. 7,00,000 would be
recognised as an expense and Rs. 1,00,000 as a pre-payment in the year ended 31st
March 2018.
Rs. 4,00,000 cost of advertisements paid for since 31st March, 2018 would be charged as
expenses in the year ended 31st March, 2019.
Question 16
X Ltd. is engaged is developing computer software. The expenditures incurred by X Ltd. in pursuance
of its development of software is given below:
(a) Paid Rs. 2,00,000 towards salaries of the program designers.
(b) Incurred Rs. 5,00,000 towards other cost of completion of program design.
(c) Incurred Rs. 2,00,000 towards cost of coding and establishing technical feasibility.
(d) Paid Rs. 7,00,000 for other direct cost after establishment of technical feasibility.
(e) Incurred Rs. 2,00,000 towards other testing costs.
(f) Cost of producing product masters for training material is Rs. 3,00,000.
(g) A focus group of other software developers was invited to a conference for the
introduction of this new software. Cost of the conference aggregated to Rs. 70,000.
(h) On March 15, 20X0, the development phase was completed and a cash flow budget
was prepared.
Net profit for the year was estimated to be equal Rs. 40,00,000. How X Ltd. should account
for the above mentioned cost?
Ans: Costs incurred in creating computer software, should be charged to research & development
expenses when incurred until technical feasibility/asset recognition criteria have been
established for the product. Here, technical feasibility is established after completion of
detailed program design.
In this case, Rs. 9,00,000 (salary cost of Rs. 2,00,000, program design cost of Rs. 5,00,000 and
coding and technical feasibility cost of Rs. 2,00,000) would be recorded as expense.
Cost incurred from the point of technical feasibility are capitalised as software costs. But the
conference cost of Rs. 70,000 would be expensed off.
In this situation, direct cost after establishment of technical feasibility of Rs. 7,00,000, testing
cost of Rs. 2,00,000 and cost of producing product masters for training material of Rs.
3,00,000 will be capitalised.
The cost of software capitalised is = Rs. (7,00,000 + 2,00,000 + 3,00,000) = Rs. 12,00,000.

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IND AS 40
Question 17
UK Ltd. has purchased a new head office property for Rs. 10 crores. The new office building has 10
floors and the organisation structure of UK Ltd. is as follows:
Floor Use
1th Waiting Area
2th Admin
3th HR
4th Accounts
5th Inspection
6th MD Office
7th Canteen
8th, 9th and 10th Vacant

Since UK Ltd. did not need the floors 8, 9 and 10 for its business needs, it has leased out the
same to a restaurant on a long-term lease basis. The terms of the lease agreement are as
follows:
- Tenure of Lease Agreement - 5 Years
- Non-Cancellable Period - 3 years
- Lease Rental-annual lease rental receivable from these floors are Rs. 10,00,000 per floor
with an escalation of 5% every year.
Based on the certificate from its architect, UK Ltd. has estimated the cost of the 3 top floors
as approximately Rs. 3 crores. The remaining cost of Rs. 7 crores can be allocated as 25%
towards Land and 75% towards Building.
As on 31st March, 2018, UK Ltd. obtained a valuation report from an independent valuer who
has estimated the fair value of the property at Rs. 15 crores. UK Ltd. wishes to use the cost
model for measuring Property, Plant & Equipment and the fair value model for measuring the
Investment Property. UK Ltd. depreciates the building over an estimated useful life of 50
years, with no estimated residual value.
Advise UK Ltd. on the accounting and disclosures for the above as per the applicable Ind AS.
Ans: Ind AS 16 ‘Property, Plant and Equipment’ states that property, plant and equipment are
tangible items that are held for use in the production or supply of goods or services, for rental
to others, or for administrative purposes.
As per Ind AS 40 ‘Investment property’, investment property is a property held to earn rentals
or for capital appreciation or both, rather than for use in the production or supply of goods
or services or for administrative purposes or sale in the ordinary course of business.
Further, as per para 8 of Ind AS 40, the building owned by the entity and leased out under one
or more operating leases will be classified as investment property.

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Here top three floors have been leased out for 5 years with a non-cancellable period of 3
years. The useful life of the building is 50 years. The lease period is far less that the useful life
of the building leased out. Further, the lease rentals of three years altogether do not recover
the fair value of the floors leased i.e. 15 crore x 30% = 4.50 crore. Hence the lease is an
operating lease. Therefore, the 3 floors leased out as operating lease will be classified as
investment property in the books of lessor ie. UK Ltd.
However, for investment property, Ind AS 40 states that an entity shall adopt as its accounting
policy the cost model to all of its investment property. Ind AS 40 also requires that an entity
shall disclose the fair value of such investment property(ies).
Total PPE (70%) Investment
property (30%)
Land (25%) Building (75%)
Cost 10 1.75 5.25 3
FV 15 2.625 7.875 4.5
Valuation model followed Cost Cost Cost *
Value recognized in the books 1.75 5.25 3
Less: Depreciation Nil (5.25/50) = (3/50) = 0.06
0.105 crore
Carrying value as on 31st March, 2018 1.75 5.145 2.94
Impairment loss No impairment loss since fair value is more than the
cost

* (as per para 30 of Ind AS 40)

Question 18
X Ltd. is engaged in the construction industry and prepares its financial statements up to 31st March
each year. On 1st April, 2013, X Ltd. purchased a large property (consisting of land) for Rs. 2,00,00,000
and immediately began to lease the property to Y Ltd. on an operating lease. Annual rentals were Rs.
20,00,000. On 31st March, 2017, the fair value of the property was Rs. 2,60,00,000. Under the terms
of the lease, Y Ltd. was able to cancel the lease by giving six months’ notice in writing to X Ltd. Y
Ltd. gave this notice on 31st March, 2017 and vacated the property on 30th September, 2017. On
30th September, 2017, the fair value of the property was Rs. 2,90,00,000. On 1st October, 2017, X
Ltd. immediately began to convert the property into ten separate flats of equal size which X Ltd.
intended to sell in the ordinary course of its business. X Ltd. spent a total of Rs. 60,00,000 on this
conversion project between 30th September, 2017 to 31st March, 2018. The project was incomplete
at 31st March, 2018 and the directors of X Ltd. estimate that they need to spend a further Rs.
40,00,000 to complete the project, after which each flat could be sold for Rs. 50,00,000.
Examine and show how the three events would be reported in the financial statements of X Ltd. for
the year ended 31st March, 2018. as per Ind AS.
Ans: From 1st April, 2013, the property would be regarded as an investment property since it is
being held for its investment potential rather than being owner occupied or developed for
sale.

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The property would be measured under the cost model. This means it will be measured at Rs.
2,00,00,000 at each year end.
On 30th September, 2017, the property ceases to be an investment property. X Ltd. begins to
develop it for sale as flats. The increase in the fair value of the property from 31st March,
2017 to 30th September, 2017 of Rs. 30,00,000 (Rs. 2,90,00,000 – Rs. 2,60,00,000) would not
be recognised for the year ended 31st March, 2018 as IND AS 40 do not permit Revaluation
Model.
Since the lease of the property is an operating lease, rental income of Rs. 10,00,000 (Rs.
20,00,000 x 6/12) would be recognised in P/L for the year ended 31st March, 2018.
When the property ceases to be an investment property, it is transferred into inventory at its
then carrying amount of Rs. 2,00,00,000. This becomes the initial ‘cost’ of the inventory.
The additional costs of Rs. 60,00,000 for developing the flats which were incurred up to and
including 31st March, 2018 would be added to the ‘cost’ of inventory to give a closing cost
of Rs. 2,60,00,000.
The total selling price of the flats is expected to be Rs. 5,00,00,000 (10 x Rs. 50,00,000). Since
the further costs to develop the flats total Rs. 40,00,000, their net realisable value is
Rs. 4,60,00,000 (Rs. 5,00,00,000 – Rs. 40,00,000), so the flats will be measured at a cost of
Rs. 2,60,00,000.
The flats will be shown in inventory as a current asset
Question 19
Venus Ltd. is a multinational entity that owns three properties. All three properties were purchased
on April 1, 20X1. The details of purchase price and market values of the properties are given as
follows:
Particulars Property 1 Property 2 Property 3
Factory Factory Let-Out
Purchase price 15,000 10,000 12,000
Market value 31.03.20X2 16,000 11,000 13,500
Life 10 Years 10 Years 10 Years
Subsequent Measurement Cost Model Revaluation Revaluation
Model Model
Property 1 and 2 are used by Venus Ltd. as factory building whilst property 3 is let-out to a
non-related party at a market rent. The management presents all three properties in balance
sheet as ‘property, plant and equipment’.
The Company does not depreciate any of the properties on the basis that the fair values are
exceeding their carrying amount and recognise the difference between purchase price and
fair value in Statement of Profit and Loss.
Required: Analyse whether the accounting policies adopted by the Venus Ltd. in relation to
these properties is in accordance of Indian Accounting Standards (Ind AS). If not, advise the
correct treatment alongwith working for the same.
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Ans: The above issue needs to be examined in the umbrella of the provisions given in Ind AS 1
‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and Equipment’ in relation
to property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
Property ‘1’ and ‘2’
Para 6 of Ind AS 16 ‘Property, Plant and Equipment’ defines:
“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.”
Paragraph 29 of Ind AS 16 states that:
“An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment”.
Further, paragraph 36 of Ind AS 16 states that:
“If an item of property, plant and equipment is revalued, the entire class of property, plant
and equipment to which that asset belongs shall be revalued”.
Further, paragraph 39 of Ind AS 16 states that:
“If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be
recognised in other comprehensive income and accumulated in equity under the heading of
revaluation surplus. However, the increase shall be recognised in profit or loss to the extent
that it reverses a revaluation decrease of the same asset previously recognised in profit or
loss”.
Further, paragraph 52 of Ind AS 16 states that:
“Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as
long as the asset’s residual value does not exceed its carrying amount”.
Property ‘3’
Para 6 of Ind AS 40 ‘Investment property’ defines:
“Investment property is property (land or a building—or part of a building—or both) held (by
the owner or by the lessee under a finance lease) 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”.
Further, paragraph 30 of Ind AS 40 states that:
“An entity shall adopt as its accounting policy the cost model to all of its investment property”.
Further, paragraph 79 (e) of Ind AS 40 requires that:

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“An entity shall disclose the fair value of investment property”.

Further, paragraph 54 (2) of Ind AS 1 ‘Presentation of Financial Statements’ requires that:
“As a minimum, the balance sheet shall include line items that present the following amounts:
(a) property, plant and equipment;
(b) investment property;
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and equipment’;
(b) applied different accounting policies to Property ‘1’ and ‘2’;
(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment Property.
These accounting treatment is neither correct nor in accordance with provision of Ind AS 1,
Ind AS 16 and Ind AS 40.
Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate
these properties irrespective of that, their fair value exceeds the carrying amount. The
revaluation gain shall be recognised in other comprehensive income and accumulated in
equity under the heading of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified as
Investment Property and only cost model is permitted for subsequent measurement.
However, Venus ltd. is required to disclose the fair value of the property in the Notes to
Accounts. Also the property ‘3’ shall be presented as separate line item as Investment
Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation of these
three properties in the balance sheet is as follows:
Case 1: Venus Ltd. has applied the Cost Model to an entire class of property, plant and
equipment.
Balance Sheet extracts as at 31st March 20X2
Assets INR
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties
Property ‘3’ 10,800
Case 2: Venus Ltd. has applied the Revaluation Model to an entire class of property, plant and
equipment. Balance Sheet extracts as at 31st March 20X2

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Assets INR
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 16,000
Property ‘2’ 11,000 27,000
Investment Properties
Property ‘3’ 10,800
Equity and Liabilities
Other Equity
Revaluation Reserve
Property ‘1’ 2,500
Property ‘2’ 2,000 4,500
The revaluation reserve should be routed through Other Comprehensive Income
(subsequently not reclassified to Profit and Loss) in Statement of Profit and Loss and Shown
as a separate column in Statement of Changes in Equity.

IND AS 23
Question 20
On 1st April, 20X1, entity A contracted for the construction of a building for Rs. 22,00,000. The land
under the building is regarded as a separate asset and is not part of the qualifying assets. The
building was completed at the end of March, 20X2, and during the period the following payments
were made to the contractor:
Payment date Amount (Rs. ’000)
1st April, 20X1 200
30th June, 20X1 600
31st December, 20X1 1,200
31st March, 20X2 200
Total 2,200
Entity A’s borrowings at its year end of 31st March, 20X2 were as follows:
a. 10%, 4-year note with simple interest payable annually, which relates specifically to
the project; debt outstanding on 31st March, 20X2 amounted to Rs. 7,00,000.
Interest of Rs. 65,000 was incurred on these borrowings during the year, and interest
income of Rs. 20,000 was earned on these funds while they were held in anticipation
of payments.
b. 12.5% 10-year note with simple interest payable annually; debt outstanding at
1st April, 20X1 amounted to Rs. 1,000,000 and remained unchanged during the year;
and

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c. 10% 10-year note with simple interest payable annually; debt outstanding at
1st April, 20X1 amounted to Rs. 1,500,000 and remained unchanged during the year.
What amount of the borrowing costs can be capitalized at year end as per relevant Ind
AS?
Ans: As per Ind AS 23, when an entity borrows funds specifically for the purpose of obtaining
a qualifying asset, the entity should determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on that borrowing during the period
less any investment income on the temporary investment of those borrowings.
The amount of borrowing costs eligible for capitalization, in cases where the funds are
borrowed generally, should be determined based on the expenditure incurred in obtaining
a qualifying asset. The costs incurred should first be allocated to the specific borrowings.
Analysis of expenditure:
Date Expenditure Amount allocated in Weighted for period
(Rs.’000) general borrowings outstanding (Rs.’000)
(Rs.’000)
1st April 20X1 200 0 0
30th June 20X1 600 100* 100×9/12=75
31st Dec 20X1 1,200 1,200 1,200×3/12=300
31st March 20X2 200 200 200×0/12=0
Total 2,200 375

*Specific borrowings of Rs. 7,00,000 fully utilized on 1st April & on 30th June to the extent of
Rs. 5,00,000 hence remaining expenditure of Rs. 1,00,000 allocated to general borrowings.
The expenditure rate relating to general borrowings should be the weighted average of the
borrowing costs applicable to the entity’s borrowings that are outstanding during the period,
other than borrowings made specifically for the purpose of obtaining a qualifying asset.
Capitalisation rate = (10,00,000 x 12.5%) + (15,00,000 x 10%) /10,00,000 + 15,00,000 = 11
Borrowing cost to be capitalized: Amount (Rs.)
On specific loan 65,000
On General borrowing (3,75,000 × 11%) 41,250
Total 1,06,250
Less interest income on specific borrowings (20,000)
Amount eligible for capitalization 86,250
Therefore, the borrowing costs to be capitalized are Rs. 86,250.

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IND AS 36
Question 21
A significant raw material used for plant Y’s final production is an intermediate product bought from
plant X of the same enterprise. X’s products are sold to Y at a transfer price that passes all margins to
X. 80% of Y’s final production is sold to customers outside of the reporting enterprise. 60% of X’s final
production is sold to Y and the remaining 40% is sold to customers outside of the reporting enterprise.
For each of the following cases, what are the cash-generating units for X and Y?
Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are higher
than market prices.
Case 2: There is no active market for the products X sells to Y.
Ans: Case 1
X could sell its products on an active market and, so, generate cash inflows from continuing
use that would be largely independent of the cash inflows from Y. Therefore, it is likely that X
is a separate cash-generating unit, although part of its production is used by Y.
It is likely that Y is also a separate cash-generating unit. Y sells 80% of its products to customers
outside of the reporting enterprise. Therefore, its cash inflows from continuing use can be
considered to be largely independent.
Internal transfer prices do not reflect market prices for X’s output. Therefore, in determining
value in use of both X and Y, the enterprise adjusts financial budgets/forecasts to reflect
management’s best estimate of future market prices for those of X’s products that are used
internally.
Case 2
It is likely that the recoverable amount of each plant cannot be assessed independently from
the recoverable amount of the other plant because:
(a) the majority of X’s production is used internally and could not be sold in an active
market. So, cash inflows of X depend on demand for Y’s products. Therefore, X cannot
be considered to generate cash inflows that are largely independent from those of Y;
and
(b) the two plants are managed together.
As a consequence, it is likely that X and Y together is the smallest group of assets that
generates cash inflows from continuing use that are largely independent.
Question 22
Elia limited is a manufacturing company which deals in to manufacturing of cold drinks and
beverages. It is having various plants across India. There is a Machinery A in the Baroda plant which
is used for the purpose of bottling. There is one more machinery which is Machinery B clubbed with
Machinery A. Machinery A can individually have an output and also sold independently in the open
market. Machinery B cannot be sold in isolation and without clubbing with Machine A it cannot

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produce output as well. The Company considers this group of assets as a Cash Generating Unit and
an Inventory amounting to Rs. 2 Lakh and Goodwill amounting to Rs. 1.50 Lakhs is included in such
CGU.
Machinery A was purchased on 1st April 2013 for Rs. 10 Lakhs and residual value is Rs. 50 thousands.
Machinery B was purchased on 1st April, 2015 for Rs. 5 Lakhs with no residual value. The useful life
of both Machine A and B is 10 years. The Company expects following cash flows in the next 5 years
pertaining to Machinery A. The incremental borrowing rate of the company is 10%.
Year Cash Flows from Machinery A
1 1,50,000
2 1,00,000
3 1,00,000
4 1,50,000
5 1,00,000
(excluding Residual Value)
Total 6,00,000

On 31st March, 2018, the professional valuers have estimated that the current market value
of Machinery A is Rs. 7 lakhs. The valuation fee was Rs. 1 lakh. There is a need to dismantle
the machinery before delivering it to the buyer. Dismantling cost is Rs. 1.50 lakhs. Specialised
packaging cost would be Rs. 25 thousand and legal fees would be Rs. 75 thousand.
The Inventory has been valued in accordance with Ind AS 2. The recoverable value of CGU is
Rs. 10 Lakh as on 31st March, 2018. In the next year, the company has done the assessment
of recoverability of the CGU and found that the value of such CGU is Rs. 11 Lakhs ie on 31st
March, 2019. The Recoverable value of Machine A is Rs. 4,50,000 and combined Machine A
and B is Rs. 7,60,000 as on 31st March, 2019.
Required:
a) Compute the impairment loss on CGU and carrying value of each asset after charging
impairment loss for the year ending 31st March, 2018 by providing all the relevant
working notes to arrive at such calculation.
b) Compute the prospective depreciation for the year 2018-2019 on the above assets.
c) Compute the carrying value of CGU as at 31st March, 2019.
Ans:
(a) Computation of impairment loss and carrying value of each of the asset in CGU after
impairment loss
(i) Calculation of carrying value of Machinery A and B before impairment
Machinery A
Cost (A) Rs. 10,00,000
Residual Value Rs. 50,000
Useful life 10 years

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Useful life already elapsed 5 years

Yearly depreciation (B) Rs. 95,000
WDV as at 31st March, 2018 [A- (B x 5)] Rs. 5,25,000
Machinery B
Cost (C) Rs. 5,00,000
Residual Value -
Useful life 10 years
Useful life already elapsed 3 years
Yearly depreciation (D) Rs. 50,000
WDV as at 31st March, 2018 [C- (D x 3)] Rs. 3,50,000
(ii) Calculation of Value-in-use of Machinery A
Period Cash Flows (Rs.) PVF PV
1 1,50,000 0.909 1,36,350
2 1,00,000 0.826 82,600
3 1,00,000 0.751 75,100
4 1,50,000 0.683 1,02,450
5 1,00,000 0.621 62,100
5 50,000 0.621 31,050
Value in use 4,89,650
(iii) Calculation of Fair Value less cost of disposal of Machinery A
Rs.
Fair Value 7,00,000
Less: Dismantling cost (1,50,000)
Packaging cost (25,000)
Legal Fees (75,000)
Fair value less cost of disposal 4,50,000
(iv) Calculation of Impairment loss on Machinery A
Rs.
Carrying Value 5,25,000
Less:Recoverable Value ie higher of Value-in-use and

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Fair value less cost of disposal 4,89,650

Impairment Loss 35,350
(v) Calculation of Impairment loss of CGU
1. First goodwill will be impaired fully and then the remaining impairment loss of
Rs. 75,000 will be allocated to Machinery A and B.
2. If we allocate remaining impairment loss to Machinery A and B on pro- rata basis,
it would come to Rs. 45,000 on Machinery A. However, the impairment loss of
Machinery A cannot exceed Rs. 35,350.Hence, impairment to CGU will be as
follows:
Carrying value Impairment loss Carrying value after
before impairment impairment loss
loss
Rs. Rs. Rs.
Machinery A 5,25,000 35,350 4,89,650
Machinery B 3,50,000 39,650* 3,10,350
Inventory 2,00,000 - 2,00,000
Goodwill 1,50,000 1,50,000 -
Total 12,25,000 2,25,000 10,00,000

* Balancing figure.
(b) Carrying value after adjustment of depreciation
Rs.
Machinery A [4,89,650 – {(4,89,650-50,000)/5}] 4,01,720
Machinery B [3,10,350 – (3,10,350/7)] 2,66,014
Inventory 2,00,000
Goodwill -
Total 8,67,734
(c) Calculation of carrying value of CGU as on 31st March, 2019
The revised value of CGU is Rs. 11 Lakh. However, impaired goodwill cannot be reversed.
Further, the individual assets cannot be increased by lower of recoverable value or
Carrying Value as if the assets were never impaired.
Accordingly, the carrying value as on 31st March, 2019 assuming that the impairment
loss had never incurred, will be:
Carrying Value Recoverable Value Final CV as at
31st Mar 2019
Machinery A 4,30,000 4,50,000 4,30,000
Machinery B 3,00,000 (7,60,000 – 4,50,000) 3,00,000
3,10,000
Inventory 2,00,000 2,00,000 2,00,000
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Goodwill -
Total 9,30,000 9,60,000 9,30,000

Hence the impairment loss to be reversed will be limited to Rs. 62,266 only
(Rs. 9,30,000 – Rs. 8,67,734).
Question 23
East Ltd. (East) owns a machine used in the manufacture of steering wheels, which are sold directly
to major car manufacturers.
• The machine was purchased on 1st April, 20X1 at a cost of Rs. 500 000 through a vendor
financing arrangement on which interest is being charged at the rate of 10 per cent per
annum.
• During the year ended 31st March, 20X3, East sold 10 000 steering wheels at a selling
price of Rs. 190 per wheel.
• The most recent financial budget approved by East’s management, covering the period
1st April, 20X3 – 31st March, 20X8, including that the company expects to sell each
steering wheel for Rs. 200 during 20X3-X4, the price rising in later years in line with
a forecast inflation of 3 per cent per annum.
• During the year ended 31st March, 20X4, East expects to sell 10 000 steering wheels.
The number is forecast to increase by 5 per cent each year until 31st March,
20X8.
• East estimates that each steering wheel costs Rs. 160 to manufacture, which includes
Rs. 110 variable costs, Rs. 30 share of fixed overheads and Rs. 20 transport costs.
• Costs are expected to rise by 1 per cent during 20X4-X5, and then by 2 per cent per
annum until 31st March, 20X8.
• During 20X5-X6, the machine will be subject to regular maintenance costing Rs. 50,000.
• In 20X3-X4, East expects to invest in new technology costing Rs. 100 000. This technology
will reduce the variable costs of manufacturing each steering wheel from Rs. 110 to
Rs. 100 and the share of fixed overheads from Rs. 30 to Rs. 15 (subject to the availability
of technology, which is still under development).
• East is depreciating the machine using the straight line method over the machine’s
10 year estimated useful life. The current estimate (based on similar assets that have
reached the end of their useful lives) of the disposal proceeds from selling the machine
is Rs. 80 000 net of disposal costs. East expects to dispose of the machine at the end
of March, 20X8.
• East has determined a pre-tax discount rate of 8 per cent, which reflects the market’s
assessment of the time value of money and the risks associated with this asset.
Assume a tax rate of 30%. What is the value in use of the machine in accordance with Ind
AS 36?

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Ans: Calculation of the value in use of the machine owned by East Ltd. (East) includes the projected
cash inflow (i.e. sales income) from the continued use of the machine and projected cash
outflows that are necessarily incurred to generate those cash inflows (i.e cost of goods
sold). Additionally, projected cash inflows include Rs. 80,000 from the disposal of the asset
in March, 20X8. Cash outflows include routing capital expenditures of Rs. 50,000 in 20X5-
X6
As per Ind AS 36, estimates of future cash flows shall not include:
• Cash inflows from receivables
• Cash outflows from payables
• Cash inflows or outflows expected to arise from future restructuring to which an
entity is not yet committed
• Cash inflows or outflows expected to arise from improving or enhancing the asset’s
performance
• Cash inflows or outflows from financing activities
• Income tax receipts or payments.
Hence in this case, cash flows do not include financing interest (i.e. 10%), tax (i.e. 30%) and
capital expenditures to which East has not yet committed (i.e. Rs. 100 000). They also do not
include any savings in cash outflows from these capital expenditure, as required by Ind AS 36.
The cash flows (inflows and outflows) are presented below in nominal terms. They include
an increase of 3% per annum to the forecast price per unit (B), in line with forecast inflation.
The cash flows are discounted by applying a discount rate (8 %) that is also adjusted for
inflation.
Note: Figures are calculated on full scale and then rounded off to the nearest absolute value.

Year ended 20X3-X4 20X4-X5 20X5-20X6 20X6-X7 20X7-X8 Value in

use
Quantity (A) 10,000 10,500 11,025 11,576 12,155

Price per unit(B) Rs. 200 Rs. 206 Rs. 212 Rs. 219 Rs. 225

Estimated cash Rs. Rs. 21,63,000 Rs. 23,37,300 Rs. Rs. 27,34,875
inflows (C=A x B) 20,00,000 25,35,144

Misc. cash inflow Rs. 80 000

disposal
proceeds (D)
Total estimated Rs. Rs. 21,63,000 Rs. 23,37,300 Rs. Rs. 28,14,875
Cash inflows 20,00,000 25,35,144
(E=C+D)
Cost per unit (F) Rs. 160 Rs. 162 Rs. 165 Rs. 168 Rs. 171

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Estimated cash (Rs. (Rs. 17,01,000) (Rs. 18,19,125) (Rs. (Rs. 20,78,505)
outflows 16,00,000) 19,44,768)

(G = A x F)
Misc. cash (Rs. 50,000)
outflow:
maintenance costs
(H)
Total estimated (Rs. (Rs. 17,01,000) (Rs. 18,69,125) (Rs. (Rs. 20,78,505)
Cash outflows 16,00,000) 19,44,768)
(I=G+H)
Net cash flows Rs. 4,00,000 Rs. 4,62,000 Rs. 4,68,175 Rs. 5,90,376 Rs. 7,36,370

(J=E-I)
Discount factor 0.9259 0.8573 0.7938 0.7350 0.6806
8% (K)

Discounted Rs. 3,70,360 Rs. 3,96,073 Rs. 3,71,637 Rs. 4,33,926 Rs. 5,01,173 Rs. 20,73,169
future cash flows

(L=J x K)

Question 24
Sun ltd is an entity with various subsidiaries. The entity closes its books of account at every year
ended on 31st March. On 1st July 20X1 Sun ltd acquired an 80% interest in Pluto ltd. Details of the
acquisition were as follows:
– Sun ltd acquired 800,000 shares in Pluto ltd by issuing two equity shares for every five
acquired. The fair value of Sun Ltd’s share on 1st July 20X1 was Rs. 4 per share and the
fair value of a Pluto’s share was Rs. 1·40 per share. The costs of issue were 5% per
share.
– Sun ltd incurred further legal and professional costs of Rs. 100,000 that directly related
to the acquisition.
– The fair values of the identifiable net assets of Pluto Ltd at 1st July 20X1 were
measured at Rs. 1·3 million. Sun ltd initially measured the non-controlling interest in
Pluto ltd at fair value. They used the market value of a Pluto ltd share for this purpose.
No impairment of goodwill arising on the acquisition of Pluto ltd was required at 31st
March 20X2 or 20X3.
Pluto ltd comprises three cash generating units A, B and C. When Pluto ltd was acquired the
directors of Sun ltd estimated that the goodwill arising on acquisition could reasonably be
allocated to units A:B:C on a 2:2:1 basis. The carrying values of the assets in these cash
generating units and their recoverable amounts are as follows:
Unit Carrying value (before goodwill allocation) Recoverable amount
Rs. ’000 Rs. ’000
A 600 740

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B 550 650
C 450 400
Required:
(i) Compute the carrying value of the goodwill arising on acquisition of Pluto Ltd in the
consolidated Balance Sheet of Sun ltd at 31st March 20X4 following the impairment
review.
(ii) Compute the total impairment loss arising as a result of the impairment review,
identifying how much of this loss would be allocated to the non-controlling interests
in Pluto ltd.
Ans:
1. Computation of goodwill on acquisition
Particular Amount
(Rs.‘000)
Cost of investment (8,00,000 x 2/5 x Rs.4) 1,280
Fair value of non-controlling interest (2,00,000 x Rs.1·4) 280
Fair value of identifiable net assets at date of acquisition (1,300)
So goodwill equals 260
Acquisition costs are not included as part of the fair value of the consideration given under
Ind AS 103, Business Combination.
2. Calculation of impairment loss
Unit Carrying value Recoverable Impairment
Amount Loss
Before Allocation After
Allocation of goodwill Allocation
(2:2:1)
A 600 104 704 740 Nil
B 550 104 654 650 4
C 400* 52 452 400 52
* After writing down assets in the individual CGU to recoverable amount
3. Calculation of closing goodwill
Goodwill arising on acquisition (W1) 260
Impairment loss (W2) (56)
So closing goodwill equals 204
4. Calculation of overall impairment loss
on goodwill (W3) 56
on assets in unit C (450 – 400) 50

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So total loss equals 106

Rs. 21·2 (20%) of the above is allocated to the NCI with the balance allocated to the
shareholders of Sun ltd.
Question 25
Parent acquires an 80% ownership interest in Subsidiary for Rs. 2,100 on April 1, 20X1. At that date,
Subsidiary’s net identifiable assets have a fair value of Rs. 1,500. Parent chooses to measure the non-
controlling interests as the proportionate interest of Subsidiary’s net identifiable assets. The assets
of Subsidiary together are the smallest group of assets that generate cash inflows that are largely
independent of the cash inflows from other assets or groups of assets. Because other cash-generating
units of Parent are expected to benefit from the synergies of the combination, the goodwill of Rs.
500 related to those synergies has been allocated to other cash-generating units within Parent. On
March 31, 20X2, Parent determines that the recoverable amount of cash-generating unit Subsidiary
is Rs. 1,000. The carrying amount of the net assets of Subsidiary, excluding goodwill, is Rs. 1,350.
Allocate the impairment loss on March 31, 20X2.
Ans. Non-controlling interests is measured as the proportionate interest of Subsidiary’s net
identifiable assets, i.e., Rs. 300 (20% of Rs. 1,500). Goodwill is the difference between the
aggregate of the consideration transferred and the amount of the non-controlling interests
(Rs. 2,100 + Rs. 300) and the net identifiable assets (Rs. 1,500), i.e., Rs. 900.
Since, the assets of Subsidiary together are the smallest group of assets that generate cash
inflows that are largely independent of the cash inflows from other assets or groups of assets,
therefore, Subsidiary is a cash-generating unit. Because other cash-generating units of Parent
are expected to benefit from the synergies of the combination, the goodwill of Rs. 500 related
to those synergies has been allocated to other cash-generating units within Parent. Because
the cash-generating unit comprising Subsidiary includes goodwill within its carrying amount,
it should be tested for impairment annually, or more frequently if there is an indication that
it may be impaired.
Testing Subsidiary (cash-generating unit) for impairment
Goodwill attributable to non-controlling interests is included in Subsidiary’s recoverable
amount of Rs. 1,000 but has not been recognised in Parent’s consolidated financial
statements. Therefore, the carrying amount of Subsidiary should be grossed up to include
goodwill attributable to the non-controlling interests, before being compared with the
recoverable amount of Rs. 1,000. Goodwill attributable to Parent’s 80% interest in Subsidiary
at the acquisition date is Rs. 400 after allocating Rs. 500 to other cash-generating units within
Parent. Therefore, goodwill attributable to the 20% non-controlling interests in Subsidiary at
the acquisition date is Rs. 100.
Testing subsidiary for impairment on March 31, 20X2
On March 31, 20X2 Goodwill of Net identifiable Total
subsidiary assets (Rs.)
(Rs.) (Rs.)
Carrying amount 400 1,350 1,750

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Unrecognised non-controlling 100 - 100

interests
Adjusted carrying amount 500 1,350 1,850
Recoverable amount 1,000
Impairment loss 850
The impairment loss of Rs. 850 should be allocated to the assets in the unit by first reducing
the carrying amount of goodwill.
Therefore, Rs. 500 of the Rs. 850 impairment loss for the unit is allocated to the goodwill. If
the partially-owned subsidiary is itself a cash-generating unit, the goodwill impairment loss
should be allocated to the controlling and non-controlling interests on the same basis as that
on which profit or loss is allocated. In this case, profit or loss is allocated on the basis of relative
ownership interests. Because the goodwill is recognised only to the extent of Parent’s 80%
ownership interest in Subsidiary, Parent recognises only 80% of that goodwill impairment loss
(i.e., Rs. 400).
The remaining impairment loss of Rs. 350 is recognised by reducing the carrying amounts of
Subsidiary’s identifiable assets.
Allocation of the impairment loss for Subsidiary on March 31, 20X2
On March 31, 20X2 Goodwill of Net identifiable assets Total (Rs.)
subsidiary (Rs.) (Rs.)
Carrying amount 400 1,350 1,750
Impairment loss (400) (350) (750)
Carrying amount after - 1,000 1,000
impairment loss

Question 26
On 1st April 20X1, Venus ltd acquired 100% of Saturn ltd for Rs. 4,00,000. The fair value of the net
identifiable assets of Saturn ltd was Rs. 3,20,000 and goodwill was Rs. 80,000. Saturn ltd is in coal
mining business. On 31st March 20X3 the government has cancelled licenses given to it in few states.
As a result Saturn’s ltd revenue is estimated to get reduce by 30%. The adverse change in market
place and regulatory conditions is an indicator of impairment. As a result Venus ltd has to estimate
the recoverable amount of goodwill and net assets of Saturn ltd on 31st March 20X3.
Venus ltd uses straight line depreciation. The useful life of Saturn’s ltd assets is estimated to be 20
years with no residual value. No independent cash inflows can be identified to any individual assets.
So the entire operation of Saturn ltd is to be treated as a CGU. Due to the regulatory entangle it is
not possible to determine the selling price of Saturn ltd as a CGU. Its value in use is estimated by the
management at Rs. 2,12,000.
Suppose by 31st March 20X5 the government reinstates the licenses of Saturn ltd. The management
expects a favourable change in net cash flows. This is an indicator that an impairment loss may have
reversed. The recoverable amount of Saturn’s ltd net asset is re-estimated. The value in use is
expected to be Rs. 3,04,000 and net selling price is expected to be Rs. 2,90,000.

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Ans: Since the fair value less costs of disposal is not determinable the recoverable amount of the
CGU is its value in use. The carrying amount of the assets of the CGU on 31st March 20X3 is
as follows:
Calculation of Impairment loss INR
Goodwill Other assets Total
Historical Cost 80,000 3,20,000 4,00,000
Accumulated Depreciation (3,20,000/20) x 2 - (32,000) (32,000)
Carrying Amount 80,000 2,88,000 3,68,000
Impairment Loss (80,000) (76,000) (1,56,000)
Revised Carrying Amount
Impairment Loss = Carrying Amount – Recoverable Amount (Rs. 3,68,000 - Rs. 2,12,000) = Rs.
1,56,000 is charged in statement of profit and loss for the period ending 31st March 20X3 as
impairment loss.
Impairment loss is allocated first to goodwill Rs. 80,000 and remaining loss of Rs. 76,000 (Rs.
1,56,000 – Rs. 80,000) is allocated to the other assets.
Reversal of Impairment loss
Reversal of impairment loss is recognised subject to:-
 The impairment loss on goodwill cannot be reversed.
 The increased carrying amount of an asset after reversal of an impairment loss not to
exceed the carrying amount that would have been determined had no impairment loss been
recognised in prior years.
Calculation of carrying amount of identifiable assets had no impairment loss is recognised
INR
Historical Cost 3,20,000
Accumulated Depreciation for 4 years (3,20,000/20) x 4 (64,000)
Carrying amount had no impairment loss is recognised on 31st March 20X5 2,56,000
Carrying amount of other assets after recognition of impairment loss INR
Carrying amount on 31st March 20X3 2,12,000
Accumulated Depreciation for 2 years (2,12,000/18) x 2 (24,000)
[rounded off to nearest thousand for ease of calculation]
Carrying amount on 31st March 20X5 1,88,000

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The impairment loss recognised previously can be reversed only to the extent of lower of re-
estimated recoverable amount is Rs.3,04,000 (higher of fair value less costs of disposal Rs.
2,90,000 and value in use Rs. 3,04,000)
the carrying amount that would have been determined had no impairment loss been
recognised for the asset in prior periods ie., Rs. 2,56,000
Impairment loss reversal will be Rs. 68,000 i.e. (Rs. 2,56,000 – Rs. 1,88,000). This amount is
recognised as income in the statement of profit and loss for the year ended 31st March 20X5.
The carrying amount of other assets at 31st March 20X5 after reversal of impairment loss will
be Rs. 2,56,000.
From 1st April 20X5 the depreciation charge will be Rs. 16,000 i.e. (Rs. 2,56,000/16)
Question 27
A company operates a mine in a country where legislation requires that the owner must restore the
site on completion of its mining operations. The cost of restoration includes the replacement of the
overburden, which must be removed before mining operations commence. A provision for the costs
to replace the overburden was recognised as soon as the overburden was removed. The amount
provided was recognised as part of the cost of the mine and is being depreciated over the mine’s
useful life. The carrying amount of the provision for restoration costs is Rs. 500, which is equal to the
present value of the restoration costs.
The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine as a
whole. The entity has received various offers to buy the mine at a price of around Rs. 800. This price
reflects the fact that the buyer will assume the obligation to restore the overburden. Disposal costs
for the mine are negligible. The value in use of the mine is approximately Rs. 1,200, excluding
restoration costs. The carrying amount of the mine is Rs. 1,000.
Answer:
The cash-generating unit’s fair value less costs of disposal is Rs. 800. This amount considers
restoration costs that have already been provided for. As a consequence, the value in use for the
cash-generating unit is determined after consideration of the restoration costs and is estimated to
be Rs. 700 (Rs. 1,200 less Rs. 500). The carrying amount of the cash-generating unit is Rs. 500, which
is the carrying amount of the mine (Rs. 1,000) less the carrying amount of the provision for
restoration costs (Rs. 500). Therefore, the recoverable amount of the cash-generating unit exceeds
its carrying amount.

IND AS 37
Question 28
X Telecom Ltd. has income tax litigation pending before appellate authorities. Legal advisor’s opinion
is that X Telecom Ltd. will lose the case and estimated that liability of Rs. 1,00,00,000 may arise in
two years. The liability is recognised on a discounted basis. The discount rate at which the liability
has been discounted is 10% and it is assumed that discount rate does not change over the period of
2 years. How should X Telecom Ltd. calculate the amount of borrowing cost?

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Ans: The discount factor of 10% for 2 years is 0.827. X Telecom Ltd. will initially recognise provision
for Rs. 82,70,000 (Rs. 1,00,00,000 x 0.827).
The discount factor of 10% at the end of year 1 is 0.909. At the end of year 1, provision amount
would be Rs. 90,90,000 (Rs. 1,00,00,000 x 0.909).
As per the standard, the difference between the two present values i.e., Rs. 8,20,000 is
recognised as a borrowing cost in year 1.
At the end of the Year 2, the liability would be Rs. 1,00,00,000.
The difference between the two present values i.e., Rs. 9,10,000 (Rs. 1,00,00,000 - Rs.
90,90,000) is recognised as borrowing cost in year 2.
Question 29:
U Ltd. is a large conglomerate with a number of subsidiaries. It is preparing consolidated financial
statements as on 31st March 2018 as per the notified Ind AS. The financial statements are due to be
authorised for issue on 15th May 2018. It is seeking your assistance for some transactions that have
taken place in some of its subsidiaries during the year.
G Ltd. is a wholly owned subsidiary of U Ltd. engaged in management consultancy services. On 31st
January 2018, the board of directors of U Ltd. decided to discontinue the business of G Ltd. from 30th
April 2018. They made a public announcement of their decision on 15th February 2018
G Ltd. does not have many assets or liabilities and it is estimated that the outstanding trade
receivables and payables would be settled by 31st May 2018. U Ltd. would collect any amounts still
owed by G Ltd’s customers after 31st May 2018. They have offered the employees of G Ltd.
termination payments or alternative employment opportunities.
Following are some of the details relating to G Ltd.
 On the date of public announcement, it is estimated by G Ltd. that it would have to
pay 540 lakhs as termination payments to employees and the costs for relocation of
employees who would remain with the Group would be Rs. 60 lakhs. The actual
termination payments totalling to Rs. 520 lakhs were made in full on 15th May 2018.
As per latest estimates made on 15th May 2018, the total relocation cost is Rs. 63
lakhs.
 G Ltd. had taken a property on operating lease, which was expiring on 31st March
2022. The present value of the future lease rentals (using an appropriate discount
rate) is Rs. 430 lakhs. On 15th May 2018, G Ltd. made a payment to the lessor of Rs.
410 lakhs in return for early termination of the lease.
The loss after tax of G Ltd. for the year ended 31st March 2018 was Rs. 400 lakhs. G Ltd. made further
operating losses totalling Rs. 60 lakhs till 30th April 2018.
How should U Ltd. present the decision to discontinue the business of G Ltd. in its consolidated
statement of comprehensive income as per Ind AS?
What are the provisions that the Company is required to make as per lnd AS 37?

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Ans: A discontinued operation is one that is discontinued in the period or classified as held for sale
at the year end. The operations of G Ltd were discontinued on 30th April 2018 and therefore,
would be treated as discontinued operation for the year ending 31st March 2019. It does not
meet the criteria for held for sale since the company is terminating its business and does not
hold these for sale.
Accordingly, the results of G Ltd will be included on a line-by-line basis in the consolidated
statement of comprehensive income as part of the profit from continuing operations of U Ltd
for the year ending 31st March 2018.
As per para 72 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’,
restructuring includes sale or termination of a line of business. A constructive obligation to
restructure arises when:
(a) an entity has a detailed formal plan for the restructuring
(b) has raised a valid expectation in those affected that it will carry out the restructuring
by starting to implement that plan or announcing its main features to those affected
by it.
The Board of directors of U Ltd have decided to terminate the operations of G Ltd. from 30th
April 2018. They have made a formal announcement on 15th February 2018, thus creating a
valid expectation that the termination will be implemented. This creates a constructive
obligation on the company and requires provisions for restructuring.
A restructuring provision includes only the direct expenditures arising from the restructuring
that are necessarily entailed by the restructuring and are not associated with the ongoing
activities of the entity.
The termination payments fulfil the above condition. As per Ind AS 10 ‘Events after Reporting
Date’, events that provide additional evidence of conditions existing at the reporting date
should be reflected in the financial statements. Therefore, the company should make a
provision for Rs. 520 lakhs in this respect.
The relocation costs relate to the future conduct of the business and are not liabilities for
restructuring at the end of the reporting period. Hence, these would be recognised on the
same basis as if they arose independently of a restructuring.
The operating lease would be regarded as an onerous contract. A provision would be made
at the lower of the cost of fulfilling it and any compensation or penalties arising from failure
to fulfil it. Hence, a provision shall be made for Rs. 410 lakhs.
Further operating losses relate to future events and do not form a part of the closure
provision.
Therefore, the total provision required = Rs. 520 lakhs + Rs. 410 lakhs = Rs. 930 lakhs
Question 30
X Solar Power Ltd., a power company, has a present obligation to dismantle its plant after 35 years
of useful life. X Solar Power Ltd. cannot cancel this obligation or transfer to third party. X Solar Power
Ltd. has estimated the total cost of dismantling at Rs. 50,00,000, the present value of which is Rs.
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30,00,000. Based on the facts and circumstances, X Solar Power Ltd. considers the risk factor of 5%
i.e., the risk that the actual outflows would be more from the expected present value. How should X
Solar Power Ltd. account for the obligation?
Ans: The obligation should be measured at the present value of outflows i.e., Rs. 30,00,000.
Further a risk adjustment of 5% i.e., Rs. 1,50,000 (Rs. 30,00,000 x 5%) would be made.
So, the liability will be recognised at = Rs. 30,00,000 + Rs.1,50,000 = Rs. 31,50,000.
Question 31
During the year, QA Ltd. delivered manufactured products to customer K. The products were faulty
and on 1st October, 2016 customer K commenced legal action against the Company claiming
damages in respect of losses due to the supply of faulty product. Upon investigating the matter, QA
Ltd. discovered that the products were faulty due to defective raw material procured from supplier
F. Therefore, on 1st December, 2016, the Company commenced legal action against F claiming
damages in respect of the supply of defec tive raw materials.
QA Ltd. has estimated that it's probability of success of both legal actions, the action of K against QA
Ltd. and action of QA Ltd. against F, is very high.
On 1st October, 2016, QA Ltd. has estimated that the damages it would have to pay K would be
Rs. 5 crores. This estimate was revised to Rs. 5.2 crores as on 31st March, 2017 and Rs. 5.25 crores
as at 15th May, 2017. This case was eventually settled on 1st June, 2017, when the Company paid
damages of Rs. 5.3 crores to K.
On 1st December, 2016, QA Ltd. had estimated that it would receive damages of Rs. 3.5 crores from
F. This estimate was revised to Rs. 3.6 crores as at 31st March, 2017 and Rs. 3.7 crores as on 15th
May, 2017. This case was eventually settled on 1st June, 2017 when F paid Rs. 3.75 crores to QA
Ltd. QA Ltd. had, in its financial statements for the year ended 31 st March, 2017, provided Rs. 3.6
crores as the financial statements were approved by the Board of Directors on 26th April, 2017.
(i) Whether the Company is required to make provision for the claim from customer K as per
applicable Ind AS? If yes, please give the rationale for the same.
(ii) If the answer to (a) above is yes, what is the entry to be passed in the books of account
as on 31st March, 2017? Give brief reasoning for your choice.
(A) Statement of Profit and Loss A/c Dr. Rs. 5.2 crores
To Current Liability A/c Rs. 5.2 crores
(B) Statement of Profit and Loss A/c Dr. Rs. 5.3 crores
To Non-Current Liability A/c Rs. 5.3 crores
(C) Statement of Profit and Loss A/c Dr.Rs. 5.25 crores
To Current Liability A/c Rs. 5.25 crores
(iii) What will the accounting treatment of the action of QA Ltd. against supplier F as per
applicable Ind AS?

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Ans (i) Yes, QA Ltd. is required to make provision for the claim from customer K as per Ind AS 37
since the claim is a present obligation as a result of delivery of faulty goods manufactured.
Also, it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligations. Further, a reliable estimate of Rs. 5.2 crore can be
made of the amount of the obligation while preparing the financial statements as on 31st
March, 2017.
(ii) Option (A) : Statement of Profit and Loss A/c Dr. Rs. 5.2 crore
To Current Liability A/c Rs. 5.2 crore
(iii) As per para 31 of Ind AS 37, QA Ltd. shall not recognise a contingent asset. Here the
probability of success of legal action is very high but there is no concrete evidence which
makes the inflow virtually certain. Hence, it will be considered as contingent asset
only and shall not be recognized.
Question 32
Assume that the firm has not been operating its warranty for five years, and reliable data exists to
suggest the following:
• If minor defects occur in all products sold, repair costs of Rs. 20,00,000 would result.
• If major defects are detected in all products, costs of Rs. 50,00,000 would result.
• The manufacturer’s past experience and future expectations indicate that each year
80% of the goods sold will have no defects. 15% of the goods sold will have minor
defects, and 5% of the goods sold will have major defects.
Calculate the expected value of the cost of repairs in accordance with the requirements of
Ind AS 37, if any. Ignore both income tax and the effect of discounting.
Ans: The expected value of cost of repairs in accordance with Ind AS 37 is:
(80% x nil) + (15% x Rs. 20,00,000) + (5% x Rs. 50,00,000) = 3,00,000 + 2,50,000
= 5,50,000
Question 33
X Ltd. is operating in the telecom industry. During the Financial Year 20X1-20X2, the Income Tax
authorities sent a scrutiny assessment notice under Section 143(2) of the Income-tax Act, 1961, in
respect to return filed under Section 139 of this Act for Previous Year 20X0-20X1 (Assessment Year
20X1-20X2) and initiated assessment proceedings on account of a deduction claimed by the company
which in the view of the authorities was inadmissible.
During the financial year 20X1-20X2 itself, the assessment proceedings were completed and the
assessing officer did not allow the deduction and raised a demand of Rs. 1,00,00,000 against the
company. The company contested such levy and filed an appeal with the Appellate authority. At the
end of the financial year 20X1-20X2, the appeal had not been heard. The company is not confident
whether that the company would win the appeal. However, the company was advised by its legal
counsel that on a similar matter, two appellate authorities of different jurisdictions had given
conflicting judgements, one in favour of the assessee and one against the assessee. The legal counsel

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further stated it had more than 50% chance of winning the appeal. Please advise how the company
should account for these transactions in the financial year 20X1-20X2.
Ans: Ind AS 37 provides that in rare cases it not clear whether there is a present obligation, for
example, in a lawsuit, it may be disputed either whether certain events have occurred or
whether those events result in a present obligation. In such a case, an entity should determine
whether a present obligation exits at the end of the reporting period by taking account of all
available evidence, for example, the opinion of experts.
In the present case, the company is not confident that whether it would win the appeal. By
taking into account the opinion of the legal counsel, it is not sure that whether the company
would win the appeal. On the basis of such evidence, it is more likely than not that a present
obligation exists at the end of the reporting period. Therefore, the entity should recognise a
provision. The company should provide for a liability of Rs. 1,00,00,000.

IND AS 10
Question 34:
What is the date of approval for issue of the financial statements prepared for the reporting period
from April 1, 2011 to March 31, 2012, in a situation where following dates are available? Completion
of preparation of financial statements May 28, 2012 Board reviews and approves it for issue June 19,
2012
Available to shareholders July 01, 2012
Annual General Meeting September 15, 2012
Filed with regulatory authority October 16, 2012
Will your answer differ if the entity is a partnership firm?
Solution: As per Ind AS 10 the date of approval for issue of financial statements is the date on which
the financial statements are approved by the Board of Directors in case of a company, and, by the
corresponding approving authority in case of any other entity. Accordingly, in the instant case, the
date of approval is the date on which the financial statements are approved by the Board of Directors
of the company, i.e., June 19, 2012.
In the case of an entity is a partnership firm, the date of approval will be the date when the relevant
approving authority of such entity approves the financial statements for issue ie. the date when the
partner(s) of the firm approve(s) the financial statements.
Question 35:
ABC Ltd. is trading company in Laptops. On 31st March 20X2 company has 50 laptops which were
purchased at Rs. 45,000 each. Company has considered the same price for calculation of closing
inventory. On 15th April 20X2, advanced version of same series of laptops is introduced in the market.
Therefore, the price of the current laptops crashes to Rs. 35,000 each. Company does not want to
value the stock as Rs. 35,000 as the event of reduction took place after the 31stMarch 20X2 and the
reduced prices were not applicable as on 31st March 20X2. Comment

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Answer: As per Ind AS 10, the decrease in the net realizable value of the stock after reporting period
should be considered as adjusting event.
Question 36:
Company XYZ Ltd. was formed to secure the tenders floated by a telecom company for publication
of telephone directories. It bagged the tender for publishing directories for Pune circle for 5 years. It
has made a profit in 2011- 2012, 2012-2013, 2013-2014 and 2014-2015. It bid in tenders for
publication of directories for other circles – Nagpur, Nashik, Mumbai, Hyderabad but as per the
results declared on 23rd April, 2015, the company failed to bag any of these. Its only activity till date
is publication of Pune directory. The contract for publication of directories for Pune will expire on
31st December 2015. The financial statements for the F.Y. 2014-15 have been approved by the Board
of Directors on July 10, 2015. Whether it is appropriate to prepare financial statements on going
concern basis?
Solution: With regard to going concern basis to be followed for preparation of financial statements,
paras 14 & 15 of Ind AS 10 states that-
An entity shall not prepare its financial statements on a going concern basis if management
determines after the reporting period either that it intends to liquidate the entity or to cease trading,
or that it has no realistic alternative but to do so.
Deterioration in operating results and financial position after the reporting period may indicate a
need to consider whether the going concern assumption is still appropriate. If the going concern
assumption is no longer appropriate, the effect is so pervasive that this Standard requires a
fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised
within the original basis of accounting. In accordance with the above, an entity needs to change the
basis of accounting if the effect of deterioration in operating results and financial position is so
pervasive that management determines after the reporting period either that it intends to liquidate
the entity or to cease trading, or that it has no realistic alternative but to do so.
In the instant case, since contract is expiring on 31st December 2015 and it is confirmed on 23rd April,
2015, i.e., after the end of the reporting period and before the approval of the financial statements,
that no further contact is secured, implies that the entity’s operations are expected to come to an
end. Accordingly, if entity’s operations are expected to come to an end, the entity needs to make a
judgement as to whether it has any realistic possibility to continue or not. In case, the entity
determines that it has no realistic alternative of continuing the business, preparation of financial
statements for 2014-15 and thereafter on going concern basis may not be appropriate.
Question 37:
X Ltd. was having investment in form of equity shares in another company as at the end of the
reporting period, i.e., 31st March, 2012. After the end of the reporting period but before the approval
of the financial statements it has been found that value of investment was fraudulently inflated by
committing a computation error. Whether such event should be adjusted in the financial statements
for the year 2011-12?
Solution: Since it has been detected that a fraud has been made by committing an intentional error
and as a result of the same financial statements present an incorrect picture, which has been
detected after the end of the reporting period but before the approval of the financial statements.
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The same is an adjusting event. Accordingly, the value of investments in the financial statements
should be adjusted for the fraudulent error in computation of value of investments.
Question 38:
XYZ Ltd. was formed to secure the tenders floated by a telecom company for publication of
telephone directories. It bagged the tender for publishing directories for Pune circle for 5 years.
It has made a profit in 2013-2014, 2014-2015, 2015-2016 and 2016-2017. It bid in tenders for
publication of directories for other circles – Nagpur, Nashik, Mumbai, Hyderabad but as per the
results declared on 23rd April, 2017, the company failed to bag any of these. Its only activity till
date is publication of Pune directory. The contract for publication of directories for Pune will expire
on 31st December 2017. The financial statements for the F.Y. 2016-17 have been approved by
the Board of Directors on July 10, 2017. Whether it is appropriate to prepare financial statements
on going concern basis?
Answer:
With regard to going concern basis to be followed for preparation of financial statements, Ind AS 10
provides as follows:
“An entity shall not prepare its financial statements on a going concern basis if management
determines after the reporting period either that it intends to liquidate the entity or to cease trading,
or that it has no realistic alternative but to do so.
Deterioration in operating results and financial position after the reporting period may indicate
a need to consider whether the going concern assumption is still appropriate. If the going concern
assumption is no longer appropriate, the effect is so pervasive that this Standard requires a
fundamental change in the basis of accounting, rather than an adjustment to the amounts
recognised within the original basis of accounting.”
In accordance with the above, an entity needs to change the basis of accounting if the effect of
deterioration in operating results and financial position is so pervasive that management determines
after the reporting period either that it intends to liquidate the entity or to cease trading, or that it
has no realistic alternative but to do so.
In the instant case, since contract is expiring on 31st December 2017 and it is confirmed on 23rd
April, 2017, i.e., after the end of the reporting period and before the approval of the financial
statements, that no further contact is secured, implies that the entity’s operations are expected to
come to an end. Accordingly, if entity’s operations are expected to come to an end, the entity
needs to make a judgement as to whether it has any realistic possibility to continue or not. In case,
the entity determines that it has no realistic alternative of continuing the business, preparation of
financial statements for 2016-17 and thereafter on going concern basis may not be appropriate.

IND AS 102
Question 39:

Tata Industries has issued a share based option to one of its key management personal which can be
exercised either in cash or equity and it has following features:
Option I Period INR

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Cash settled shares 74,000

Service condition 3 years
Option II
Equity settled Shares 90,000
Conditions:
Service 3 years
Restriction to sell 2 years
Fair values
Equity price with a restriction of sale for 2 years 115
Fair value grant date 135
Fair value 20X0 138
20X1 140
20X2 147

Pass the Journal entries?

Answer:
Fair value of Equity option component:
Fair value of a share with restrictive clause INR 115
No. of shares 90,000
Fair Value A INR 1,03,50,000
Fair value of a share at the date of grant INR 135
No. of cash settled shares 74,000
Fair Value B INR 99,90,000
Fair value of Equity component in Compound Instrument (A-B) INR 3,60,000

Journal Entries
31/12/20X0 Employee benefit expenses Dr. 35,24,000
To Share based payment reserve (equity) 1,20,000
(3,60,000/3)
To Share based payment liability (138 x 74,000) 34,04,000
/3
(Recognition of Equity option and cash
settlement option)
31/12/20X1 Employee benefits expenses Dr. 36,22,667
To Share based payment reserve (equity) 1,20,000
(3,60,000/3)
To Share based payment liability (140 x 74,000) 35,02,667
2/3-34,04,000
(Recognition of Equity option and cash
settlement option)
31/12/20X2 Employee benefits expenses Dr. 40,91,333

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To Share based payment reserve (equity) 1,20,000

(3,60,000/3)
To Share based payment liability 39,71,333
(147 x 74,000) 3/3- (34,04,000 + 35,02,667)
(Recognition of Equity option and cash
settlement option)
Upon cash alternative chosen
Share based payment liability (147 x 74,000) Dr. 1,08,78,000
To Bank/ cash 1,08,78,000
(Being settlement made in cash)
Upon equity alternative chosen
Share based payment liability (147 x 74,000) Dr. 1,08,78,000
To Share Capital 1,08,78,000
Question 40:

MINDA issued 11,000 share appreciation rights (SARs) that vest immediately to its employees on 1
April 20X0. The SARs will be settled in cash. Using an option pricing model, at that date it is estimated
that the fair value of a SAR is INR 100. SAR can be exercised any time up until 31 March 20X3. At the
end of period on 31 March 20X1 it is expected exercise the option 95% of total employees, 92% at
the end of next year and finally it was vested only 89% at the end of the 3rd year.
Fair value of SAR INR
31-Mar-20X1 132
31-Mar-20X2 139
31-Mar-20X3 141
Pass the Journal entries?

Answer:
Period Fair value To be vested Cumulative Expense
Start 100 100% 11,00,000 11,00,000
Period 1 132 95% 13,79,400 2,79,400
Period 2 139 92% 14,06,680 27,280
Period 3 141 89% 13,80,390 (26,290)
13,80,390

Question 41:

A Ltd. had on 1st April, 2015 granted 1,000 share options each to 2,000 employees. The options
are due to vest on 31st March, 2018 provided the employee remains in employment till 31st March,
2018.

On 1st April, 2015, the Directors of Company estimated that 1,800 employees would qualify for
the option on 31st March, 2018. This estimate was amended to 1,850 employees on 31st March,
2016 and further amended to 1,840 employees on 31st March, 2017.
On 1st April, 2015, the fair value of an option was Rs. 1.20. The fair value increased to Rs. 1.30
as on 31st March, 2016 but due to challenging business conditions, the fair value declined thereafter.

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In September 2016, when the fair value of an option was Rs. 0.90, the Directors repriced the option
and this caused the fair value to increase to Rs. 1.05. Trading conditions improved in the second half
of the year and by 31st March, 2017 the fair value of an option was Rs.1.25. QA Ltd. decided that
additional cost incurred due to repricing of the options on 30th September, 2016 should be spread
over the remaining vesting period from 30th September, 2016 to 31st March, 2018.

The Company has requested you to suggest the suitable accounting treatment for these transaction
as on 31st March, 2017. [MTP May 2019]
Answer:
Paragraph 27 of Ind AS 102 requires the entity to recognise the effects of repricing that increase the
total fair value of the share-based payment arrangement or are otherwise beneficial to the
employee.

If the repricing increases the fair value of the equity instruments granted paragraph B43(a) of
Appendix B requires the entity to include the incremental fair value granted (ie the difference
between the fair value of the repriced equity instrument and that of the original equity instrument,
both estimated as at the date of the modification) in the measurement of the amount recognised
for services received as consideration for the equity instruments granted.

If the repricing occurs during the vesting period, the incremental fair value granted is included in
the measurement of the amount recognised for services received over the period from the
repricing date until the date when the repriced equity instruments vest, in addition to the amount
based on the grant date fair value of the original equity instruments, which is recognised over the
remainder of the original vesting period.

Accordingly, the amounts recognised in years 1 and 2 are as follows:

Year Calculation Compensation Cumulative
expense for period compensation
expense
Rs. Rs.
1 [1,850 employees× 1,000 options × Rs. 1.20] × 7,40,000 7,40,000
1/3
2 (1,840 employees× 1,000 options × [(Rs.1.20 8,24,000 15,64,000
× 2/3)+ {(Rs.1.05 - 0.90) ×0.5/1.5}] – 7,40,000

Question 42:

A parent grants 200 share options to each of 100 employees of its subsidiary, conditional upon the
completion of two years’ service with the subsidiary. The fair value of the share options on grant date
is Rs. 30 each. At grant date, the subsidiary estimates that 80 percent of the employees will
complete the two-year service period. This estimate does not change during the vesting period. At
the end of the vesting period, 81 employees complete the required two years of service. The
parent does not require the subsidiary to pay for the shares needed to settle the grant of share
options.
Pass the necessary journal entries for giving effect to the above arrangement.

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Answer:

As required by paragraph B53 of the Ind AS 102, over the two-year vesting period, the subsidiary
measures the services received from the employees in accordance, the requirements applicable to
equity-settled share-based payment transactions as given in paragraph 43B. Thus, the subsidiary
measures the services received from the employees on the basis of the fair value of the share
options at grant date. An increase in equity is recognised as a contribution from the parent in the
separate or individual financial statements of the subsidiary.
The journal entries recorded by the subsidiary for each of the two years are as follows:
Year 1 Remuneration expense Dr.

(200 x 100 employees x Rs. 30 x 80% x ½) 2,40,000

To Equity (Contribution from the parent) 2,40,000

Year 2 Remuneration expense Dr.

[(200 x 81 employees x Rs. 30) – 2,40,000] 2,46,000

To Equity (Contribution from the parent) 2,46,000

Question 43

An Entity P issues Share based payment to its employees based on the below details –
No. of employees 100 nos.
Fair value at Grant date INR 25
Market condition Share price to reach at INR 30
Service condition To remain in service until market condition meets
Expected completion of market condition 4 years

Define expenses related to such Share based payment in each year subject to the below
scenarios-

a) Market condition meets in the year 3, OR

b) Market condition meets in the year 5

Ans: Market conditions are being taken care while calculating fair value at grant date. However,
service conditions will be considered as per the expected vesting right to be exercised by
employees and would be re-estimated during vesting period. However, if the market related
condition meets before it is expected then all remaining expenses would immediately be
charged off, however if it goes longer than the expected then original expected period will
follow.

a) Market condition meets in the year 3

Year 1 2,500/4 = 625

Year 2 2,500/4 = 625

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Year 3 2,500-625-625=1,250

Year 4 NIL

b) Market condition meets in the year 5

Year 1 2,500/4 = 625
Year 2 2,500/4 = 625

Year 3 2,500/4 = 625

Year 4 2,500/4 = 625

Year 5 NIL

IND AS 41
Question 44
As at 31st March, 2017, a plantation consists of 100 Pinus Radiata trees that were planted 10 years
earlier. The tree takes 30 years to mature, and will ultimately be processed into building material for
houses or furniture. The enterprise’s weighted average cost of capital is 6% p.a.
Only mature trees have established fair values by reference to a quoted price in an active market.
The fair value (inclusive of current transport costs to get 100 logs to market) for a mature tree of the
same grade as in the plantation is:
As at 31st March, 2017: 171
As at 31st March, 2018: 165
Assume that there would be immaterial cash flow between now and point of harvest. The present
value factor of Rs. 1 @ 6% for 19th year = 0.331 20th year = 0.312
State the value of such plantation as on 31st March, 2017 and 2018 and the gain or loss to be
recognised as per Ind AS.
Ans: As at 31st March, 2017, the mature plantation would have been valued at 17,100 (171 x 100).
As at 31st March, 2018, the mature plantation would have been valued at 16,500 (165 x 100).
Assuming immaterial cash flow between now and the point of harvest, the fair value (and
therefore the amount reported as an asset on the statement of financial position) of the
plantation is estimated as follows:
As at 31st March, 2017: 17,100 x 0.312 = 5,335.20.
As at 31st March, 2018: 16,500 x 0.331 = 5,461.50.
Gain or loss
The difference in fair value of the plantation between the two year end dates is 126.30
(5,461.50 – 5,335.20), which will be reported as a gain in the statement or profit or loss
(regardless of the fact that it has not yet been realised).

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Question 45
A farmer owned a dairy herd, of three years old cattle as at April 1, 20X1 with a fair value of Rs. 13,750
and the number of cattle in the herd was 250.
The fair value of three year cattle as at March 31, 20X2 was Rs. 60 per cattle. The fair value of four
year cattle as at March 31, 20X2 is Rs.75 per cattle.
Calculate the measurement of group of cattle as at March 31, 20X2 stating price and physical change
separately.
Ans: Particulars Amount (Rs.)
Fair value as at April 1, 20X1 13,750
Increase due to Price change [250 x {60 - (13,750/250)}] 1,250
Increase due to Physical change [250 x {75-60}] 3,750
Fair value as at March 31, 20X2 18,750

IND AS 1
Question 46
An entity has taken a loan facility from a bank that is to be repaid within a period of 9 months from
the end of the reporting period. Prior to the end of the reporting period, the entity and the bank
enter into an arrangement, whereby the existing outstanding loan will, unconditionally, roll into the
new facility which expires after a period of 5 years.
(a) How should such loan be classified in the balance sheet of the entity?
(b) Will the answer be different if the new facility is agreed upon after the end of the
reporting period?
(c) Will the answer to (a) be different if the existing facility is from one bank and the new
facility is from another bank?
(d) Will the answer to (a) be different if the new facility is not yet tied up with the existing
bank, but the entity has the potential to refinance the obligation?
Solution
(a) The loan is not due for payment at the end of the reporting period. The entity and the
bank have agreed for the said roll over prior to the end of the reporting period for a
period of 5 years. Since the entity has an unconditional right to defer the settlement
of the liability for at least twelve months after the reporting period, the loan should
be classified as non-current.
(b) Yes, the answer will be different if the arrangement for roll over is agreed upon after
the end of the reporting period, since assessment is required to be made based on
terms of the existing loan facility. As at the end of the reporting period, the entity does
not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period. Hence the loan is to be classified as current.

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(c) Yes, loan facility arranged with new bank cannot be treated as refinancing, as the loan
with the earlier bank would have to be settled which may coincide with loan facility
arranged with a new bank. In this case, loan has to be repaid within a period of 9
months from the end of the reporting period, therefore, it will be classified as current
liability.
(d) Yes, the answer will be different and the loan should be classified as current. This is
because, as per paragraph 73 of Ind AS 1, when refinancing or rolling over the
obligation is not at the discretion of the entity (for example, there is no arrangement
for refinancing), the entity does not consider the potential to refinance the obligation
and classifies the obligation as current.
Question 47
On 1 April 20X3 Charming Ltd issued 100,000 Rs 10 bonds for Rs 1,000,000. On 1 April each year
interest at the fixed rate of 8 per cent per year is payable on outstanding capital amount of the bonds
(ie the first payment will be made on 1 April 20X4). On 31 March each year (i.e from 31 March 20X4),
Charming Ltd has a contractual obligation to redeem 10,000 of the bonds at Rs 10 per bond. How
should Charming Ltd. classify such Bonds: current or non-current?
Ans:
In its statement of financial position at 31 March 20X4, Charming Ltd must present Rs 80,000 accrued
interest and Rs 100,000 current portion of the non-current bond (ie the portion repayable on 31
Mach 20X4) as current liabilities. The Rs900,000 due later than 12 months after the end of the
reporting period is presented as a noncurrent liability.
Question 48
Paragraph 69(a) of Ind AS 1 states “An entity shall classify a liability as current when it expects to
settle the liability in its normal operating cycle”. An entity develops tools for customers and this
normally takes a period of around 2 years for completion. The material is supplied by the customer
and hence the entity only renders a service. For this, the entity receives payments upfront and credits
the amount so received to “Income Received in Advance”. How should this “Income Received in
Advance” be classified, i.e., current or non- current?
Ans:
Ind AS 1 provides “Some current liabilities, such as trade payables and some accruals for employee
and other operating costs, are part of the working capital used in the entity’s normal operating cycle.
An entity classifies such operating items as current liabilities even if they are due to be settled more
than twelve months after the reporting period.”
In accordance with the above, income received in advance would be classified as current liability
since it is a part of the working capital, which the entity expects to earn within its normal operating
cycle.
Question 49
In December 2XX1 an entity entered into a loan agreement with a bank. The loan is repayable in three
equal annual instalments starting from December 2XX5. One of the loan covenants is that an amount

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equivalent to the loan amount should be contributed by promoters by March 24 2XX2, failing which
the loan becomes payable on demand. As on March 24, 2XX2, the entity has not been able to get the
promoter’s contribution. On March 25, 2XX2, the entity approached the bank and obtained a grace
period upto June 30, 2XX2 to get the promoter’s contribution.
The bank cannot demand immediate repayment during the grace period. The annual reporting period
of the entity ends on March 31, 2XX2.
(a) As on March 31, 2XX2, how should the entity classify the loan?
(b) Assume that in anticipation that it may not be able to get the promoter’s contribution by
due date, in February 2XX2, the entity approached the bank and got the compliance date
extended upto June 30, 2XX2 for getting promoter’s contribution. In this case will the loan
classification as on March 31, 2XX2 be different from (a) above?
Ans:
(a) Ind AS 1, inter alia, provides, “An entity classifies the liability as non-current if the lender
agreed by the end of the reporting period to provide a period of grace ending at least twelve
months after the reporting period, within which the entity can rectify the breach and during
which the lender cannot demand immediate repayment.” In the present case, following the
default, grace period within which an entity can rectify the breach is less than twelve months
after the reporting period. Hence as on March 31, 2XX2, the loan will be classified as current.
(b) Ind AS 1 deals with classification of liability as current or non-current in case of breach of a
loan covenant and does not deal with the classification in case of expectation of breach. In
this case, whether actual breach has taken place or not is to be assessed on June 30, 2XX2,
i.e., after the reporting date. Consequently, in the absence of actual breach of the loan
covenant as on March 31, 2XX2, the loan will retain its classification as non-current.
Question 50
OMN Ltd has a subsidiary MN Ltd. OMN Ltd provides a loan to MN Ltd at 8% interest to be paid
annually. The loan is required to be paid whenever demanded back by OMN Ltd.
How should the loan be classified in the financial statements of OMN Ltd? Will it be any different for
MN Ltd?
Ans: The demand feature might be primarily a form of protection or a tax-driven feature of the
loan. Both parties might expect and intend that the loan will remain outstanding for the
foreseeable future. If so, the instrument is, in substance, long-term in nature, and accordingly,
OMN Ltd would classify the loan as a non-current asset.
However, OMN Ltd would classify the loan as a current asset if both the parties intend that it
will be repaid within 12 months of the reporting period.
MN Ltd would classify the loan as current because it does not have the right to defer
repayment for more than 12 months, regardless of the intentions of both the parties.
The classification of the instrument could affect initial recognition and subsequent
measurement. This might require the entity’s management to exercise judgement, which
could require disclosure under judgements and estimates.
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IND AS 34
Question 51
To comply with listing requirements and other statutory obligations Quaker Ltd. prepares interim
financial reports at the end of each quarter. The company has brought forward losses of Rs. 700 lakhs
under Income Tax Law, of which 90% is eligible for set off as per the recent verdict of the Court, that
has attained finality. No Deferred Tax Asset has been recognized on such losses in view of the
uncertainty over its eligibility for set off. The company has reported quarterly earnings of Rs. 700
lakhs and Rs. 300 lakhs respectively for the first two quarters of Financial year 2013-14 and
·anticipates a net earning of Rs. 800 lakhs in the coming half year ended March 2014 of which Rs. 100
lakhs will be the loss in the quarter ended Dec. 2013. The tax rate for the company is 30% with a 10%
surcharge.
You are required to calculate the amount of Tax Expense to be reported for each quarter of financial
year 2013-14.
Ans: Estimated tax liability on annual income
= [Income Rs.1,800 lakhs less b/f losses Rs. 630 lakhs (90% of 700)] x 33%
= 33% of Rs. 1,170 lakhs = Rs. 386.10 lakhs
As per Para 29(c) of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised in
each interim period based on the best estimate of the weighted average annual income tax
rate expected for the full financial year.
Thus, estimated weighted average annual income tax rate = Rs. 386.10 lakhs divided by Rs.
1,800 lakhs=21.45%
Tax expense to be recognised in each quarter
Rs. in lakhs
Quarter I – Rs. 700 lakhs x 21.45% 150.15
Quarter II – Rs. 300 lakhs x 21.45% 64.35
Quarter III – (Rs. 100 lakhs) x 21.45% (21.45)
Quarter IV – Rs. 900 lakhs x 21.45% 193.05
Question 52
Antarbarti Limited reported a Profit Before Tax (PBT) of Rs. 4 lakhs for the third quarter ending 30-
09-2011. On enquiry you observe the following, give the treatment required under AS 25:
(i) Dividend income of Rs. 4 lakhs received during the quarter has been recognized to the
extent of Rs. 1 lakh only.
(ii) 80% of sales promotion expenses Rs. 15 lakhs incurred in the third quarter has been
deferred to the fourth quarter as the sales in the last quarter is high.
(iii) In the third quarter, the company changed depreciation method from WDV to SLM, which
resulted in excess depreciation of Rs. 12 lakhs. The entire amount has been debited in the
third quarter, though the share of the third quarter is only Rs. 3 lakhs.

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(iv) Rs. 2 lakhs extra-ordinary gain received in third quarter was allocated equally to the third
and fourth quarter.
(v) Cumulative loss resulting from change in method of inventory valuation was recognized
in the third quarter of Rs. 3 lakhs. Out of this loss Rs. 1 lakh relates to previous quarters.
(vi) Sale of investment in the first quarter resulted in a gain of Rs. 20 lakhs. The company had
apportioned this equally to the four quarters.
Prepare the adjusted profit before tax for the third quarter.
Ans: As per IND AS 34“Interim Financial Reporting”, seasonal or occasional revenue and cost within
a financial year should not be deferred as of interim date untill it is appropriate to defer at the
end of the enterprise’s financial year. Therefore dividend income, extra-ordinary gain, and gain
on sale of investment received during 3rd quarter should be recognised in the 3rd quarter only.
Similarly, sales promotion expenses incurred in the 3rd quarter should also be charged in the
3rd quarter only.
Further, as per the standard, if there is change in the accounting policy within the current
financial year, then such a change should be applied retrospectively by restating the financial
statements of prior interim periods of the current financial year. The change in the method of
depreciation is a change in the accounting estimates and inventory valuation is a change in the
accounting policy.
Therefore, the prior interim periods’ financial statements should be restated by applying the
change in the method of valuation retrospectively. Accordingly, the adjusted profit before tax
for the 3rd quarter will be as follows: Statement showing Adjusted Profit Before Tax for the
third quarter
(Rs. in lakhs)
Profit before tax (as reported) 4
Add: Dividend income RRs. (4-1) lakhs 3
Depreciation charged in the 3rd quarter, due to change in the
method, should be applied prospectively -
Extra ordinary gain R Rs. (2-1) lakhs 1
Cumulative loss due to change in the method of inventory valuation
should be applied retrospectively Rs. (3-2) lakhs 1
Less: Sales promotion expenses (80% of Rs. 15 lakhs) (12)
Gain on sale of investment (occasional gain should not be deferred) (5)
Adjusted Profit before tax for the third quarter (8)
Question 53
An entity reports quarterly, earns Rs. 1,50,000 pre-tax profit in the first quarter but expects to
incur losses of Rs. 50,000 in each of the three remaining quarters. The entity operates in a jurisdiction
in which its estimated average annual income tax rate is 30%.
The management believes that since the entity has zero income for the year, its income-tax expense
for the year will be zero. State whether the management’s views are correct. If not, then
calculate the tax expense for each quarter as well as for the year as per Ind AS 34.

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Ans. As per para 30 (c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is recognised
in each interim period based on the best estimate of the weighted average annual income tax
rate expected for the full financial year.
Accordingly, the management’s contention that since the net income for the year will be zero
no income tax expense shall be charged quarterly in the interim financial report, is not
correct.
The following table shows the correct income tax expense to be reported each quarter in
accordance with Ind AS 34:

Period Pre-tax earnings (in) Effective tax rate Tax expense (in
Rs.)
First Quarter 1,50,000 30% 45,000
Second Quarter (50,000) 30% (15,000)
Third Quarter (50,000) 30% (15,000)
Fourth Quarter (50,000) 30% (15,000)
Annual 0 0

IND AS 8
Question 54:
Entity ABC acquired a building for its administrative purposes and presented the same as property,
plant and equipment (PPE) in the financial year 2011- 12. During the financial year 2012- 13, it
relocated the office to a new building and leased the said building to a third party. Following the
change in the usage of the building, Entity ABC reclassified it from PPE to investment property in the
financial year 2012- 13. Should Entity ABC account for the change as a change in accounting policy?
Solution: Paragraph 16(a) of Ind AS 8 provides that the application of an accounting policy for
transactions, other events or conditions that differ in substance from those previously occurring are
not changes in accounting policies.
As per Ind AS 16, ‘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.”
As per Ind AS 40, ‘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.”
As per the above definitions, whether a building is an item of property, plant and equipment (PPE) or
an investment property for an entity depends on the purpose for which it is held by the entity. It is
thus possible that due to a change in the purpose for which it is held, a building that was previously

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classified as an item of property, plant and equipment may warrant reclassification as an investment
property, or vice versa. Whether a building is in the nature of PPE or investment property is
determined by applying the definitions of these terms from the perspective of that entity. Thus, the
classification of a building as an item of property, plant and equipment or as an investment property
is not a matter of an accounting policy choice. Accordingly, a change in classification of a building
from property, plant and equipment to investment property due to change in the purpose for which
it is held by the entity is not a change in an accounting policy.
Question 55
ABC changed its accounting policy for inventory in 2016-2017. Prior to the change, inventory had
been valued using the first in first out method (FIFO) . However, it was felt that in order to match
current practice and to make the financial statements more relevant and reliable a weighted average
valuation model should be used.
The effect of the change on the valuation of inventory was as follows:
• 31st March, 2015 - Increase of Rs. 10 million
• 31st March, 2016 - Increase of Rs. 15 million
• 31st March, 2017- Increase of Rs. 20 million
Profit or loss under the FIFO valuation model are as follows: Rs. in million
2016-2017 2015-2016
Revenue 324 296
Cost of sales (173) (164)
Gross profit 151 132
Expenses (83) (74)
Profit 68 58

Retained earnings at 31st March, 2015 were Rs. 423 million.

Present the change in accounting policy in the profit or loss and produce an extract of the
statement of changes in equity in accordance with Ind AS 8.
Ans: Profit or loss under weighted average valuation are as follows: Rs. in million
2017 2016 (Restated)
Revenue 324 296
Cost of sales (168) (159)
Gross profit 156 137
Expenses (83) (74)
Profit 73 63

Statement of changes in equity (extract) Rs. in million

Retained Retained earnings
earnings (Original)
At 1st April, 2015 423 423
Change in inventory valuation policy 10 -

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At 1st April, 2015 (Restated) 433 -

Profit for 2015-2016 63 58
At 31st March, 2016 496 481
Profit for 2016-2017 73 68
At 31st March, 2017 569 549

Question 56
1. During 20X2, Beta Ltd. discovered that some products that had been sold during 20X1
were incorrectly included in inventory at March 31, 20X1 at Rs.6,500.
2 Beta’s accounting records for 20X2 show sales of Rs. 1,04,000, cost of goods sold of
Rs.86,500 (including Rs. 6,500 for the error in opening inventory), and income taxes of Rs.
5,250.
3. In 20X1, Beta Ltd. reported:
• Sales of Rs. 73,500
• Cost of goods sold of Rs. 53,500
• Profit before income taxes of Rs. 20,000
• Income taxes of Rs. 6,000
• Profit of Rs. 14,000
4. 20X1 opening retained earnings was Rs. 20,000 and closing retained earnings was Rs.
34,000.
5. Beta’s income tax rate was 30 per cent for 20X2 and 20X1. It had no other income or
expenses.
6. Beta Ltd. had Rs. 5,000 of share capital throughout, and no other components of equity
except for retained earnings. Its shares are not publicly traded and it does not disclose
earnings per share.
You are required to prepare relevant extract from the statement of profit and loss and
statement of changes in equity. Also what should be disclosed in the notes.
Ans: Beta Ltd.
Extract from the statement of profit and loss (Amount in Rs.)
20X2 Restated 20X1
Sales 104,000 73,500
Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
Income taxes (7,200) (4,050)
Profit 16,800 9,450

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Beta Ltd.
Statement of changes in equity (Amount in Rs.)
Share Capital Retained Earnings Total
Balance as at March 31, 20X0 5,000 20,000 25,000
Profit for the year ended March 31, 20X1, as restated 9,450
9,450
Balance as at March 31, 20X1 5,000 29,450 34,450
Profit for the year ended March 31, 20X2 16,800 16,800
Balance as at March 31, 20X2 5,000 46,250 51,250
Extract from the notes:
Some products that had been sold in 20X0-20X1 were incorrectly included in inventory at
March 31, 20X1 at Rs. 6,500. The financial statements of March 31, 20X1 have been restated to
correct this error. The effect of the restatement on those financial statements is as summarised
above. There is no effect in March 31, 20X2.
Question 57
While preparing the annual financial statements for the year ended 31st March, 2013, an entity
discovers that a provision for constructive obligation for payment of bonus to selected employees in
corporate office (material in amount) which was required to be recognised in the annual financial
statements for the year ended 31st March, 2011 was not recognised due to oversight of facts. The
bonus was paid during the financial year ended 31st March, 2012 and was recognised as an expense
in the annual financial statements for the said year. Would this situation require retrospective
restatement of comparatives considering that the error was material?
Solution: As per paragraph 41 of Ind AS 8, errors can arise in respect of the recognition,
measurement, presentation or disclosure of elements of financial statements. Financial statements
do not comply with Ind AS if they contain either material errors or immaterial errors made
intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows. Potential current period errors discovered in that period are corrected
before the financial statements are approved for issue. However, material errors are sometimes not
discovered until a subsequent period, and these prior period errors are corrected in the comparative
information presented in the financial statements for that subsequent period.
As per paragraph 40A of Ind AS 1, an entity shall present a third balance sheet as at the beginning of
the preceding period in addition to the minimum comparative financial statements if, inter alia, it
makes a retrospective restatement of items in its financial statements and the retrospective
restatement has a material effect on the information in the balance sheet at the beginning of the
preceding period.
In the given case, expenses for the year ended 31st March, 2011 and liabilities as at 31st March,
2011 were understated because of non-recognition of bonus expense and related provision.

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Expenses for the year ended 31st March, 2012, on the other hand, were overstated to the same
extent because of recognition of the aforesaid bonus as expense for the year. To correct the
above errors in the annual financial statements for theyear ended 31st March, 2013, the entity
should:
(a) restate the comparative amounts (i.e., those for the year ended 31st March, 2012) in the
statement of profit and loss; and
(b) present a third balance sheet as at the beginning of the preceding period (i.e., as at 1st April,
2011) wherein it should recognise the provision for bonus and restate the retained earnings.

IND AS 7
Question 58
Z Ltd. has no foreign currency cash flow for the year 2017. It holds some deposit in a bank in the
USA. The balances as on 31.12.2017 and 31.12.2018 were US$ 100,000 and US$ 102,000
respectively. The exchange rate on December 31, 2017 was US$1 = Rs. 45. The same on 31.12.2018
was US$1 = Rs. 50. The increase in the balance was on account of interest credited on 31.12.2018.
Thus, the deposit was reported at Rs. 45,00,000 in the balance sheet as on December
31, 2017. It was reported at Rs. 51,00,000 in the balance sheet as on 31.12.2018. How these
transactions should be presented in cash flow for the year ended 31.12.2018 as per Ind AS 7?
Ans: The profit and loss account was credited by Rs. 1,00,000 (US$ 2000 × Rs. 50) towards interest
income. It was credited by the exchange difference of US$ 100,000 × (Rs. 50 - Rs.45) that is,
Rs. 500,000. In preparing the cash flow statement, Rs. 500,000, the exchange difference,
should be deducted from the ‘net profit before taxes, and extraordinary item’. However, in
order to reconcile the opening balance of the cash and cash equivalents with its closing
balance, the exchange difference Rs. 500,000, should be added to the opening balance in
note to cash flow statement.
Cash flows arising from transactions in a foreign currency shall be recorded in Z Ltd.’s
functional currency by applying to the foreign currency amount the exchange rate between
the functional currency and the foreign currency at the date of the cash flow.
Question 59
Company A acquires 70% of the equity stake in Company B on July 20, 20X1. The consideration paid
for this transaction is as below:
(a) Cash consideration of Rs. 15,00,000
(b) 200,000 equity shares having face of Rs. 10 and fair value of Rs. 15 per share.
On the date of acquisition, Company B has cash and cash equivalent balance of Rs. 2,50,000
in its books of account.
On October 10, 20X2, Company A further acquires 10% stake in Company B for cash
consideration of Rs. 8,00,000.
Advise how the above transactions will be disclosed/presented in the statement of cash flows
as per Ind AS 7.

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Ans: As per para 39 of Ind AS 7, the aggregate cash flows arising from obtaining control of
subsidiary shall be presented separately and classified as investing activities.
As per para 42 of Ind AS 7, the aggregate amount of the cash paid or received as consideration
for obtaining subsidiaries is reported in the statement of cash flows net of cash and cash
equivalents acquired or disposed of as part of such transactions, events or changes in
circumstances.
Further, investing and financing transactions that do not require the use of cash or cash
equivalents shall be excluded from a statement of cash flows. Such transactions shall be
disclosed elsewhere in the financial statements in a way that provides all the relevant
information about these investing and financing activities.
As per para 42A of Ind AS 7, cash flows arising from changes in ownership interests in a
subsidiary that do not result in a loss of control shall be classified as cash flows from financing
activities, unless the subsidiary is held by an investment entity, as defined in Ind AS 110, and
is required to be measured at fair value through profit or loss. Such transactions are
accounted for as equity transactions and accordingly, the resulting cash flows are classified in
the same way as other transactions with owners.
Considering the above, for the financial year ended March 31, 20X2 total consideration of Rs.
15,00,000 less Rs. 250,000 will be shown under investing activities as “ Acquisition of the
subsidiary (net of cash acquired)”.
There will not be any impact of issuance of equity shares as consideration in the cash flow
statement however a proper disclosure shall be given elsewhere in the financial statements
in a way that provides all the relevant information about the issuance of equity shares for
non-cash consideration.
Further, in the statement of cash flows for the year ended March 31, 20X3, cash consideration
paid for the acquisition of additional 10% stake in Company B will be shown under financing
activities.
Question 60
A Ltd., whose functional currency is Indian Rupee, had a balance of cash and cash equivalents of Rs.
2,00,000, but there are no trade receivables or trade payables balances as on 1st April, 2017. During
the year 2017-2018, the entity entered into the following foreign currency transactions:
1) A Ltd. purchased goods for resale from Europe for €2,00,000 when the exchange
rate was €1 = Rs. 50. This balance is still unpaid at 31st March, 2018 when the
exchange rate is €1 = Rs. 45. An exchange gain on retranslation of the trade
payable of Rs. 5,00,000 is recorded in profit or loss.
2) A Ltd. sold the goods to an American client for $ 1,50,000 when the exchange
rate was $1 = Rs. 40. This amount was settled when the exchange rate was $1 =
Rs. 42. A further exchange gain regarding the trade receivable is recorded in the
statement of profit or loss.
3) A Ltd. also borrowed €1,00,000 under a long-term loan agreement when the
exchange rate was €1 = Rs. 50 and immediately converted it to Rs. 50,00,000.
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The loan was retranslated at 31st March, 2018 @ Rs. 45, with a further exchange
gain recorded in the statement of profit or loss.
4) A Ltd. therefore records a cumulative exchange gain of Rs. 18,00,000 (10,00,000
+ 3,00,000 + 5,00,000) in arriving at its profit for the year.
5) In addition, A Ltd. records a gross profit of Rs. 10,00,000 (Rs. 60,00,000 – Rs.
50,00,000) on the sale of the goods.
6) Ignore taxation.
How cash flows arising from the above transactions would be reported in the statement of
cash flows of A Ltd. under indirect method?
Ans:
Statement of cash flows Particulars Amount (Rs.)
Cash flows from operating activities
Profit before taxation (10,00,000 + 18,00,000) 28,00,000
Adjustment for unrealised exchange gains/losses:
Foreign exchange gain on long term loan [€ 1,00,000 x Rs. (50 – 45)] (5,00,000)
Decrease in trade payables [2,00,000 x Rs. (50 – 45)] (10,00,000)
Operating Cash flow before working capital changes 13,00,000
Changes in working capital (Due to increase in trade payables) 50,00,000
Net cash inflow from operating activities 63,00,000
Cash inflow from financing activity 50,00,000
Net increase in cash and cash equivalents 1,13,00,000
Cash and cash equivalents at the beginning of the period 2,00,000
Cash and cash equivalents at the end of the period 1,15,00,000

IND AS 108
Question 61
X Ltd. has identified the following business components.
Segment Revenue (Rs. ) Profit (Rs. ) Assets (Rs. )
External Internal
Pharma 97,00,000 Nil 20,00,000 55,00,000
FMCG Nil 4,00,000 2,50,000 25,00,000
Ayurveda 3,00,000 Nil 2,00,000 4,00,000
Others 8,00,000 41,00,000 5,50,000 6,00,000
Total for the entity 1,08,00,000 45,00,000 30,00,000 90,00,000

Which of the segments would be reportable as per the criteria prescribed in Ind AS108?
Ans: Quantitative thresholds are calculated below:
Segments Pharma FMCG Ayurveda Others
% segment sales to total sales 63.40 2.61 1.96 32.03

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% segment profit to total profits 66.67 8.33 6.67 18.33

% segment assets to total assets 61.11 27.78 4.44 6.67
Segment Pharma would separately reportable since they meet all three size criteria, though
any one criteria is required. FMCG segment does not satisfy the revenue and profit test but
does satisfy the asset test. So it would be separately reportable. Ayurveda segment does not
meet any threshold. It may not be classified as reportable segment.
An entity may combine information about operating segments that do not meet the
quantitative thresholds with information about other operating segments that do not meet
the quantitative thresholds to produce a reportable segment only if the operating segments
have similar economic characteristics and share a majority of the aggregation criteria.
If the total external revenue reported by operating segments constitutes less than 75% of the
entity’s revenue, additional operating segments should be identified as reportable segments
(even if they do not meet the criteria) until at least 75% of the entity’s revenue is included in
reportable segments.
Question 62
X Ltd. is operating in coating industry. Its business segment comprises coating and others consisting
of chemicals, polymers and related activities. Certain information for financial year 20X1-20X2 is
given below: (Rs. in lakhs)
Segments External sale Tax Other operating Result Asset Liabilities
income
Coating 2,00,000 5,000 40,000 10,000 50,000 30,000
Others 70,000 3,000 15,000 4,000 30,000 10,000

Additional information:
1. Unallocated revenue net of expenses is Rs. 30,00,00,000
2. Interest and bank charges is Rs. 20,00,00,000
3. Income tax expenses is Rs. 20,00,00,000 (current tax Rs. 19,50,00,000 and deferred
tax Rs. 50,00,000)
4. Investments Rs. 1,00,00,00,000 and unallocated assets Rs. 1,00,00,00,000.
5. Unallocated liabilities, Reserve & surplus and share capital are Rs. 2,00,00,00,000, Rs.
3,00,00,00,000 &Rs. 1,00,00,00,000 respectively.
6. Depreciation amounts for coating & others are Rs. 10,00,00,000 and Rs. 3,00,00,000
respectively.
7. Capital expenditure for coating and others are Rs. 50,00,00,000 and Rs. 20,00,00,000
respectively.
8. Revenue from outside India is Rs. 3,00,00,00,000 and segment asset outside India Rs.
1,00,00,00,000.

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Based on the above information, how X Ltd. would disclose information about reportable
segment revenue, profit or loss, assets and liabilities for financial year 20X1-20X2?
Ans: Segment information
(A) Information about operating segment
(1) the company’s operating segments comprise :
Coatings: consisting of decorative, automotive, industrial paints and related activities.
Others: consisting of chemicals, polymers and related activities.
(2) Segment revenues, results and other information.
(Rs. in Lakhs)
Revenue Coating Others Total
1 External sales (gross) 2,00,000 70,000 2,70,000
Tax (5,000) (3,000) (8,000)
External sales (net) 1,95,000 67,000 2,62,000
Other operating income 40,000 15,000 55,000
Total Revenue 2,35,000 82,000 3,17,000
2 Results
Segment results 10,000 4,000 14,000
Unallocated income (net of unallocated 3,000
expenses)
Profit from operation before 17,000
interest, taxation and exceptional items
Interest and bank charges 2,000
Profit before exceptional items 15,000
Exceptional items Nil
Profit before taxation 15,000
Income Taxes
-Current taxes 1,950
-Deferred taxes 50
Profit after taxation 13,000
3 Other Information
(a) Assets
Segment Assets 50,000 30,000 80,000
Investments 10,000
Unallocated assets 10,000
Total Assets 1,00,000
(b) Liabilities/Shareholder’s funds
Segment liabilities 30,000 10,000 40,000
Unallocated liabilities 20,000
Share capital 10,000
Reserves and surplus 30,000
Total liabilities/shareholder’s funds 1,00,000

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(c) Others
Capital Expenditure 5,000 2,000
Depreciation 1,000 300
Geographical Information
India (Rs. ) Outside India Total (Rs. )
(Rs. )
Revenue 2,87,000 30,000 3,17,000
Segment assets 70,000 10,000 80,000
Capital expenditure 7,000 7,000

Notes:
(i) The operating segments have been identified in line with the Ind AS 108, taking into
account the nature of product, organisation structure, economic environment and
internal reporting system.
(ii) Segment revenue, results, assets and liabilities include the respective amounts
identifiable to each of the segments. Unallocable assets include unallocable fixed
assets and other current assets. Unallocable liabilities include unallocable current
liabilities and net deferred tax liability.
(iii) Corresponding figures for previous year have not been provided. However, in practical
scenario the corresponding figures would need to be given.

IND AS 105
Question 63
CK Ltd. prepares the financial statement under Ind AS for the quarter year ended 30th June, 2018.
During the 3 months ended 30th June, 2018 following events occurred:
On 1st April, 2018, the Company has decided to sell one of its divisions as a going concern following
a recent change in its geographical focus. The proposed sale would involve the buyer acquiring the
non-monetary assets (including goodwill) of the division, with the Company collecting any
outstanding trade receivables relating to the division and settling any current liabilities.
On 1st April, 2018, the carrying amount of the assets of the division were as follows:
- Purchased Goodwill – Rs. 60,000
- Property, Plant & Equipment
(average remaining estimated useful life two years) - Rs. 20,00,000
- Inventories - Rs. 10,00,000
From 1st April, 2018, the Company has started to actively market the division and has received
number of serious enquiries. On 1st April, 2018 the directors estimated that they would receive
Rs. 32,00,000 from the sale of the division. Since 1st April, 2018, market condition has improved
and as on 1st August, 2018 the Company received and accepted a firm offer to purchase the division
for Rs. 33,00,000.

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The sale is expected to be completed on 30th September, 2018 and Rs. 33,00,000 can be assumed to
be a reasonable estimate of the value of the division as on 30th June, 2018. During the period from
1st April to 30th June inventories of the division costing Rs. 8,00,000 were sold for Rs. 12,00,000. At
30th June, 2018, the total cost of the inventories of the division was Rs. 9,00,000. All of these
inventories have an estimated net realisable value that is in excess of their cost.
The Company has approached you to suggest how the proposed sale will be reported in the interim
financial statements for the quarter ended 30th June, 2018 giving relevant explanations.
Answer: The decision to offer the division for sale on 1st April, 2018 means that from that date the
division has been classified as held for sale. The division available for immediate sale, is being
actively marketed at a reasonable price and the sale is expected to be completed within one year.
The consequence of this classification is that the assets of the division will be measured at the
lower of their existing carrying amounts and their fair value less cost to sell. Here the division shall
be measured at their existing carrying amount ie Rs. 30,60,000 since it is less than the fair value
less cost to sell Rs. 32,00,000.
The increase in expected selling price will not be accounted for since earlier there was no impairment
to division held for sale.
The assets of the division need to be presented separately from other assets in the balance sheet.
Their major classes should be separately disclosed either on the face of the balance sheet or in the
notes.
The Property, Plant and Equipment shall not be depreciated after 1st April, 2018 so its carrying value
at 30th June, 2018 will be Rs. 20,00,000 only. The inventories of the division will be shown at Rs.
9,00,000.
The division will be regarded as discontinued operation for the quarter ended 30th June, 2018. It
represents a separate line of business and is held for sale at the year end.
The Statement of Profit and Loss should disclose, as a single amount, the post-tax profit or loss of the
division on classification as held for sale.
Further, as per Ind AS 33, EPS will also be disclosed separately for the discontinued operation.
Question 64
A Ltd. is to sell a non-current asset, being a piece of land. The piece of land has been contaminated
and will require the entity to carry out Rs. 100,000 of work in order to rectify the contamination. If
the land was not contaminated, it could be sold for Rs. 300,000. With the contamination, it is worth
only Rs. 200,000. The work that is needed to rectify the contamination will extend the period of sale
by one year from the date the land is first marketed for sale.
Required:
In the following situations, examine with suitable reasons whether land can be classified as held for
sale in accordance with Ind AS 105: Non-current assets held for sale and discontinued operations
Situation 1 The land is marketed for Rs. 300,000 and A Ltd. was not aware of the contamination till
the time a firm purchase commitment was signed with a purchaser. The purchaser found the

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contamination through a survey. The purchaser signed the firm purchase commitment on condition
that the contamination damage will be rectified.
Situation 2 A Ltd. marketed the land for Rs. 300,000, knowing about the contamination when the
proposal to sale the land went in the market. However, A Ltd. marketed it with an agreement that it
would carry out the rectification work within few months from signing the firm purchase
commitment.
Situation 3A Ltd. knew about the contamination prior to float the proposal to sell the land and
markets it for Rs. 200,000 with no obligation on itself to rectify or fix the contamination.
Ans: Situation 1
As far as the entity was aware, the land was marketed and available for immediate sale in its
present condition at a reasonable price. The event extending the one-year period was
imposed by the buyer after the firm purchase commitment was received and the entity is
taking steps to address it. The land qualifies as held for sale and continues to do so after it is
required to carry out the rectification work.
Situation 2
The land is not available for immediate sale in its present condition when it is first marketed.
It is being marketed at a price that involves further work to the land. It cannot be classified as
held for sale when it is first marketed. It also cannot be classified as held for sale when a
purchase commitment is received, because even then it is not for sale in its present condition
and no conditions have been unexpectedly imposed. The land will not be classified as held
for sale until the rectification work is actually carried out.
Situation 3
The land in this case is available for immediate sale in its present condition and it would qualify
to be classified as held for sales since it is being marketed at reasonable price.
Question 65
The accountant of PB Limited decided to treat the plant as held for sale until the demand picks up
and accordingly measures the plant at lower of carrying amount and fair value less cost to sell. The
accountant has also stopped charging depreciation for rest of the period considering the plant as held
for sale. The fair value less cost to sell on 30th September, 2017 and 31st March, 2018 was Rs. 13.5
lakh and Rs. 12 lakh respectively.
The accountant has made the following working:
Carrying amount on initial classification as held for sale Rs. Rs.
Purchase price of Plant 24,00,000
Less: Accumulated Depreciation [(Rs. 24,00,000/8)x2.5 years] 7,50,000 16,50,000
Fair value less cost to sell as on 31st March, 2017 12,00,000
The value lower of the above two 12,00,000

Balance Sheet extracts as on 31st March, 2018

Particulars Rs.
Assets
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Current Assets
Other Current Assets
Assets classified as held for sale 12,00,000

Required:
Analyze whether the above accounting treatment is in compliance with the Ind AS. If not, advise
the correct treatment showing necessary workings. [Nov 2018]
Answer: As per Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’, an entity
shall classify a non-current asset as held for sale if its carrying amount will be recovered principally
through a sale transaction rather than through continuing use.
For asset to be classified as held for sale, it must be available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of such assets and its sale must
be highly probable. In such a situation, an asset cannot be classified as a non-current asset held for
sale, if the entity intends to sell it in a distant future.
For the sale to be highly probable, the appropriate level of management must be committed to a
plan to sell the asset, and an active programme to locate a buyer and complete the plan must have
been initiated. Further, the asset must be actively marketed for sale at a price that is reasonable in
relation to its current fair value. In addition, the sale should be expected to qualify for recognition as
a completed sale within one year from the date of classification and actions required to complete the
plan should indicate that it is unlikely that significant changes to the plan will be made or that the
plan will be withdrawn.
Further Ind AS 105 also states that an entity shall not classify as held for sale a non-current asset that
is to be abandoned. This is because its carrying amount will be recovered principally through
continuing use.
An entity shall not account for a non-current asset that has been temporarily taken out of use as if it
had been abandoned.
In addition to Ind AS 105, Ind AS 16 states that depreciation does not cease when the asset becomes
idle or is retired from active use unless the asset is fully depreciated.
The Accountant of PB Ltd. has treated the plant as held for sale and measured it at the fair value less
cost to sell. Also, the depreciation has not been charged thereon since the date of classification as
held for sale which is not correct and not in accordance with Ind AS 105 and Ind AS 16.
Accordingly, the manufacturing plant should neither be treated as abandoned asset nor as held for
sale because its carrying amount will be principally recovered through continuous use. PB Ltd. shall
not stop charging depreciation or treat the plant as held for sale because its carrying amount will be
recovered principally through continuing use to the end of their economic life.
The working of the same for presenting in the balance sheet will be as follows:
Calculation of carrying amount as on 31stMarch, 2018 Rs.
Purchase Price of Plant 24,00,000
Less: Accumulated depreciation (24,00,000/ 8 years) x 3 years (9,00,000)
Carrying amount before impairment 15,00,000
Less: Impairment loss (Refer Working Note) (3,00,000)
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Revised carrying amount after impairment 12,00,000

Balance Sheet extracts as on 31stMarch 2018

Assets Rs.
Non-Current Assets
Property, Plant and Equipment 12,00,000

Working Note:
Fair value less cost to sell of the Plant = Rs. 12,00,000
Value in Use (not given) or = Nil (since plant has temporarily not been used for manufacturing
due to decline in demand)
Recoverable amount = higher of above i.e. Rs. 12,00,000
Impairment loss = Carrying amount – Recoverable amount
Impairment loss = Rs. 15,00,000 - Rs. 12,00,000 = Rs. 3,00,000.

Accounting for CSR

Question 66
State whether any unspent amount of CSR expenditure (any shortfall in the amount that was
expected to be spent as per the provisions of the Companies Act on CSR activities) at the reporting
date shall be provided for? Also state in case the excess amount has been spent (ie more than what
is required as per the provisions of the Companies Act on CSR activities), can it be carry forward to
set-off against future CSR expenditure.
Ans:
(i) Treatment of any unspent amount of CSR expenditure
• Section 135 (5) of the Companies Act, 2013, requires that the Board of every eligible
company, “shall ensure that the company spends, in every financial year, at least 2% of
the average net profits of the company made during the three immediately preceding
financial years or where the company has not completed the period of three financial
years since its incorporation, during such immediately preceding financial years, in
pursuance of its Corporate Social Responsibility Policy”. A proviso to this Section states
that “if the company fails to spend such amount, the Board shall, in its report specify
the reasons for not spending the amount and, unless the unspent amount relates to any
ongoing project, transfer such unspent amount to a Fund specified in Schedule VII,
within a period of six months of the expiry of the financial year”.
• Any amount remaining unspent, pursuant to any ongoing project, undertaken by a
company in pursuance of its Corporate Social Responsibility Policy, shall be transferred
by the company within a period of thirty days from the end of the financial year to a
special account to be opened by the company in that behalf for that financial year in
any scheduled bank to be called the Unspent Corporate Social Responsibility Account.
Such amount shall be spent by the company in pursuance of its obligation towards the
Corporate Social Responsibility Policy within a period of three financial years from the
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date of such transfer, failing which, the company shall transfer the same to a Fund
specified in Schedule VII, within a period of thirty days from the date of completion of
the third financial year.
• If a company contravenes the provisions, the company shall be punishable with fine
which shall not be less than fifty thousand rupees but which may extend to twenty- five
lakh rupees and every officer of such company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not
be less than fifty thousand rupees but which may extend to five lakh rupees, or with
both.
(ii) Treatment of excess amount spent on CSR Activities
Since 2% of average net profits of immediately preceding three years is the minimum
amount which is required to be spent under section 135 (5) of the Act, the excess
amount cannot be carried forward for set off against the CSR expenditure required
Question 67
ABC Ltd. is a company which has a net worth of INR 200 crores, it manufactures rubber parts for
automobiles. The sales of the company are affected due to low demand of its products.
The previous year’s financials state: (INR in Crores)
March 31, 20X4 March 31, 20X3 March 31, 20X2 March 31, 20X1
(Current year)
Net Profit 3.00 8.50 4.00 3.00
Sales (turnover) 850 950 900 800
Required
Does the Company have an obligation to form a CSR committee since the applicability criteria is not
satisfied in the current financial year? [May 2018]
Solution:
(i) As per section 135 of the Companies Act 2013
Every company having either
a. net worth of Rs. 500 crore or more, or
b. turnover of Rs. 1,000 crore or more or
c. a net profit of Rs. 5 crore or more
during immediate preceding financial year shall constitute a Corporate Social Responsibility
(CSR) Committee of the Board consisting of three or more directors (including at least one
independent director).

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(ii) A company which meets the net worth, turnover or net profits criteria in immediate preceding
financial years, will need to constitute a CSR Committee and comply with provisions of
sections 135 (2) to (5) read with the CSR Rules.
As per the criteria to constitute CSR committee -
1) Net worth greater than or equal to INR 500 Crores: This criterion is not satisfied.
2) Sales greater than or equal to INR 1000 Crores: This criterion is not satisfied.
3) Net Profit greater than or equal to INR 5 Crores: This criterion is satisfied in financial
year ended March 31, 20X3.
Hence, the Company will be required to form a CSR committee.
Question 68
After the havoc caused by flood in Jammu and Kashmir, a group of companies undertakes during the
period from October, 20X1 to December, 20X1 various commercial activities, with considerable
concessions/discounts, along the related affected areas. The management intends to highlight the
expenditure incurred on such activities as expenditure incurred on activities undertaken to discharge
corporate social responsibility, while publishing its financial statements for the year 20X1-20X2.
Required: State whether the management’s intention is correct or not and why?
Solution: Corporate Social Responsibility (CSR) Reporting is an information communiqué with respect
to discharge of social responsibilities of corporate entity. Through ‘CSR Report’ the corporate
enterprises disclose the manner in which they are discharging their social responsibilities. More
specifically, it is addressed to the public or society at large, although it can be squarely used by other
user groups also.
Section 135 of the Companies Act, 2013 mandated the companies fulfilling the criteria mentioned in
the said section to spend certain amount of their profit on activities as specified in the Schedule VII
to the Act. Companies not falling within that criteria can also spend on CSR activities voluntarily.
However, besides the requirements of constitution of a CSR committee and a CSR policy, the
corporate entities should also take care that expenditure incurred for CSR should not be the
expenditure incurred for the activities in the ordinary course of business. If expenditure incurred is
for the activities in the ordinary course of business, then it will not be qualified as expenditure
incurred on CSR activities.
Here, it is assumed that the commercial activities performed at concessional rates are the activities
done in the ordinary course of business of the companies. Therefore, the intention of the
management to highlight the expenditure incurred on such commercial activities in its financial
statements as the expenditure incurred on activities undertaken to discharge CSR, is not correct.

IND AS 12
Question 69
An entity is finalising its financial statements for the year ended 31st March, 20X2. Before 31st
March, 20X2, the government announced that the tax rate was to be amended from 40 per cent
to 45 per cent of taxable profit from 30th June, 20X2.

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The legislation to amend the tax rate has not yet been approved by the legislature. However, the
government has a significant majority and it is usual, in the tax jurisdiction concerned, to regard an
announcement of a change in the tax rate as having the substantive effect of actual enactment (i.e.
it is substantively enacted).
After performing the income tax calculations at the rate of 40 per cent, the entity has the following
deferred tax asset and deferred tax liability balances:
Deferred tax asset Rs. 80,000
Deferred tax liability Rs. 60,000
Of the deferred tax asset balance, Rs. 28,000 related to a temporary difference. This deferred
tax asset had previously been recognised in OCI and accumulated in equity as a revaluation
surplus.
The entity reviewed the carrying amount of the asset in accordance with para 56 of Ind
AS 12 and determined that it was probable that sufficient taxable profit to allow utilisation
of the deferred tax asset would be available in the future.
Show the revised amount of Deferred tax asset & Deferred tax liability and present the
necessary journal entries. [RTP Nov 2019]
Ans: Calculation of Deductible temporary differences:
Deferred tax asset = Rs. 80,000
Existing tax rate = 40%
Deductible temporary differences = 80,000/40% =Rs. 2,00,000
Calculation of Taxable temporary differences:
Deferred tax liability = Rs. 60,000
Existing tax rate = 40%
Deductible temporary differences = 60,000 / 40% = Rs. 1,50,000
Of the total deferred tax asset balance of Rs. 80,000, Rs. 28,000 is recognized in OCI Hence,
Deferred tax asset balance of Profit & Loss is Rs. 80,000 - Rs. 28,000 = Rs. 52,000
Deductible temporary difference recognized in Profit & Loss is Rs. 1,30,000 (52,000 / 40%)
Deductible temporary difference recognized in OCI is Rs. 70,000 (28,000 / 40%) The adjusted
balances of the deferred tax accounts under the new tax rate are:
Deferred tax asset Rs.
Previously credited to OCI-equity Rs. 70,000 x 0.45 31,500
Previously recognised as Income Rs. 1,30,000 x 0.45 58,500
90,000
Deferred tax liability

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Previously recognized as expense Rs. 1,50,000 x 0.45 67,500

The net adjustment to deferred tax expense is a reduction of Rs. 2,500. Of this amount, Rs.
3,500 is recognised in OCl and Rs. 1,000 is charged to P&L.
The amounts are calculated as follows:

Carrying Carrying Increase

amount at amount at (decrease) in
45% 40% deferred tax
expense

Deferred tax assets

Previously credited to OCI-equity 31,500 28,000 (3,500)

Previously recognised as Income 58,500 52,000 (6,500)

Deferred tax liability 90,000 80,000 (10,000)

Previously recognized as expense 67,500 60,000 7,500

Net adjustment (2,500)

An alternative method of calculation is: Rs.

DTA shown in OCI Rs. 70,000 x (0.45 - 0.40) 3,500
DTA shown in Profit or Loss Rs. 1,30,000 x (0.45-0.40) 6,500
DTL shown in Profit or Loss Rs. 1,50,000 x (0.45 -0.40) 7,500
Journal Entries
Deferred tax asset 3,500
OCI –revaluation surplus 3,500
Deferred tax asset 6,500
Deferred tax expense 6,500
Deferred tax expense 7,500
Deferred tax liability 7,500
Alternatively, a combined journal entry may be passed as follows:
Deferred tax asset Dr. 10,000
Deferred tax expense Dr. 1,000
To OCI –revaluation surplus 3,500

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To Deferred tax liability 7,500

Question 70:
In March 2018, Pharma Ltd. acquires Dorman Ltd. in a business combination for a total cost of Rs.
12,000 lakhs. At that time Dorman Ltd.'s assets and liabilities are as follows:
Rs. in lakhs
Assets
Cash 780
Receivables (net) 5,200
Plant and equipment 7,000
Deferred tax asset 360
Liabilities
Payables 1,050
Borrowings 4,900
Employee entitlement liabilities 900
Deferred tax liability 300

The plant and equipment has a fair value of Rs. 8,000 lakhs and a tax written down value of Rs. 6,000
lakhs. The receivables are short-term trade receivables net of a doubtful debts allowance of Rs. 300
lakhs.
Bad debts are deductible for tax purposes when written off against the allowance account by Dorman
Ltd. Employee benefit liabilities are deductible for tax when paid.
Dorman Ltd. owns a popular brand name that meets the recognition criteria for intangible assets
under Ind AS 103 'Business Combinations’. Independent valuers have attributed a fair value of Rs.
4.300 lakhs for the brand. However, the brand does not have any cost for tax purposes and no tax
deductions are available for the same.
The tax rate of 30% can be considered for all items. Assume that unless otherwise stated, all items
have a fair value and tax base equal to their carrying amounts at the acquisition date.
You are required to:
1. Calculate deferred tax assets and liabilities arising from the business combination (do not
offset deferred tax assets and liabilities)
2. Calculate the goodwill that should be accounted on consolidation. (10 Marks)
Answer:
Breakdown of assets and liabilities acquired as part of the business combination, including deferred
taxes and goodwill.
Rs. In lakhs
Book Fair Tax base Taxable Deferred tax
value value (deductible) asset (liability) @
temporary 30%
difference

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Cash 780 7801 780 1 - -

Receivables 5,200 5,2001 5,5003 (300) 90
Plant and equipment 7,000 8,0002 6,0004 2,000 (600)
Brands 4,3002 -5 4,300 (1,290)
Goodwill (Balancing 2,1009
figure)
Deferred tax asset 360 3,607
Total assets 20,740
Payables (1,050) (1,050) (1,050) 1
1

Borrowings (4,900) (4,900) (4,900) 1

1

Employee Entitlement (900) (900) 1 -6 (900) 270

liabilities
Deferred tax liability (300) (1,890)
8

Total liabilities (8,740)

Consideration paid 12,000
Notes
(1) This amount has been derived from Dorman Ltd.'s Balance Sheet as it is stated that 'unless
otherwise stated, all items have a fair value and tax base equal to their carrying amounts in
Dorman Ltd.'s Balance Sheet at the acquisition date’.
(2) Stated fair value in the fact pattern (different to the carrying amount in Dorman Ltd.'s Balance
Sheet at the acquisition date).
(3) Because bad debts are only deductible when written off against the allowance account by
Dorman Ltd. the tax base of the receivables is their gross value, i.e., (Rs. 5,200 + Rs. 300) lakhs
allowance account.
(4) Tax written down value of the plant and equipment as stated in the fact pattern.
(5) As the brand name does not have a cost for tax purposes and no tax deduction is available in
relation to it, its tax base is nil.
(6) As the employee entitlement liabilities are only deductible for tax purposes when paid, their
tax base is nil.
(7) The aggregate deferred tax asset is Rs. 360 lakhs, comprised of Rs.90 lakhs in relation to the
receivables and Rs.270 lakhs in relation to the employee entitlement liabilities.
(8) The aggregate deferred tax liability is Rs. 1,890 lakhs calculated as follows:
Rs. In lakhs DTL amount in Dorman Deferred tax impact Total DTL in Pharma
Ltd.’s Balance Sheet of fair value Ltd’s consolidated
adjustments financial statements

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Plant and 300 300 600

equipment ([7,000-6,000] × 30%) ([1,000 × 30%)
Brand names 0 1,290 1,290
(4,300 × 30%)
TOTAL 300 1,590 1,890
(9) Goodwill is effectively the 'balancing item' in the equation, applying the requirements of lnd AS
103, para 32. The consideration transferred is Rs. 12,000 lakhs and the net of the acquisition
date amounts of the identifiable assets acquired and the liabilities assumed measured in
accordance with Ind AS 103, including the deferred tax assets and liabilities arising, is Rs. 9,900
lakhs.
Question 71
QA Ltd. is in the process of computation of the deferred taxes as per applicable Ind AS. QA Ltd. had
acquired 40% shares in GK Ltd. for an aggregate amount of Rs. 45 crores. The shareholding gives QA
Ltd. significant influence over GK Ltd. but not control and therefore the said interest in GK Ltd. is
accounted using the equity method. Under the equity method, the carrying value of investment in
GK Ltd. was Rs. 70 crores on 31st March, 2017 and Rs. 75 crores as on 31st March, 2018. As per the
applicable tax laws, profits recognised under the equity method are taxed if and when they are
distributed as dividend or the relevant investment is disposed of.
QA Ltd. wants you to compute the deferred tax liability as on 31st March, 2018 and the charge to the
Statement of Profit for the same. Consider the tax rate at 20%.
Ans. DTL created on accumulation of undistributed profits as on 31.3.2018
31st March, 2017 31st March, 2018
Carrying value 70 crore 75 crore
Value as per tax records 45 crore 45 crore
Tax base 45 crore 45 crore
Taxable temporary differences 25 crore 30 crore
Total Deferred tax liability @ 20% 5 crore 6 crore
Charged to P&L during the year 5 crore 1 crore
(6 crore – 5 crore)
Question 72
X Ltd. prepares consolidated financial statements to 31st March each year. During the year ended
31st March 2018, the following events affected the tax position of the group:
(i) Y Ltd., a wholly owned subsidiary of X Ltd., made a loss adjusted for tax purposes of Rs.
30,00,000. Y Ltd. is unable to utilise this loss against previous tax liabilities . Income-tax Act
does not allow Y Ltd. to transfer the tax loss to other group companies. However, it allows Y
Ltd. to carry the loss forward and utilise it against company’s future taxable profits. The

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directors of X Ltd. do not consider that Y Ltd. will make taxable profits in the foreseeable
future.
(ii) Just before 31st March, 2018, X Ltd. committed itself to closing a division after the year end,
making a number of employees redundant. Therefore X Ltd. recognised a provision for closure
costs of Rs. 20,00,000 in its statement of financial position as at 31st March, 2018. Income-
tax Act allows tax deductions for closure costs only when the closure actually takes place. In
the year ended 31 March 2019, X Ltd. expects to make taxable profits which are well in excess
of Rs. 20,00,000. On 31st March, 2018, X Ltd. had taxable temporary differences from other
sources which were greater than Rs. 20,00,000.
(iii) During the year ended 31 March 2017, X Ltd. capitalised development costs which satisfied
the criteria in paragraph 57 of Ind AS 38 ‘Intangible Assets’. The total amount capitalised was
Rs. 16,00,000. The development project began to generate economic benefits for X Ltd. from
1st January 2018. The directors of X Ltd. estimated that the project would generate economic
benefits for five years from that date. The development expenditure was fully deductible
against taxable profits for the year ended 31 March 2018.
(iv) On 1 April 2017, X Ltd. borrowed Rs. 1,00,00,000. The cost to X Ltd. of arranging the borrowing
was Rs. 2,00,000 and this cost qualified for a tax deduction on 1 April 2017. The loan was for
a three-year period. No interest was payable on the loan but the amount repayable on 31
March 2020 will be Rs. 1,30,43,800. This equates to an effective annual interest rate of 10%.
As per the Income-tax Act, a further tax deduction of Rs. 30,43,800 will be claimable when
the loan is repaid on 31st March, 2020.
Explain and show how each of these events would affect the deferred tax assets / liabilities in
the consolidated balance sheet of X Ltd. group at 31 March, 2018 as per Ind AS. Assume the
rate of corporate income tax is 20%.
Ans.
(i) The tax loss creates a potential deferred tax asset for the group since its carrying value is nil
and its tax base is Rs. 30,00,000.
However, no deferred tax asset can be recognised because there is no prospect of being able
to reduce tax liabilities in the foreseeable future as no taxable profits are anticipated.
(ii) The provision creates a potential deferred tax asset for the group since its carrying value is
Rs. 20,00,000 and its tax base is nil.
This deferred tax asset can be recognised because X Ltd. is expected to generate taxable
profits in excess of Rs. 20,00,000 in the year to 31st March, 2019.
The amount of the deferred tax asset will be Rs. 4,00,000 (Rs. 20,00,000 x 20%).
This asset will be presented as a deduction from the deferred tax liabilities caused by the
(larger) taxable temporary differences.
(iii) The development costs have a carrying value of Rs. 15,20,000 (Rs. 16,00,000 – (Rs. 16,00,000
x 1/5 x 3/12)).

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The tax base of the development costs is nil since the relevant tax deduction has already been
claimed.
The deferred tax liability will be Rs. 3,04,000 (Rs. 15,20,000 x 20%). All deferred tax liabilities
are shown as non-current.
(iv) The carrying value of the loan at 31st March, 2018 is Rs. 1,07,80,000 (Rs. 1,00,00,000 – Rs.
2,00,000 + (Rs. 98,00,000 x 10%)).
The tax base of the loan is Rs. 1,00,00,000.
This creates a deductible temporary difference of Rs. 7,80,000 (Rs. 1,07,80,000 – Rs.
1,00,00,000) and a potential deferred tax asset of Rs. 1,56,000 (Rs. 7,80,000 x 20%).
Due to the availability of taxable profits next year (see part (ii) above), this asset can be
recognised as a deduction from deferred tax liabilities.
Question 73
A’s Ltd. profit before tax according to Ind AS for Year 20X1-20X2 is Rs. 100 thousand and taxable
profit for year 20X1-20X2 is Rs. 104 thousand. The difference between these amounts arose as
follows:
On 1st February, 20X2, it acquired a machine for Rs. 120 thousand. Depreciation is charged on the
machine on a monthly basis for accounting purpose. Under the tax law, the machine will be
depreciated for 6 months. The machine’s useful life is 10 years according to Ind AS as well as for tax
purposes. In the year 20X1-20X2, expenses of Rs. 8 thousand were incurred for charitable donations.
These are not deductible for tax purposes.
You are required to prepare necessary entries as at 31st March 20X2, taking current and deferred tax
into account. The tax rate is 25%.
Also prepare the tax reconciliation in absolute numbers as well as the tax rate reconciliation.
Ans: Current tax= Taxable profit x Tax rate = Rs.104 thousand x 25% = Rs.26 thousand.
Computation of Taxable Profit: Rs. in thousand
Accounting profit 100
Add: Donation not deductible 8
Less: Excess Depreciation (4)
Total Taxable profit 104
Rs. in thousand Rs. in thousand
Profit & loss A/c Dr. 26
To Current Tax 26
Deferred tax:
Machine’s carrying amount according to Ind AS is Rs. 118 thousand (Rs. 120 thousand – Rs. 2
thousand)

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Machine’s carrying amount for taxation purpose = Rs. 114 thousand (Rs. 120 thousand – Rs.
6 thousand)
Deferred Tax Liability = Rs. 4 thousand x 25% Rs. in thousand
Profit & loss A/c Dr. 1
To Deferred Tax Liability 1
Tax reconciliation in absolute numbers: Rs. in thousand
Profit before tax according to Ind AS 100
Applicable tax rate 25%
Tax 25
Expenses not deductible for tax purposes (Rs. 8 thousand x 25%) 2
Tax expense (Current and deferred) 27
Tax rate reconciliation
Applicable tax rate 25%
Expenses not deductible for tax purposes 2%
Average effective tax rate 27%
Question 74
QA Ltd. is in the process of computation of the deferred taxes as per applicable Ind AS and wants
guidance on the tax treatment for the following:
(i) QA Ltd. does not have taxable income as per the applicable tax laws, but pays 'Minimum
Alternate Tax’ (MAT) based on its books profits. The tax paid under MAT can be carried
forward for the next 10 years and as per the Company's projections submitted to its
bankers, it is in a position to get credit for the same by the end of eighth year. The
Company is recognising the MAT credit as a current asset under IGAAP. The amount of
MAT credit as on 31st March, 2016 is Rs. 8.5 crores and as on 31st March, 2017 is Rs.
9.75 crores;
(ii) The Company measures its head office property using the revaluation model. The
property is revalued every year as on 31st March. On 31st March, 2016, the carrying
value of the property (after revaluation) was Rs. 40 crores whereas its tax base was
Rs. 22 crores. During the year ended 31st March, 2017, the Company charged
depreciation in its Statement of Profit and Loss of Rs. 2 crores and claimed a tax
deduction for tax depreciation of Rs. 1.25 crores. On 31st March, 2017, the property was
revalued to Rs.45 crores. As per the tax laws, the revaluation of Property, Plant &
Equipment does not affect taxable income at the time of revaluation.
The Company has no other temporary differences other than those indicated above. The
Company wants you to compute the deferred tax liability as on 31st March, 2017 and the

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charge/credit to the Statement of Profit and Loss and/or Other Comprehensive Income
for the same. Consider the tax rate at 20%. [MTP May 2019]
Ans: Computation of Deferred Tax Liability
(i) MAT credit as on 31st December of Rs. 9.75 crore will be presented in the Balance
Sheet as Deferred tax asset. DTA in the current year will be Rs. 1.25
crore (Rs. 9.75 crore – Rs. 8.50 crore)
(ii)
(a) In case defer tax is created only on account of depreciation
Carryin Value as Tax Taxable / Total Credit to P&L
g value per tax base (deductible) Deferred tax during the year
without records temporary liability/
revalua difference (asset) @
ti on 20%
A b c D E= b-d F = e x 20% g
31st March, 2016 22 crore 22 crore 22 crore nil nil nil
Less: Depreciation (2 crore) (1.25 crore)
for the year 2016- 17

Carrying value as on 20 crore 20.75 20.75 (0.75 crore) DTA DTA

31st March, 2017 crore crore (0.15 crore) (0.15 crore)

(b) Computation of tax effect taking into account the revalued figures and adjusting impact
of tax effect on account of difference in depreciation
S. Carrying Value Tax Taxable / Total Credit to P&L Charged to OCI
No. value as per base (deductible) Deferred during the during the year
after tax temporary tax year
revaluati records difference liability/
on (asset) @
20%
a b c d E= b-d F=ex g h
20%
I 31st March, 40 crore 22 22 18 crore DTL 3.6 - DTL 3.6
2016 crore crore crore crore
IV Revalued 45 crore 20.75 20.75 24.25 crore DTL 4.85 DTA (0.15 DTL 5 crore
again on crore crore Crore crore) (Refer Note
31.3.2017 (22- (Refer below) [5 DTL
(It
is assumed 1.25) table (a) (B/F) –
that above) 0.15 DTA =
revaluation 4.85 DTL]
has been
done after
taking into
consideration
the impact of
Depreciation
for the
current year)

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V Additional DTL 1.25 DTA (0.15 DTL (1.40

DTL/DTA crore crore) crore) (Refer
required (Refer Note below)
during the table (a))
year (IV-I)

Note:
As per para 65 of Ind AS 12, when an asset is revalued for tax purposes and that revaluation
is related to an accounting revaluation of an earlier period, or to one that is expected to be
carried out in a future period, the tax effects on account of revaluation of asset and the
adjustment of the tax base are recognised in other comprehensive income in the periods in
which they occur.
Here, it is important to understand that only the tax effects on account of revaluation of asset
and the adjustment of the tax base are recognised in other comprehensive income. However,
tax effects on account of depreciation of asset and the adjustment of the tax base are
recognized in profit and loss.
Accordingly, first of all the tax effect has been calculated assuming that there is no revaluation
(Refer Table (a) above) [Since the information for the carrying value before revaluation has
not been mentioned, it is assumed to be equal to the carrying amount as per the tax records].
Later the DTA arrived due to difference in depreciation is adjusted with the DTL created due
to revaluation. DTA of Rs. 0.15 crore on account of depreciation will be charged to Profit and
Loss and DTL of Rs. 1.40 crore will be charged to OCI. Net effect in the year 31.3.2017 will
be DTL 1.25 crore (DTL 1.4 crore – DTA 0.15 crore) [Refer Table (b) above.

IND AS 103
Question 75
Motu Ltd acquired Chotu Ltd. During the analysis of the financial statement they discovered that
Chotu Ltd has an existing lease arrangement where Chotu Ltd. is a lessee. The lease term is 5 years
and is an operating lease for an office space at a prime location. The remaining lease period under
the arrangement is 3 years. Motu Ltd.’s M&A head assess that that:
(i) the lease is ‘at-market’; and
(ii) other market participants would not be willing to pay a premium for it.
The annual rentals are:
Year 1: INR 2,000
Year 2: INR 2,100
Year 3: INR 2,200
Year 4: INR 2,300
Year 5: INR 2,400

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Chotu Ltd financial statements include an annual rent expense of INR2,200 (determined on a straight-
line basis) as lease rental increase is not linked to inflation and a deferred rent liability of INR 300 at
the acquisition date.
Please discuss the treatment of the lease arrangement in the business combination accounting?
Answer: The accrued rent for straight-lining does not represent a liability and accordingly it is not
recorded as a liability on the acquisition date. However, the rental expenses will be recorded based
on straight-lining (which will be computed based on the remaining lease period) for INR 2,300 per
year.
Question 76:
AX Ltd. and BX Ltd. amalgamated on and from 1st January 20X2. A new Company ABX Ltd. was formed
to take over the businesses of the existing companies.
Summarized Balance Sheet as on 31-12-20X2 INR in '000
ASSETS Note No. AX Ltd BX Ltd
Non-current assets
Property, Plant and Equipment 8,500 7,500
Financial assets
Investments 1,050 550
Current assets
Inventory 1,250 2,750
Trade receivable 1,800 4,000
Cash and Cash equivalent 450 400
13,050 15,200
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of INR 10 each) 6,000 7,000
Other equity 3,050 2,700
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 3,000 4,000
Current liabilities
Trade payable 1,000 1,500
13,050 15,200
ABX Ltd. issued requisite number of shares to discharge the claims of the equity shareholders of the
transferor companies.
Prepare a note showing purchase consideration and discharge thereof and draft the Balance Sheet
of ABX Ltd:
a. Assuming that both the entities are under common control

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b. Assuming BX ltd is a larger entity and their management will take the control of the entity.
The fair value of net assets of AX and BX limited are as follows:
Assets AX Ltd. (‘000) BX Ltd. (‘000)
Fixed assets 9,500 1,000
Inventory 1300 2900
Fair value of the business 11,000 1,4000
Refer - ICAI SM for Solution
Question 77:
Entity A acquires 80% of the share capital of Entity B, which holds a single asset, or a group of assets
not constituting a business. The remaining 20% of the share capital is held by Entity M, an unrelated
third party. The fair value of the asset is Rs. 20,000. Entity A controls Entity B, as defined in Ind AS
110 Consolidated Financial Statements. Cash paid for the acquisition is Rs. 16,000 and fair value of
non-controlling interest is Rs. 4,000. How does an acquirer account for the acquisition of a controlling
interest in another entity that is not a business?
Answer: Under Ind AS 110, an entity must consolidate all investees that it controls, not just those
that are businesses, and recognise any non-controlling interest in non-wholly owned subsidiaries.
When the acquisition of an entity is not a business combination, the requirements of acquisition
accounting of Ind AS 103 relating to the allocation of the consideration transferred to the identifiable
assets and liabilities and the recognition of goodwill are not applicable.
Paragraph 2(b) of Ind AS 103 states that upon the acquisition of an asset or a group of assets that
does not constitute a business, the acquirer shall identify and recognise the individual identifiable
assets acquired and liabilities assumed. The cost of the group shall be allocated to the individual
identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Such
a transaction or event does not give rise to goodwill.
Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Assets state that "Cost is the
amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire
an asset at the time of its acquisition or construction. Therefore, when an asset is acquired, its cost
is the amount of consideration paid, plus the amount of non-controlling interest (NCI) recorded
related to that asset- as this represents a 'claim' relating to that asset.
With respect to case above, the following entries would be recorded:
Asset Dr 20,000
NCI Cr 4,000
Cash Cr 16,000
Question 78:
On September 30, 20X1 Entity A issues 2.5 shares in exchange for each ordinary share of Entity B. All
of Entity B’s shareholders exchange their shares in Entity B. Therefore, Entity A issues 150 ordinary
shares in exchange for all 60 ordinary shares of Entity B.
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The fair value of each ordinary share of Entity B at September 30, 20X1 is 40. The quoted market price
of Entity A’s ordinary shares at that date is 16. The fair values of Entity A’s identifiable assets and
liabilities at September 30, 20X1 are the same as their carrying amounts, except that the fair value of
Entity A’s non- current assets at September 30, 20X1 is 1,500.
The statements of financial position of Entity A and Entity B immediately before the business
combination are:
Entity A Entity B
(legal parent, (legal subsidiary,
accounting acquiree) accounting acquirer)
Current assets 500 700
Non-current assets 1,300 3,000
Total assets 1,800 3,700
Current liabilities 300 600
Non-current liabilities 400 1,100
Total liabilities 700 1,700
Shareholders’ equity
Retained earnings 800 1,400
Issued equity
100 ordinary shares 300
60 ordinary shares 600
Total shareholders’ equity 1,100 2,000
Total liabilities and shareholders’ equity 1,800 3,700
Prepare consolidated balance sheet. Also calculate earnings per share from the following
information:
Entity B’s earnings for the annual period ended December 31, 20X0 were 600 and that the
consolidated earnings for the annual period ended December 31, 20X1 were 800. There was no
change in the number of ordinary shares issued by Entity B during the annual period ended December
31, 20X0 and during the period from January 1, 2006 to the date of the reverse acquisition on
September 30, 20X1.
Solution:
Identifying the acquirer
As a result of Entity A issuing 150 ordinary shares, Entity B’s shareholders own 60 per cent of the
issued shares of the combined entity (i.e., 150 of the 250 total issued shares). The remaining 40 per
cent are owned by Entity A’s shareholders. Thus, the transaction is determined to be a reverse
acquisition in which Entity B is identified as the accounting acquirer (while Entity A is the legal
acquirer).
Calculating the fair value of the consideration transferred
If the business combination had taken the form of Entity B issuing additional ordinary shares to Entity
A’s shareholders in exchange for their ordinary shares in Entity A, Entity B would have had to issue

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40 shares for the ratio of ownership interest in the combined entity to be the same. Entity B’s
shareholders would then own 60 of the 100 issued shares of Entity B — 60 per cent of the combined
entity. As a result, the fair value of the consideration effectively transferred by Entity B and the
group’s interest in Entity A is 1,600 (40 shares with a fair value per share of 40).
The fair value of the consideration effectively transferred should be based on the most reliable
measure. In this example, the quoted market price of Entity A’s shares provides a more reliable basis
for measuring the consideration effectively transferred than the estimated fair value of the shares in
Entity B, and the consideration is measured using the market price of Entity A’s shares — 100 shares
with a fair value per share of 16.
Measuring goodwill
Goodwill is measured as the excess of the fair value of the consideration effectively transferred (the
group’s interest in Entity A) over the net amount of Entity A’s recognised identifiable assets and
liabilities, as follows:
Consideration effectively transferred 1,600
Net recognised values of Entity A’s identifiable assets and liabilities
Current assets 500
Non-current assets 1,500
Current liabilities (300)
Non-current liabilities (400) (1,300)
Goodwill 300
Consolidated statement of financial position at September 30, 20X1
The consolidated statement of financial position immediately after the business combination is:
Current assets [700 + 500] 1,200
Non-current assets [3,000 + 1,500] 4,500
Goodwill 300
Total assets 6,000
Current liabilities [600 + 300] 900
Non-current liabilities [1,100 + 400] 1,500
Total liabilities 2,400
Shareholders’ equity
Issued equity 250 ordinary shares [600 + 1,600] 2,200
Retained earnings 1,400
Total shareholders’ equity 3,600
Total liabilities and shareholders’ equity 6,000
The amount recognised as issued equity interests in the consolidated financial statements (2,200) is
determined by adding the issued equity of the legal subsidiary immediately before the business
combination (600) and the fair value of the consideration effectively transferred (1,600). However,

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the equity structure appearing in the consolidated financial statements (i.e., the number and type of
equity interests issued) must reflect the equity structure of the legal parent, including the equity
interests issued by the legal parent to effect the combination.
Earnings per share
Earnings per share for the annual period ended December 31, 20X1 is calculated as follows:
Number of shares deemed to be outstanding for the period from January 1,
20X1 to the acquisition date (i.e., the number of ordinary shares issued by Entity A
(legal parent, accounting acquiree) in the reverse acquisition) 150
Number of shares outstanding from the acquisition date to December 31, 20X1 250
Weighted average number of ordinary shares outstanding [(150 × 9/12) + (250 × 3/12)] 175
Earnings per share [800/175] 4.57
Restated earnings per share for the annual period ended December 31, 20X0 is 4.00 [calculated as
the earnings of Entity B of 600 divided by the number of ordinary shares Entity A issued in the reverse
acquisition (150)].
Question 79
How should contingent consideration payable in relation to a business combination be accounted for
on initial recognition and at the subsequent measurement as per Ind AS in the following cases:
i) On 1 April 2016, A Ltd. acquires 100% interest in B Ltd. As per the terms of agreement the
purchase consideration is payable in the following 2 tranches:
 an immediate issuance of 10 lakhs shares of A Ltd. having face value of INR 10 per
share;
 a further issuance of 2 lakhs shares after one year if the profit before interest and tax
of B Ltd. for the first year following acquisition exceeds INR 1 crore.
The fair value of the shares of A Ltd. on the date of acquisition is INR 20 per share. Further,
the management has estimated that on the date of acquisition, the fair value of contingent
consideration is Rs. 25 lakhs.
During the year ended 31 March 2017, the profit before interest and tax of B Ltd. exceeded
Rs. 1 crore. As on 31 March 2017, the fair value of shares of A Ltd. is Rs. 25 per share.
ii) Continuing with the fact pattern in (a) above except for:
 The number of shares to be issued after one year is not fixed.
 Rather, A Ltd. agreed to issue variable number of shares having a fair value equal to
Rs. 40 lakhs after one year, if the profit before interest and tax for the first year
following acquisition exceeds Rs. 1 crore. A Ltd. issued shares with Rs. 40 lakhs after
an year.

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Ans: Paragraph 37 of Ind AS 103, inter alia, provides that the consideration transferred in a
business combination should be measured at fair value, which should be calculated as the
sum of (a) the acquisition-date fair values of the assets transferred by the acquirer, (b) the
liabilities incurred by the acquirer to former owners of the acquiree and (c) the equity
interests issued by the acquirer.
Further, paragraph 39 of Ind AS 103 provides that the consideration the acquirer transfers in
exchange for the acquiree includes any asset or liability resulting from a contingent
consideration arrangement. The acquirer shall recognise the acquisition-date fair value of
contingent consideration as part of the consideration transferred in exchange for the
acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent
consideration arrangements are classified as equity or a liability in accordance with Ind AS 32
or other applicable Ind AS, i.e., for the rare case of non-financial contingent consideration.
Paragraph 40 provides that the acquirer shall classify an obligation to pay contingent
consideration that meets the definition of a financial instrument as a financial liability or as
equity on the basis of the definitions of an equity instrument and a financial liability in
paragraph 11 of Ind AS 32, Financial Instruments: Presentation. The acquirer shall classify as
an asset a right to the return of previously transferred consideration if specified conditions
are met. Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for
contingent consideration.
i) In the given case the amount of purchase consideration to be recognised on initial recognition
shall be as follows:
Fair value of shares issued (10,00,000 x Rs. 20) Rs. 2,00,00,000
Fair value of contingent consideration Rs. 25,00,000
Total purchase consideration Rs. 2,25,00,000

Subsequent measurement of contingent consideration payable for business combination

In general, an equity instrument is any contract that evidences a residual interest in the assets
of an entity after deducting all of its liabilities. Ind AS 32 describes an equity instrument as
one that meets both of the following conditions:
 There is no contractual obligation to deliver cash or another financial asset to another
party, or to exchange financial assets or financial liabilities with another party under
potentially unfavourable conditions (for the issuer of the instrument).
 If the instrument will or may be settled in the issuer's own equity instruments, then it
is:
 a non-derivative that comprises an obligation for the issuer to deliver a fixed
number of its own equity instruments; or
 a derivative that will be settled only by the issuer exchanging a fixed amount
of cash or other financial assets for a fixed number of its own equity
instruments.

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In the given case, given that the acquirer has an obligation to issue fixed number of shares on
fulfilment of the contingency, the contingent consideration will be classified as equity as per
the requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should not
be re-measured and its subsequent settlement should be accounted for within equity.
Here, the obligation to pay contingent consideration amounting to Rs. 25,00,000 is recognised
as a part of equity and therefore not re-measured subsequently or on issuance of shares.
ii) The amount of purchase consideration to be recognised on initial recognition is shall be as
follows:
Fair value shares issued (10,00,000 x Rs. 20) Rs. 2,00,00,000
Fair value of contingent consideration Rs. 25,00,000
Total purchase consideration Rs. 2,25,00,000

Subsequent measurement of contingent consideration payable for business combination

The contingent consideration will be classified as liability as per Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration not classified as equity should
be measured at fair value at each reporting date and changes in fair value should be
recognised in profit or loss.
As at 31 March 2017, (being the date of settlement of contingent consideration), the liability
would be measured at its fair value and the resulting loss of Rs. 15,00,000 (Rs. 40,00,000 - Rs.
25,00,000) should be recognised in the profit or loss for the period. A Ltd. would recognise
issuance of 160,000 (Rs. 40,00,000/ 25) shares at a premium of Rs. 15 per share.
Question 80:
H Ltd. acquired equity shares of S Ltd., a listed company, in two tranches as mentioned in the below
table:

Date Equity stake Remarks

purchased
st
1 November, 2016 15% The shares were purchased based on the
st quoted price on the stock exchange on
1 January, 2017 45%
the relevant dates.
Both the above-mentioned companies have INR as their functional currency. Consequently, H
Ltd. acquired control over S Ltd. on 1st January, 2017. Following is the Balance Sheet of S Ltd.
as on that date:
Particulars Carrying value Fair value
(Rs. in crore) (Rs. in crore)
ASSETS:
Non-current assets
(a) Property, plant and equipment 40.0 90.0
(b) Intangible assets 20.0 30.0
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(c) Financial assets 100.0 350.0

- Investments
Current assets
(a) Inventories 20.0 20.0
(b) Financial assets
- Trade receivables 20.0 20.0
- Cash held in functional currency 4.0 4.5
(c) Other current assets
Non-current asset held for sale 4.0 4.5
TOTAL ASSETS 208
EQUITY AND LIABILITIES:
Equity
(a) Share capital (face value Rs.100) 12.0 50.4
(b) Other equity 141.0 Not applicable
Non-current liabilities
(a) Financial liabilities
- Borrowings 20.0 20.0
Current liabilities
(a) Financial liabilities
- Trade payables 28.0 28.0
(b) Provision for warranties 3.0 3.0
(c) Current tax liabilities 4.0 4.0
TOTAL EQUITY AND LIABILITIES 208.0
Other information:
Property, plant and equipment in the above Balance Sheet include leasehold motor vehicles
having carrying value of Rs. 1 crore and fair value of Rs. 1.2 crore. The date of inception of the
lease was 1st April, 2010. On the inception of the lease, S Ltd. had correctly classified the lease
as a finance lease. However, if facts and circumstances as on 1st April, 2017 are considered,
the lease would be classified as an operating lease.
Following is the statement of contingent liabilities of S Ltd. as on 1st January, 2017:
Particulars Fair value Remarks
(Rs. In crore)
Law suit filed by a customer for a 0.5 It is not probable that an outflow of
claim of Rs. 2 crore resources embodying economic
benefits will be required to settle the
claim.
Any amount which would be paid in
respect of law suit will be tax
deductible.

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Income tax demand of Rs. 7 crore 2.0 It is not probable that an outflow of
raised by tax authorities; S Ltd. has resources embodying economic
challenged the demand in the court. benefits will be required to settle the
claim.
In relation to the above-mentioned contingent liabilities, S Ltd. has given an indemnification
undertaking to H Ltd. up to a maximum of Rs. 1 crore.
Rs. 1 crore represents the acquisition date fair value of the indemnification undertaking.
Any amount which would be received in respect of the above undertaking shall not be taxable.
The tax bases of the assets and liabilities of S Ltd. is equal to their respective carrying values being
recognised in its Balance Sheet.
Carrying value of non-current asset held for sale of Rs. 4 crore represents its fair value less cost
to sell in accordance with the relevant Ind AS.
In consideration of the additional stake purchased by H Ltd. on 1st January, 2017, it has issued
to the selling shareholders of S Ltd. 1 equity share of H Ltd. for every 2 shares held in S Ltd.
Fair value of equity shares of H Ltd. as on 1st January, 2017 is Rs. 10,000 per share.
On 1st January, 2017, H Ltd. has paid Rs. 50 crore in cash to the selling shareholders of S Ltd.
Additionally, on 31st March, 2019, H Ltd. will pay Rs. 30 crore to the selling shareholders of S
Ltd. if return on equity of S Ltd. for the year ended 31st March, 2019 is more than 25% per annum.
H Ltd. has estimated the fair value of this obligation as on 1st January, 2017 and 31st March,
2017 as Rs. 22 crore and Rs. 23 crore respectively. The change in fair value of the obligation is
attributable to the change in facts and circumstances after the acquisition date.
Quoted price of equity shares of S Ltd. as on various dates is as follows:
As on November, 2016 Rs. 350 per share
As on 1st January, 2017 Rs. 395 per share
As on 31st March, 2017 Rs. 420 per share
On 31st May, 2017, H Ltd. learned that certain customer relationships existing as on 1st January,
2017, which met the recognition criteria of an intangible asset as on that date, were not
considered during the accounting of business combination for the year ended 31st March, 2017.
The fair value of such customer relationships as on 1st January, 2017 was Rs. 3.5 crore (assume that
there are no temporary differences associated with customer relations; consequently, there is
no impact of income taxes on customer relations).
On 31st May, 2017 itself, H Ltd. further learned that due to additional customer relationships
being developed during the period 1st January, 2017 to 31st March, 2017, the fair value of such
customer relationships has increased to Rs. 4 crore as on 31st March, 2017.

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On 31st December, 2017, H Ltd. has established that it has obtained all the information necessary
for the accounting of the business combination and that more information is not obtainable.
H Ltd. and S Ltd. are not related parties and follow Ind AS for financial reporting. Income tax rate
applicable is 30%.
You are required to provide your detailed responses to the following, along with reasoning and
computation notes:
a. What should be the goodwill or bargain purchase gain to be recognised by H Ltd. in its
financial statements for the year ended 31st March, 2017. For this purpose, measure non-
controlling interest using proportionate share of the fair value of the identifiable net
assets of S Ltd.
b. Will the amount of non-controlling interest, goodwill, or bargain purchase gain so
recognised in (a) above change subsequent to 31st March, 2017?
If yes, provide relevant journal entries.
c. What should be the accounting treatment of the contingent consideration as on
31st March, 2017?
Refer - MTP May 2019

Financial Instrument
Question 81:
On 1 January 2018, Entity X writes a put option for 1,00,000 of its own equity shares for which it
receives a premium of Rs. 5,00,000.
Under the terms of the option, Entity X may be obliged to take delivery of 1,00,000 of its own shares
in one year’s time and to pay the option exercise price of Rs. 22,000,000. The option can only be
settled through physical delivery of the shares (gross physical settlement). Examine the nature of the
financial instrument and how it will be accounted assuming that the present value of option exercise
price is Rs. 20,000,000?
Ans: This derivative involves Entity X taking delivery of a fixed number of equity shares for a fixed
amount of cash. Even though the obligation for Entity X to purchase its own equity shares for
Rs. 22,000,000 is conditional on the holder of the option exercising the option, Entity X has
an obligation to deliver cash which it cannot avoid.
As per para 23 of Ind AS 32 ‘Financial Instruments: Presentation’, the accounting for financial
instrument will be as below:
• The financial liability is recognised initially at the present value of the redemption
amount, and is reclassified from equity. This would imply that a financial liability for an
amount of present value of Rs. 22,000,000, say Rs. 20,000,000 will be recognised through
a debit to equity. The initial premium received (Rs. 5,00,000) is credited to equity.

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• Subsequently, the financial liability is measured in accordance with Ind AS 109. While a
subsequent paragraph will deal with measurement of financial liabilities. The financial
liability of Rs. 20,000,000 will be measured at amortised cost as per Ind AS 109 and
finance cost of Rs. 2,000,000 will be recognised over the exercise period.
• If the contract expires without delivery, the carrying amount of the financial liability is
reclassified to equity ie. an amount of Rs. 22,000,000 will be reclassified from financial
liability to equity.
Question 82
On 1 January 20X1, ABG Pvt. Ltd., a company incorporated in India enters into a contract to buy solar
panels from A&A Associates, a firm domiciled in UAE, for which delivery is due after 6 months i.e. on
30 June 20X1
The purchase price for solar panels is US$ 50 million.
The functional currency of ABG is Indian Rupees (INR) and of A&A is Dirhams.
The obligation to settle the contract in US Dollars has been evaluated to be an embedded
derivative which is not closely related to the host purchase contract.
Exchange rates:
1. Spot rate on 1 January 20X1: USD 1 = INR 60
2. Six-month forward rate on 1 January 20X1: USD 1 = INR 65
3. Spot rate on 30 June 20X1: USD 1 = INR 66
Analyse
Ans: This contract comprises of two components:
• Host contract to purchase solar panels denominated in INR i.e. a notional payment in INR at
6-month forward rate (INR 3,250 million or INR 325 crores)
• Forward contract to pay US Dollars and receive INR i.e. a notional receipt in INR. In other
words, a forward contract to sell US Dollars at INR 65 per US Dollar
It may be noted that the notional INR payment in respect of host contract and the notional
INR receipt in respect of embedded derivative create an offsetting position.
Subsequently, the host contract is not accounted for until delivery. The embedded derivative
is recorded at fair value through profit or loss. This gives rise to a gain or loss on the derivative,
and a corresponding derivative asset or liability.
On delivery ABG records the inventory at the amount of the host contract (INR 325 crores).
The embedded derivative is considered to expire. The derivative asset or liability (i.e. the
cumulative gain or loss) is settled by becoming part of the financial liability that arises on
delivery.
In this case the carrying value of the currency forward at 30 June 20X1 on maturity is INR 50
million X (66 minus 65) = INR 5 crores (liability/loss). The loss arises because ABG has agreed

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to sell US Dollars at Rs. 65 per US Dollar whereas in the open market, US Dollar can be sold at
Rs. 66 per US Dollar.
No accounting entries are passed on the date of entering into purchase contract. On that date,
the forward contract has a fair value of zero (refer section “option and non-option based
derivatives” below)
Subsequently, say at 30 June 20X1, the accounting entries are as follows (all in INR crores):
1. Loss on derivative contract 5
To Derivative liability 5
(Being loss on currency forward)
2. Inventory 325
To Trade payables (financial liability) 325
(Being inventory recorded at forward exchange rate determined on date of contract)
3. Derivative liability 5
To Trade payables (financial liability) 5
(Being reclassification of derivative liability to trade payables upon settlement)
The effect is that the financial liability at the date of delivery is INR 330 crores (= INR 325
crores + INR 5 crores), equivalent to US$ 50 million at the spot rate on 30 June 20X1.
Going forward, the financial liability is a US$ denominated financial instrument. It is
retranslated at the dollar spot rate in the normal way, until it is settled.
Question 83:
D Ltd. issues callable preference shares to G Ltd. for a consideration of Rs. 10 lakhs. The holder has
an option to convert these preference shares to a fixed number of equity instruments of the issuer
anytime up to a period of 3 years. If the option is not exercised by the holder, the preference shares
are redeemed at the end of 3 years. The preference shares carry a coupon of RBI base rate plus 1%
p.a.
The prevailing market rate for similar preference shares, without the conversion feature or issuer’s
redemption option, is RBI base rate plus 4% p.a. On the date of contract, RBI base rate is 9% p.a. The
value of call as determined using Black and Scholes model for option pricing is is Rs. 29,165
Calculate the value of the liability and equity components.
Ans: The values of the liability and equity components are calculated as follows:
Present value of principal payable at the end of 3 years (Rs. 10 lakhs discounted at 13% for 3
years) = Rs. 6,93,050
Present value of interest payable in arrears for 3 years (Rs. 100,000 discounted at 13% for
each of 3 years) = Rs. 2,36,115

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The issuer's right to call the instrument in the event that interest rates go up makes a callable
instrument less attractive to the holder than a plain vanilla instrument. This results in a
derivative asset. The value of that early redemption option is Rs. 29,165
Net financial liability (A + B – C) = Rs. 9,00,000
Therefore, equity component = fair value of compound instrument, say, Rs. 1,000,000 less net
financial liability component i.e. Rs. 9,00,000 = Rs. 1,00,000.
In subsequent years, the profit and loss account is charged with interest of RBI base rate plus
4% p.a. on the liability component at (A) above.
Question 84:
On 1st April 2017, A Ltd. lent Rs. 2 crores to a supplier in order to assist them with their expansion
plans. The arrangement of the loan cost the company Rs. 10 lakhs. The company has agreed not to
charge interest on this loan to help the supplier's short -term cash flow but expected the supplier to
repay Rs. 2.40 crores on 31st March 2019. As calculated by the finance team of the company, the
effective annual rate of interest on this loan is 6.9% On 28th February 2018, the company received
the information that poor economic climate has caused the supplier significant problems and in order
to help them, the company agreed to reduce the amount repayable by them on 31st March 2019
to Rs. 2.20 crores. Suggest the accounting entries as per applicable Ind AS
Ans: The loan to the supplier would be regarded as a financial asset. The relevant accounting
standard Ind AS 109 provides that financial assets are normally measured at fair value.
If the financial asset in which the only expected future cash inflows are the receipts of
principal and interest and the investor intends to collect these inflows rather than dispose of
the asset to a third party, then Ind AS 109 allows the asset to be measured at amortised cost
using the effective interest method.
If this method is adopted, the costs of issuing the loan are included in its initial carrying value
rather than being taken to profit or loss as an immediate expense. This makes the initial
carrying value Rs. 2,10,00,000.
Under the effective interest method, part of the finance income is recognised in the current
period rather than all in the following period when repayment is due. The income recognised
in the current period is Rs. 14,49,000 (Rs. 2,10,00,000 x 6.9%) evidence that the financial asset
suffered impairment at 31st March 2018.
The asset is re-measured at the present value of the revised estimated future cash inflows,
using the original effective interest rate. Under the revised estimates the closing carrying
amount of the asset would be Rs. 2,05,79,981 (Rs. 2,20,00,000 / 1.069). The reduction in
carrying value of Rs. 18,69,019 (Rs. 2,24,49,000 – 2,05,79,981) would be charged to profit or
loss in the current period as an impairment of a financial asset.
Therefore, the net charge to profit or loss in respect of the current period would be Rs.
4,20,019 (18,69,019 – 14,49,000).

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Question 85:
An entity purchases a debt instrument with a fair value of Rs. 1,000 on 15th March,
20X1 and measures the debt instrument at fair value through other comprehensive income. The
instrument has an interest rate of 5% over the contractual term of 10 years, and has a 5% effective
interest rate. At initial recognition, the entity determines that the asset is not a purchased or original
credit-impaired asset.
On 31st March 20X1 (the reporting date), the fair value of the debt instrument has decreased to
Rs. 950 as a result of changes in market interest rates. The entity determines that there has not
been a significant increase in credit risk since initial recognition and that ECL should be measured at
an amount equal to 12 month ECL, which amounts to Rs. 30.
On 1st April 20X1, the entity decides to sell the debt instrument for Rs. 950, which is its fair value at
that date.
Pass journal entries for recognition, impairment and sale of debt instruments as per Ind AS 109.
Entries relating to interest income are not to be provided.
Ans: On Initial recognition
Debit (Rs.) Credit (Rs.)
Financial asset-FVOCI Dr. 1,000
To Cash 1,000
On Impairment of debt instrument
Impairment expense (P&L) Dr. 30
Other comprehensive income Dr. 20
To Financial asset-FVOCI 50
The cumulative loss in other comprehensive income at the reporting date was Rs. 20. That amount
consists of the total fair value change of Rs. 50 (that is, Rs. 1,000-Rs. 950) offset by the change
in the accumulated impairment amount representing 12-month ECL, that was recognized (Rs. 30).
On Sale of debt instrument
Cash 950
To Financial asset –FVOCI 950
Loss on sale (P&L) 20
To Other comprehensive income 20
Question 86
ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as on 1
April 20X1 @ Rs 150 each. The rate of dividend is 10% payable every year. The preference shares are
convertible into 5,000 equity shares of the company at the end of 5th year from the date of allotment.

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When the CCCPS are issued, the prevailing market interest rate for similar debt without conversion
options is 15% per annum. Transaction cost on the date of issuance is 2% of the value of the proceeds.
Key terms:
Date of Allotment 01-Apr-20X1
Date of Conversion 01-Apr-20X6
Number of Preference Shares 10,000
Face Value of Preference Shares 150
Total Proceeds 15,00,000
Rate Of dividend 10%
Market Rate for Similar Instrument 15%
Transaction Cost 30,000
Face value of equity share after conversion 10
Number of equity shares to be issued 5,000
The effective interest rate for liability component 15.86%

Ans: This is a compound financial instrument with two components – liability representing present
value of future cash outflows and balance represents equity component.
a. Computation of Liability & Equity Component
Date Particulars Cash Flow Discount Factor Net present Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75
31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95
31-Mar-20X6 Dividend 150,000 0.497177 74,576.55
Total Liability Component 502,823.25
Total Proceeds 1,500,000.00
Total Equity Component (Bal fig) 997,176.75

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount
Liability Component 502,823 10,056 492,767
Equity Component 997,177 19,944 977,233
Total Proceeds 1,500,000 30,000 1,470,000

c. Accounting for liability at amortised cost:

- Initial accounting = Present value of cash outflows less transaction costs
- Subsequent accounting = At amortised cost, ie, initial fair value adjusted for interest and
repayments of the liability.
Opening Financial Liability Interest Cash Flow Closing Financial
A B C Liability
A+B-C
01-Apr-20X1 492,767 - - 4,92,767
31-Mar-20X2 492,767 78,153 150,000 4,20,920
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31-Mar-20X3 420,920 66,758 150,000 3,37,678

31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6 129,494 20,506 150,000 -

Question 87
Comforts Ltd. granted Rs.10,00,000 loan to its employees on January 1, 2009 at a concessional
interest rate of 4% per annum. Loan is to be repaid in five equal annual installments along with
interest. Market rate of interest for such loan is 10% per annum. Following the principles of
recognition and measurement as laid down in AS 30 'Financial Instruments: Recognition and
Measurement', record the entries for the year ended 31st December, 2009 for the loan transaction,
and also calculate the value of loan initially to be recognised and amortised cost for all the subsequent
years.
Ans:
(i) Journal Entries in the books of Comfort Ltd. for the year ended 31st December, 2009
(regarding loan to employees)
Dr. Cr.
Staff loan A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Being the disbursement of loans to staff)
Staff cost A/c (10,00,000 – 8,54,763)[Refer part (ii)]
To Staff loan A/c Dr. 1,45,237
(Being the write off of excess of loan balance over 1,45,237
present value thereof, in order to reflect the loan at its
present value of Rs. 8,54,763)
Staff loan A/c Dr. 85,476
To Interest on staff loan A/c 85,476
(Being the charge of interest @ market rate of 10% to
the loan)
Bank A/c Dr. 2,40,000
To Staff loan A/c 2,40,000
(Being the repayment of first instalment with interest
for the year)
Interest on staff loan A/c Dr. 85,476
To Profit and loss A/c 85,476
(Being transfer of balance in staff loan Interest account
to profit and loss account)
Profit and loss A/c Dr. 1,45,237
To Staff cost A/c 1,45,237
(Being transfer of balance in staff cost account to profit
and loss account)
(ii) Calculation of initial recognition amount of loan to employees
Cash Inflow
Yearend Principal Interest @4% Total P.V. factor Value
2009 2,00,000 40,000 2,40,000 0.9090 2,18,160
2010 2,00,000 32,000 2,32,000 0.8263 1,91,702

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2011 2,00,000 24,000 2,24,000 0.7512 1,68,269

2012 2,00,000 16,000 2,16,000 0.6829 1,47,506
2013 2,00,000 8,000 2,08,000 0.6208 1,29,126
Present value or 8,54,763
Fair value
(iii) Calculation of amortised cost of loan to employees
Year Amortised cost Interest to be Repayment Amortised Cost
(Opening balance) recognised@10% (Closing balance)
[1] [2] [3] [4]=[1]+ [2] –[3]
2009 8,54,763 85,476 2,40,000 7,00,239
2010 7,00,239 70,024 2,32,000 5,38,263
2011 5,38,263 53,826 2,24,000 3,68,089
2012 3,68,089 36,809 2,16,000 1,88,898
2013 1,88,898 19,102 (Bal. fig.)∗ 2,08,000 Nil

Question 88
On 1st January 20X1, SamCo. Ltd. agreed to purchase USD ($) 20,000 from JT Bank in future on 31st
December 20X1 for a rate equal to Rs. 68 per USD. SamCo. Ltd. did not pay any amount upon entering
into the contract. SamCo Ltd. is a listed company in India and prepares its financial statements on a
quarterly basis.
Following the principles of recognition and measurement as laid down in Ind AS 109, you are required
to record the entries for each quarter ended till the date of actual purchase of USD.
For the purposes of accounting, please use the following information representing marked to market
fair value of forward contracts at each reporting date:
As at 31st March 20X1 – Rs. (25,000)
As at 30th June 20X1 - Rs. (15,000)
As at 30th September 20X1 - Rs. 12,000
Spot rate of USD on 31st December 20X1 - Rs. 66 per USD
Ans:
(i) Assessment of the arrangement using the definition of derivative included under Ind AS
109.
Derivative is a financial instrument or other contract within the scope of this Standard with
all three of the following characteristics:
a) its value changes in response to the change in a Specified 'underlying'.
b) it requires no initial net investment or an initial net investment that is smaller than would
be required for other types of contracts that would be expected to have a similar
response to changes in market factors.
c) it is settled at a future date.

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Upon evaluation of contract in question it is noted that the contract meets the definition of a
derivative as follows:
a) the value of the contract to purchase USD at a fixed price changes in response to changes
in foreign exchange rate.
b) the initial amount paid to enter into the contract is zero. A contract which would give the
holder a similar response to foreign exchange rate changes would have required an
investment of USD 20,000 on inception.
c) the contract is settled in future
The derivative is a forward exchange contract.
As per Ind AS 109, derivatives are measured at fair value upon initial recognition and are
subsequently measured at fair value through profit and loss.
(ii) Accounting on 1st January 20X1:
As there was no consideration paid and without evidence to the contrary the fair value of the
contract on the date of inception is considered to be zero. Accordingly, no accounting entries
shall be recorded on the date of entering into the contract.
(iii) Accounting on 31st March 20X1:
Profit and loss A/c Dr. 25,000
To derivative financial liability 25,000
(Being mark to market loss on forward contract recorded)
(iv) Accounting on 30th June 20X1:
The change in value of the derivative forward contract shall be recorded as a derivative
financial liability in the books of SamCo Ltd. by recording the following journal entry:
Derivative financial liability A/c Dr. 10,000
To Profit and loss A/c 10,000
(being partial reversal of mark to market loss on forward contract recorded)
(v) Accounting on 30th September 20X1:
The value of the derivative forward contract shall be recorded as a derivative financial asset
in the books of SamCo Ltd. by recording the following journal entry:
Derivative financial liability A/c Dr 15,000
Derivative financial asset A/c Dr 12,000
To Profit and loss A/c 27,000
(being gain on mark to market of forward contract booked as derivative financial asset and
reversal of derivative financial liability)
(vi) Accounting on 31st December 20X1:

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The settlement of the derivative forward contract by actual purchase of USD 20,000 shall be
recorded in the books of SamCo Ltd. by recording the following journal entry:
Cash (USD Account) @ 20,000 * 66 Dr. 13,20,000
Profit and loss A/c Dr. 52,000
To Cash @ 20,000 x 68 13,60,000
To Derivative financial asset A/c 12,000
(being loss on settlement of forward contract booked on actual purchase of USD)
Question 89
Wheel Co. Limited has a policy of providing subsidized loans to its employees for the purpose of
buying or building houses. Mr. X, who’s executive assistant to the CEO of Wheel Co. Limited, took a
loan from the Company on the following terms:
• Principal amount: 1,000,000
• Interest rate: 4% for the first 400,000 and 7% for the next 600,000
• Start date: 1 January 20X1
• Tenure: 5 years
• Pre-payment: Full or partial pre-payment at the option of the employee
• The principal amount of loan shall be recovered in 5 equal annual instalments and will
be first applied to 7% interest bearing principal
• The accrued interest shall be paid on an annual basis
• Mr. X must remain in service till the term of the loan ends
The market rate of a comparable loan available to Mr. X, is 12% per annum.
Following table shows the contractually expected cash flows from the loan given to Mr. X:
(amount in Rs.)

Date Outflows Principal Interest Interest Principal

income 7% income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 200,000 28,000 16,000 600,000
31-Dec-20X3 200,000 14,000 16,000 400,000
31-Dec-20X4 200,000 - 16,000 200,000
31-Dec-20X5 200,000 - 8,000 -

Mr. S, pre-pays Rs. 200,000 on 31 December 20X2, reducing the outstanding principal as at
that date to Rs. 400,000.

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Following table shows the actual cash flows from the loan given to Mr. X, considering the pre-
payment event on 31 December 20X2: (amount in Rs.)

Date Outflows Principal Interest Interest Principal

income 7% income 4% outstanding
1-Jan-20X1 (1,000,000) 1,000,000
31-Dec-20X1 200,000 42,000 16,000 800,000
31-Dec-20X2 400,000 28,000 16,000 400,000
31-Dec-20X3 200,000 - 16,000 200,000
31-Dec-20X4 200,000 - 8,000 -
31-Dec-20X5 - - - -

Record journal entries in the books of Wheel Co. Limited considering the requirements of Ind
AS 109.
Ans. As per requirement of Ind AS 109, a financial instrument is initially measured and recorded at
its fair value. Therefore, considering the market rate of interest of similar loan available to
Mr. X is 12%, the fair value of the contractual cash flows shall be as follows:
Inflows

Date Principal Interest Rs. Interest Discount factor PV

income income 4% @12%
7%

31-Dec-20X1 200,000 42,000 16,000 0.8929 2,30,357

31-Dec-20X2 200,000 28,000 16,000 0.7972 1,94,515

31-Dec-20X3 200,000 14,000 16,000 0.7118 1,63,709

31-Dec-20X4 200,000 - 16,000 0.6355 1,37,272

31-Dec-20X5 200,000 - 8,000 0.5674 1,18,025

Total (fair value) 8,43,878

Benefit to Mr. X, to be considered a part of employee cost for Wheel Co. Rs. 1,56,121
The deemed employee cost is to be amortised over the period of loan i.e. the minimum period
that Mr. X must remain in service.
The amortization schedule of the Rs. 843,878 loan is shown in the following table:
Date Loan outstanding Total cash inflows (principal Interest @ 12%
repayment + interest
1-Jan-20X1 843,878
31-Dec-20X1 687,143 258,000 101,265

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31-Dec-20X2 525,600 244,000 82,457

31-Dec-20X3 358,672 230,000 63,072
31-Dec-20X4 185,713 216,000 43,041
31-Dec-20X5 (0) 208,000 22,287

Journal Entries to be recorded at every period end:

a. 1 January 20X1 –
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)

Loan to employee A/c Dr. 843,879

Pre-paid employee cost A/c Dr 156,121
To Cash A/c 1,000,000
(Being loan asset recorded at initial fair value)

b. 31 December 20X1 –
Cash A/c Dr. 258,000
To Interest income (profit and loss) @12% A/c 101,265
To loan to employee A/c 156,735
(Being first instalment of repayment of loan accounted for
using the amortised cost and effective interest rate of 12%)
Employee benefit (profit and loss) A/c Dr. 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost charged to
profit and loss as employee benefit cost)

On 31 December 20X2, due to pre-payment of a part of loan by Mr. X, the carrying value of
the loan shall be re-computed by discounting the future remaining cash flows by the original
effective interest rate.
There shall be two sets of accounting entries on 31 December 20X2, first the realisation of the
contractual cash flow as shown in (c) below and then the accounting for the pre-payment of
Rs. 200,000 included in (d) below:
c. 31 December 20X2 –
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)
Cash A/c Dr. 244,000
To Interest income (profit and loss) @12% A/c 82,457
To loan to employee A/c 161,543
(Being second instalment of repayment of loan accounted
for using the amortised cost and effective interest rate of
12%)
Employee benefit (profit and loss) A/c Dr 31,224
To Pre-paid employee cost A/c 31,224
(Being amortization of pre-paid employee cost charged to
profit and loss as employee benefit cost)

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Computation of new carrying value of loan to employee:

Inflows
Date Principal Interest Interest Discount factor PV
income 7% income 4% @12%
31-Dec-20X3 200,000 - 16,000 0.8929 192,857
31-Dec-20X4 200,000 - 8,000 0.7972 165,816
Total (revised carrying value) 358,673
Less: Current carrying value 525,601
Adjustment required 166,928

The difference between the amount of pre-payment and adjustment to loan shall be
considered a gain, though will be recorded as an adjustment to pre-paid employee cost, which
shall be amortised over the remaining tenure of the loan.
d. 31 December 20X2 prepayment–
Particulars Dr. Amount (Rs.) Cr. Amount
(Rs.)
Cash A/c Dr. 200,000
To Pre-paid employee cost A/c 33,072
To loan to employee A/c 166,928
(Being gain to Wheel Co. Limited recorded as an adjustment to
pre-paid employee cost)

The amortisation schedule of the new carrying amount of loan shall be as follows:
Date Loan outstanding Total cash inflows (principal Interest @ 12%
repayment + interest
31-Dec-20X2 358,673
31-Dec-20X3 185,714 216,000 43,041
31-Dec-20X4 - 208,000 22,286

Amortisation of employee benefit cost shall be as follows:

Date Balance Amortised to P&L Adjustment
1-Jan-20X1 156,121
31-Dec-20X1 124,897 31,224
31-Dec-20X2 60,601 31,224 33,072
31-Dec-20X3 30,300 30,300
31-Dec-20X4 - 30,300

e. 31 December 20X3 –
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)
Cash A/c Dr. 216,000
To Interest income (profit and loss) @12% A/c 43,041
To loan to employee A/c 172,959

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(Being third instalment of repayment of loan accounted

for using the amortised cost and effective interest rate of
12%)

Employee benefit (profit and loss) A/c Dr 30,300

To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost charged to
profit and loss as employee benefit cost)

f. 31 December 20X4 –
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)

Cash A/c Dr 208,000

To Interest income (profit and loss) @12% A/c 22,286
To loan to employee A/c 185,714
(Being last instalment of repayment of loan
accounted for using the amortised cost and effective
interest rate of 12%)
Employee benefit (profit and loss) A/c Dr 30,300
To Pre-paid employee cost A/c 30,300
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)

Question 90
Wheel Co. Limited borrowed Rs. 500,000,000 from a bank on 1 January 20X1. The original terms of
the loan were as follows:
• Interest rate: 11%
• Repayment of principal in 5 equal instalments
• Payment of interest annually on accrual basis
• Upfront processing fee: Rs. 5,870,096
Effective interest rate on loan: 11.50%
On 31 December 20X2, Wheel Co. Limited approached the bank citing liquidity issues in
meeting the cash flows required for immediate instalments and re-negotiated the terms of
the loan with banks as follows:
• Interest rate 15%
• Repayment of outstanding principal in 10 equal instalments starting 31 December
20X3
• Payment of interest on an annual basis
Record journal entries in the books of Wheel Co. Limited till 31 December 20X3, after giving
effect of the changes in the terms of the loan on 31 December 20X2

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Ans: On the date of initial recognition, the effective interest rate of the loan shall be computed
keeping in view the contractual cash flows and upfront processing fee paid. The following
table shows the amortisation of loan based on effective interest rate:
Date Cash flows Cash flows Amortised cost Interest @ EIR
(principal) (interest and (opening + interest – (11.50%)
fee) cash flows)
1-Jan-20X1 (500,000,000) 5,870,096 494,129,904
31-Dec-20X1 100,000,000 55,000,000 395,954,843 56,824,939
31-Dec-20X2 100,000,000 44,000,000 297,489,650 45,534,807
31-Dec-20X3 100,000,000 33,000,000 198,700,959 34,211,310
31-Dec-20X4 100,000,000 22,000,000 99,551,570 22,850,610
31-Dec-20X5 100,000,000 11,000,000 (0) 11,448,430

a. 1 January 20X1 –
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)
Cash A/c Dr. 494,129,904
To Loan from bank A/c 494,129,904
(Being loan recorded at its fair value less transaction
costs on the initial recognition date)

b. 31 December 20X1 –
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)
Loan from bank A/c Dr. 98,175,061
Interest expense (profit and loss) Dr. 56,824,939
To Cash A/c 155,000,000
(Being first instalment of loan and payment of
interest accounted for as an adjustment to the
amortised cost of loan)

c. 31 December 20X2 – Before Wheel Co. Limited approached the bank –

Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)
Interest expense (profit and loss) Dr. 45,534,807
To Loan from bank A/c 1,534,807
To cash A/c 44,000,000
(Being loan payment of interest recorded by the
Company before it approached the Bank for
deferment of principal)

Upon receiving the new terms of the loan, Wheel Co. Limited, re-computed the carrying value
of the loan by discounting the new cash flows with the original effective interest rate and
comparing the same with the current carrying value of the loan. As per requirements of Ind
AS 109, any change of more than 10% shall be considered a substantial modification, resulting
in fresh accounting for the new loan:
Date Cash flows Interest Discount PV of cash flows
(principal) outflow @15% factor

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31-Dec-20X2 (400,000,000)
31-Dec-20X3 40,000,000 60,000,000 0.8969 89,686,099
31-Dec-20X4 40,000,000 54,000,000 0.8044 75,609,805
31-Dec-20X5 40,000,000 48,000,000 0.7214 63,483,092
31-Dec-20X6 40,000,000 42,000,000 0.6470 53,053,542
31-Dec-20X7 40,000,000 36,000,000 0.5803 44,100,068
31-Dec-20X8 40,000,000 30,000,000 0.5204 36,429,133
31-Dec-20X9 40,000,000 24,000,000 0.4667 29,871,422
31-Dec-20Y0 40,000,000 18,000,000 0.4186 24,278,903
31-Dec-20Y1 40,000,000 12,000,000 0.3754 19,522,235
31-Dec-20Y3 40,000,000 6,000,000 0.3367 15,488,493
PV of new contractual cash flows discounted at 11.50% 451,522,791
Carrying amount of loan 397,489,650
Difference 54,033,141
Percentage of carrying amount 13.59%

Note: Calculation above done on full decimal, though in the table discount factor is limited to 4
decimals.
Considering a more than 10% change in PV of cash flows compared to the carrying value of
the loan, the existing loan shall be considered to have been extinguished and the new loan
shall be accounted for as a separate financial liability. The accounting entries for the same are
included below:
d. 31 December 20X2 – accounting for extinguishment
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)
Loan from bank (old) A/c Dr 397,489,650
Finance cost (profit and loss) Dr 2,510,350
To Loan from bank (new) A/c 400,000,000
(Being new loan accounted for at its principal amount in
absence of any transaction costs directly related to such
loan and correspondingly a de-recognition of existing
loan)

e. 31 December 20X3
Particulars Dr. Amount (Rs.) Cr. Amount (Rs.)
Loan from bank A/c Dr. 40,000,000
Interest expense (profit and loss) Dr. 60,000,000
To cash A/c 100,000,000
(Being first instalment of the new loan and payment of
interest accounted for as an adjustment to the
amortised cost of loan)

Question 91
KK Ltd. has granted an interest free loan of Rs. 10,00,000 to its wholly owned Indian Subsidiary YK
Ltd. There is no transaction cost attached to the said loan. The Company has not finalised any terms

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and conditions including the applicable interest rates on such loans. The Board of Directors of the
Company are evaluating various options and has requested your firm to provide your views under
Ind AS in following situations:
(i) The Loan given by KK Ltd. to its wholly owned subsidiary YK Ltd. is interest free and
such loan is repayable on demand.
(ii) The said Loan is interest free and will be repayable after 3 years from the date of granting
such loan. The current market rate of interest for similar loan is 10%. Considering the
same, the fair value of the loan at initial recognition is Rs. 8,10,150.
(iii) The said loan is interest free and will be repaid as and when the YK Ltd. has funds to
repay the Loan amount.
Based on the same, KK Ltd. has requested you to suggest the accounting treatment of the
above loan in the stand-alone financial statements of KK Ltd. and YK Ltd. and also in the
consolidated financial statements of the group. Consider interest for only one year for the
above loan.
Further the Company is also planning to grant interest free loan from YK Ltd. to KK Ltd. in
the subsequent period. What will be the accounting treatment of the same under applicable
Ind AS? [RTP May 2019]
Ans: Scenario (i)
Since the loan is repayable on demand, it has fair value equal to cash consideration given.
KK Ltd. and YK Ltd. should recognize financial asset and liability, respectively, at the
amount of loan given (assuming that loan is repayable within a year). Upon, repayment, both
the entities should reverse the entries that were made at the origination.
Journal entries in the books of KK Ltd.
At origination
Loan to YK Ltd. A/c Dr. Rs. 10,00,000
To Bank A/c Rs. 10,00,000
On repayment
Bank A/c Dr. Rs. 10,00,000
To Loan to YK Ltd. A/c Rs. 10,00,000
Journal entries in the books of YK Ltd.
At origination
Bank A/c Dr. Rs. 10,00,000
To Loan from KK Ltd. A/c Rs. 10,00,000
On repayment
Loan from KK Ltd. A/c Dr. Rs. 10,00,000

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To Bank A/c Rs. 10,00,000

In the consolidated financial statements, there will be no entry in this regard since loan
receivable and loan payable will get set off.
Scenario (ii)
Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair value upon
initial recognition. Fair value is normally the transaction price. However, sometimes certain
type of instruments may be exchanged at off market terms (ie, different from market terms
for a similar instrument if exchanged between market participants).
If a long-term loan or receivable that carries no interest while similar instruments if exchanged
between market participants carry interest, then fair value for such loan receivable will be
lower from its transaction price owing to the loss of interest that the holder bears. In such
cases where part of the consideration given or received is for something other than the
financial instrument, an entity shall measure the fair value of the financial instrument.
The difference in fair value and transaction cost will treated as investment in Subsidiary YK
Ltd.
Both KK Ltd. and YK Ltd. should recognise financial asset and liability, respectively, at fair
value on initial recognition, i.e., the present value of Rs. 10,00,000 payable at the end of
3 years using discounting factor of 10%. Since the question mentions fair value of the loan
at initial recognition as Rs. 8,10,150, the same has been considered. The difference between
the loan amount and its fair value is treated as an equity contribution to the subsidiary. This
represents a further investment by the parent in the subsidiary.
Journal entries in the books of KK Ltd. (for one year)
At origination
Loan to YK Ltd. A/c Dr. Rs. 8,10,150
Investment in YK Ltd. A/c Dr. Rs. 1,89,850
To Bank A/c Rs. 10,00,000
During periods to repayment- to recognise interest
Year 1 – Charging of Interest
Loan to YK Ltd. A/c Dr. Rs. 81,015
To Interest income A/c Rs. 81,015
Transferring of interest to Profit and Loss
Interest income A/c Dr. Rs. 81,015
To Profit and Loss A/c Rs. 81,015
On repayment
Bank A/c Dr. Rs. 10,00,000

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To Loan to YK Ltd. A/c Rs. 10,00,000

Note- Interest needs to be recognised in statement of profit and loss. The same cannot be
adjusted against capital contribution recognised at origination.
Journal entries in the books of YK Ltd. (for one year)
At origination
Bank A/c Dr. Rs. 10,00,000
To Loan from KK Ltd. A/c Rs. 8,10,150
To Equity Contribution in KK Ltd. A/c Rs. 1,89,850
During periods to repayment- to recognise interest
Year 1
Interest expense A/c Dr. Rs. 81,015
To Loan from KK Ltd. A/c Rs. 81,015
On repayment
Loan from KK Ltd. A/c Dr. Rs. 10,00,000
To Bank A/c Rs. 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
Scenario (iii)
Generally, a loan which is repayable when funds are available, cannot be stated as loan
repayable on demand. Rather the entity needs to estimate the repayment date and
determine its measurement accordingly by applying the concept prescribed in Scenario (ii).
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
In case the subsidiary YK Ltd. is planning to grant interest free loan to KK Ltd., then the
difference between the fair value of the loan on initial recognition and its nominal value
should be treated as dividend distribution by YK Ltd. and dividend income by the parent KK
Ltd.

IND AS 113
Question 93
On 1st April 2017, A Ltd. assumes a decommissioning liability in a business combination. The 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. A Ltd. uses the expected present value technique to measure the fair
value of the decommissioning liability. If A Ltd. was contractually allowed to transfer its
decommissioning liability to a market participant, it concludes that a market participant would use

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the following inputs, probability-weighted as appropriate, when estimating the price, it would expect
to receive:
(i) Labour costs are developed on the basis of current market place wages, adjusted for
expectations of future wage increases, required to hire contractors to dismantle and remove
offshore oil platforms. A Ltd. assigns probability assessments (based A Ltd.’s experience with
fulfilling obligations of this type and its knowledge of the market) to a range of cash flow
estimates as follows:
Cash flow estimate (Rs.) Probability assessment
50,000 25%
62,500 50%
87,500 25%

(ii) A Ltd. estimates allocated overhead and equipment operating costs to be 80% of expected
labour costs in consistent with the cost structure of market participants.
(iii) A Ltd. estimates 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 as follows:
1. A third-party contractor typically adds 20% mark-up on labour and allocated internal costs to
provide a profit margin on the job.
2. A Ltd. estimates 5% premium of the expected cash flows, including the effect of inflation for
uncertainty inherent in locking in today’s price for a project that will not occur for 10 years.
(iv) Entity A assumes a rate of inflation of 4% over the 10-year period on the basis of available
market data.
(v) The risk-free rate of interest for a 10-year maturity on 1st April, 2017 is 5 %. A Ltd. adjusts
that rate by 3.5 per cent to reflect its risk of non-performance (ie the risk that it will not fulfil
the obligation), including its credit risk.
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.
Measure the fair value of its decommissioning liability.
Ans: Measurement of the fair value of its decommissioning liability Expected cash flows (Rs.) 1st
April 2017
Expected labour costs (Refer W.N.) 65,625
Allocated overhead and equipment costs (0.80 × Rs. 65,625) 52,500
Contractor’s profit mark-up [0.20 × (Rs. 65,625 + Rs. 52,500)] 23,625
Expected cash flows before inflation adjustment 1,41,750
Inflation factor (4% for 10 years) on compounding 1.4802
Expected cash flows adjusted for inflation 2,09,818
Market risk premium (Rs. 2,09,818 x 5%) 10,491
Expected cash flows adjusted for market risk 2,20,309

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Expected present value using discount rate of (5 +3.5) 8.5% for 10 years 97,443

Working Note:
Cash flow estimate (Rs.) Probability assessment Expected cash flows
(Rs.)
50,000 25% 12,500
62,500 50% 31,250
87,500 25% 21,875
65,625
Question 94:
ABC Ltd. acquired 5% equity shares of XYZ Ltd. for Rs. 10 crore in the year 2011-12. The company is
in process of preparing the financial statements for the year 2012-13 and is assessing the fair value
at subsequent measurement of the investment made in XYZ Ltd. Based on the observable input, the
ABC Ltd. identified a similar nature of transaction in which PQR Ltd. acquired 20% equity shares in
XYZ Ltd. for Rs. 60 crore. The price of such transaction was determined on the basis of Comparable
Companies Method (CCM)- Enterprise Value (EV) / EBITDA which was 8. For the current year, the
EBITDA of XYZ Ltd. is Rs. 40 crore. At the time of acquisition, the valuation was determined after
considering 5% of liquidity discount and 5% of non-controlling stake discount. What will be the fair
value of ABC Ltd.’s investment in XYZ Ltd. as on the balance sheet date?
Solution: Determination of Enterprise Value of XYZ Ltd.
Particulars Rs. in crore
EBITDA as on the measurement date 40
EV/EBITDA multiple as on the date of valuation 8
Enterprise value of XYZ Ltd. 320
Determination of subsequent measurement of XYZ Ltd.
Particulars Rs. in crore
Enterprise Value of XYZ Ltd. 320
ABC Ltd.’s share based on percentage of holding (5% of 320) 16
Less: Liquidity discount & Non-controlling stake discount (5%+5%=10%) (1.6)
Fair value of ABC Ltd.’s investment in XYZ Ltd. 14.4
Question 95:
You are a senior consultant of your firm and are in process of determining the valuation of KK Ltd.
You have determined the valuation of the company by two approaches i.e. Market Approach and
Income approach and selected the highest as the final value. However, based upon the discussion

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with your partner you have been requested to assign equal weights to both the approaches and
determine a fair value of shares of KK Ltd. The details of the KK Ltd. are as follows:
Particulars Rs. in crore
Valuation as per Market Approach 5268.2
Valuation as per Income Approach 3235.2
Debt obligation as on Measurement date 1465.9
Surplus cash & cash equivalent 106.14
Fair value of surplus assets and Liabilities 312.4
Number of shares of KK Ltd. 8,52,84,223 shares
Determine the Equity value of KK Ltd. as on the measurement date on the basis of above details
Solution: Equity Valuation of KK Ltd
Particulars Weights (Rs. in crore)
As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
Enterprise Valuation based on weights (5268.2 x 50%) + (3235.2 x 50%) 4,251.7
Less: Debt obligation as on measurement date (1465.9)
Add: Surplus cash & cash equivalent 106.14
Add: Fair value of surplus assets and liabilities 312.40
Enterprise value of KK Ltd. 3204.33
No. of shares 85,284,223
Value per share 375.72

IND AS 24
Question 96
Uttar Pradesh State Government holds 60% shares in PQR Limited and 55% shares in ABC Limited.
PQR Limited has two subsidiaries namely P Limited and Q Limited. ABC Limited has two
subsidiaries namely A Limited and B Limited. Mr. KM is one of the Key management personnel in
PQR Limited. ·
(a) Determine the entity to whom exemption from disclosure of related party transactions
is to be given. Also examine the transactions and with whom such exemption applies.
(b) What are the disclosure requirements for the entity which has availed the exemption?
Answer:

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(a) As per para 18 of Ind AS 24, ‘Related Party Disclosures’, if an entity had related party
transactions during the periods covered by the financial statements, it shall disclose
the nature of the related party relationship as well as information about those
transactions and outstanding balances, including commitments, necessary for users to
understand the potential effect of the relationship on the financial statements.
However, as per para 25 of the standard a reporting entity is exempt from the
disclosure requirements in relation to related party transactions and outstanding
balances, including commitments, with:
(i) a government that has control or joint control of, or significant influence over,
the reporting entity; and
(ii) another entity that is a related party because the same government has control
or joint control of, or significant influence over, both the reporting entity and the
other entity
According to the above paras, for Entity P’s financial statements, the exemption in
paragraph 25 applies to:
(i) transactions with Government Uttar Pradesh State Government; and
(ii) transactions with Entities PQR and ABC and Entities Q, A and B.
Similar exemptions are available to Entities PQR, ABC, Q, A and B, with the transactions
with UP State Government and other entities controlled directly or indirectly by UP
State Government. However, that exemption does not apply to transactions with Mr.
KM. Hence, the transactions with Mr. KM needs to be disclosed under related party
transactions.
(b) It shall disclose the following about the transactions and related outstanding
balances referred to in paragraph 25:
(a) the name of the government and the nature of its relationship with the
reporting entity (ie control, joint control or significant influence);
(b) the following information in sufficient detail to enable users of the entity’s
financial statements to understand the effect of related party transactions
on its financial statements:
(i) the nature and amount of each individually significant transaction; and
(ii) for other transactions that are collectively, but not individually, significant,
a qualitative or quantitative indication of their extent.
Question 97
ABC Ltd. is a long-standing customer of XYZ Ltd. Mrs. P whose husband is a director in XYZ Ltd.
purchased a controlling interest in entity ABC Ltd. on 1st June, 2017. Sales of products from XYZ Ltd.
to ABC Ltd. in the two-month period from 1st April 2017 to 31st May 2017 totalled Rs. 8,00,000.
Following the shares purchased by Mrs. P, XYZ Ltd. began to supply the products at a discount of 20%
to their normal selling price and allowed ABC Ltd. three months’ credit (previously ABC Ltd. was only

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allowed one month’s credit, XYZ Ltd.’s normal credit policy). Sales of products from XYZ Ltd. to ABC
Ltd. in the ten-month period from 1st June 2017 to 31st March 2017 totalled Rs. 60,00,000. On 31st
March 2018, the trade receivables of XYZ Ltd. included Rs. 18,00,000 in respect of amounts owing by
ABC Ltd.
Analyse and show how the above event would be reported in the financial statements of XYZ Ltd. for
the year ended 31 March 2018 and mention the disclosure requirements also as per Ind AS.
Ans: XYZ Ltd. would include the total revenue of Rs. 68,00,000 (Rs. 60,00,000 + Rs. 8,00,000) from
ABC Ltd. received / receivable in the year ended 31st March 2018 within its revenue and show
Rs. 18,00,000 within trade receivables at 31st March 2018.
Mrs. P would be regarded as a related party of XYZ Ltd. because she is a close family member
of one of the key management personnel of XYZ Ltd.
From 1st June 2017, ABC Ltd. would also be regarded as a related party of XYZ Ltd. because
from that date ABC Ltd. is an entity controlled by another related party.
Because ABC Ltd. is a related party with whom XYZ Ltd. has transactions, then XYZ Ltd. should
disclose:
– The nature of the related party relationship.
– The revenue of Rs. 60,00,000 from ABC Ltd. since 1st June 2017.
– The outstanding balance of Rs. 18,00,000 at 31st March 2018.
In the current circumstances it may well be necessary for XYZ Ltd. to also disclose the
favourable terms under which the transactions are carried out.

IND AS 19
Question 98
A Ltd. prepares its financial statements to 31st March each year. It operates a defined benefit
retirement benefits plan on behalf of current and former employees. A Ltd. receives advice from
actuaries regarding contribution levels and overall liabilities of the plan to pay benefits. On 1st April,
2017, the actuaries advised that the present value of the defined benefit obligation was Rs.
6,00,00,000. On the same date, the fair value of the assets of the defined benefit plan was Rs.
5,20,00,000. On 1st April, 2017, the annual market yield on government bonds was 5%. During the
year ended 31st March, 2018, A Ltd. made contributions of Rs. 70,00,000 into the plan and the plan
paid out benefits of Rs. 42,00,000 to retired members. Both these payments were made on 31st
March, 2018.
The actuaries advised that the current service cost for the year ended 31st March, 2018 was Rs.
62,00,000. On 28th February, 2018, the rules of the plan were amended with retrospective effect.
These amendments meant that the present value of the defined benefit obligation was increased by
Rs. 15,00,000 from that date.
During the year ended 31st March, 2018, A Ltd. was in negotiation with employee representatives
regarding planned redundancies. The negotiations were completed shortly before the year end and
redundancy packages were agreed. The impact of these redundancies was to reduce the present

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value of the defined benefit obligation by Rs. 80,00,000. Before 31st March, 2018, A Ltd. made
payments of Rs. 75,00,000 to the employees affected by the redundancies in compensation for
the curtailment of their benefits. These payments were made out of the assets of the retirement
benefits plan.
On 31st March, 2018, the actuaries advised that the present value of the defined benefit obligation
was Rs. 6,80,00,000. On the same date, the fair value of the assets of the defined benefit plan were
Rs. 5,60,00,000.
Examine and present how the above event would be reported in the financial statements of A Ltd.
for the year ended 31st March, 2018 as per Ind AS.
Ans: All figures are Rs. in ’000.
On 31st March, 2018, A Ltd. will report a net pension liability in the statement of financial
position. The amount of the liability will be 12,000 (68,000 – 56,000).
For the year ended 31st March, 2018, A Ltd. will report the current service cost as an operating
cost in the statement of profit or loss. The amount reported will be 6,200. The same treatment
applies to the past service cost of 1,500.
For the year ended 31st March, 2018, A Ltd. will report a finance cost in profit or loss based
on the net pension liability at the start of the year of 8,000 (60,000 – 52,000). The amount of
the finance cost will be 400 (8,000 x 5%).
The redundancy programme represents the partial settlement of the curtailment of a defined
benefit obligation. The gain on settlement of 500 (8,000 – 7,500) will be reported in the
statement of profit or loss.
Other movements in the net pension liability will be reported as remeasurement gains or
losses in other comprehensive income.
For the year ended 31st March, 2018, the remeasurement loss will be 3,400 (Refer W. N.).
Working Note:
Remeasurement of gain or loss
Rs. in ’000
Liability at the start of the year (60,000 – 52,000) 8,000
Current service cost 6,200
Past service cost 1,500
Net finance cost 400
Gain on settlement (500)
Contributions to plan (7,000)
Remeasurement loss (balancing figure) 3,400
Liability at the end of the year (68,000 – 56,000) 12,000

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Question 99
AKJ Ltd is a listed company engaged in the business of manufacturing of electronic equipment. The
company has various branch offices spread out across India and has 1,000 employees.
As per the statutory requirements, gratuity shall be payable to an employee on the termination of
his employment after he has rendered continuous service for not less than five years -
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease.
The completion of continuous service of five years shall not be necessary where the termination of
the employment of any employee is due to death or disablement.
The amount payable is determined by a formula linked to number of years of service and last drawn
salary. The amount payable to an employee shall not exceed Rs. 10,00,000.
Compute the amount of employee benefit, if any, attributed to each year of service.
Ans: The amount of gratuity would be attributed to each year of service and calculated as follows:
Number of employees not likely to fulfill the eligibility criteria will be ignored.
Other employees will be grouped according to period of service they are expected to render
taking into account:
● mortality rate,
● disablement and
● resignation after 5 years.
Gratuity payable will be calculated in accordance with the formula prescribed in the governing
statute based on the period of service and the salary at the time of termination of
employment, assuming promotion, salary increases etc.
For those employees for whom the amount payable as per the formula does not exceed Rs.
10,00,000, over the expected period of service, the amount payable will be divided by the
expected period of service and the resulting amount will be attributed to each year of the
expected period of service, including the period before the stipulated period of 5 years.
In case of the remaining employees, the amount as per the formula exceeds Rs. 10,00,000
over the expected period of service of 10 years, and the amount of the threshold of Rs.
10,00,000 is reached at the end of 8 years i.e. Rs. 1,25,000 (Rs. 10,00,000 divided by 8) is
attributed to each of the first 8 years. In this case, no benefit is attributed to subsequent two
years. This is because service beyond 8 years will lead to no material amount of further
benefits.

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Question 100
RKA Private Ltd is an old company established in 1911. The company started with a very small capital
base and today it is one of the leading companies in India in its industry. The company has an annual
turnover of Rs. 11,000 crores and planning to get listed in the next year.
The company has a large employee base. The company provided a defined benefit plan to its
employees. Following is the information relating to the balances of the fund’s assets and liabilities as
at 1st April, 2011 and 31st March, 2012.
Rs. in lacs
Particulars 1st April, 2011 31st Mar, 2012
Present value of benefit obligation 1,400 1,580
Fair value of plan assets 1,140 1,275
For the financial year ended 31st March, 2012, service cost was Rs. 55 lacs. The company made a
contribution of an amount of Rs. 111 lacs to the plan. No benefits were paid during the year.
Consider a discount rate of 8%. You are required to -
(a) Compute the balance(s) of the company to be included its balance sheet as on 31st
March, 2012 and amounts to be recognized in the statement of profit and loss and other
comprehensive income for the year ended 31st March, 2012.
(b) Give the journal entries in respect of amount(s) to be recognized.
Ans:
(a)
Extract of the Balance Sheet of RKA Private Ltd as at 31st March, Rs. in lacs
2012
Closing net defined liability (1,580 – 1,275) lacs 305
Extract of the Statement of Profit or Loss of RKA Private Ltd for the Rs. in lacs
year ended 31st March, 2012
Service cost 55
Net interest (Refer W.N.1) 21
Profit or loss 76
Other comprehensive income:
Remeasurements (Refer W.N.2) 80
Total 156
Journal entry
Particulars Rs. in lacs Rs. in lacs
Profit & Loss Dr. 76
Other comprehensive income Dr. 80
To Cash (Contribution) 111
To Net defined benefit liability (Refer WN 3) 45
Working Notes:
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a. Computation of Net interest taken to the Statement of Profit or Loss

= Discount rate x Opening net defined benefit liability
= 8% x (1,400 – 1,140) lacs
= 8% x 260 lacs
= 21 lacs (Rounded off to nearest lacs)
b. Computation of Remeasurements
Actuarial gain or loss on defined benefit liability:
Particulars Rs. in lacs
Opening balance of liability 1,400
Current service cost 55
Interest on opening liability (1,400 x 8%) 112
Actuarial loss (Bal. fig) 13
Closing balance of liability 1,580
Particulars Rs. in lacs
Opening balance of asset 1,140
Cash contribution 111
Actual return (Bal. fig) 24
Closing balance of asset 1,275
Actuarial loss on liability + Loss on return = Rs. 13 lacs + Rs. 67 lacs = Rs. 80 lacs.
c. Computation of increase/ decrease in net defined benefit liability:
Particulars Rs. in lacs
Opening net liability (Rs. 1,400 lacs – Rs. 1,140 lacs) 260
Closing net liability (Rs. 1,580 lacs – Rs. 1,275 lacs) 305
Increase in liability 45
Question 101
OPQ Ltd is a listed company having its corporate office at Nagpur. The company has a branch office
at Chennai. The company has been operating in Indian market for the last 10 years.
The company operates a pension plan that provides a pension of 2.5% of the final salary for each year
of service. The benefits become vested after seven years of service.
On 1st April, 2018, the company increased the pension to 3% of the final salary for each year of service
starting from 1st April, 2011. On the date of the improvement, the present value of the additional
benefits for service from 1April, 2011 to 1st April 218 was as follows:

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● Employees with more than seven years’ service on 1 January 2018 – Rs. 2,75,000
● Employees with less than 7 years of service – Rs. 2,21,000 (average 4 years to go).
What would be the accounting treatment in this case?
Ans: OPQ Ltd increased the pension to 3% of the final salary for each year of service starting from
1st April, 2011 to 1st April, 2018.
The company would recognize the total amount of Rs. 4,96,000 (i.e. Rs. 2,75,000 + Rs.
2,21,000) immediately, as for the purpose of recognition it does not make any difference as
to whether the benefits are already vested or not.
Question 102
SA Pvt Ltd is engaged in the business of retail having 100 retail outlets across Northern and Southern
India. The company’’s head office is located at Chennai.
SA Pvt Ltd is a subsidiary of SAG Ltd. SAG Ltd is listed on the National Stock Exchange in India.
Following information is available for SA Pvt Ltd:
Plan Assets
At 1st April, 2011, the fair value of plan assets was Rs. 10,000.
Contribution to the plan assets done on 31March, 2012 – Rs. 3,000
Amount paid on 31st March, 2012 – Rs. 300
At 31st March, 2012, the fair value of plan assets was Rs. 14,700 Actual return on plan assets – Rs.
2,000
Defined Benefit Obligation
At 1st April, 2011, present value of the defined benefit obligation was Rs. 12,000.
At 31st March, 2012, present value of the defined benefit obligation was Rs. 15,500.
Actuarial losses on the obligation for the year ended 31st March, 2012 were Rs. 100.
Current Service Cost – Rs. 2,500
Benefit paid – Rs. 300
Discount rate used to calculate defined benefit liability - 10%.
As per Ind AS 19, please suggest if there is any amount based on the above mentioned information
that would be taken to other comprehensive income (with workings). Also compute net interest on
the net defined benefit liability (asset).
Ans: As per Ind AS 19, net remeasurement of Rs. 900 would be recognized in other comprehensive
income.
Computation of Net remeasurement
= Remeasurement – Actuarial loss
= Rs. 1000 (Refer WN - 1) – Rs. 100 (Given in the question)

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= Rs. 900.
Computation of net interest expense
Particulars Amount in Rs.
Defined benefit liability as at 1 April 2011 (A)(Given in the question) 12,000
Fair value of plan asset as at 1 April 2011 (B) (Given in the question) (10,000)
Net defined benefit liability (A - B) 2,000
Net interest expense (as it is net liability) (Refer note given below) 200
Note:
Net interest expense would be computed on net defined benefit liability using discount rate
of 10% given in the question-
= Net defined benefit liability x Discount rate
= 2,000 x 10% = Rs. 200.
Working Note: Computation of amount of remeasurement
Particulars Amount in Rs.
Actual return on plan asset for the year ended 31 March 2012 (C)
(Given in the question) 2,000
Less: Interest income on Rs. 10,000 held for 12 months at 10% (D) (1,000)
Remeasurement (E = C - D) 1,000

IND AS 21
Question 103
Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share capital of
Mark Limited, an entity registered as company in Germany. The functional currency of Global Limited
is Rupees and its financial year end is 31st March, 20X2.
(i) The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30th September, 20X1.
The exchange rates as at 30th September, 20X1 was Rs. 82 / EURO and at 31st March,
20X2 was Rs. 84 / EURO.
What is the value at which the goodwill has to be recognised in the financial statements of
Global Limited as on 31st March, 20X2?
(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million EURO
during the year ended 31st March, 20X2. The exchange rate on the date of purchase by Global
Limited was Rs. 83 / EURO and on 31st March, 20X2 was Rs. 84 / EURO. The entire goods
purchased from Mark Limited are unsold as on 31st March, 20X2. Determine the unrealised
profit to be eliminated in the preparation of consolidated financial statements.
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Answer:
(i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be expressed
in the functional currency of the foreign operation and shall be translated at the closing rate
in accordance with paragraphs 39 and 42. In this case the amount of goodwill will be as
follows:
Net identifiable asset Dr. 23 million
Goodwill(bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x Rs. 84 = Rs. 117.6 million
(ii) Particulars EURO in million
Sale price of Inventory 4.20
Unrealised Profit [a] 1.80
Exchange rate as on date of purchase of Inventory [b]Rs. 83 / Euro Unrealized profit to be
eliminated [a x b] Rs. 149.40 million
As per para 39 of Ind AS 21 “income and expenses for each statement of profit and loss
presented (ie including comparatives) shall be translated at exchange rates at the dates of
the transactions”.
In the given case, purchase of inventory is an expense item shown in the statement profit
and loss account. Hence, the exchange rate on the date of purchase of inventory is taken
for calculation of unrealized profit which is to be eliminated on the event of consolidation.
Question 104
Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to deliver goods
in exchange for total consideration of USD 50 million and receives an upfront payment of USD 20
million on this date. The functional currency of the supplier is INR. The goods are delivered and
revenue is recognised on 31st March, 2018. USD 30 million is received on 1st April, 2018 in full
and final settlement of the purchase consideration.
State the date of transaction for advance consideration and recognition of revenue. Also state the
amount of revenue in INR to be recognized on the date of recognition of revenue. The exchange
rates on 1st January, 2018 and 31st March, 2018 are Rs. 72 per USD and Rs. 75 per USD respectively.
[RTP May 2019]
Answer: This is the case of Revenue recognised at a single point in time with multiple payments. As
per the guidance given in Appendix B to Ind AS 21:
A Ltd. will recognise a non-monetary contract liability amounting Rs. 1,440 million, by translating USD
20 million at the exchange rate on 1st January, 2018 ie Rs. 72 per USD.

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A Ltd. will recognise revenue at 31st March, 2018 (that is, the date on which it transfers the goods
to the customer).
A Ltd. determines that the date of the transaction for the revenue relating to the advance
consideration of USD 20 million is 1st January, 2018. Applying paragraph 22 of Ind AS 21,
A Ltd. determines that the date of the transaction for the remainder of the revenue as 31st March,
2018.
On 31st March, 2018, A Ltd. will:
• derecognise the non-monetary contract liability of USD 20 million and recognise USD 20
million of revenue using the exchange rate as at 1st January, 2018 ie Rs. 72 per USD; and
• recognise revenue and a receivable for the remaining USD 30 million, using the exchange rate
on 31st March, 2018 ie Rs. 75 per USD.
• The receivable of USD 30 million is a monetary item, so it should be translated using the
closing rate until the receivable is settled.
Question 105
M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies and non-
pharmaceutical companies. It has a wholly owned subsidiary, G Ltd, which is engaged in the business
of pharmaceuticals. G Ltd purchases the pharmaceutical bottles from its parent company. The
demand of G Ltd is very high and the operations of M Ltd are very large and hence to cater to its
shortfall, G Ltd also purchases the bottles from other companies. Purchases are made at the
competitive prices.
M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on 1st February, 2011. The cost of these
bottles was Rs. 830 lacs in the books of M Ltd at the time of sale. At the year-end i.e. 31st
March, 2011, all these bottles were lying as closing stock with G Ltd. What should be the accounting
treatment for the above? Following additional information is available:
Exchange rate on 1st February, 2011 1 Euro = Rs. 83
Exchange rate on 31st March, 2011 1 Euro = Rs. 85
Solution:
Accounting treatment in the books of M Ltd
M Ltd will recognize sales of Rs. 996 lacs (12 lacs Euro X 83) Profit on sale of inventory = 996 lacs –
830 lacs = Rs. 166 lacs. Accounting treatment in the books of G Ltd
G Ltd will recognize inventory on 1February, 2011 of Euro 12 lacs which will also be its closing stock
at year end.
Accounting treatment in the consolidated financial statements
Receivable and payable in respect of above mentioned sale / purchase between M Ltd and G Ltd will
get eliminated.
The closing stock of G Ltd will be translated at year end resulting in amount of closing stock of Rs.
1,020 lacs (12 lacs Euro X 85).

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The restated amount of closing stock includes three components–

 Restated amount of cost of inventory for Rs. 850 lacs
 Profit element of Rs. 166 lacs; and
 Translated amount of profit element of Rs. 4 lacs.
At the time of consolidation, the two elements amounting to Rs. 170 lacs will be eliminated from the
closing stock.
Question 106
Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to deliver goods
in exchange for total consideration of USD 50 million and receives an upfront payment of USD 20
million on this date. The functional currency of the supplier is INR. The goods are delivered and
revenue is recognised on 31st March, 2018. USD 30 million is received on 1st April, 2018 in full
and final settlement of the purchase consideration.
State the date of transaction for advance consideration and recognition of revenue. Also state the
amount of revenue in INR to be recognized on the date of recognition of revenue. The exchange
rates on 1st January, 2018 and 31st March, 2018 are Rs. 72 per USD and Rs. 75 per USD respectively
Answer: This is the case of Revenue recognised at a single point in time with multiple payments. As
per the guidance given in Appendix B to Ind AS 21:
A Ltd. will recognise a non-monetary contract liability amounting Rs. 1,440 million, by translating USD
20 million at the exchange rate on 1st January, 2018 ie Rs. 72 per USD.
A Ltd. will recognise revenue at 31st March, 2018 (that is, the date on which it transfers the goods
to the customer).
A Ltd. determines that the date of the transaction for the revenue relating to the advance
consideration of USD 20 million is 1st January, 2018. Applying paragraph 22 of Ind AS 21,
A Ltd. determines that the date of the transaction for the remainder of the revenue as 31st March,
2018.
On 31st March, 2018, A Ltd. will:
• derecognise the non-monetary contract liability of USD 20 million and recognise USD 20
million of revenue using the exchange rate as at 1st January, 2018 ie Rs. 72 per USD; and
• recognise revenue and a receivable for the remaining USD 30 million, using the exchange rate
on 31st March, 2018 ie Rs. 75 per USD.
• The receivable of USD 30 million is a monetary item, so it should be translated using the
closing rate until the receivable is settled.
Question 107
Entity A, whose functional currency is Rs., has a foreign operation, Entity B, with a Euro functional
currency. Entity B issues to A perpetual debt (i.e. it has no maturity) denominated in euros with an
annual interest rate of 6 per cent. The perpetual debt has no issuer call option or holder put option.
Thus, contractually it is just an infinite stream of interest payments in Euros.
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In A's consolidated financial statements, can the perpetual debt be considered, in accordance with
Ind AS 21.15, a monetary item "for which settlement is neither planned nor likely to occur in the
foreseeable future" (i.e. part of A's net investment in B), with the exchange gains and losses on the
perpetual debt therefore being recorded in equity?
Solution:
Yes, as per Ind AS 21 net investment in a foreign operation is the amount of the reporting entity’s
interest in the net assets of that operation.
As per para 15 of Ind AS 21, an entity may have a monetary item that is receivable from or payable
to a foreign operation. An item for which settlement is neither planned nor likely to occur in the
foreseeable future is, in substance, a part of the entity’s net investment in that foreign operation.
Such monetary items may include long-term receivables or loans. They do not include trade
receivables or trade payables.
Analysis on the basis of above mentioned guidance
Through the origination of the perpetual debt, A has made a permanent investment in B. The interest
payments are treated as interest receivable by A and interest payable by B, not as repayment of the
principal debt. Hence, the fact that the interest payments are perpetual does not mean that
settlement is planned or likely to occur. The perpetual debt can be considered part of A's net
investment in B.
In accordance with para 15 of Ind AS 21, the foreign exchange gains and losses should be recorded in
equity at the consolidated level because settlement of that perpetual debt is neither planned nor
likely to
Question 108
On 30th January, 20X1, A Ltd. purchased a machinery for $5,000 from USA supplier on credit basis.
A’s Ltd. functional currency is the Rupee. The exchange rate on the date of transaction is 1$= Rs. 60.
The fair value of the machinery determined on 31st March, 20X1 is $ 5,500. The exchange rate on
31st March, 20X1 is 1$= Rs. 65. The payment to overseas supplier done on 31st March 20X2 and the
exchange rate on 31st March 20X2 is 1$= Rs. 67. The fair value of the machinery remain unchanged
for the year ended on 31st March 20X2. Prepare the Journal entries for the year ended on 31st March
20X1 and year 20X2 according to Ind AS 21.
Answer: Journal Entries
Purchase of Machinery on credit basis on 30th January 20X1:
Rs. Rs.
Machinery A/c (5,000 x $ 60) Dr. 3,00,000
To Creditors 3,00,000
(Initial transaction will be recorded at exchange rate on the date of
transaction)

Exchange difference arising on translating monetary item on 31st March 20X1:

Rs. Rs.
Machinery A/c [(5,500 x $ 65) – (5,000 x $ 60)] Dr. 57,500
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To Revaluation Surplus a/c (OCI) 57,500

Profit & Loss A/c [(5,000 x $ 65) – (5,000 x $ 60)] Dr. 25,000
To Creditors 20,000

Exchange difference arising on translating monetary item and settlement of creditors on 31st March
20X2:
Rs. Rs.
Creditors A/c (5,000 x $65) Dr. 3,25,000
Profit & loss A/c [(5,000 x ($ 67 -$ 65)] Dr. 10,000
To Bank A/c 3,35,000

Question 109
Parent P acquired 90 percent of subsidiary S some years ago. P now sells its entire investment in S
for Rs. 1,500 lakhs. The net assets of S are 1,000 and the NCI in S is Rs. 100 lakhs. The cumulative
exchange differences that have arisen during P’s ownership are gains of Rs. 200 lakhs, resulting in P’s
foreign currency translation reserve in respect of S having a credit balance of Rs.180 lakhs, while the
cumulative amount of exchange differences that have been attributed to the NCI is Rs. 20 lakhs
Calculate P’s gain on disposal.
Ans: P’s gain on disposal would be calculated in the following manner:
(Rs. in Lakhs)
Sale proceeds 1500
Net assets of S (1000)
NCI derecognised 100
Foreign currency translation reserve 180
Gain on disposal 780

IND AS 101
Question 110
ABC Ltd is a government company and is a first-time adopter of Ind AS. As per the previous GAAP,
the contributions received by ABC Ltd. from the government (which holds 100% shareholding in ABC
Ltd.) which is in the nature of promoters’ contribution have been recognised in capital reserve and
treated as part of shareholders’ funds in accordance with the provisions of AS 12, Accounting for
Government Grants.
State whether the accounting treatment of the grants in the nature of promoters’ contribution as per
AS 12 is also permitted under Ind AS 20 Accounting for Government Grants and Disclosure of
Government Assistance. If not, then what will be the accounting treatment of such grants recognised
in capital reserve as per previous GAAP on the date of transition to Ind AS.
Ans: Paragraph 2 of Ind AS 20, “Accounting for Government Grants and Disclosure of Government
Assistance” inter alia states that the Standard does not deal with government participation in
the ownership of the entity.

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Since ABC Ltd. is a Government company, it implies that government has 100% shareholding
in the entity. Accordingly, the entity needs to determine whether the payment is provided as
a shareholder contribution or as a government. Equity contributions will be recorded in equity
while grants will be shown in the Statement of Profit and Loss.
Where it is concluded that the contributions are in the nature of government grant, the entity
shall apply the principles of Ind AS 20 retrospectively as specified in Ind AS 101 ‘First Time
Adoption of Ind AS’. Ind AS 20 requires all grants to be recognised as income on a systematic
basis over the periods in which the entity recognises as expenses the related costs for which
the grants are intended to compensate. Unlike AS 12, Ind AS 20 requires the grant to be
classified as either a capital or an income grant and does not permit recognition of
government grants in the nature of promoter’s contribution directly to shareholders’ funds.
Where it is concluded that the contributions are in the nature of shareholder contributions
and are recognised in capital reserve under previous GAAP, the provisions of paragraph 10 of
Ind AS 101 would be applied which states that, which states that except in certain cases, an
entity shall in its opening Ind AS Balance Sheet:
(a) recognise all assets and liabilities whose recognition is required by Ind AS;
(b) not recognise items as assets or liabilities if Ind AS do not permit such recognition;
(c) 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
(d) apply Ind AS in measuring all recognised assets and liabilities.”
Accordingly, as per the above requirements of paragraph 10(c) in the given case, contributions
recognised in the Capital Reserve should be transferred to appropriate category under ‘Other
Equity’ at the date of transition to Ind AS.
Question 111:
XYZ Pvt. Ltd. is a company registered under the Companies Act, 2013 following Accounting
Standards notified under Companies (Accounting Standards) Rules, 2006. The Company has
decided to voluntary adopt Ind AS w.e.f 1st April, 2018 with a transition date of 1st April, 2017.
The Company has one Wholly Owned Subsidiary and one Joint Venture which are into manufacturing
of automobile spare parts.
The -consolidated financial statements of the Company under Indian GAAP are as under:
Consolidated Financial Statements (Rs. in Lakhs)

Particulars 31.03.2018 31.03.2017

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Shareholder's Funds Share Capital

7,953 7,953
Reserves & Surplus
16,547 16,597
Non-Current Liabilities
Long Term Borrowings
Long Term Provisions 1,000 1,000
Other Long-Term Liabilities 1,101 691
5,202 5,904
Current Liabilities
Trade Payables 9,905 8,455
Short Term Provisions 500 475
Total 42,208 41,075
Non-Current Assets
Property Plant & Equipment 21,488 22,288
Goodwill on Consolidation of subsidiary and JV Investment 1,507 1,507
Property 5,245 5,245
Long Term Loans & Advances 6,350 6,350
Current Assets
4,801 1,818
Trade Receivables Investments ·
1,263 3,763
Other Current Assets
1,554 104
Total 42,208 41,075
Additional Information:
The Company has entered into a joint arrangement by acquiring 50% of the equity shares of ABC
Pvt. Ltd. Presently, the same has been accounted as per the proportionate consolidated method. The
proportionate share of assets and liabilities of ABC Pvt. Ltd. included in the consolidated financial
statement of XYZ Pvt. Ltd. is as under

Particulars Rs. in Lakhs

Property, Plant & Equipment 1,200
Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Trade Payables 75
Short Term Provisions 35
The Investment is in the nature of Joint Venture as per Ind AS 111.
The Company has approached you to advice and suggest the accounting adjustments which are
required to be made in the opening Balance Sheet as on 1st April, 2017. [RTP May 2019]

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Solution: As per paras D31AA and D31AB of Ind AS 101, when changing from proportionate
consolidation to the equity method, an entity shall recognise its investment in the joint venture at
transition date to Ind AS.
That initial investment shall be measured as the aggregate of the carrying amounts of the assets
and liabilities that the entity had previously proportionately consolidated, including any goodwill
arising from acquisition. If the goodwill previously belonged to a larger cash-generating unit, or to
a group of cash-generating units, the entity shall allocate goodwill to the joint venture on the
basis of the relative carrying amounts of the joint venture and the cash-generating unit or group of
cash-generating units to which it belonged. The balance of the investment in joint venture at the
date of transition to Ind AS, determined in accordance with paragraph D31AA above is regarded as
the deemed cost of the investment at initial recognition.
Accordingly, the deemed cost of the investment will be
Property, Plant & Equipment 1,200
Goodwill (Refer Note below) 119
Long Term Loans & Advances 405
Trade Receivables 280
Other Current Assets 50
Total Assets 2054
Less: Trade Payables 75
Short Term Provisions 35
Deemed cost of the investment in JV 1944

Calculation of proportionate goodwill share of Joint Venture ie ABC Pvt. Ltd.

Property, Plant & Equipment 22,288
Goodwill 1,507
Long Term Loans & Advances 6,350
Trade Receivables 1,818
Other Current Assets 104
Total Assets 32,067
Less: Trade Payables 8,455
Short Term Provisions 475
23,137

Proportionate Goodwill of Joint Venture

= [(Goodwill on consolidation of subsidiary and JV/Total relative net asset) x Net asset of JV]
= (1507 / 23,137) x 1825 = 119 (approx.)
Accordingly, the proportional share of assets and liabilities of Joint Venture will be removed from
the respective values assets and liabilities appearing in the balance sheet on 31.3.2017 and
Investment in JV will appear under non-current asset in the transition date balance sheet as on
1.4.2017.
Adjustments made in I GAAP balance sheet to arrive at Transition date Ind AS Balance Sheet

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Particulars 31.3.2017 Ind AS Transition date

Adjustment Balance Sheet
as per Ind AS

Non-Current Assets 22,288 (1,200) 21,088

Property Plant & Equipment
Intangible assets - Goodwill
on Consolidation 1,507 (119) 1,388
Investment Property 5,245 - 5,245
Long Term Loans & Advances 6,350 (405) 5,945
Non- current investment in JV - 1,944 1,944
Current Assets -
Trade Receivables 1,818 (280) 1,538
Investments 3,763 - 3,763
Other Current Assets 104 (50) 54
Total 41,075 (110) 40,965
Shareholder's Funds
Share Capital 7,953 - 7,953
Reserves & Surplus 16,597 - 16,597
Non-Current Liabilities
Long Term Borrowings 1,000 1,000
Long Term Provisions 691 691
Other Long-Term Liabilities 5,904 5,904
Current Liabilities
Trade Payables 8,455 (75) 8,380
Short Term Provisions 475 (35) 440
Total 41,075 (110) 40,965

IND AS 33
Question 112
At 30 June 20X1, the issued share capital of an entity consisted of 1,500,000 ordinary shares of Rs. 1
each. On 1 October 20X1, the entity issued Rs. 1,250,000 of 8% convertible loan stock for cash at par.
Each Rs. 100 nominal of the loan stock may be converted, at any time during the years ended 20X6
to 20X9, into the number of ordinary shares set out below:
30 June 20X6: 135 ordinary shares;
30 June 20X7: 130 ordinary shares;
30 June 20X8: 125 ordinary shares; and
30 June 20X9: 120 ordinary shares.
If the loan stocks are not converted by 20X9, they would be redeemed at par. There are two different
ways of assessing these instruments under Ind AS 32: the conversion option, to convert to a number

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of shares which varies only with time, could be viewed as either an option to convert to a variable or
a fixed number of shares and recognised as either a liability or equity respectively.
This illustration assumes that the written equity conversion option is accounted for as a derivative
liability and marked to market through profit or loss. The change in the options’ fair value reported
in 20X2 and 20X3 amounted to losses of Rs. 2,500 and Rs. 2,650 respectively. It is assumed that there
are no tax consequences arising from these losses.
The profit before interest, fair value movements and taxation for the year ended 30 June 20X2 and
20X3 amounted to Rs. 825,000 and Rs. 895,000 respectively and relate wholly to continuing
operations. The rate of tax for both periods is 33%.
Calculate Basic and Diluted EPS.
Answer: 20X3 20X2
Trading results Rs. Rs.
A. Profit before interest, fair value movements and tax 895,000 825,000
B. Interest on 8% convertible loan stock (20X2: 9/12 × Rs.100,000) (100,000) (75,000)
C. Change in fair value of embedded option (2,650) (2,500)
Profit before tax 792,350 747,500
Taxation @ 33% on (A-B) (262,350) (247,500)
Profit after tax 530,000 500,000
Calculation of basic EPS
Number of equity shares outstanding 1,500,000 1,500,000
Earnings Rs. 530,000 Rs. 500,000
Basic EPS 35 paise 33 paise
Calculation of diluted EPS
Test whether convertibles are dilutive:
The saving in after-tax earnings, resulting from the conversion of Rs. 100 nominal of loan
stock, amounts to Rs. 100 × 8% × 67% + Rs. 2,650/12,500 = Rs. 5.36 + Rs. 0.21 = Rs. 5.57.
There will then be 135 extra shares in issue.
Therefore, the incremental EPS is 4 paise (ie. Rs. 5.57/135). As this incremental EPS is less
than the basic EPS at the continuing level, it will have the effect of reducing the basic EPS of
35 paise. Hence the convertibles are dilutive.
20X3 20X2
Adjusted earnings Rs. Rs.
Profit for basic EPS 530,000 500,000
Add: Interest and other charges on earnings saved
as a result of the conversion 102,650 77,500
(100,000 + 2,650) (75000+ 2500)
Less: Tax relief thereon (33,875) (25,575)
Adjusted earnings for equity 598,775 551,925

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Adjusted number of shares

From the conversion terms, it is clear that the maximum number of shares issuable on
conversion of Rs. 1,250,000 loan stock after the end of the financial year would be at the rate
of 135 shares per Rs. 100 nominal (that is, 1,687,500 shares).
20X3 20X2
Number of equity shares for basic EPS 1,500,000 1,500,000
Maximum conversion at date of issue 1,687,500 × 9/12 – 1,265,625
Maximum conversion after balance sheet date 1,687,500 –
Adjusted capital 3,187,500 2,765,625
Adjusted earnings for equity Rs. 598,775 Rs. 551,925
Diluted EPS (approx.) 19 paise 20 paise
Question 113
At 31 December 20X7 and 20X8, the issued share capital of an entity consisted of 4,000,000 ordinary
shares of Rs. 25 each. The entity has granted options that give holders the right to subscribe for
ordinary shares between 20Y6 and 20Y9 at Rs. 70 per share. Options outstanding at 31 December
20X7 and 20X8 were 630,000. There were no grants, exercises or lapses of options during the year.
The profit after tax, attributable to ordinary equity holders for the years ended 31 December 20X7
and 20X8, amounted to Rs. 500,000 and Rs. 600,000 respectively (wholly relating to continuing
operations).
Average market price of share:
Year ended 31 December 20X7 = Rs. 120
Year ended 31 December 20X8 = Rs. 160
Calculate basic and diluted EPS.
Answer:
Calculation of basic EPS
20X8 20X7
Profit after tax Rs. 600,000 Rs. 500,000
Number of shares 4,000,000 4,000,000
Basic EPS (approx.) 15 paise 13 paise.
Calculation of diluted EPS
Adjusted number of shares
Number of shares under option:
Issued at full market price:
(630,000 × 70) ÷ 120 367,500
(630,000 × 70) ÷ 160 275,625
Issued at nil consideration — dilutive 354,375 262,500
Total number of shares under option 630,000 630,000
Number of equity shares for basic EPS 4,000,000 4,000,000
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Number of dilutive shares under option 354,375 262,500

Adjusted number of shares (A) 4,354,375 4,262,500
Profit after tax (B) Rs. 600,000 Rs. 500,000
Diluted EPS (B/A) 14 paise 12 paise
Percentage dilution 7.00% 6.40%
Note: If options had been granted or exercised during the period, the number of ‘nil
consideration’ shares in respect of these options would be included in the diluted EPS
calculation on a weighted average basis for the period prior to exercise.
Question 114
An entity issues 2,000 convertible bonds at the beginning of Year 1. The bonds have a three-year
term, and are issued at par with a face value of Rs. 1,000 per bond, giving total proceeds of Rs.
20,00,000. Interest is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each
bond is convertible at any time up to maturity into 250 ordinary shares. The entity has an option to
settle the principal amount of the convertible bonds in ordinary shares or in cash.
When the bonds are issued, the prevailing market interest rate for similar debt without a conversion
option is 9 per cent. At the issue date, the market price of one ordinary share is Rs. 3. Income tax is
ignored.
Profit attributable to ordinary equity holders of the parent entity Year 1 Rs. 10,00,000
Ordinary shares outstanding Rs. 12,00,000
Convertible bonds outstanding 2,000
Calculate basic and diluted EPS when
Ans: Allocation of proceeds of the bond issue:
Liability component Rs. 18,48,122*
Equity component Rs. 1,51,878
Rs. 20,00,000
The liability and equity components would be determined in accordance with IND AS 32
Financial Instruments: Presentation. These amounts are recognised as the initial carrying
amounts of the liability and equity components.
*This represents the present value of the principal and interest discounted at 9% Rs.
20,00,000 payable at the end of three years; Rs. 1,20,000 payable annually in arrears for three
years.
Basic earnings per share Year 1:
Rs. 10,00,000 / 1,200,000 = Rs. 0.83 per ordinary share
Diluted earnings per share Year 1:

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It is presumed that the issuer will settle the contract by the issue of ordinary shares. The
dilutive effect is therefore calculated as under.
[Rs. 1,000,000 + Rs166,3312] / [1,200,000 + 500,0003] = Rs. 0.69 per ordinary share
2 Profit is adjusted for the accretion of Rs. 166,331 (Rs. 1,848,122 × 9%) of the liability
because of the passage of time.
3 500,000 ordinary shares = 250 ordinary shares × 2,000 convertible bonds
Question 115
An entity has two classes of shares in issue:
• 5,000 non-convertible preference shares
• 10,000 ordinary shares
The preference shares are entitled to a fixed dividend of Rs. 5 per share before any dividends are paid
on the ordinary shares. Ordinary dividends are then paid in which the preference shareholders do
not participate. Each preference share then participates in any additional ordinary dividend above
Rs. 2 at a rate of 50% of any additional dividend payable on an ordinary share.
The entity’s profit for the year is Rs. 100,000, and dividends of Rs. 2 per share are declared on the
ordinary shares.
Compute the allocation of earnings for the purpose of calculation of Basic EPS when an entity has
ordinary shares & participating equity instruments that are not convertible into ordinary shares.
Ans: The calculation of basic EPS is as follows:
Rs. Rs.
Profit 100,000
Less Dividends payable for the period:
Preference (5,000 × Rs. 5) 25,000
Ordinary (10,000 × Rs. 2) 20,000 (45,000)
Undistributed earnings 55,000
Allocation of undistributed earnings:
Allocation per ordinary share = A
Allocation per preference share = B where B = 50% of A
(A × 10,000) + (50% × A × 5,000) = Rs. 55,000
A = 55,000 / (10,000 + 2,500) = Rs. 4.4
B = 50% of A
B = Rs. 2.2
Dividend per share are: Preference Ordinary
shares shares
Rs. per share Rs. per share

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Distributed earnings 5.00 2.00

Undistributed earnings 2.20 4.40
Totals 7.20 6.40
Proof: (5,000 × Rs. 7.2) + (10,000 × Rs. 6.4) = Rs.100,000

Consolidation Based on IND AS

Question 116:
Angel Ltd. has adopted Ind AS with a transition date of 1st April, 2017. Prior to Ind AS adoption, it
followed Accounting Standards notified under Companies (Accounting Standards) Rules, 2006
(hereinafter referred to as "IGAAP").
It has made investments in equity shares of Pharma Ltd., a listed company engaged in the business
of pharmaceuticals. The shareholding pattern of Pharma Ltd. is given below:

Shareholders (refer Note 1) Percentage shareholding as

on 1st April, 2017
Angel Ltd. 21%
Little Angel Ltd. (refer Note 2) 24%
Wealth Master Mutual Fund (refer Note 3) 3%
Individual public shareholders (refer Note 4) 52%

Notes:
(1) None of the shareholders have entered into any shareholders' agreement.
(2) Little Angel Ltd. is a subsidiary of Angel Ltd. (under Ind AS) in which Angel Ltd. holds 51%
voting power.
(3) Wealth Master Mutual Fund is not related party of either Little Angel Ltd. or Pharma Ltd.
(4) Individual public shareholders represent 17,455 individuals. None of the individual
shareholders hold more than 1% of voting power in Pharma Ltd.
All commercial decisions of Pharma Ltd. are taken by its directors who are appointed by a simple
majority vote of the shareholders in the annual general meetings ("AGM ”). The following table shows
the voting pattern of past AGMs of Pharma Ltd.:
Shareholders AGM for the financial year:
2013-14 2014-15 2015-16
Angel Ltd. Attended and voted in favour of Attended and voted in favour of Attended and voted in favour of all
all the resolutions all the resolutions the resolutions

Little Angel Attended and voted as per Attended and voted as per Attended and voted as per
Ltd. directions of Angel Ltd. directions of Angel Ltd directions of Angel Ltd

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Wealth Master Attended and voted in favour Attended and voted in favour of Attended and voted in favour of
Mutual Fund of all the resolutions except for all the resolutions except for all the resolutions except for
the the reappointment of the the
reappointment of the retiring retiring directors Reappointment of the retiring
directors directors

Individuals 7% of the individual 8% of the individual 6% of the individual

shareholders attended the shareholders attended the shareholders attended the AGM.
AGM. All the individual AGM. All the individual All the individual shareholders
shareholders voted in favour of shareholders voted in favour of voted in favour of all the
all the resolutions, except that all the resolutions, except that resolutions, except that
50% of the individual 50% of the individual 50% of the individual
Shareholders voted against the Shareholders voted against the Shareholders voted against the
resolution to appoint the resolution to appoint resolution to appoint the retiring
retiring directors. the retiring directors. directors.

Pharma Ltd. has obtained substantial long term borrowings from a bank. The loan is payable in 20
years from 1st April, 2017. As per the terms of the borrowing, following actions by Pharma Ltd.
will require prior approval of the bank:
• Payment of dividends to the shareholders in cash or kind;
• Buyback of its own equity shares;
• Issue of bonus equity shares;
• Amalgamation of Pharma Ltd. with any other entity; and
• Obtaining additional loans from any entity.
Recently, the Board of Directors of Pharma Ltd. proposed a dividend of Rs. 5 per share. However,
when the CFO of Pharma Ltd. approached the bank for obtaining their approval, the bank rejected
the proposal citing concerns over the short-term cash liquidity of Pharma Ltd. Having learned
about the developments, the Directors of Angel Ltd. along with the Directors of Little Angel Ltd.
approached the bank with a request to re-consider its decision. The Directors of Angel Ltd. and Little
Angel Ltd. urged the bank to approve a reduced dividend of at least Rs. 2 per share. However, the
bank categorically refused to approve any payout of dividend.
Under IGAAP, Angel Ltd. has classified Pharma Ltd. as its associate. As the CFO of Angel Ltd., you are
required to comment on the correct classification of Pharma Ltd. on transition to Ind AS.
Answer:
To determine whether Pharma Limited can be continued to be classified as an associate on
transition to lnd AS, we will have to determine whether Angel Limited controls Pharma Limited as
defined under Ind AS 110.
An investor controls an investee if and only if the investor has all the following:
(a) Power over investee
(b) Exposure, or rights, to variable returns from its involvement with the investee

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(c) Ability to use power over the investee to affect the amount of the investor's returns.
Since Angel Ltd. does not have majority voting rights in Pharma Ltd. we will have to determine
whether the existing voting rights of Angel Ltd. are sufficient to provide it power over Pharma
Ltd.
Analysis of each of the three elements of the definition of control:
Elements / conditions Analysis

Power over investee Angel Limited along with its subsidiary Little Angel Limited
(hereinafter referred to as "the Angel group") does not have
majority voting rights in Pharma Limited. Therefore, in order to
determine whether Angel group have power over Pharma
Limited. we will need to analyse whether Angel group, by
virtue of its non- majority voting power, have practical ability
to unilaterally direct the relevant activities of Pharma Limited.
In other words, we will need to analyse whether Angel group
has de facto power over Pharma Limited. Following is the
analysis of de facto power of Angel over Pharma Limited:

The public shareholding of Pharma Limited (that is, 52%

represents thousands of shareholders none individually holding
material shareholding,

The actual participation of Individual public shareholders in the

general meetings is minimal (that is, in the range of 6% to 8%).

Even the public shareholders who attend the meeting do not

consult with each other to vote.

Therefore, as per guidance of Ind AS 110, the public

shareholders will not be able to outvote Angel group (who is
the largest shareholder group) in any general meeting.

Based on the above-mentioned analysis, we can conclude that

Angel group has de facto power over Pharma Limited.

Exposure, or rights, to variable Angel group has exposure to variable returns from its
returns from its involvement involvement with Pharma Limited by virtue of its equity stake.
with the investee

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Ability to use power over the Angel group has ability to use its power (in the capacity of a
investee to affect the amount of principal and not an agent) to affect the amount of returns from
the investor's returns Pharma Limited because it is in the position to appoint directors
of Pharma Limited who would take all the decisions regarding
relevant activities of Pharma Limited.

Here, it is worthwhile to evaluate whether certain rights held by

the bank would prevent Angel Limited's ability to use the
power over Pharma Limited to affect its returns. It is to be
noted that, all the rights held by the bank in relation to Pharma
Limited are protective in nature as they do not relate to the
relevant activities (that is, activities that significantly affect he
Pharma Limited's returns) of Pharma Limited.

As per lnd AS 110, protective rights are the rights designed to

protect the interest of the party holding those rights without
giving that party power over the entity to which those rights
relate.

Therefore, the protective rights held by the bank should not be

considered while evaluating whether or not Angel Group has
control over Pharma Limited.

Conclusion: Since all the three elements of definition of control is present, it can be concluded that
Angel Limited has control over Pharma Limited.
Since it has been established that Angel Limited has control over Pharma Limited, upon transition to
lnd AS, Angel Limited shall classify Pharma Limited as its subsidiary.
Question 117
On 1 April 20X1, Alpha Ltd. acquires 80 percent of the equity interest of Beta Pvt. Ltd. in exchange
for cash of Rs. 300. Due to legal compulsion, Beta Pvt. Ltd. had to dispose of their investments by a
specified date. Therefore, they did not have sufficient time to market Beta Pvt. Ltd. to multiple
potential buyers. The management of Alpha Ltd. initially measures the separately recognizable
identifiable assets acquired and the liabilities assumed as of the acquisition date in accordance with
the requirement of Ind AS 103. The identifiable assets are measured at Rs. 500 and the liabilities
assumed are measured at Rs. 100. Alpha Ltd. engages on independent consultant, who determined
that the fair value of 20 per cent non-controlling interest in Beta Pvt. Ltd. is Rs. 84.
Alpha Ltd. reviewed the procedures it used to identify and measure the assets acquired and liabilities
assumed and to measure the fair value of both the non controlling interest in Beta Pvt. Ltd. and the
consideration transferred. After the review, it decided that the procedures and resulting measures
were appropriate.

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Calculate the gain or loss on acquisition of Beta Pvt. Ltd. and also show the journal entries for
accounting of its acquisition. Also calculate the value of the non-controlling interest in Beta Pvt. Ltd.
on the basis of proportionate interest method, if alternatively applied?
Ans: The amount of Beta Pvt. Ltd. identifiable net assets [Rs. 400, calculated as Rs. 500 - Rs. 100)
exceeds the fair value of the consideration transferred plus the fair value of the non
controlling interest in Beta Pvt. Ltd. [Rs. 384 calculated as 300 + 84]. Alpha Ltd. measures the
gain on its purchase of the 80 per cent interest as follows: Rs. in lakh
Amount of the identifiable net assets acquired (Rs. 500 - Rs. 100) 400
Less: Fair value of the consideration transferred for Alpha Ltd. 80 per cent
interest in Beta Pvt. Ltd. 300
Add: Fair value of non controlling interest in Beta Pvt. Ltd. 84
(384)
Gain on bargain purchase of 80 per cent interest 16
Journal Entry Rs. in lakhs Rs. in lakhs
Identifiable assets acquired Dr. 500
To Cash 300
To Liabilities assumed 100
To OCI/Equity-Gain on the bargain purchase 16
To Equity-non controlling interest in Beta Pvt Ltd. 84
If the acquirer chose to measure the non controlling interest in Beta Pvt. Ltd. on the basis of
its proportionate interest in the identifiable net assets of the acquire, the recognized amount
of the non controlling interest would be Rs. 80 (Rs. 400 x 0.20). The gain on the bargain
purchase then would be Rs. 20 (Rs. 400- (Rs. 300 + Rs. 80)
Question 118
A parent purchased an 80% interest in a subsidiary for Rs. 1,60,000 on 1 April 20X1 when the fair
value of the subsidiary’s net assets was Rs. 1,75,000. Goodwill of Rs. 20,000 arose on consolidation
under the partial goodwill method. An impairment of goodwill of Rs. 8,000 was charged in the
consolidated financial statements to 31 March 20X3. No other impairment charges have been
recorded. The parent sold its investment in the subsidiary on 31 March 20X4 for Rs. 2,00,000. The
book value of the subsidiary’s net assets in the consolidated financial statements on the date of the
sale was Rs. 2,25,000 (not including goodwill of Rs. 12,000). When the subsidiary met the criteria to
be classified as held for sale under Ind AS 105, no write down was required because the expected fair
value less cost to sell (of 100% of the subsidiary) was greater than the carrying value.
The parent carried the investment in the subsidiary at cost, as permitted by Ind AS 27.
Calculate gain or loss on disposal of subsidiary in parent’s separate and consolidated financial
statements as on 31st March 20X4.

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Ans: The parent’s separate statement of profit and loss for 20X3-20X4 would show a gain on the
sale of investment of Rs. 40,000 calculated as follow:
Rs. ‘000
Sale proceeds 200
Less: cost of investment in subsidiary (160)
Gain on sale in parent’s account 40
However, the group’s statement of profit & loss for 20X3-20X4 would show a gain on the sale
of subsidiary of Rs. 8,000 calculated as follows:
Rs.’000
Sale proceeds 200
Less: share of net assets at date of disposal (Rs. 2,25,000 X 80%) (180)
Goodwill on consolidation at date of sale (W.N 1) (12)
(192)
Gain on sale in the group’s account 8
Working Note 1
The goodwill on consolidation (assuming partial goodwill method) is calculated as follows:
Rs.’000
Fair value of consideration at the date of acquisition 160
Non- controlling interest measured at proportionate share of the acquiree’s
identifiable net assets (1,75,000 X 20%) 35
Less: fair value of net assets of subsidiary at date of acquisition (175)
(140)
Goodwill arising on consolidation 20
Impairment at 31 March 20X3 (8)
Goodwill at 31 March 20X4 12
Question 119
AT Ltd. purchased a 100% subsidiary for Rs. 50,00,000 on 31st March 20X1 when the fair value of the
BT Ltd. whose net assets was Rs. 40,00,000. Therefore, goodwill is Rs.10,00,000. The AT Ltd. sold 60%
of its investment in BT Ltd. on 31st March 20X3 for Rs. 67,50,000, leaving the AT Ltd. with 40% and
significant influence. At the date of disposal, the carrying value of net assets of BT Ltd., excluding
goodwill is Rs. 80,00,000. Assume the fair value of the investment in associate BT Ltd. retained is
proportionate to the fair value of the 60% sold, that is Rs. 45,00,000.

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Calculate gain or loss on sale of proportion of BT Ltd. in AT Ltd’s separate and consolidated financial
statements as on 31st March 20X3.
Ans: AT Ltd.’s statement for profit or loss of 20X2-20X3 would show a gain on the sale of
investment of Rs. 37,50,000 calculated as follows:
Rs.’ lakhs
Sale proceeds 67.5
Less: cost on investment in subsidiary (Rs. 50,00,000 X 60%) (30.0)
Gain on sale in the parent’s financial statement 37.5
In the consolidated financial statements, the group will calculate the gain or loss on disposal
differently. The carrying amount of all of the assets including goodwill is derecognized when
control is lost. This is compared to the proceeds received and the fair value of the investment
retained.
The gain on the disposal will, therefore, be calculated as follows:
Rs.’ lakhs
Sale proceeds 67.5
Fair value of 40% interest retained 45.0
112.5
Less: Net assets disposed, including goodwill (80,00,000+ 10,00,000) (90.0)
Gain on sale in the group’s financial statements 22.5
The gain on loss of control would be recorded in profit or loss. The gain or loss includes the
gain of Rs. 13,50,000 [Rs. 67,50,000 – (Rs. 90,00,000 X 60%)] on the portion sold. However, it
also includes a gain on remeasurement of the 40% retained interest of Rs. 9,00,000 (Rs.
36,00,000* to Rs. 45,00,000). The entity will need to disclose the portion of the gain that is
attributable to remeasuring any remaining interest to fair value, that is, Rs. 9,00,000.
* 90,00,000x 40%= 36,00,000
Question 120:
Ram Ltd. acquired 60% ordinary shares of Rs. 100 each of Krishan Ltd. on 1st October 20X1. On March
31, 20X2 the summarised Balance Sheets of the two companies were as given below:
Ram Ltd. Krishan Ltd.
Assets
Property, Plant Equipment
Land & Buildings 3,00,000 3,60,000
Plant & Machinery 4,80,000 2,70,000
Investment in Krishan Ltd. 8,00,000 -

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Inventory 2,40,000 72,800

Financial Assets

Trade Receivable 1,19,600 80,000

Cash 29,000 16,000

Total 19,68,600 7,98,800

Equities & Liabilities

Equity Capital (Shares of Rs. 100 each fully paid) 10,00,000 4,00,000

Other Equity

Other Reserves 6,00,000 2,00,000

Retained earnings 1,14,400 1,64,000

Financial Liabilities

Bank Overdraft 1,60,000 -

Trade Payable 94,200 34,800

Total 19,68,600 7,98,800

The Retained earnings of Krishan Ltd. showed a credit balance of Rs. 60,000 on 1st April 20X1 out of
which a dividend of 10% was paid on 1st November; Ram Ltd. has credited the dividend received to
its Retained earnings; Fair Value of P& M as on 1st October 20X1 was Rs. 4,00,000; The rate of
depreciation on plant & machinery is 10%.
Following are the changes in Fair value as per respective IND AS from book value as on 1st
October 20X1 which is to be considered while consolidating the Balance Sheets.
Liabilities Amount Assets Amount
Trade Payables 20,000 Land & Buildings 2,00,000
Inventories 30,000

Prepare consolidated Balance Sheet as on March 31, 20X2.

Answer: Refer SM for Solution
Question 121:

On 1st April 2017 Alpha Ltd. commenced joint construction of a property with Gama Ltd. For this
purpose, an agreement has been entered into that provides for joint operation and ownership of the
property. All the ongoing expenditure, comprising maintenance plus borrowing costs, is to be
shared equally. The construction was completed on 30th September 2017 and utilisation of the
property started on 1st January 2018 at which time the estimated useful life of the same was
estimated to be 20 years.
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Total cost of the construction of the property was Rs. 40 crores. Besides internal accruals, the cost
was partly funded by way of loan of Rs. 10 crores taken on 1st January 2017. The loan carries interest
at an annual rate of 10% with interest payable at the end of year on 31st December each year. The
company has spent Rs. 4,00,000 on the maintenance of such property.
The company has recorded the entire amount paid as investment in Joint Venture in the books of
accounts. Suggest the suitable accounting treatment of the above transaction as the accounting
entries as per applicable Ind AS.
Answer:
As provided in Ind- AS 111 - Joint Arrangements - this is a joint arrangement because two or more
parties have joint control of the property under a contractual arrangement. The arrangement will be
regarded as a joint operation because Alpha Ltd. and Gama Ltd. have rights to the assets and
obligations for the liabilities of this joint arrangement. This means that the company and the other
investor will each recognise 50% of the cost of constructing the asset in property, plant and
equipment.
The borrowing cost incurred on constructing the property should under the principles of Ind AS 23
‘Borrowing Costs’, be included as part of the cost of the asset for the period of construction.
In this case, the relevant borrowing cost to be included is Rs. 50,00,000 (Rs. 10,00,00,000 x 10% x
6/12).
The total cost of the asset is Rs. 40,50,00,000 (Rs. 40,00,00,000 + Rs. 50,00,000)
Rs. 20,25,00,000 crores is included in the property, plant and equipment of Alpha Ltd. and the same
amount in the property, plant and equipment of Gama Ltd.
The depreciation charge for the year ended 31 March 2018 will therefore be Rs. 1,01,25,000 (Rs.
40,50,00,000 x 1/20 x 6/12) Rs. 50,62,500 will be charged in the statement of profit or loss of the
company and the same amount in the statement of profit or loss of Gama Ltd. (finance cost for the
second half year of Rs. 50,00,000 plus maintenance costs of Rs. 4,00,000) will be charged to the
statement of profit or loss of Alpha Ltd. and Gama Ltd. in equal proportions- Rs. 27,00,000 each.
Question 122:
As at the beginning of its current financial year, AB Limited holds 90% equity interest in BC Limited.
During the financial year, AB Limited sells 70% of its equity interest in BC Limited to PQR Limited for
a total consideration of Rs. 56 crore and consequently loses control of BC Limited. At the date of
disposal, fair value of the 20% interest retained by AB Limited is Rs. 16 crore and the net assets of BC
Limited are fair valued at Rs. 60 crore.
These net assets include the following:
(a) Debt investments classified as fair value through other comprehensive income (FVOCI) of Rs.
12 crore and related FVOCI reserve of Rs. 6 crore.
(b) Net defined benefit liability of Rs. 6 crore that has resulted in a reserve relating to net
measurement losses of Rs. 3 crore.

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(c) Equity investments (considered not held for trading) of Rs. 10 crore for which irrevocable
option of recognising the changes in fair value in FVOCI has been availed and related FVOCI
reserve of Rs. 4 crore.
(d) Net assets of a foreign operation of Rs. 20 crore and related foreign currency translation
reserve of Rs. 8 crore.
In consolidated financial statements of AB Limited, 90% of the above reserves were included in
equivalent equity reserve balances, with the 10% attributable to the non-controlling interest included
as part of the carrying amount of the non-controlling interest.
Solution:
Paragraph 25 of Ind AS 110 states that if a parent loses control of a subsidiary, the parent:
(a) derecognises the assets and liabilities of the former subsidiary from the consolidated
balance sheet.
(b) recognises any investment retained in the former subsidiary at its fair value when control is
lost and subsequently accounts for it and for any amounts owed by or to the former
subsidiary in accordance with relevant Ind ASs. That fair value shall be regarded as the fair
value on initial recognition of a financial asset in accordance with Ind AS 109 or, when
appropriate, the cost on initial recognition of an investment in an associate or joint venture.
(c) recognises the gain or loss associated with the loss of control attributable to the former
controlling interest.”
Paragraph B98(c) of Ind AS 110 states that on loss of control over a subsidiary, a parent shall reclassify
to profit or loss, or transfer directly to retained earnings if required by other Ind AS, the amounts
recognised in other comprehensive income in relation to the subsidiary on the basis specified in
paragraph B99.
As per paragraph B99, if a parent loses control of a subsidiary, the parent shall account for all amounts
previously recognised in other comprehensive income in relation to that subsidiary on the same basis
as would be required if the parent had directly disposed of the related assets or liabilities.
Therefore, if a gain or loss previously recognised in other comprehensive income would be
reclassified to profit or loss on the disposal of the related assets or liabilities, the parent shall
reclassify the gain or loss from equity to profit or loss (as a reclassification adjustment) when it loses
control of the subsidiary. If a revaluation surplus previously recognised in other comprehensive
income would be transferred directly to retained earnings on the disposal of the asset, the parent
shall transfer the revaluation surplus directly to retained earnings when it loses control of the
subsidiary.
In view of the basis in its consolidated financial statements, AB Limited shall:
(a) re-classify the FVOCI reserve in respect of the debt investments of Rs.5.4 crore (90% of Rs.
6 crore) attributable to the owners of the parent to the statement of profit or loss in
accordance with paragraph B5.7.1A of Ind AS 109, Financial Instruments which requires that
the cumulative gains or losses previously recognised in OCI shall be recycled to profit and
loss upon derecognition of the related financial asset. This is reflected in the gain on disposal.

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Remaining 10% (i.e., Rs. 0.6 crore) relating to non-controlling interest (NCI) is included as
part of the carrying amount of the non-controlling interest that is derecognised in
calculating the gain or loss on loss of control of the subsidiary;
(b) transfer the reserve relating to the net measurement losses on the defined benefit liability
of Rs. 2.7 crore (90% of Rs.3 crore) attributable to the owners of the parent within equity to
retained earnings. It is not reclassified to profit or loss. The remaining 10% (i.e., Rs. 0.3 crore)
attributable to the NCI is included as part of the carrying amount of NCI that is derecognised
in calculating the gain or loss on loss of control over the subsidiary. No amount is reclassified
to profit or loss, nor is it transferred within equity, in respect of the 10% attributable to the
non- controlling interest.
(c) reclassify the cumulative gain on fair valuation of equity investment of Rs.3.6 crore (90% of
Rs. 4 crore) attributable to the owners of the same parent from OCI to retained earnings
under equity as per paragraph B5.7.1 of Ind AS 109, Financial Instruments, which provides
that in case an entity has made an irrevocable election to recognise the changes in the fair
value of an investment in an equity instrument not held for trading in OCI, it may
subsequently transfer the cumulative amount of gains or loss within equity. Remaining 10%
(i.e., Rs. 0.4 crore) related to the NCI are derecognised along with the balance of NCI and not
reclassified to profit and loss.
(d) reclassify the foreign currency translation reserve of Rs.7.2 crore (90% × Rs. 8 crore)
attributable to the owners of the parent to statement of profit or loss as per paragraph 48
of Ind AS 21, The Effects of Changes in Foreign Exchange Rates, which specifies that the
cumulative amount of exchange differences relating to the foreign operation, recognised in
OCI, shall be reclassified from equity to profit or loss on the disposal of foreign operation.
This is reflected in the gain on disposal. Remaining 10% (i.e., Rs. 0.8 crore) relating to the NCI
is included as part of the carrying amount of the NCI that is derecognised in calculating the
gain or loss on the loss of control of subsidiary, but is not reclassified to profit or loss in
pursuance of paragraph 48B of Ind AS 21, which provides that the cumulative exchange
differences relating to that foreign operation attributed to NCI shall be derecognised on
disposal of the foreign operation, but shall not be reclassified to profit or loss
The impact of loss of control over BC Limited on the consolidated financial statements of AB
Limited is summarised below:(Rupees in crore)
Particular Amount Amount PL RE
(Dr) (Cr) Impact Impact

Gain /Loss on Disposal on Investments

Bank 56
Non-controlling interest (Derecognised) 6
Investment at FV (20% Retained) 16
Gain on Disposal (PL) balancing figure 18 18

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De-recognition of total net assets of subsidiary 60

Reclassification of FVTOCI reserve on debt instruments to

profit or loss
FVTOCI reserve on debt instruments (6 cr. x 90%) 5.4

To Profit and loss 5.4 5.4

Reclassification of net measurement loss reserve to profit or
loss

Reserve and Surplus 2.7 -2.7

To Net measurement loss reserve (FVTOCI) [(3 cr. x 90%)] 2.7

Reclassification of FVTOCI reserve on equity instruments to

retained earnings

FVTOCI reserve on equity instruments (4 cr.x 90%) 3.6

To Reserve and Surplus 3.6 3.6

Foreign currency translation reserve reclassified to profit or
loss
Foreign currency translation reserve (FVOCI) [8 cr. x 90%] 7.2

To Profit and loss 7.2 7.2

Total 30.6 0.9

Question 123:

Entity A holds a 20% equity interest in Entity B (an associate) that in turn has a 100% equity interest
in Entity C. Entity B recognised net assets relating to Entity C of Rs. 1,000 in its consolidated financial
statements. Entity B sells 20% of its interest in Entity C to a third party (a non-controlling shareholder)
for Rs. 300 and recognises this transaction as an equity transaction in accordance with paragraph 23
of Ind AS 110, resulting in a credit in Entity B’s equity of Rs. 100.
The financial statements of Entity A and Entity B are summarised as follows before and after the
transaction:
Before

A’s consolidated financial statements

Assets Rs. Liabilities Rs.

Investment in B 200 Equity 200

Total 200 Total 200

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B’s consolidated financial statements

Assets Rs. Liabilities Rs.

Assets (from C) 1000 Equity 1000

Total 1000 Total 1000

The financial statements of B after the transaction are summarised below:

After

B’s consolidated financial statements

Assets Rs. Liabilities Rs.

Assets (from C) 1000 Equity 1000

Cash 300 Equity transaction with

non- controlling interest 100

Equity attributable to owners 1100

Non-controlling interest 200

Total 1300 Total 1300

Although Entity A did not participate in the transaction, Entity A’s share of net assets in Entity B
increased as a result of the sale of B's 20% interest in C. Effectively, A's share in B's net assets is now
Rs. 220 (20% of Rs. 1,100) i.e., Rs. 20 in addition to its previous share.
How is an equity transaction that is recognised in the financial statements of Entity B reflected in the
consolidated financial statements of Entity A that uses the equity method to account for its
investment in Entity B?
Solution:
Ind AS 28 defines the equity method as “a method of accounting whereby the investment is initially
recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of
the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss
and the investor’s other comprehensive income includes its share of the investee’s other
comprehensive income.”
Paragraph 27 of Ind AS 28, states, inter alia, that when an associate or joint venture has subsidiaries,
associates or joint ventures, the profit or loss, other comprehensive income, and net assets taken
into account in applying the equity method are those recognised in the associate’s or joint venture’s
financial statements (including the associate’s or joint venture’s share of the profit or loss, other
comprehensive income and net assets of its associates and joint ventures), after any adjustments
necessary to give effect to uniform accounting policies.
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The change of interest in the net assets / equity of the associate as a result of the investee’s equity
transaction is reflected in the investor’s financial statements as ‘share of other changes in equity of
investee’ (in the statement of changes in equity) instead of gain in Statement of profit and loss, since
it reflects the post-acquisition change in the net assets of the investee as per paragraph 3 of Ind AS
28 and also faithfully reflects the investor’s share of the associate’s transaction as presented in the
associate’s consolidated financial statements.
Thus, in the given case, Entity A recognises Rs. 20 as change in other equity instead of in statement
of profit and loss and maintains the same classification as of its associate, Entity B, i.e., a direct credit
to equity as in its consolidated financial statements.
Note: Also Refer Chain Holding Question from ICAI SM

Analysis of Financial Statement

Question 124:
Pluto Ltd. has purchased a manufacturing plant for Rs. 6 lakhs on 1 April 20X1. The useful life of the
plant is 10 years. On 30th September 20X3, Pluto temporarily stops using the manufacturing plant
because demand has declined. However, the plant is maintained in a workable condition and it will
be used in future when demand picks up.
The accountant of Pluto ltd. decided to treat the plant as held for sale until the demands picks up and
accordingly measures the plant at lower of carrying amount and fair value less cost to sell.
Also, the accountant has also stopped charging the depreciation for the rest of period considering
the plant as held for sale. The fair value less cost to sell on 30th September 20X3 and 31 March 20X4
was Rs. 4 lakhs and Rs. 3.5 lakhs respectively.
The accountant has performed the following working: INR
Carrying amount on initial classification as held for sale
Purchase Price of Plant 6,00,000
Less: Accumulated dep (6,00,000/ 10 Years)* 2.5 years (1,50,000)
4,50,000
Fair Value less cost to sell as on 31 March 20X3 4,00,000
The value will be lower of the above two 4,00,000

Balance Sheet extracts as on 31 March 20X4

Assets
Current Assets
Other Current Assets
Assets classified as held for sale 3,50,000

Required:
Analyse whether the above accounting treatment made by the accountant is in compliance with the
Ind AS. If not, advise the correct treatment alongwith working for the same.

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Solution: The above treatment needs to be examined in the light of the provisions given in Ind AS 16
‘Property, Plant and Equipment’ and Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued
Operations’.
Para 6 of Ind AS 105 ‘Non-current Assets Held for Sale and Discontinued Operations’ states that:
“An entity shall classify a non-current asset (or disposal group) as held for sale if its carrying amount
will be recovered principally through a sale transaction rather than through continuing use”.
Paragraph 7 of Ind AS 105 states that:
“For this to be the case, 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. Thus, an asset (or disposal group) cannot be
classified as a non-current asset (or disposal group) held for sale, if the entity intends to sell it in a
distant future”.
Further, paragraph 8 of Ind AS 105 states that:
“For the sale to be highly probable, the appropriate level of management must be committed to a
plan to sell the asset (or disposal group), and an active programme to locate a buyer and complete
the plan must have been initiated. Further, the asset (or disposal group) must be actively marketed
for sale at a price that is reasonable in relation to its current fair value. In addition, the sale should be
expected to qualify for recognition as a completed sale within one year from the date of classification
and actions required to complete the plan should indicate that it is unlikely that significant changes
to the plan will be made or that the plan will be withdrawn.”
Paragraph 13 of Ind AS 105 states that:
“An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned. This is because its carrying amount will be recovered principally through continuing use.”
Paragraph 55 of Ind AS 16 states that:
“Depreciation does not cease when the asset becomes idle or is retired from active use unless the
asset is fully depreciated.”
Going by the guidance given above,
The Accountant of Pluto Ltd. has treated the plant as held for sale and measured it at the fair value
less cost to sell. Also, the depreciation has not been charged thereon since the date of classification
as held for sale which is not correct and not in accordance with Ind AS 105 and Ind AS 16.
Accordingly, the manufacturing plant should be treated as abandoned asset rather as held for sale
because its carrying amount will be principally recovered through continuous use. Pluto Ltd. shall not
stop charging depreciation or treat the plant as held for sale because its carrying amount will be
recovered principally through continuing use to the end of their economic life.
The working of the same for presenting in the balance sheet is given as below:
Calculation of carrying amount as on 31 March 20X4
Purchase Price of Plant 6,00,000
Less: Accumulated depreciation (6,00,000/ 10 Years)* 3 Years (1,80,000)

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4,20,000

Balance Sheet extracts as on 31 March 20X4

Assets
Non-Current Assets
Property, Plant and Equipment 4,20,000

Question 125:
Mercury Ltd. is an entity engaged in plantation and farming on a large scale diversified across India.
On 1st April 20X1, the company has received a government grant for Rs. 10 lakhs subject to a
condition that it will continue to engage in plantation of eucalyptus tree for a coming period of five
years.
The management has a reasonable assurance that the entity will comply with condition of engaging
in the plantation of eucalyptus tree for specified period of five years and accordingly it recognises
proportionate grant for Rs. 2 lakhs in Statement of Profit and Loss as income following the principles
laid down under Ind AS 20 Accounting for Government Grants and Disclosure of Government
Assistance.
Required: Analyse whether the above accounting treatment made by the management is in
compliance of the Ind AS. If not, advise the correct treatment alongwith working for the same.
Ans: As per given facts, the company is engaged in plantation and farming. Hence Ind AS 41
Agriculture shall be applicable to this company.
The above facts need to be examined in the light of the provisions given in Ind AS 20
‘Accounting for Government Grants and Disclosure of Government Assistance’ and Ind AS 41
‘Agriculture’.
Para 2(d) of Ind AS 20 ‘Accounting for Government Grants and Disclosure of Government
Assistance’ states:
“This Standard does not deal with government grants covered by Ind AS 41, Agriculture”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:
“This Standard shall be applied to account for the government grants covered by paragraphs
34 and 35 when they relate to agricultural activity”.
Further, paragraph 1 (c) of Ind AS 41 ‘Agriculture’, states:
“If a government grant related to a biological asset measured at its fair value less costs to sell
is conditional, including when a government grant requires an entity not to engage in
specified agricultural activity, an entity shall recognise the government grant in profit or loss
when, and only when, the conditions attaching to the government grant are met”.
Understanding of the given facts, The Company has recognised the proportionate grant for
Rs 2 lakhs in Statement of Profit and Loss before the conditions attaching to government grant
are met which is not correct and nor in accordance with provision of Ind AS 41 ‘Agriculture’.

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Accordingly, the accounting treatment of government grant received by the Mercury Ltd. is
governed by the provision of Ind AS 41 ‘Agriculture’ rather Ind AS 20 ‘Accounting for
Government Grants and Disclosure of Government Assistance’.
Government grant for Rs. 10 lakhs shall be recognised in profit or loss when, and only when,
the conditions attaching to the government grant are met i.e. after the expiry of specified
period of five years of continuing engagement in the plantation of eucalyptus tree.
Balance Sheet extracts showing the presentation of Government Grant as on 31st March 20X2
Liabilities INR
Non-Current liabilities
Other Non-Current Liabilities
Government Grants 10,00,000

IND AS 115
Question 126
Growth Ltd enters into an arrangement with a customer for infrastructure outsourcing deal.
Based on its experience, Growth Ltd determines that customising the infrastructure will take
approximately 200 hours in total to complete the project and charges Rs. 150 per hour.
After incurring 100 hours of time, Growth Ltd and the customer agree to change an aspect of the
project and increases the estimate of labour hours by 50 hours at the rate of Rs. 100 per hour.
Determine how contract modification will be accounted as per Ind AS 115?
Answer: Considering that the remaining goods or services are not distinct, the modification will be
accounted for on a cumulative catch up basis, as given below:
Particulars Hours Rate (Rs.) Amount (Rs.)
Initial contract amount 200 150 30,000
Modification in contract 50 100 5,000
Contract amount after modification 250 140* 35,000
Revenue to be recognised 100 140 14,000
Revenue already booked 100 150 15,000
Adjustment in revenue (1,000)
*35,000 / 250 = 140
Question 127
An entity provides broadband services to its customers along with voice call service.
Customer buys modem from the entity. However, customer can also get the connection from the
entity and modem from any other vendor. The installation activity requires limited effort and the cost

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involved is almost insignificant. It has various plans where it provides either broadband services or
voice call services or both.
Are the performance obligations under the contract distinct?
Solution: Entity promises to customer to provide
- Broadband Service
- Voice Call services
- Modem
Entity’s promise to provide goods and services is distinct
- if customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer, and
- entity’s promise to transfer the good or service to the customer is separately identifiable
from other promises in the contract
For broadband and voice call services –
- Broadband and voice services are separately identifiable from other promises as company
has various plans to provide the two services separately. These two services are not
dependant or interrelated. Also the customer can benefit on its own from the services
received.
For sale of modem –
- Customer can either buy product from entity or third party. No significant customisation
or modification is required for selling product.
Based on the evaluation we can say that there are three separate performance obligation: -
- Broadband Service
- Voice Call services
- Modem
Question 128
An entity, a software developer, enters into a contract with a customer to transfer a software license,
perform an installation service and provide unspecified software updates and technical support
(online and telephone) for a two-year period. The entity sells the license, installation service and
technical support separately. The installation service includes changing the web screen for each type
of user (for example, marketing, inventory management and information technology). The
installation service is routinely performed by other entities and does not significantly modify the
software. The software remains functional without the updates and the technical support.
Determine how many performance obligations does the entity have?
Ans: The entity assesses the goods and services promised to the customer to determine which
goods and services are distinct. The entity observes that the software is delivered before the

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other goods and services and remains functional without the updates and the technical
support. Thus, the entity concludes that the customer can benefit from each of the goods and
services either on their own or together with the other goods and services that are readily
available.
The entity also considers the factors of Ind AS 115 and determines that the promise to transfer
each good and service to the customer is separately identifiable from each of the other
promises. In particular, the entity observes that the installation service does not sign ificantly
modify or customise the software itself and, as such, the software and the installation service
are separate outputs promised by the entity instead of inputs used to produce a combined
output.
On the basis of this assessment, the entity identifies four performance obligations in the
contract for the following goods or services:
• The software license
• An installation service
• Software updates
• Technical support
Question 129
An entity has a fixed fee contract for Rs. 1 million to develop a product that meets specified
performance criteria. Estimated cost to complete the contract is Rs. 950,000. The entity will transfer
control of the product over five years, and the entity uses the cost -to-cost input method to measure
progress on the contract. An incentive award is available if the product meets the following weight
criteria:
Weight (kg) Award % of fixed fee Incentive fee
951 greater 0%—
701–950 10% Rs. 100,000
700 or less 25% Rs. 250,000
The entity has extensive experience creating products that meet the specific performance criteria.
Based on its experience, the entity has identified five engineering alternatives that will achieve the
10 percent incentive and two that will achieve the 25 percent incentive. In this case, the entity
determined that it has 95 percent confidence that it will achieve the 10 percent incentive and 20
percent confidence that it will achieve the 25 percent incentive.
Based on this analysis, the entity believes 10 percent to be the most likely amount when estimating
the transaction price. Therefore, the entity includes only the 10 percent award in the transaction
price when calculating revenue because the entity has concluded it is probable that a significant
reversal in the amount of cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is subsequently resolved due to its 95 percent confidence
in achieving the 10 percent award.

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The entity reassesses its production status quarterly to determine whether it is on track to meet the
criteria for the incentive award. At the end of the year four, it becomes apparent that this contract
will fully achieve the weight-based criterion. Therefore, the entity revises its estimate of variable
consideration to include the entire 25 percent incentive fee in the year four because, at this point, it
is probable that a significant reversal in the amount of cumulative revenue recognized will not occur
when including the entire variable consideration in the transaction price.
Evaluate the impact of changes in variable consideration when cost incurred is as follows:
Year Rs.
1 50,000
2 1,75,000
3 4,00,000
4 2,75,000
5 50,000
Ans [Note: For simplification purposes, the table calculates revenue for the year independently
based on costs incurred during the year divided by total expected costs, with the assumption
that total expected costs do not change.]
Fixed consideration A 1,000,000
Estimated costs to complete* B 950,000
Year 1 Year 2 Year 3 Year 4 Year 5
Total estimated variable C 100,000 100,000 100,000 250,000 250,000
consideration
Fixed revenue D=A x H/B 52,632 184,211 421,053 289,474 52,632
Variable revenue E=C x H/B 5,263 18,421 42,105 72,368 13,158
Cumulative revenue adjustment F(see
below) — — — 99,370 —
Total revenue G=D+E+F 57,895 202,632 463,158 461,212 65,790
Costs H 50,000 175,000 400,000 275,000 50,000
Operating profit I=G–H 7,895 27,632 63,158 186,212 15,790
Margin (rounded off) J=I/G 14% 14% 14% 40% 24%
* For simplicity, it is assumed there is no change to the estimated costs to complete
throughout the contract period.
* In practice, under the cost-to-cost measure of progress, total revenue for each period
is determined by multiplying the total transaction price (fixed and variable) by the ratio

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of cumulative cost incurred to total estimated costs to complete, less revenue

recognized to date.
Calculation of cumulative catch-up adjustment:
Updated variable consideration L 250,000
Percent complete in Year 4: (rounded off) M=N/O 95%
Cumulative costs through Year 4 N 900,000
Estimated costs to complete O 950,000
Cumulative variable revenue through Year 4: P 138,130
Cumulative catch-up adjustmentF=L x M–P 99,370
Question 130
Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for the same,
Q TV allowed Deshabandhu a free advertisement spot, which was duly utilised by Deshabandu.
How revenue for these nonmonetary transactions in the area of advertising will be recognised and
measured?
Ans: Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the same
line of business to facilitate sales to customers or potential customers. For example, this
Standard would not apply to a contract between two oil companies that agree to an exchange
of oil to fulfil demand from their customers in different specified locations on a timely basis.
In industries with homogenous products, it is common for entities in the same line of business
to exchange products in order to sell them to customers or potential customers other than
parties to exchange. The current scenario, on the contrary, will be covered under Ind AS 115
since the same is exchange of dissimilar goods or services because both of the entities deal in
different mode of media, i.e., one is print media and another is electronic media and both
parties are acting as customers and suppliers for each other.
Further, in the current scenario, it seems it is for consumption by the said parties and hence
it does not fall under paragraph 5(d). It may also be noted that, even if it was to facilitate sales
to customers or potential customers, it would not be scoped out since the parties are not in the
same line of business.
As per paragraph 47 of Ind AS 115, “An entity shall consider the terms of the contract and its
customary business practices to determine the transaction price. The transaction price is the
amount of consideration to which an entity expects to be entitled in exchange for transferring
promised goods or services to a customer, excluding amounts collected on behalf of third
parties (for example, some sales taxes). The consideration promised in a contract with a
customer may include fixed amounts, variable amounts, or both”.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall measure
the non-cash consideration (or promise of non-cash consideration) at fair value.

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In accordance with the above, QTV and Deshabandhu should measure the revenue promised
in the form of non-cash consideration as per the above referred principles of Ind AS 115.
Question 131
X Ltd. is engaged in manufacturing and selling of designer furniture. It sells goods on extended credit.
X Ltd. sold furniture for Rs. 40,00,000 to a customer, the payment against which was receivable after
12 months with interest at the rate of 3% per annum. The market interest rate on the date of
transaction was 8% per annum. How will X Ltd. recognise revenue for the above transaction?
Ans: X Ltd. should determine the fair value of revenue by calculating the present value of the cash
flows receivable.
Total amount receivable = Rs. 40,00,000 x 1.03 = Rs. 41,20,000.
Present Value of receivable (Revenue) = Rs. 41,20,000/1.08 = Rs. 38,14,815.
Interest income = Rs. 41,20,000 - Rs. 38,14,815 = Rs. 3,05,185.
Therefore, on transaction date Rs. 38,14,815 will be recognised as revenue from sale of goods
and Rs. 3,05,185 will be recognised as interest income over the period in accordance with Ind
AS 109.
Question 132
KK Ltd. runs a departmental store which awards 10 points for every purchase of Rs. 500 which can be
discounted by the customers for further shopping with the same merchant. Each point is redeemable
on any future purchases of KK Ltd.’s products within 3 years. Value of each point is Rs. 0.50. During
the accounting period 2017-2018, the entity awarded 1,00,00,000 points to various customers of
which 18,00,000 points remained undiscounted (to be redeemed till 31st March, 2020). The
management expects only 80% of the remaining will be discounted in future.
The Company has approached your firm with the following queries and has asked you to suggest the
accounting treatment (Journal Entries) under the applicable Ind AS for these award points:
(a) How should the recognition be done for the sale of goods worth Rs. 10,00,000 on a
particular day?
(b) How should the redemption transaction be recorded in the year 2017-2018? The Company
has requested you to present the sale of goods and redemption as independent
transaction. Total sales of the entity is Rs. 5,000 lakhs.
(c) How much of the deferred revenue should be recognised at the year-end (2017-2018)
because of the estimation that only 80% of the outstanding points will be redeemed?
(d) In the next year 2018-2019, 60% of the outstanding points were discounted Balance 40% of
the outstanding points of 2017-2018 still remained outstanding. How much of the deferred
revenue should the merchant recognize in the year 2018-2019 and what will be the amount
of balance deferred revenue?
(e) How much revenue will the merchant recognized in the year 2019-2020, if 3,00,000 points
are redeemed in the year 2019-2020?
Ans:

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(a) Points earned on Rs. 10,00,000 @ 10 points on every Rs. 500 = [(10,00,000/500) x 10] = 20,000
points.
Value of points = 20,000 points x Rs. 0.5 each point = Rs. 10,000

Revenue recognized for sale of goods Rs. 9,90,099 [10,00,000 x (10,00,000/10,10,000)]

Revenue for points deferred Rs. 9,901 [10,00,000 x (10,000/10,10,000)]

Journal Entry Rs. Rs.

Bank A/c Dr. 10,00,000

To Sales A/c 9,90,099

To Liability under Customer Loyalty programme 9,901

(b) Points earned on Rs. 50,00,00,000 @ 10 points on every Rs. 500 = [(50,00,00,000/500) x 10] =
1,00,00,000 points.
Value of points = 1,00,00,000 points x Rs. 0.5 each point = Rs. 50,00,000
Revenue recognized for sale of goods = Rs. 49,50,49,505 [50,00,00,000 x (50,00,00,000 /
50,50,00,000)]
Revenue for points = Rs. 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]
Journal Entries in the year 2017-18

Bank A/c Dr. 50,00,00,000

To Sales A/c 49,50,49,505

To Liability under Customer Loyalty programme 49,50,495

(On sale of Goods)

Liability under Customer Loyalty programme Dr. 42,11,002

To Sales A/c 42,11,002

(On redemption of (100 lakhs -18 lakhs) points)

Revenue for points to be recognized

Undiscounted points estimated to be recognized next year 18,00,000 x 80% = 14,40,000 points

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Total expected points to be redeemed in 2018-2019 and 2019-2020 = [(1,00,00,000-18,00,000)

+ 14,40,000] = 96,40,000
Revenue to be recognised with respect to discounted point = 49,50,495 x
(82,00,000/96,40,000) = 42,11,002
(c) Revenue to be deferred with respect to undiscounted point in 2017-2018= 49,50,495 –
42,11,002 = 7,39,493
(d) In 2018-2019, KK Ltd. would recognize revenue for discounting of 60% of outstanding points as
follows:
Outstanding points = 18,00,000 x 60% = 10,80,000 points
Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points
Revenue to be recognized in the year 2018-2019 = [{49,50,495 x (92,80,000 / 96,40,000)} -
42,11,002] = Rs. 5,54,620.
Journal Entry in the year 2018-2019

Liability under Customer Loyalty programme Dr. 5,54,620

To Sales A/c 5,54,620

(On redemption of further 10,80,000 points)

The Liability under Customer Loyalty programme at the end of the year 2018-2019 will be Rs.
7,39,493 – 5,54,620 = 1,84,873.
(e) In the year 2019-2020, the merchant will recognized the balance revenue of Rs. 1,84,873
irrespective of the points redeemed as this is the last year for redeeming the points. Journal
entry will be as follows:
Journal Entry in the year 2019-2020

Liability under Customer Loyalty programme Dr. 1,84,873

To Sales A/c 1,84,873

(On redemption of further 10,80,000 points)

IND AS 116
Question 133
A lessee enters into a lease of an equipment. The contract stipulates the lessor will perform
maintenance of the leased equipment and receive consideration for that maintenance service. The
contract includes the following fixed prices for the lease and non-lease component:

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Lease Rs.80,000
Maintenance Rs. 10,000
Total Rs. 90,000
Assume the stand-alone prices cannot be readily observed, so the lessee makes estimates,
maximising the use of observable information, of the lease and non-lease components, as follows:
Lease Rs. 85,000
Maintenance Rs. 15,000
Total Rs. 1,00,000
In the given scenario, assuming lessee has not opted the practical expedient, how will the lessee
allocate the consideration to lease and non-lease component?
Solution: The stand-alone price for the lease component represents 85% (i.e., Rs. 85,000 / Rs.
1,00,000) of total estimated stand-alone prices. The lessee allocates the consideration in the contract
(i.e., Rs. 90,000), as follows:
Lease (Rs. 90,000 x 85%) Rs. 76,500
Maintenance (Rs. 90,000 x 15%) Rs. 13,500
Total Rs. 90,000
Question 134
Entity W entered into a contract for lease of retail store with Entity J on January 01/01/2017. The
initial term of the lease is 5 years with a renewal option of further 3 years. The annual payments for
initial term and renewal term is Rs. 100,000 and Rs. 110,000 respectively. The annual lease payment
will increase based on the annual increase in the CPI at the end of the preceding year. For example,
the payment due on 01/01/18 will be based on the CPI available at 31/12/17.
Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/2020 is 5% and 6%
respectively and the CPI at lease commencement date and as at 01/01/2020 is 120 and 125
respectively.
At the lease commencement date, Entity W did not have a significant economic incentive to exercise
the renewal option. In the first quarter of 2020, Entity W installed unique lease improvements into
the retail store with an estimated five-year economic life. Entity W determined that it would only
recover the cost of the improvements if it exercises the renewal option, creating a significant
economic incentive to extend.
Is Entity W required to remeasure the lease in the first quarter of 2020?
Solution: Since Entity W is now reasonably certain that it will exercise its renewal option, it is required
to remeasure the lease in the first quarter of 2020.
The following table summarizes information pertinent to the lease remeasurement.

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Remeasured lease term 5 years; 2 years remaining in the initial term

plus 3 years in the renewal period

Entity W’s incremental borrowing rate On the 6%

remeasurement date

CPI available on the remeasurement date 125

Right-of-use asset immediately before the Rs. 1,81,840 (Refer note 1)

remeasurement

Lease liability immediately before the Rs. 1,85,947 (Refer note 1)

remeasurement

To remeasure the lease liability, Entity W would first calculate the present value of the future lease
payments for the new lease term (using the updated discount rate of 6%). The following table shows
the present value of the future lease payments based on an updated CPI of 125. Since the initial lease
payments were based on a CPI of 120, the CPI has increased by 4% approx. As a result, Entity W would
increase the future lease payments by 4%. As shown in the table, the revised lease liability is Rs.
490,589.
Year 4 5 6 7 8 Total

Lease payment 104,000 104,000 114,400 114,400 114,400 551,200

Discount 1 0.943 0.890 0.840 0.792 0.792

Present value 104,000 98,072 101,816 96,096 90,605 490,589

To calculate the adjustment to the lease liability, Entity W would compare the recalculated and
original lease liability balances on the remeasurement date.
Revised lease liability 490,589

Original lease liability (1,85,947)

3,04,642

Entity W would record the following journal entry to adjust the lease liability.
ROU Asset Dr. 3,04,642
To Lease liability 3,04,642
Being lease liability and ROU asset adjusted on account of remeasurement.
Working Notes:
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1 Calculation of ROU asset before the date of remeasurement

Year Lease Payment Present value factor @ Present value of lease
beginning (A) 5% (B) payments (AxB=C)
1 1,00,000 1.000 1,00,000
2 1,00,000 0.952 95,200
3 1,00,000 0.907 90,700
4 1,00,000 0.864 86,400
5 1,00,000 0.823 82,300
Lease liability as at commencement date 4,54,600

2 Calculation of Lease Liability and ROU asset at each year end

Yr Lease Liability ROU asset
Initial Lease Interest Closing Initial Value Depreciation Closing balance
value payments expense balance
1 4,54,600 1,00,000 - 3,54,600 4,54,600 90,920 3,63,680
2 3,54,600 1,00,000 17,730 2,72,330 3,63,680 90,920 2,72,760
3 2,72,330 1,00,000 13,617 1,85,947 2,72,760 90,920 1,81,840
4 1,85,947 1,81,840

Question 135
Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments
are Rs. 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be
readily determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a. At
the beginning of Year 7, Lessee and Lessor agree to amend the original lease by extending the
contractual lease term by four years. The annual lease payments are unchanged (i.e., Rs. 1,00,000
payable at the end of each year from Year 7 to Year 14). Lessee’s incremental borrowing rate at the
beginning of Year 7 is 7% p.a.
How should the said modification be accounted for?
Solution: At the effective date of the modification (at the beginning of Year 7), Lessee remeasures
the lease liability based on:
(a) An eight-year remaining lease term
(b) Annual payments of Rs. 1,00,000 and
(c) Lessee’s incremental borrowing rate of 7% p.a.
The modified lease liability equals Rs. 5,97,100 (W.N.1). The lease liability immediately before the
modification (including the recognition of the interest expense until the end of Year 6) is Rs. 3,46,355
(W.N.3). Lessee recognises the difference between the carrying amount of the modified lease liability
and the carrying amount of the lease liability immediately before the modification (i.e., Rs. 2,50,745)
(W.N. 4) as an adjustment to the ROU Asset.
Working Notes:

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1. Calculation of modified lease liability:

Year Lease Payment (A) Present value factor Present value of lease
@ 7% (B) payments (A*B=C)
7 100,000 0.935 93,500
8 100,000 0.873 87,300
9 100,000 0.816 81,600
10 100,000 0.763 76,300
11 100,000 0.713 71,300
12 100,000 0.666 66,600
13 100,000 0.623 62,300
14 100,000 0.582 58,200
Modified lease liability 5,97,100

2. Calculation of Lease liability as at commencement date:

Year Lease Payment Present value factor @ Present value of lease
(A) 6% (B) payments (A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification date 7,35,900

3. Calculation of Lease liability immediately before modification date:

Year Opening lease Interest @ 6% Lease payments Closing liability
liability (B) = [A x 6%] (C) (D) = [A+B-C]
(A)
1 7,35,900 44,154 100,000 6,80,054
2 6,80,054 40,803 100,000 6,20,857
3 6,20,857 37,251 100,000 5,58,108
4 5,58,108 33,486 100,000 4,91,594
5 4,91,594 29,496 100,000 4,21,090
6 4,21,090 25,265 100,000 3,46,355
Lease liability as at modification 3,46,355
date

4. Adjustment to ROU asset:

Modified Lease liability 5,97,100
Original Lease liability as at modification date (3,46,355)

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Adjustment to ROU asset 2,50,745

The ROU asset will be increased by Rs. 2,50,745 on the date of modification.
Question 136
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments
are Rs. 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be
readily determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a.
At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:
(a) include an additional 1,500 square metres of space in the same building starting from the
beginning of Year 6 and
(b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500
square metres is Rs. 1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s
incremental borrowing rate at the beginning of Year 6 is 7% p.a.
The consideration for the increase in scope of 1,500 square metres of space is not commensurate
with the stand-alone price for that increase adjusted to reflect the circumstances of the contract.
Consequently, Lessee does not account for the increase in scope that adds the right to use an
additional 1,500 square metres of space as a separate lease.
How should the said modification be accounted for?
Solution: The pre-modification ROU Asset and the pre-modification lease liability in relation to the
lease are as follows:
Lease liability ROU Asset
Year Opening Interest Lease Closing Opening Depreciation Closing balance
balance expense @ 6% payment balance balance charge
1 7,35,900* 44,154 (1,00,000) 6,80,054 7,35,900 (73,590) 6,62,310
2 6,80,054 40,803 (1,00,000) 6,20,857 6,62,310 (73,590) 5,88,720
3 6,20,857 37,251 (1,00,000) 5,58,108 5,88,720 (73,590) 5,15,130
4 5,58,108 33,486 (1,00,000) 4,91,594 5,15,130 (73,590) 4,41,540
5 4,91,594 29,496 (1,00,000) 4,21,090 4,41,540 (73,590) 3,67,950
6 4,21,090 3,67,950

*Refer Note 4.
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease
liability on the basis of:
(a) A three-year remaining lease term (ie. till 8th year),
(b) Annual payments of Rs. 150,000 and
(c) Lessee’s incremental borrowing rate of 7% p.a.
Year Lease Payments Present value @ 7% Present value of lease payments
(A) (B) (A x B = C)

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1 1,50,000 0.935 1,40,250

2 1,50,000 0.873 1,30,950
3 1,50,000 0.816 1,22,400
Modified lease liability 3,93,600

The modified liability equals Rs. 3,93,600, of which (a) Rs. 1,31,200 relates to the increase of Rs.
50,000 in the annual lease payments from Year 6 to Year 8 and (refer note 1) (b) Rs. 2,62,400 relates
to the remaining three annual lease payments of Rs. 1,00,000 from Year 6 to Year 8 with reduction
of lease term (Refer Note 3)
Decrease in the lease term:
At the effective date of the modification (at the beginning of Year 6), the pre-modification ROU Asset
is Rs. 3,67,950. Lessee determines the proportionate decrease in the carrying amount of the ROU
Asset based on the remaining ROU Asset for the original 2,000 square metres of office space (i.e., a
remaining three-year lease term rather than the original five-year lease term). The remaining ROU
Asset for the original 2,000 square metres of office space is Rs. 2,20,770 [i.e., Rs. (3,67,950 / 5) x 3
years].
At the effective date of the modification (at the beginning of Year 6), the pre-modification lease
liability is Rs. 4,21,090. The remaining lease liability for the original 2,000 square metres of office
space is Rs. 2,67,300 (i.e., present value of three annual lease payments of Rs. 1,00,000, discounted
at the original discount rate of 6% p.a.) (refer note 2).
Consequently, Lessee reduces the carrying amount of the ROU Asset by Rs. 1,47,180 (Rs. 3,67,950 –
Rs. 2,20,770), and the carrying amount of the lease liability by Rs. 1,53,790 (Rs. 4,21,090 – Rs.
2,67,300). Lessee recognises the difference between the decrease in the lease liability and the
decrease in the ROU Asset (Rs. 1,53,790 – Rs. 1,47,180 = Rs. 6,610) as a gain in profit or loss at the
effective date of the modification (at the beginning of Year 6).
Lease Liability Dr. 1,53,790
To ROU Asset 1,47,180
To Gain 6,610
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of
the remeasurement of the remaining lease liability reflecting the revised discount rate of 7% p.a.,
which is Rs. 4,900 (Rs. 2,67,300 – Rs. 2,62,400*), as an adjustment to the ROU Asset.
*(Refer note 3)
Lease Liability Dr. 4,900
To ROU Asset 4,900

Increase in the leased space:

At the commencement date of the lease for the additional 1,500 square metres of space (at the
beginning of Year 6), Lessee recognises the increase in the lease liability related to the increase in

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leased space of Rs. 1,31,200 (i.e., present value of three annual lease payments of Rs. 50,000,
discounted at the revised interest rate of 7% p.a.) as an adjustment to the ROU Asset.
ROU Asset Dr. 1,31,200
To Lease Liability 1,31,200
The modified ROU Asset and the modified lease liability in relation to the modified lease are as
follows:
Lease liability ROU Asset
Year Opening Interest Lease Closing Opening Depreciation Closing
balance expense @ 7% payment balance balance charge balance
6 3,93,600 27,552 (1,50,000) 2,71,152 3,47,100** (1,15,700) 2,31,400
7 2,71,152 18,981 (1,50,000) 1,40,133 2,31,400 (1,15,700) 1,15,700
8 1,40,133 9,867* (1,50,000) - 1,15,700 (1,15,700) -

* Difference is due to approximation.

** Refer Note 5
Working Notes:
1 Calculation of lease liability on increased consideration:
Year Lease Payments (A) Present value @7% (B) Present value of lease
payments (A x B = C)
1 50,000 0.935 46,750
2 50,000 0.873 43,650
3 50,000 0.816 40,800
Modified lease liability 1,31,200

2. Calculation of remaining lease liability for the original contract of 2000 square meters at
Original discount rate:
Year Lease Payments Present value factor @ 6% Present value of lease
(A) (B) payments (A x B = C)
1 1,00,000 0.943 94,300
2 1,00,000 0.890 89,000
3 1,00,000 0.840 84,000
Remaining lease liability 2,67,300

3. Calculation of Initial value of ROU asset and lease liability:

Year Lease Payment Present value factor @ 6% Present value of lease
(A) (B) payments (A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500

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7 100,000 0.665 66,500

8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification 7,35,900
date

4. Calculation of opening balance of Modified ROU Asset at the beginning of 6th year:
The remaining ROU Asset for the original 2,000 square metres of office 2,20,770
space after decrease in term
Less: Adjustment for increase in interest rate from 6% to 7% (4,870)
Add: Adjustment for increase in leased space 1,31,200
3,47,100

FR Expected Questions-May 20 Page 168