FR Notes

FINANCIAL REPORTING (FR)

COM632

COURSE PLAN:

UNIT 1 - ACCOUNTING STANDARDS 1 & 2

Introduction to AS

AS 1 - Disclosure of Accounting Policies

AS 2 - Valuation of Inventories

UNIT 2 - ACCOUNTING STANDARDS 9 & 10

AS 9 - Revenue Recognition

AS 10 - Plant, Property and Equipment

UNIT 3 - ACCOUNTING STANDARD 11

AS 11 - Effects of Changes in Foreign Exchange Rates

UNIT 4 - ACCOUNTING STANDARDS 13 & 16

AS 13 - Accounting for Investments

AS 16 - Borrowing Costs

UNIT 5 - ACCOUNTING STANDARDS 25 & 26

AS 25 - Interim Financial Reporting

AS 26 - Intangible Assets
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 UNIT 1 - ACCOUNTING STANDARDS 1 & 2

Accounting Standards:

Accounting Standards are written and policy documents that are

issued by expert accounting bodies or by the government or other
regulatory bodies covering the aspects of recognition, measurement,
treatment, presentation and disclosure of accounting transactions in
the financial statements.

Accounting Standards are a common set of principles, standards and

procedures that define the basis of financial accounting and
practices.

Objectives of AS: To standardize the diverse accounting policies and

practices with a view to eliminate the extent possible, the non-
comparability of the financial statements and add the reliability to the
financial statement.

Advantages of AS:

Standards reduced to a reasonable extent or altogether eliminate any

confusing variation in the accounting treatments used to prepare the
financial statement.
There are certain areas where important information is not required
by the law to be disclosed. There, standards may call for disclosure
beyond that required by the law.
It facilitates comparison of financial statements of different
companies situated at different places.

Disadvantages of AS:

There may be a trend towards rigidity and away from flexibility in

applying AS.
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 Differences in AS are bound to be because of differences in the
traditions and the legal system from one country to another.

Procedure of Issuing of AS by ICAI:

Accounting Standard Board (ASB) shall determine the broad area in

which AS needs to be formulated and the priority in regard to the
selection therefore.
ASB will be assisted by studying groups constituted to consider
specific subjects.
ASB will also hold a dialogue with the representatives of the
government, public sector undertakings (PSUs), industry and other
organizations for ascertaining their views.
On the basis of the work of the study group and the representative,
organizations and exposure draft of the proposed standard will be
prepared and issued for comments by the members of the ICAI and
public at large.
After taking into consideration the comments received, the draft of
the proposed standard will be finalized and submitted to the council
of the ICAI.
The council will consider the final graph of the proposed standard
and if found necessary, modify the same.

Scope of AS:

1. It provides accounting norms

2. Conformity with laws
3. Ensure reliable financial statements
4. Acts as a harmonizer
5. Determine the extent of disclosure

Requirements for companies to follow Ind-AS:

1. All companies should be listed

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 2. If the turnover of the company exceeds 250 crores, the
company should follow Ind-AS. If the turnover is below 250
crores, it should follow AS.

Objectives/Significance of an Accounting Standard-

1. Identification of financial transactions

2. Measuring financial transactions
3. Preparation of financial transactions
4. Disclosure of information

Applicability of AS:

Level I Enterprises- Corporate entities which fall in any one or more

of the following categories, at the end of the relevant accounting
period, are classified as Level I Entities.

Companies that are listed in a stock exchange either in India or

abroad. It can also include companies that are in the process of
getting listed.
Banking, financial and insurance business companies.
All commercial, industrial and business reporting entities whose
turnover (excluding other incomes) exceeds Rs. 50 crores in the
immediately preceding accounting year.
All commercial, industrial and business entities having borrowings
(including public deposits) in excess of Rs. 10 crores at any time
during the immediately preceding accounting year.
All holding and subsidiary companies of any one of the above
entities.
All standards are applicable.

Level II Enterprises- Non-corporate entities which are not Level I

Entities but fall in any one or more of the following categories are
classified as Level II Entities from the accounting year commencing
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 on or after 1st April, 2012.

All commercial, industrial and business entities whose turnover

(excluding other incomes) exceeds Rs. 1 crore but does not exceed
Rs. 50 crores in the immediately preceding accounting year.
All commercial, industrial and business entities having borrowings
(including public deposits) in excess of Rs. 1 crore but not exceeding
Rs. 10 crores at any time during the immediately preceding
accounting year.
All holding and subsidiary companies of any one of the above
entities.

Level III Enterprises- Companies that do not fall under Level I and
Level II.

(Companies that fall under Level II and Level III entities are also
known as SMEs)

(ASs applicable for Levels II and III entities are- AS1, 2, 4, 5, 7, 9, 10,
11, 12, 13, 14, 15, 16, 22, 26, 28)(ASs which are a relaxation are-
AS19, 20, 29)(ASs which are not applicable are- AS3, 17, 18, 21, 23,
24, 25 and 27)

Implementation of Ind-AS:

Ind-AS was officially being implemented from 1st April 2015 by the
ICAI.

Prior to that, all companies registered under Companies Act were

following AS and IFRS standards.

The ICAI gave the FY 2015-16 as a trial year, making it optional for
the companies to switch to Ind-AS. From 1st April 2016, it was made
mandatory for all companies to switch from AS and follow Ind-AS.
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 This process can be divided into 3 phases-

Phase 1-

Established on 1 April 2015

Voluntary basis for all companies

Phase 2-

Made compulsory on 1 April 2016

Mandatory for-

Companies listed/in the process of listing in India/outside having net

worth of more than 500 crores
Unlisted companies having net worth of more than 500 crores
Parent and subsidiary companies of the above categories

Phase 3-

Released on 1 April 2017

Mandatory for-

Companies listed/in the process of listing having net worth of more

than 250 crores but not exceeding 500 crores
Unlisted companies having net worth of more than 250 crores
Parent and subsidiary companies of the above categories

IFRS: International Financial Reporting Standards

International Accounting Standards Board (IASB) was responsible for

introducing the IFRS

Change in Status of Enterprise:

When moved from Level II to Level I- ASs are applicable from the
subsequent accounting year without any retrospective effect on the
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 previous years accountings.
When moved from Level I to Levels II or III- ASs have to be continued
for 2 years as a Level I enterprise. If the status continues to be the
same in the 3rd year, then the ASs are applicable as per the current
level.

AS1 - Disclosure of Accounting Policies

Accounting Policies refer to specific accounting principles and the

methods of applying those principles adopted by the enterprise in
preparation and presentation of financial statements.

At the time of preparation of financial statements there are many

areas which have more than one method of accounting treatment.

Examples- Conversion of foreign currency items (Average rate and

TT buying rate)

Examples- Valuation of inventories (FIFO, LIFO, Weighted Average)

Need for Disclosure of Accounting Policies: To promote better

understanding of financial statements, it is required that all
significant accounting policies followed in preparation of financial
statements should be disclosed.

Fundamental Accounting Assumptions:

It is generally assumed that financial statements are prepared on the

basis of fundamental accounting assumptions.

1. Going Concern- It means that an enterprise had intention for

continuing the operation in the foreseeable future.
2. Consistency- It means that the same accounting policies are
followed from one period to another.
3. Accrual- It means that the financial statement is prepared on a
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 mercantile system only. Under this system, the effects of
transaction and other events are recognized when they occur
and they are recorded in the accounting records and reported in
the financial statement of the period which they relate to.

Nature of Accounting Policies: There is no single list of accounting

policies which are applicable to all circumstances. The differing
circumstances in which enterprises operate in a situation of diverse
and complex economic activity make alternative accounting
principles and methods of applying those principles acceptable. The
choice of the appropriate accounting principle and the methods of
applying those principles in the specific circumstances of each
enterprise calls for considerable judgment by the management of
the enterprise.

The various standards of the ICAI combined with the efforts of the
government and other regulatory agencies and progressive
management has reduced in recent years the number of acceptable
alternatives particularly in the case of corporate enterprise. While
continuing efforts, in this regard, in future, are likely to reduce the
number still further. The availability of alternative accounting
principles and methods of applying those principles is not likely to be
eliminated altogether in the view of the differing circumstances
faced by the enterprises.

Areas where Differing Accounting Policies are Encountered:

The following are the examples of the areas in which different

accounting policies may be adopted by different enterprises-

1. Methods of depreciation, depletion and amortization

2. Treatment of expenditure during construction
3. Conversion of foreign currency items
4. Valuation of inventories
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 5. Treatment of goodwill
6. Valuation of investments
7. Treatment of retirement benefits
8. Recognition of profit on long-term contracts
9. Valuation of fixed assets
10. Treatment of contingent liabilities

Criteria followed while applying AS:

Basic objective of selection of accounting policies is that the

financial statements should be prepared on the basis of such
accounting policies which exhibit a true and fair view of the state of
affairs or the balance sheet and the P&L a/c.

For this purpose, the major consideration governing the selection

and application of accounting policies are-

Prudence- making estimates for expected bad debts, warranty

claims, or even certain losses. “Uncertain profits but provide for all
losses.”
Substance Over Form- it means that transactions should be
accounted for in accordance with actual happening and economic
reality of the transaction, not by its legal form
Materiality- financial statement should disclose all the items and
facts which are sufficient enough to influence the decisions of reader
or user of those statements

Changes in Accounting Policies:

A change in accounting policies should be made in the following

conditions-

Adoption of different accounting policies is required by Act or

regulation or for compliance with an AS.
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 It is considered that change would result in more appropriate
presentation of financial statements.

Q1. A company follows the following policies for retirement benefits-

Contribution to pension fund is made based on actuarial valuation at

the year end in respect of employees who have opted for pension
scheme.

Contribution to the gratuity fund is made based on actuarial

valuation at the year end.

Leave encashment is accounted for on Pay-As-You-Go method.

Comment.

A1. The accrual is a fundamental accounting assumption. Therefore,

any accounting policy cannot be contrary to fundamental accounting
assumptions. Policy followed for leave encashment on the basis of
Pay-As-You-Go is not in accordance with accrual assumption.
Therefore, the accounting policy as regards leave encashment is not
correct.

Q2. Induga Ltd. manufactures a special type of computer. The

company has a software division for developing programmes with
respect to specialized areas such as medical imaging. During the
year ended 31st March 2010, the company manufactured a
prototype computer to be used for demonstrating the medical
imaging software programme and not for sale. The cost of
manufacturing the prototype computer was Rs. 50 lakhs. The
amount was included in fixed production overheads of the hardware
division. Comment.

A2. Cost of prototype computer which is manufactured by the

company and is not meant for sale. It should not be included in the
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 fixed production overheads.

Q3. UFC Company is engaged in the business of financial services

and is undergoing a tight liquidity position since most of the assets
of the company are blocked in various claims/petitions in a special
court. UFC has accepted Inter-Corporate Deposits (ICDs) and it is
making its best effort to settle the dues. There were claims at varied
rates of interest from lenders from the due date of ICDs to the date
of repayment. The company has provided interest as per the terms
of the contract till the due date and a note for non-provision of
interest from the due date to the date of repayment was affected in
the financial statements. On account of uncertainties existing
regarding the determination of the amount and in the absence of any
special legal obligation at present as per the terms of the contract,
the company considers that these claims are in nature of ‘Claims
against the company not acknowledged as debt’, and the same has
been disclosed by way of a note in the accounts instead of making a
provision in the P&L a/c. Is that correct?

A3. AS1 recognizes prudence as one of the major considerations

governing the selection and application of accounting policies. In
view of the uncertainty attached to future events, profits are not
anticipated but recognized only when realized. Provision is made for
all known liabilities and losses even though the amount cannot be
determined with certainty and represents only a best estimate in the
light of available information.

The treatment done by the company of not providing the interest

amount from the due date to the date of repayment is not correct.
Hence the company should provide for the liability at the amount
estimated based on facts and circumstances.

AS2 - Valuation of Inventories

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 Objective: The objective of this standard is to formulate the method
of computation of inventories, determine the value of closing stock
at which the inventory is to be shown in the balance sheet till it is not
sold and recognized as revenue.

Inventories consist of the following:

Held for sale in the ordinary course of business (finished goods)

In the process of production of such sale (raw materials and WIP)
In the form of materials or supplies to be consumed in the production
process or in the rendering of services (stores, spares,
consumables). Inventories do not include machineries.

Note- Inventories do not include machinery

Examples-

Merchandise purchased by a retailer and held for resale

Computer software held for resale
Land and other property held for resale
Finished goods produced or WIP being produced, by the enterprise
and include materials, maintenance supplies, consumables and loose
tools awaiting use in the production process.

Note- inventories do not include spare parts, servicing equipment

and standby equipment which meet the definition of property, plant
and equipment as per AS 10- Property, Plant and Equipment (PPE)

Non-Applicability of AS 2:

AS 2 should be applied in accounting for inventories other than:

WIP arising under construction contracts

WIP arising in the ordinary course of business of service providers
Shares, debentures and other financial instruments held as stock-in-
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 trade
Producers’ inventories of livestock, agricultural and forest products,
and mineral oils, ores and gases

Measurement of Inventories:

Inventories should be valued at lower of cost and net realizable value

(NRV)

Major points for valuation of inventories:

Step 1- determination of cost of inventories

Step 2- determination of Net Realizable Value (NRV) of inventories
Step 3- comparison between the Cost and NRV, whichever is lower is
the value of inventory

NRV = Estimated sale value - Estimated selling cost - further completion

costs if any

Eg- the cost of stock purchased for the year is 40 lakhs. During the
year, 75% of the stock got sold. The company wants to value the
closing stock at 10 lakhs. The company also estimates to sell this
stock for 11 lakhs in the next accounting year. 10% on selling price is
estimated as cost of selling expense. Suggest if the valuation is
according to the AS 2?

NRV= Estimated sale value – Estimated selling cost – Further

completion cost if any

Cost of Inventory:

Cost of Purchase = (Purchase price + duties and taxes + freight

inward + other expenses directly attributed to the acquisition) -
(duties and taxes recoverable by enterprises from taxing authorities
+ trade discount + rebate + duty drawback + other similar items)
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 Cost of Conversion = it consists of the cost directly related to the
units-

Direct labor
Direct material
Direct expenses
Fixed and variable production overheads

Other costs (incurred in bringing the inventories to the present

location and condition)

Cost of Conversion:

It consists of the costs directly related to the units-

Direct Labor
Direct Material
Direct Expenses

Plus- Fixed and Variable Production Overheads

Overheads:

1. Fixed Production Overheads- Indirect cost of production that

remains relatively constant regardless of volume of production
(i.e. depreciation and maintenance of factory building, cost of
factory management)

FPO is measured on normal capacity. In periods of abnormally high

production, the amount of fixed production overheads allocated to
each unit of production is decreased so that inventories are not
measured above cost.

2. Variable Production Overheads- Indirect cost of production that

varies directly or neatly directly with the volume of production
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 (i.e. indirect material, indirect labor)

VPO is measured always on actual production

Cost of Conversion for Joint/By-Products:

Joint Products- When the cost of conversion of each product is not

separately identifiable, total cost of conversion is allocated between
the products on the rational and consistent basis (i.e. Allocation on
the basis of relative sale value of product).
By-Products: If by-products, scrap or waste materials are not of
material value, they are measured at net realizable value, then net
realizable value is deducted from cost of conversion. Net cost of
conversion (ie. cost of conversion - net realizable value) is
distributed among the main products.

Inclusion of Excise Duty:

Excise duty contributes directly to bringing inventory to its present

location and condition
Hence, it should be included in the valuation of inventories
The excise duty paid/ provided on finished goods should, therefore,
be included in inventory valuation

Cost Excluded from Cost of Inventories

Abnormal amounts of wasted materials, labor, or other production

costs
Storage costs: unless those costs are necessary in the production
process prior to a further production stage
Administrative overheads: that do not contribute to bringing the
inventories to their present location and condition
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 Selling and Distribution costs

Cost Formulae:

1. Specific Identification Method-

In case of purchase of an item specifically segregated for a specific

project and is not ordinarily inter-changeable.
In case of goods or services produced and segregated for specific
projects.

2. FIFO/ Weighted Average Cost Method-

Where specific identification method is not applicable

3. Standard Cost/Retail Method-

When it is impractical to calculate the cost

These methods may be used for convenience if the result
approximate actual cost

Disclosure as per AS 2:

The financial statement should disclose the following:

Accounting policy adopted in measuring inventories

Cost formula used
Classifications of inventories are:

Raw materials and components

Work-in-progress
Finished goods
Stock-in-trade (in respect of goods acquired for trading)
Stores and spares
Loose tools
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 Others ( specify nature)

In the process of production of such sale (raw materials and WIP)

In the form of materials or supplies to be consumed in the production
process or in the rendering of services (stores, spares,
consumables). Inventories do not include machineries.

Applications of AS 2:

Question: A company holds the following items in its stock. Calculate

the value of inventory

Material No. of Units Cost per unit (Rs.) NRV

A 200 10 12
B 300 5 4
C 500 7 6

Answer:

Material Units Cost/unit NRV Cost value NRV Inventory

A 200 10 12 2000 2400 2000
B 300 5 4 1500 1200 1200
C 500 7 6 3500 3000 3000

Question: What will be the value of closing stock?

Items Historical Cost (Rs.) NRV (Rs.)

A 40 28
B 32 32
C 16 24

Answer:

Items Historical Cost (Rs.)

:
 NRV (Rs.) Valuation of Stock

A 40 28 28
B 32 32 32
C 16 24 16

Question- Sony Pharma ordered 12,000 kg. of certain material at

Rs.80 per unit. The purchase price includes excise duty Rs. 4 per kg
in respect of which full CENVAT credit is admissible. Freight incurred
amounted to Rs. 77,400. Normal transit loss is 3%. The company
actually received 11,600 kg. and consumed 10,100 kg of material.
Compute cost of inventory under AS 2 and abnormal loss.

Answer-

Particulars Amount
9,60,000
Purchase price (12,000 x 80)
(48,000)
(-) CENVAT credit (12,000 x 4)
9,12,000
(+) Freight
77,400
Total Material Cost
9,89,400
Number of Units after normal loss (97% x 12,000)
11,640
Normal cost per Kg (9,89,400/11640)
85
Closing stock value (11,600 - 10,100 x 85)
1,27,500
Abnormal Loss (11640 - 11,600 x 85)
3400

Question: Induga Ltd. manufactures computers. During the year

ended 31st March 2010, the company manufactured 550 computers.
It has the policy of valuing finished stock of goods at a standard cost
of Rs. 1.8 lakhs per computer. The details of the cost are as under:
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 Raw materials consumed - 400 (in lakhs)

Direct labor - 250

Variable overheads - 150

Fixed production overheads - 290 (including 100 lakhs towards

interest)

Compute the value of cost per computer for the purpose of closing
stock.

Answer:

Raw materials 400

Direct labor 250

Variable production overheads 150

Fixed production overheads (290 - 100) 190

Total Cost 990

Cost per computer = 990/550 = 1.8 lakhs

Production is assumed to be normal; in this case only absorption

costing method should be followed and not standard costing

Question: Raw material was purchased at Rs. 100/kg. Price of the raw
material is on the decline. The finished goods in which the raw
material is incorporated are expected to be sold at below cost.
10,000 kgs of raw material is in stock at the year end. Replacement
cost is Rs. 80/kg. How will you value the inventory?

Answer:

Materials and other supplies are not to be valued below cost if the
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 finished goods are expected to be sold at or above the cost.
In this case, the cost of finished goods will exceed the NRV, hence
materials can be written down at NRV.
The replacement cost is the best available measure of NRV
Hence, in this case the finished goods are to be valued at NRV
(10,000 at Rs. 80/kg)

Question: In a production process, normal waste is 5% of input.

5000MT of input were put in process resulting in a wastage of
300MT. Cost/ton of input is Rs. 1,000. The entire quantity of waste is
in stock at the year end. If waste has nil realizable value, what is the
cost/unit?

Answer:

As per AS 2, all abnormal amounts of waste materials, labor, and

other production costs are excluded from cost of inventories and the
same is recognized as expenses for the period incurred.
cost/unit (1,000 x 5,000/4,750) = Rs. 1,052.63
The cost of normal waste is included in inventory cost. The abnormal
waste will be charged in the P & L statement.

Question:

Material cost = Rs. 100/kg

Direct labor = Rs. 20/kg

Variable production overheads = Rs. 10/kg

Fixed production overheads-

Normal production capacity = 1,00,000 kgs

Overhead = Rs. 10,00,000

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 Finished goods = 2,000 kgs

Compute the value of inventory as per AS 2

Answer:

Raw materials 100

Direct labor 20

Variable production overheads 10

Fixed production overheads (10,00,000 / 1,00,000) 10

Total Cost 140

Valuation of inventory = 140 x 2,000 = Rs. 2,80,000

Question: Does inventory include machinery spares?

Answer: Inventories do not include machinery spares which can be

used only in connection with an item of fixed asset and whose use is
expected to be irregular; such machinery spares are accounted for in
accordance with Accounting Standard (AS) 10.

Question: The cost of production of Product X is Rs. 450 which

includes per unit cost of material, labor, and overheads of Rs. 250,
Rs. 110, and Rs. 90 respectively. At the end of the accounting year on
31/03/2018, the replacement cost of raw material is Rs. 210/unit.

There are 500 units of raw material in stock on 31/03/2018

Calculate as per AS 2 the value of closing stock of raw material

when:

1. Finished product is sold for Rs. 420/unit

2. Finished product is sold for Rs. 490/unit
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 Answer:

1. When finished product is sold for Rs. 420/unit

Here, the NRV of the product is Rs. 420 and it is less than its total
cost of Rs. 450 and cost of raw material is Rs. 250 which is more
than the replacement cost of Rs. 210
In this situation, raw materials should be valued at replacement cost
and the value of stock of raw materials would be-

500 units x Rs. 210/unit = Rs. 1,05,000

When the NRV is lower than the total cost and the cost of raw
materials/replacement cost (whichever is lower) should be
considered for valuation of raw material.

2. When finished product is sold for Rs. 490/unit

Here, the NRV of the product is Rs. 490 which is more than its total
cost of Rs. 450.
In this situation, raw materials should be valued at actual cost of raw
materials and the value of stock of raw materials would be-

500 units x Rs. 250/unit = Rs. 1,25,000

When the NRV is higher than the total cost and the cost of raw
materials/replacement cost (whichever is higher) should be
considered for valuation of raw materials

Question- A company holds the following item in its stock. Calculate

the value of inventory using the given information:

Materials No. of Units Cost per Unit Net Realizable Value

A 200 10 12
B 300 5 4
:
 C 500 7 6

Answer-

Cost of Inventory as Cost of Inventory Cost of Inventory

Material
per actual cost as per NRV as per AS 2
A 200 x 10 2000 200 x 12 2400 2000
B 300 x 5 1500 300 x 4 1200 1200
C 500 x 7 3500 500 x 6 3000 3000
Total 7000 6600 6200

Difference between Ind-AS 1 and AS 1

IND AS 1 AS 1
Ind AS deals with the presentation
of financial statements on the
basis for which an enterprise
furnishes and presents their
AS 1 deals with the disclosure
financial statement.
requirement of accounting policy
Helps the enterprise compare
In this, accounting policies means
their financial statements of the
certain accounting principles and
previous period and also with the
methods that an enterprise adopts
competitor’s financial statements.
to prepare and present their financial
It also outlines the guidelines statements.
regarding the structure of the
financial statement including the
content.

Difference between IFRS and GAAP:

BASIS IFRS GAAP

A statement of financial The requirements for the
:
 position presentation of financial
A statement of statements are set out
comprehensive income/a as per the Schedule VI
statement displaying of the Companies Act,
components of profit or loss 1956, Schedule III of the
(separate income statement) Banking Regulation Act,
and a second statement 1949, the regulations
beginning with profit or loss issued by the Insurance
and displaying components Regulatory and
of other comprehensive Development Authority
income. and the SEBI guidelines
1. A statement of cash flow for mutual funds
Components A statement of change in together with the
of Financial equity accounting standards
Statements Notes including summary of notified under the
accounting policies and Companies Rule, 2006.
explanatory notes.
The components of
Comparative figures are financial statements are:
presented for one year. When
a change in accounting policy Balance Sheet
has been applied, Statement of Profit and
retrospectively or items of Loss
financial statements have Cash Flow Statement
been restated. A statement of Explanatory notes
financial position is required including summary of
as at the beginning of the accounting policies
earliest period presented.
Omission or misstatement are Financial statements
material if individually or should disclose all
collectively they could “material” items, i.e., the
2. Difference
influence the economic knowledge of which
of Omission
decisions that users take on might influence the
the basis of financial decisions of the user of
statements. the financial statements.
This requires faithful
representation of the effects Requires compliance
of the transactions, other with the applicable
events and conditions in requirements of the
accordance with the Companies Act, 1956
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 definitions of and recognition and the other regulatory
criteria for assets, liabilities, requirements and the
3. Fair income and expenses set out application of the
Presentation in the framework. In case qualitative
management concludes characteristics of the
misleading interpretations of accounting standards
the AS requirements, it may framework. Departure
depart from the standard or from the Accounting
the interpretation. The Standards or Companies
reasons for why there might Act, 1956 are prohibited
be a misleading interpretation unless permitted by
must be disclosed. other

There is no such
guidance under Indian
GAAP. not disclosed as
4. payable within 12
Non-current only with the
Classification months after the
agreement to refinance or
of Financial balance sheet date of
reschedule payments on a
Liabilities the agreement to
long-term basis is completed
under refinance or reschedule
before the end of the
Refinancing payment is completed
reporting period.
Arrangements after the balance sheet
date and before the date
of approval of financial
statements.

Difference between AS 2 vs Ind AS 2

AS 2 Ind AS 2
Scope of AS 2 does not deal
with the inventory treatment
related to service providers

Explains that inventories do not

include machinery spares which Ind AS 2 details the treatment related
can be used only in connection to the cost of inventories of service
with an item of fixed asset and providers
whose use is expected to
irregular Does not contain specific explanation
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 Cost of inventories does not in respect of such spares
include “selling and distribution
costs” and it is expensed in the Specifically excludes only “selling
period in which they are incurred costs” and not “distribution costs”

Does not contain the definition Defines fair value and provides an
of fair value explanation in respect of distinction
between ‘NRV’ and ‘fair value’
Requires the inventory value of
goods which cannot be Requires the same formula to be used
segregated for specific projects for all the inventories with similar
should be assigned using FIFO nature
or WAC
The scope includes such inventories
The scope excludes
More information (total carrying
measurement of inventories held
amount, inventory amount recognized
by producers of agricultural and
as expense, write-down and reverse
forest products, agricultural
write-down of inventories recognized,
produce after harvest, and
circumstances that led to reverse
minerals and mineral products
write-down of inventories, carrying
though it provides guidance on
amount of inventory pledges as
measurement of such
security) to be disclosed
inventories

Requires to disclose the

accounting policies, cost
formula, classification of
inventories

UNIT 2 - ACCOUNTING STANDARDS 9 & 10

Accounting Standard (AS) 9- Revenue Recognition:

Revenue- Regular inflow of money from core business operations

and also during the ordinary course of business like dividends etc.

Recognition- Generally on accrual basis, it is measurable, set and

certain
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 Sources of Revenue:

1. Sale of goods
2. Rendering of services-

Once and for all basis

Continuing basis

3. Interest/dividend/royalty

Sale of Goods:

1. Revenue is recognized only after the transfer of the title

2. If the seller is ready to deliver but the buyer is not ready to take,
then sale of goods will not happen.

AS 9:

AS 9 explains when revenue should be recognized in P&L a/c and

also states the circumstances in which revenue recognition can be
postponed.

Revenue means gross inflow of cash, receivable or other

consideration, arising in course of ordinary activities of an enterprise
such as-

1. Sale of goods
2. Rendering of services
3. Use of enterprises’ resources by others yielding interest,
dividend and royalties

In other words, revenue is the charge made to the customer/clients

for goods.

Timing of Revenue Recognition-

:
 Revenue from sale or rendering services should be recognized at the
time of sale of or rendering of services
However, if at the time of rendering of services or sale, there is
significant uncertainty in ultimate collection of revenue, then revenue
recognition is postponed and in such cases, revenue should be
recognized only when it becomes reasonably certain that ultimate
collection will be made.
It also applies to revenue arising out of escalation of price, export
incentive and interest etc.

Applicability of AS 9:

1. Revenue from Sale of Goods-

When seller has transferred ownership of goods to the buyer for a

price
If there is no significant uncertainty in collection of amount of
consideration
If delivery is delayed at buyer’s request and buyer takes title and
accepts billing
When delivery of goods sold is subject to condition-

Installation and inspection

Sale on approval
Guaranteed sale (after agreement period)
Warranty sales (with provision for unexpired warranty)
Consignment sales (only when sold to third party)
Special order and shipments (when goods are identified and ready
for delivery)
Varying value of delivery (revenue on sale of delivery)
Non-varying value of delivery (revenue on straight line basis over
time)
Installment sale (revenue of sale excluding interest should be
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 recognized as on the date of sale)

Note- Repo arrangements (an enterprise entering into sale with a

separate agreement to repurchase same at a later date) should be
recorded as financing arrangements, resulting cash inflow is not
revenue and should not be recognized as revenue.

2. Revenue from Rendering of Services-

When service is performed-

1. Completed service contract method

2. Proportionate completion method

Installation fees (when installation is completed and accepted by the

clients)
Advertising commission (when advertisement appears before public)
Insurance commission (on effective commencement/reward renewal
date of policy)
Financial service commission (once and for all or on a continuing
basis)
Admission fees (when event takes place)
Tuition fees (over period of instruction)
Membership fees
Revenue from interest (on time proportion basis)
Revenue from royalties (on accrual basis)
Revenue from dividend (when dividend is declared by the company)

Note- when uncertainty of collection of revenue arises subsequently

after revenue recognition, it is better to make provision for
uncertainty in collection rather than adjustment in already
recognized revenue

Non-Applicability of AS 9:
:
 Revenue arising from construction contracts
Revenue arising from hire purchase, lease agreements
Revenue arising from government, grants and subsidies
Revenue of insurance companies arising from insurance contracts
Gain- realized/unrealized (eg- profit on sale of fixed assets)

Applications of AS 9:

Question 1: The board of directors decided on 31/3/2020 to increase

the sale price of certain items retrospective from 1/1/2020. In view of
this, place price revision with effect from 1st January, 2020, the
company has to receive Rs. 25 lakhs from its customers in respect of
sales made from 1st January, 2020 to 31st March, 2020 and the
Accountant cannot make up his mind whether to include Rs. 25 lakhs
in the sales for 2019-20. Suggest.

Answer 1: Price revision affected during the current accounting

period 2019-20. As a result, the company stands to receive Rs. 25
lakhs from its customers in respect of sales made from 1st January,
2020 to 31st March, 2020. If the company is able to assess the
ultimate collection with reasonable certainty, then additional revenue
arising out of said price revision can be recognized in 2019-20.

Question 2: The ABC Ltd. has recognized Rs. 7.5 lakhs on accrual
basis income from dividend on securities and units of mutual funds
of face value of Rs. 50 lakhs held by it at the end of the financial year
31st March, 2020. The dividends on the securities and mutual funds
were declared at the rate of 15% on 15th June, 2020. The dividend
was proposed on 10-4-2020 by the declaring company. Whether the
treatment is as per the relevant accounting standard?

Answer 2: No, the treatment is not as per AS 9. As per AS-9 dividend

is recognized in the books of investors when the right to receive is
established. In this case right to receive is established on 15-6-2020,
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 hence dividend is deemed to be accrued on 15-6-2020 and,
therefore, the dividend income should be recognized by ABC Ltd.
during the year 2020-21.

Question 3: Induja Ltd. used certain resources of ABC Ltd. In return,

ABC Ltd. received Rs. 10,00,000 and Rs. 15,00,000 as interest and
royalties respectively from Induja Ltd. during the year 2020-21. You
are required to state whether and on what basis these revenues can
be recognized by ABC Ltd.

Answer 3: Revenue arising from the use of enterprise resources’

yielding interest and royalties by others should only be recognized
when no significant uncertainty as to its measurability or
collectability exists.

In this case, interest should be recognized in the year to which it

pertains, not in the year in which it is received. Same is the case with
royalties.

If both interest and royalty accrue in 2020-21, it should be

recognized in the same accounting year.

Question 4: Advice to Induga Ltd. about the treatment of the

following in the final statement of accounts for the year ended on
31st March, 2010. A claim lodged with the Railways in March 2007
for loss of goods of Rs. 2,00,000 had been passed for payment in
March 2010 for Rs. 1,50,000. No entry was passed in the books of
the company, when the claim was lodged.

Answer 4: AS 9 on recognition states that where the ability to assess

the ultimate collection with reasonable certainty is lacking at the time
of raising any claim, revenue recognition is postponed to the extent
of uncertainty involved. AS 9 states that when recognition of revenue
is postponed due to the effect of uncertainties, it is considered as
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 revenue of the period in which it is properly recognized. In this case,
it may be assumed that ability of claim was not certain in the earlier
periods. This is supposed from the fact that only Rs. 1,50,000 were
collected against a claim of Rs. 2,00,000. So this transaction cannot
be taken as a prior period item.

Question 5: Sale includes Rs. 200 lakhs representing royalty

receivable for supply of know-how to a company in South-East Asia.
As per agreement, the amount is to be received in USD. However,
exchange permission was denied to the company in South-East Asia
for remitting the same.

Answer 5: As per AS 9 on revenue recognition, where the ability to

assess the ultimate collection with reasonable certainty is lacking at
the time of raising any claim, revenue recognition is postponed to the
extent of uncertainty involved. In such cases, it may be appropriate
to recognize revenue only when it is reasonably certain that the
ultimate collection will be made.

Question 6: Media Advertising obtained advertisement rights for one

day world cup cricket tournament to be held in May/June 2020 for
Rs. 250 lakhs.

By 31st March 2020, they paid Rs. 150 lakhs to secure these
advertisement rights. The balance Rs. 100 lakhs was paid in April
2020.

By 31st March 2020, they processed advertisement for 70% of the

available time for Rs. 350 lakhs. The advertiser paid 60% of the
amount by that date. The balance 40% was received in April 2020.

The advertisement for balance 30% time was procured in April 2020
for Rs. 150 lakhs.
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 The advertiser paid the full amount while booking the advertisement.
25% of the advertisement time is expected to be available in May
2020 and balance 75% in June 2020.

Calculate the profit/loss for the month of April, May and June 2020.

Answer 6: In a transaction involving the rendering of services,

performance should be measured either under the completed
service contract method or under the proportionate completion
method, whichever is related the revenue to the work accomplished.
Such performance should be regarded as being achieved when no
significant uncertainty exists regarding the amount of the
consideration that will be derived from rendering of services. Further,
appendix to AS 9 states that revenue from advertising should be
recognized when the service is completed. In this case, the service
as regards advertisement is deemed to be completed when the
related advertisement appears before the public.

As the 25% of the advertisement appeared in May 2020 amd 75% in

June 2020, the revenue with 250 lakhs i.e. (350+150) - (150+100)
should be apportioned in 25% and 75% ratio which will be 62.5 lakhs
in May 2020 and 187.5 lakhs in June 2020.

Question 7: M Ltd. manufactured machinery used in steel plants. It

quotes prices in various tenders issued by steel plants. As per terms
of the contract, full price of machinery is not released by the steel
plants, but 10% thereof is retained and paid after one year if there is
satisfactory performance of the machinery supplied. The company
accounts for only 90% of the invoice value as sales income and the
balance amount in the year of receipt to the extent of actual receipts
only. State your views as an auditor.

Answer 7: In the case of M Ltd., the goods as well as the risks and
rewards of ownership have been transferred to the steel plants. The
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 invoice raised by M Ltd. is for the full price, but 10% less is received
as the same is kept as “Retention Money”. In this case, therefore,
revenue has to be recognized at the full invoice price, i.e. 100% has
to be accounted as sales income. Depending on the past experience
of recovering the balance 10% from steel plants, M Ltd. can however
make a provision for sales income that is not likely to be realized. In
the absence of the above, the auditor will have to qualify his report.

Question 8: A Ltd. has sold certain goods to B Ltd. for Rs. 10,000 on
a 90 days credit period. But, if B Ltd. would pay it within 20 days, a
cash discount of 5% shall be provided by A Ltd. It is reasonably
certain that B Ltd. will pay the amount within 15 days.

Answer 8: In this case, if A Ltd. follows AS 9, then revenue should be

recorded as Rs. 10,000 and when B Ltd. will pay Rs. 9,500, the
amount of cash discount of Rs. 500 will be recognized as an
expense.

If A Ltd. were to follow Ind AS 18, estimated cash discount will be Rs.
500. So, revenue should be measured at Rs. 9,500.

Question 9: XY Hotels Ltd. presents its revenue from operations in

the statement of P&L for the year ended 31 March 2022 as under:

A) Gross Revenue from Operations 2,00,000

Less: Duties and Taxes (20,000)

Net Revenue from Operations 1,80,000

Less: Discounts (30,000)

Net Revenue from Operations 1,50,000

B) Other Incomes 17,500

Total Income 1,67,500

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 Comment if the above disclosure of the revenue would be in
compliance with the disclosure required in as per AS 9.

Answer 9: Disclosure of duties and taxes of Rs. 20,000 is in

accordance with the explanation given in AS 9, however the
disclosure of discounts is not as per AS 9.

The trade discount as deduction from the revenue is not correct and
is not in accordance with the requirements of AS 9.

Comparison of AS 9 with Ind AS 18:

AS 9 Ind AS 18
Revenue is gross inflow of cash,
Definition of revenue is broadly
receivables or other
compared to the definition given in
consideration arising in the
AS 9
course of the ordinary activities
of an enterprise from the sale of Revenue arising from agreements of
goods, service, interest, royalties real estate development are
and dividends specifically scoped out

Existing AS 9 does not exclude Measured at the fair value of the

such revenue arising from consideration
agreements of real estate
Specifically deals with exchange of
Revenue is recognized at the goods and services with goods and
nominal amount of consideration services of similar or dissimilar
receivable nature

It does not deal with exchange of Only percentage of completion

goods and services with goods method is permitted
and services
Recognizes interest only on effective
Completed service contract interest rate basis
method is permitted in the case
of service Provides guidelines regarding
revenue recognition in case the
Recognizes revenue from interest entity is under any obligation to
on time proportion basis provide free or discounted goods or
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 Does not deal with services or award credits to its
free/discounted sale of goods or customers due to any customer
services loyalty programme

Disclosure of excise duty as Does not specifically deal with it.

deduction from revenue from Excise duty is shown as expense in
sales transactions the P&L Account

AS 10: Property, Plant and Equipment:

The Property, Plant and Equipment (PPE) is also generally known as

fixed assets.

These fixed assets are tangible property in contract to the intangible

property which is dealt by another AS 26.

These tangible assets are-

Held for use in production or supply of goods and services, for rental
to others, or for administrative purposes
Expected to be used during more than one period
Not held for sale in the normal course of business

Eg- land, building, plant and machinery, furniture and fitting and
office equipment etc.

Objectives of AS 10:

Recognition of assets
Determination of their carrying amounts
The depreciation charges and impairment losses to be recognized in
relation to them

Scope of AS 10:

This standard does not apply to-

:
 Biological assets related to agricultural activity other than bearer
plants
Wasting assets including mineral rights, expenditure on the
exploration for an extraction of minerals, oil, natural gas, and similar
non-regenerative resources

Recognition of Assets:

The cost of an item of PPE should be recognized as an asset if and

only if:

It is probable that future economic benefits associated with the asset

will flow to the entity, and
The cost of the item can be measured reliably

Note-

Only when the rewards and risks have actually passed to the entity,
the asset can be recognized
Spare parts are usually treated as inventory and recognized in the
P&L as an when consumed

Question 1: A plant and machinery is purchased for Rs. 20 lakhs. It

satisfied the recognition criteria: future economic benefits will flow to
the entity in the form of the capability to produce goods using the
machinery, sell them and earn profits. Similarly, its price can be
measured reliably from the purchase invoice. Therefore, it qualifies to
be recognized as PPE.

Question 2: Small spare parts for machinery are purchased at a cost

of Rs. 1.25 lakhs and stored by the entity. These are regularly issued
whenever required by the maintenance department. Rs. 55,000
worth spare parts were consumed during the year. Should the
balance be recognized as assets as per AS 10?
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 Answer 2: The consumed part of Rs.55,000 should be shown as an
expense in the Statement of Profit and loss. The balance of Rs.
70,000 should be carried forward as inventory as per AS-2.

Question 3: ABC Ltd purchased an item of machinery for Rs. 2 lakhs,

together with major spare parts worth Rs. 25,000 not readily
available in the market. Should it recognize the total of Rs. 2.25 lakhs
as PPE?

Answer 3: Yes, it should recognize the total of Rs. 2.25 lakhs as PPE.
Those spares which can be used exclusively with an item of PPE are
accounted for as PPE.

Safety and Environment Equipment:

The acquisition of such property, plant and equipment, although not

directly increasing the future economic benefits of any particular
existing item of PPE, may be necessary for an entity to obtain the
future economic benefits from its other assets.
Such items of PPE qualify for recognition as assets because they
enable an entity to derive future economic benefits from related
assets in excess of what could be derived had those items not been
acquired.

Question 4: A chemical manufacturer may install new chemical

handling processes to comply with environmental requirements for
the production and storage of dangerous chemicals. Should the
related plant enhancements be recognized as an asset?

Answer 4: Yes, they should be recognized as assets because without

them the entity is unable to manufacture and sell chemicals.

Measurement of PPE:
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 PPE must be measured at cost.

The cost of PPE comprises of-

Purchase price includes import duties, non-refundable purchase

taxes, less trade discounts and rebates
Cost directly attributable to bringing the asset to the location and
condition necessary for it to be used in a manner intended by
management
Initial estimates of cost of dismantling/decommissioning, removing,
and site restoration at present value if the entity has an obligation
that it incurs on acquisition of the asset or as a result of using the
asset other than to produce inventories

Notes: It is to be noted that estimated cost of dismantling is to be

included in the cost of property, plant and equipment will be at its
present value as per AS-29.

Application of AS 10:

Question 5: ABC Ltd. has put a plant (50 crores) in 2020 on

leasehold land; the leasehold period is 15 years. The ABC Ltd. has to
dismantle the plant removing from the leasehold land and restore the
leasehold land at the same position at the time of inception of lease.
The estimated cost of dismantling the plant after 15 years will be Rs.
20 crores. The pretax rate of the time value of money and risk
specific to the liability is 10%. Calculate the cost of the plant.

Answer 5: Total cost of the PPE = Purchase cost + estimated

dismantling cost

= 50 crores + (20 crores/1.1015) = 50,00,00,000 + 4,78,78,410 =

54,78,78,410
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 Directly Attributable Cost to the PPE:

Employee benefit of those involved in the construction or acquisition

of an asset
Cost of site preparation
Initial delivery and handling cost
Installation and assembly cost
Cost of testing
Borrowing costs
Professional fees

Not Directly Attributable Cost to the PPE:

Cost of opening a new facility (preoperative expenses)

Cost of introducing a new product/ service (advertising and
promotion)
Cost of conducting business in new location with a new class of
customer
Training cost
Administration and other general overhead
Cost incurred when the asset is left idle/ operating full capacity
Initial operating losses
Cost of reloading

Exchange of Assets:

The exchange of items of PPE, regardless of whether the asset are

similar, are measured at fair value
Exceptions:

The exchange transaction lacks commercial substances or

The fair value of neither the assets exchange can be measured
reliably
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 If the acquired item is not measured at fair value, its cost is
measured at the carrying amount of the asset given up

When does a transaction have commercial substance?

Whether an exchange transaction has commercial substance

depends on the extent to which the reporting entity’s future cash
flows are expected to change as a result of the transaction. If the
expected cash flow after the exchange differs from what would have
been expected without the occurring, the exchange value has
commercial substance. In such cases it has to be measured at fair
value.
If the transaction does not have commercial substance or the fair
value of neither the asset received nor the asset given up can be
measured reliably, then the asset acquired is valued at the carrying
amount of the asset given up and adjustment for settle-up paid or
received in cash or a cash equivalent is referred to as best.

Question 6: J & Co. exchanges an automobile with a carrying value

of Rs. 2500 with S & Co. for a tooling machine with a fair market
value of Rs. 3200. No boot is exchanged in the transaction. The fair
value of the automobile is not readily determinable. What would be
the value of the PPE?

Answer 6: The PPE will be valued at Rs. 3200, the fair market value

Measurement of Cost:

1. Subsequent Cost-

Day-to-day servicing/repairs and maintenance should not be

capitalized
Cost associated with incremental benefits (improved quality of
output, saving in cost) can be capitalized
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 2. Part Replacement- replacement cost has to be capitalized if
recognition criteria are met (aircraft, ships etc.)
3. Major Inspection/Overhaul Costs- inspection cost has to be
capitalized if recognition criteria are met (aircraft)

Measurement subsequent to Initial Recognition:

An entity may choose between the cost model and the revaluation
model, but the same policy must be applied to the entire class of
PPE

Cost Model: (Cost - Accumulated Depreciation and Accumulated

Impairment Losses)
Revaluation Model: (Fair Value - Accumulated Depreciation and
Accumulated Impairment Losses)

Note- to use the revaluation model, the fair value must be reliably
measurable

Revaluation Method:

Elimination Method- accumulated depreciation gets eliminated

Proportionately Restated Method- restated proportionately with the
change in gross carrying amount so that the carrying amount after
revelation equals is revalued amount

Computation of Carrying Amount: When cost is 1,000 and

depreciation is 250

Cost Elimination Proportionately

Particulars
Method Method Restated Method
1467
Cost 1,000 1,100
(1,000/750 x 1,100)
(367)
Accumulated
:
 Depreciation (250) - (250/750 x 1,100)

Carrying Amount 750 1,100 1,100

Depreciation as per AS 10:

Depreciable amount should be allocated on a systematic basis over

useful life
Depreciation method should reflect the pattern in which the asset’s
economic benefits are consumed
Depreciation charge for each period should be recognized as an
expense
AS 10 does not specify a method to be used
AS 10 requires that each part of an item of PPE that has a cost that is
significant when compared to the total cost of the item should be
depreciated separately
Eg- depreciate separately engines and airparts of an aircraft

Question 7: XYZ Ltd. is installing a new plant at its production facility.

It has incurred these costs:

Cost of the plant 25,00,000

Initial delivery and handling costs 2,00,000

Cost of site preparation 6,00,000

Consultancy fee 7,00,000

Interest charge paid to supplier of plant for deferred credit 2,00,000

Estimated dismantling cost to be incurred after 7 years (PV) 3,00,000

Operating losses before commercial production 4,00,000

Which of the above costs are to be capitalized as per AS 10?

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 Answer 7: Costs:

Cost of the plant 25,00,000

Initial delivery and handling costs 2,00,000

Cost of site preparation 6,00,000

Consultancy fee 7,00,000

Estimated dismantling cost to be incurred after 7 years (PV) 3,00,000

Total cost of the plant 43,00,000

Question 8: Anjali Ltd. began the construction of a new factory on 1st

October 2021. The following costs were incurred-

Answer 8:

Amt. Capitalizing as per AS

Particulars
(000’s) 10
Purchase of land

Cost of dismantling existing Yes

10,000
structure on the site
500 Yes
Materials
6,000 Yes
Employment cost
1,800 For 8 months
Production overheads directly
related to construction 1,200 Excluding abnormal
element
Allocated general administrative 600
expenses No
400
Architects and consultants fee Yes
00
Cost of relocating staff No
200
Cost of formal opening ceremony No
1,200
:
 Interest on loan to partly finance 6,000 For 8 months
factory construction
Yes, but not included in
Plant and machinery purchased for factory cost
the factory

Question 9: ABC Ltd purchased a machine costing Rs. 1,25,000 for

its manufacturing operations and paid shipping costs of Rs. 20,000.
ABC Ltd spent an additional amount of Rs. 10,000 for testing and
preparing the machine for use. What amount should ABC Ltd record
as the cost of the machine?

Answer 9: As per AS-10, the cost of PPE should comprise its

purchase price and any

attributable cost of bringing the asset to its working condition for its
intended use.

In this case the cost of machinery includes all expenditures incurred

in acquiring the asset and preparing it for use. Cost includes the
purchase price, freight and handling charges, insurance cost on the
machine while in transit, cost of special foundations, and costs of
assembling, installation and testing.

Therefore the cost to be recorded is Rs.1,55,000 (Rs. 1,25,000 + Rs.

20,000 + Rs. 10,000).

Question 10: On 1 December 2012, Induga Co. purchased land worth

Rs. 4,00,000 for the factory site. ABC Ltd. demolished the owned
building on the property and sold the materials for salvage. ABC Ltd.
incurred the following additional costs-

Demolition of old building 50,000

Legal fees for purchase contract and recording ownership 10,000

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 Title guarantee insurance 12,000

Salvage value 8,000

What is the value of the land that ABC Ltd. should account in their
balance sheet on 31 December 2012?

Answer 10: As per AS 10, the cost of the land should include all
expenditure incurred preparing it for its ultimate use. Hence,
purchase price, legal fees, title insurance and demolition cost of old
buildings should be included in the value of the asset.

Purchase Price 4,00,000

Demolition of Old Building 50,000

Legal Fees 10,000

Title Insurance 12,000

(-) Less: Salvage Value (8,000)

Value of Land 4,64,000

Question 11: On 31 March, 2012, Winn Co traded in an old machine

having a carrying value of Rs. 16,800 and paid cash difference of Rs.
6000 for a new machine having a total cash price of Rs. 20,500.
What should be the amount of loss to be recognized by Winn Co on
this exchange?

Answer 11: As per AS-10, When a PPE is acquired in exchange or in

part exchange for another asset, the cost of the asset acquired
should be recorded at fair value adjusted for any balancing payment
or receipt of cash or other consideration.

In this case, the fair value of the machine acquired is Rs. 20,500 and
carrying amount of old machine is Rs. 16,800 which has been
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 exchanged for the new machine in addition to that Rs. 6,000 cash
was also paid.

Therefore, the loss of Rs. 2,300 is to be recorded in exchange of old

machine (16800+6000 – 20500)

Question 12: Rawat and Co. incurred costs to modify its building and
to rearrange its production line. As a result, an overall reduction in
production costs is expected. However, the modifications did not
increase the building’s market value, and the rearrangement did not
extend the production line’s life. Should the building modification
costs and the production line rearrangement costs be capitalized?

Answer 12: As per AS-10, only expenditure that increases the future
benefits from the existing asset beyond its previously assessed
standard of performance is included in the gross book value, e.g., an
increase in capacity.

In this case future benefits from the existing asset appear to have
increased beyond its previously assessed standard of performance
as there is overall reduction in production cost which is expected.

Therefore both the building modification and production line

rearrangement that contributed to the improved efficiency in the
production process have to be capitalized.

Question 13: A conveyor system was capitalized on 01-01-2010 with

a value of Rs. 41.37 crores. The break-up of the capital cost was as
follows:

Civil & Mechanical Structure - Rs. 11.72

Driving Units and Plumbing- Rs. 05.40

Rope- Rs. 02.83

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 Belt- Rs. 11.17

Safety & Electrical Equipment- Rs. 06.15

Other Accessories- Rs. 04.10

Total- Rs. 41.37

During the financial year 2013-14 due to wear and tear, the rope
used in the conveyor system was replaced by a new one at a cost of
Rs. 8 crores.

As the new rope did not increase the capacity and is a component of
the total asset, the company charged the full cost of the new rope for
repairs and maintenance.

The old rope continues to appear in the books of account and is

charged with depreciation every year.

Whether the above, accounting treatment is correct. If not, give the

correct accounting treatment with explanation.

Anwer 13: As per AS 10, Subsequent expenditure relating to an item

of fixed asset should be added to its book value only if it increases
the future benefits from the existing asset beyond its previously
assessed standard of performance.

In the given case, the new replaced rope does not increase the
future benefits from the assets beyond their previously assessed
performance.

Therefore the cost of replacement of rope should be charged to

revenue.

However in doing so the estimated scrap value of the old rope

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 should be deducted from the cost of new rope

Question 14: On 1st October 2011, X Ltd. began the construction of a

new factory. Costs relating to the factory are as follows-

Purchase of the land

10,000
Cost of dismantling existing structure on the site
500
Purchase of materials to construct the factory
6,000
Employment costs
1,800
Production overheads directly related to the construction
1,200
Allocated general administrative overheads
600
Architects and consultants fees directly related to the
400
construction
300
Costs of relocating staff who are to work at the new factory
200
Costs relating to the formal opening of the factory
1,200
Interest on loan to partly finance factory construction
6,000
Plant and machinery purchased for use in the factory

(1) the factory took 8 months to construct and was brought into use
on 30th June 2012. The employment costs are for the 9 months to
30 June 2012.

(2) the production overheads were incurred in the 8 months ended

31 May 2012. They included an abnormal cost of Rs. 200 caused by
the need to rectify damage caused by a gas leak.

(3) X Ltd. received a loan of Rs. 120 lakhs on 1 October 2011. The
building meets the definition of a qualifying asset in accordance with
AS 16- Borrowing Costs. The loan carries a rate of interest of 10%
per annum.
:
 Determine the cost of the asset to be included in the

Answer 14: Costs relating to Factory:

Purchase of land 10,000

Purchase of material 6,000

Cost of dismantling 500

Employment costs 1,600

Direct production overheads 1,000

Architecture fees 400

Final opening cost 200

Plant and Machinery 6,000

Total Costs related to Factory- 25,700

Question 15: A publishing company undertook repair and overhauling

of its machinery at a cost of Rs. 2.50 lakhs to maintain them in good
condition and capitalized the amount, as it is more than 25% of the
original cost of the machinery. As an auditor, what would you do in
this situation?

Answer 15: Size of the expenditure is not the criteria to decide

whether subsequent expenditure should be capitalized.

The important question is whether the expenditure increases the

expected future benefits from the asset beyond its pre-assessed
standard of performance as per AS-10. Only then it should be
capitalized.

Since in this case, the benefits are maintained at an existing level,

the expenditure should not be capitalized.
:
 Question 16: A building suffered uninsured fire damage. The
damaged portion of the building was refurbished with higher quality
materials. The cost and related accumulated depreciation of the
damaged portion are identifiable. How would you account these
events as per AS 10?

Answer 16: When an entity suffers a casualty loss to an asset; the

accounting loss is recorded at the net carrying value of the damaged
asset, if known.

In this case, the cost and related accumulated depreciation are

identifiable. The entity should therefore recognize a loss in the
current period equal to the carrying amount of the damaged portion
of the building.

The refurbishing of the building, which is an economic event

separate from the fire damage, should be treated similarly as the
purchase of other assets or betterments. The cost of refurbishing
the building should therefore be capitalized.

Question 17: A company has scrapped a semi-automatic part of a

machine (not written off) and replaced it with a more expensive fully
automatic part, which has doubled the output of the machine. At the
same time the machine was moved to a more suitable place in the
factory, which involved the building of a new foundation in addition to
the cost of dismantling and re-erection. The company wants to
charge the whole expenditure to revenue. As an auditor, what would
you do in this situation?

Answer 17: If the subsequent expenditure increases the expected

future benefits from the asset beyond its pre-assessed standard of
performance then as per AS-10, it should be capitalized. Otherwise it
should be expensive.
:
 In this case, the replacement of a semi-automatic part with a fully
automatic part has doubled the output of the machine thus, it has
increased future benefits beyond the machines’ pre-assessed
standard performance, and hence this expenditure should be
capitalized as part of the cost of the machine.

However, the expenses for shifting the machine and building of a

new foundation in addition to the cost of dismantling and erection do
not contribute to any new future benefits from the existing asset.
They only serve to maintain performance of the machine. Hence this
cost has to be charged to revenue.

Question 18: ABC Ltd. imported a machine from Germany at a cost of

Euros 1,50,000. The exchange rate at the time of import was Rs. 55
for 1 Euro. Customs duty was paid at 25% of its cost. The customs
department applied a standard exchange rate of Rs. 52 for 1 Euro for
the purpose of computation. Other port charges, inward transport
and octroi amounted to Rs. 2,00,000. An engineer was invited from
Germany for installation. His fees and expenses came to Rs.
3,00,000 in rupees plus 10,000 euros. This was remitted at Rs. 56 for
1 Euro. A loan of Rs. 50 lakhs was taken on 1st September 2010 for
the acquisition of the machine at an interest of 8% per annum. The
machine was installed and put to commercial use on 1st February,
2011. Depreciation is charged on a straight-line basis in the books of
accounts at 13.91% per annum. What is the book value of the asset
on 31 March 2011 and on 31 March 2012 as per AS 10?

Answer 18:

Cost of the Machine:

The cost of the machine is given as Euros 1,50,000. We need to

convert this amount to INR using the exchange rate at the time of
import, which was Rs. 55 for 1 Euro.
:
 Cost of the machine in INR = 1,50,000 Euros x Rs. 55/Euro = Rs.
82,50,000

Customs Duty:

The customs duty paid was 25% of the cost of the machine.

Customs duty in INR = 25% of Rs. 78,00,000 (1,50,000 x 52) = Rs.

19,50,000

Other Port Charges, Inward Transport, and Octroi = 2,00,000

Engineer Fees and Expenses:

The engineer fees and expenses were Rs. 3,00,000 in rupees plus
10,000 euros.

Engineer fees and expenses in INR = Rs. 3,00,000 + 10,000 Euros x

Rs. 56/Euro

= Rs. 3,00,000 + Rs. 5,60,000 = Rs. 8,60,000

Loan Interest:

The loan amount is Rs. 50,00,000 at an interest rate of 8% per

annum.

Loan interest for the period from 1st September 2010 to 31st January
2011

= Rs. 50,00,000 x 8% x (5/12) = Rs. 1,66,667

Total Cost of the Asset on 31st March 2011:

= Cost of the machine + Customs duty + Other port charges, inward

transport, and octroi + Engineer fees and expenses + Loan interest
:
 (for the period from 1st February 2011 to 31st March 2011)

= Rs. 82,50,000 + Rs. 19,50,000 + Rs. 2,00,000 + Rs. 8,60,000 + Rs.

1,66,667

= Rs. 1,14,26,667

Total Cost of the Asset on 31st March 2012:

= Cost of the machine + Customs duty + Other port charges, inward

transport, and octroi + Engineer fees and expenses + Loan interest
(for the period from 1st April 2011 to 31st March 2012)

= Rs. 82,50,000 + Rs. 19,50,000 + Rs. 2,00,000 + Rs. 8,60,000 + Rs.

4,00,000

= Rs. 1,18,72,500

Depreciation for the period from 1st February 2011 to 31st March
2011:

= Cost of the asset on 31st March 2011 x Depreciation rate x (59

days/365 days)

= Rs. 1,14,26,667 x 13.91% x (2/12)

= Rs. 2,64,908

Depreciation for the period from 1st April 2011 to 31st March 2012:

= Cost of the asset on 31st March 2012 x Depreciation rate

= Rs. 1,14,26,667 x 13.91%

= Rs. 15,89,449

Book Value of the Asset on 31st March 2011:

:
 = Total cost of the asset on 31st March 2011 - Depreciation for the
period from 1st February 2011 to 31st March 2011

= Rs. 1,14,26,667 - Rs. 2,64,908

= Rs. 1,11,61,759

Book Value of the Asset on 31st March 2012:

= Total cost of the asset on 31st March 2012 - Depreciation for the
period from 1st April 2011 to 31st March 2012

= Rs. 1,14,26,667 - Rs. 15,89,449

= Rs. 98,37,218

Question 19: A shipping company is required by law to bring its ships

for a major inspection and overhaul every 5 years. The overhaul
expenditure, might at first seem to be repair, but is actually a cost
incurred to get the ship back into a worthy condition. The cost of the
ship is Rs. 20 crores with 20 years of life and the major overhaul
happens every 5 years. The estimated overhaul expenses are Rs. 5
crores every 5 years. Compute the book value of the asset for every
5 years until its lifetime.

Answer 19:

Particulars Overhaul Ship

First 5 years-

Cost value
15 crores
Lifetime 5 crores
20 years
Depreciation (Cost 5 years
value/lifetime) 0.75 crores/year
1
:
 Book Value = Cost value - crore/year 15 crores - 8.75 crores =
depreciation 6.25 crores

= 20 crores - 8.75 crores =

11.25 crores
Second 5 years-

Cost value
11.25 crores
Lifetime 5 crores
15 years
Depreciation (Cost 5 years
0.75 crores/year
value/lifetime)
1
crore/year 15 crores - 1.75 crores =
Book Value = Cost value -
13.25 crores
depreciation

= 11.25 crores - 8.75 crores =

16.5 crores
Third 5 years-

Cost value
15 crores
Lifetime 5 crores
20 years
Depreciation (Cost 5 years
0.75 crores/year
value/lifetime)
1
crore/year 15 crores - 1.75 crores =
Book Value = Cost value -
13.25 crores
depreciation

= 20 crores - 1.75 crores = 2.5

crores
Fourth 5 years-

Cost value 15 crores

5 crores
Lifetime 20 years
5 years
Depreciation (Cost 0.75 crores/year
value/lifetime) 1
15 crores - 1.75 crores =
crore/year
Book Value = Cost value - 13.25 crores
:
 depreciation

= 20 crores - 1.75 crores =

18.25 crores

UNIT 3 - ACCOUNTING STANDARD 11

AS11 - Effects of Changes in Foreign Rates

In India, financial statements are prepared in INR, which is the

reporting currency.

All transactions done in INR are recorded in INR. There are

transactions happening across borders and are dealt in different
currencies.

This mandates the translation of foreign currency in INR.

Hence, AS 11 is required to prescribe the method for translation of

foreign currency.

AS 11 deals with the effects of changes in foreign exchange rates

while recording transactions.

Applicability of AS 11:

Accounting for transactions in foreign currency

Translating the financial statement of foreign operation- integral as
well as non-integral
Prescribing the accounting standard for forward exchange contracts

Foreign Currency Transactions:

Buying or selling of goods and services priced in foreign currency

Acquisition or disposal of fixed assets denominated in foreign
currency
:
 Incurs or settles liability denominated in foreign currency
Lending or borrowing amounts denominated in foreign currency
Unperformed forward contracts

Classification of Accounting Treatment:

Category I (Foreign Currency Transactions):

Buying or selling the goods or services

Lending and borrowing in foreign currency
Acquisition and disposition of assets denominated in foreign
currency

Category II (Foreign Operations):

Foreign branch
An associate
Joint venture
Foreign subsidiary

Category III (Forward Exchange Contracts):

For managing risk/hedging

For trading and speculation

Accounting Treatment for Category I-

Initial Recognition- transactions should be recorded at the exchange

rate on the date of the transaction
If there is no significant changes in the rate, alternatively average
rate can be used for a week or month
Valuation at the Balance Sheet Date:

1. Monetary items (debtors, creditors, loan) should be recorded at

the exchange rate on the closing date
:
 2. Non-monetary items should be recorded at historical cost (fixed
asset and long-term investments) and at fair value (inventory
and current investments)
3. Contingent liabilities should be recorded at the exchange rate
on the closing date

Treatment of Exchange Difference: all types of exchange differences

will be charged to P&L a/c for the period

Question 1: X Ltd. borrowed US $5,00,000 on 31-12-2009 which will

be repaid (settled) on 30-6-2010. X Ltd. prepares financial
statements ending on 31-3-2010. Rate of exchange between
reporting currency (Rupee) and foreign currency (US$) on different
dates are as under:

31.12.2009 - 1USD = INR 44

31.3.2010 - 1USD = INR 44.50

30.06.2010 - 1USD = INR 44.75

Answer 1: Initial Recognition- 31/12/2009

Bank a/c (5,00,000 x 44) —--

Dr.
2,20,00,000
2,20,00,000
To Borrowings a/c

31/3/2010 (in Balance Sheet)

Borrowing/Loan (5,00,000 x 44.50) 2,22,50,000

31/3/2010 (to P&L a/c)

P&L a/c (Difference in Exchange) —--Dr.

2,50,000 2,50,000
To Borrowings a/c
:
 Repayment of Loan - 30/6/2010

Borrowings a/c —--

Dr.
2,22,50,000
P&L a/c (Difference in Exchange) —--
2,23,75,000
Dr. 1,25,000

To Bank a/c

If the repayment was done on 28/2/2010 at an exchange rate of 1

USD = INR 44.20:

Borrowings a/c —--

Dr.
2,20,00,000
P&L a/c (Difference in Exchange) —-- 2,21,00,000
Dr. 1,00,000

To Bank a/c

Category II (Foreign Operations):

Integral Foreign Operations-

Extensions of the reporting enterprise activities (dependent

branches, sales depot, foreign arm) that produces raw material and
transfer it to head office (reporting enterprise)
Or foreign operations only raises finance to help the reporting
enterprise

Note- All transactions are recorded and treated as if the reporting

enterprises’ transactions. Hence, all Category I transactions’ rules
are applicable.

Capitalization of Exchange Differences (1/4/2011 onwards):

:
 Para 46A of AS 11 (inserted by the MCA) allows enterprises to
capitalize the exchange rate differences instead of debiting or
crediting it to the P/L a/c.

The same will be amortized if-

Option has been exercised by the enterprise (such option cannot be

revoked)
Foreign currency monetary item is more than 12 months at the time
of originating the asset/liability
If the exchange difference related to acquisition of depreciable asset,
the same will be added/deducted to the cost of the asset and
amortized over remaining life of the asset
If the difference is related to acquisition of depreciable asset, the
same will be added/deducted to the cost of the asset and amortized
over remaining life of the asset
If the difference is related to any non-depreciable assets, the same
shall be transferred to Foreign Currency Monetary Items Translation
Difference Account (FCMITDA) and amortized over the balance
period of such long term monetary assets
As per ICAI announcement (30.3.2013), the FCMITDA should be
shown as ‘Reserves and Surplus’ on the Equities and Liabilities side
of the Balance Sheet

Question 2: A company borrowed $100,000 on 1st April 2011 which

has been used for other than acquiring depreciable assets repayable
in full after the period of 5 years. Exchange rate on that date was $1=
INR48. The company follows the financial year as its accounting year.
The detail of the exchange rates on different dates are as follows:

Exchange rates: 31 Mar, 2012 – 50; 2013-52; 2014-53.50; 2015-55;

2016-56

A) The company has opted to amortize the exchange difference

:
 arising on reporting of long-term foreign currency monetary items.

B) Assuming that the company has depreciable assets out of this

borrowing on 01.04.2011 and the useful life of the asset is 10 years.
Company follows the straight line method for depreciation. (Ignore
interest on loan).

Answer 2: (A)

Exchange Amt. to be
Opening Closing
Year Total recognized Remarks
Balance Diff. Balance
in P&L a/c
Total
amortized
31/3/2012 Nil 2,00,000 2,00,000 40,000 1,60,000
over 2
years
Amortized
31/3/2013 1,60,000 2,00,000 3,60,000 90,000 2,70,000 over 4
years
Amortized
31/3/2014 2,70,000 1,50,000 4,20,000 1,40,000 2,80,000 over 3
years
Amortized
31/3/2015 2,80,000 1,50,000 4,30,000 2,15,000 2,15,000 over 2
years
Full amt.
31/3/2016 2,15,000 1,00,000 3,15,000 3,15,000 Nil is
amortized

(Opening Balance- Unamortized exchange difference)

Accounting Entries (31/3/2012):

Exchange difference on long-term foreign

currency —--Dr. 2,00,000
2,00,000
To Loan (Foreign Currency) a/c
:
 Difference in exchange a/c
—--Dr.
40,000
FCMITDA a/c 2,00,000
—--Dr.
1,60,000
To Exchange difference on long-term foreign
currency a/c
P&L a/c
—--Dr. 40,000
40,000
To Difference in exchange a/c

(B) Assuming to have Depreciable Asset from the Borrowings:

Exchange
Cost of Total Cost WDV of
Year Depn. Remarks
Asset of Asset Asset
Diff.
Depn. at
31/3/2012 48,00,000 2,00,000 50,00,000 5,00,000 45,00,000 SLM for 10
years
Depn. on
5,00,000 capitalized
31/3/2013 45,00,000 2,00,000 47,00,000 + 41,78,000 exchange
22,000 value

(2,00,000/9
Depn. on
5,00,000 additional
+ exchange
31/3/2014 41,78,000 1,50,000 43,28,000 37,87,000
22,000 value
+ 19,000
(1,50,000/8
Depn. on
5,00,000
additional
+
exchange
31/3/2015 37,87,000 1,50,000 39,37,000 22,000 33,75,000
value
+ 19,000
+ 21,000
(1,50,000/7
:
 5,00,000 Depn. on
+ additional
31/3/2016 33,75,000 1,00,000 34,75,000 22,000 28,96,000 exchange
+ 19,000 value
+ 21,000
+ 17,000 (1,00,000/6

Non-Integral Foreign Operations-

If foreign operations are carried out independently without much

dependance on reporting enterprise
Activities of foreign operations are financed by its operations and
local borrowings
Foreign operation sales are in currencies other that the reporting
currency
Foreign operation expenses are paid in currencies other than the
reporting currency
Day-to-day cash flows of reporting enterprise is independent of
foreign enterprises’ cash flows
Sales prices of foreign enterprises are not affected by exchange rate
of the reporting currency of foreign operation
There is an active sales market for the foreign operation product

Translation of Accounts of Non-Integral Foreign Operations:

All Balance Sheet Items (Assets & Liabilities) to be reported at

closing rate
Items of incomes and expenses to be recorded at the actual rate on
the date of transaction. Average rate can be applied subject to
materiality
All foreign exchange rate differences should be accumulated in
‘Foreign Currency Translation Reserve’ until the disposal of ‘Net
Investment in Non-Integral foreign operation’
Contingent liability at closing rate
:
 Net Investment in Non-Integral Foreign Operation: An item for which
the settlement is neither planned nor likely to occur in foreseeable
future

Effects of Consolidation/Disposal:

When a non-integral foreign subsidiary/joint venture is consolidated

with the reporting enterprise:

Goodwill/Capital reserve to be translated at closing rate

Exchange difference to be recognized as income or expense in
consolidated financial statement
Exchange difference from monetary items should be accumulated in
‘Currency Translation Reserve’

Disposal of Foreign Non-Integral Operation fully or partially:

Exchange difference lying in the Currency Translation Reserve to be

recognized as income/expense fully if it were to be a full disposal or
proportionately if done partially

Changes in Classification (Integral to Non-Integral):

Translation procedure applicable to non-integral shall be followed

from the date of change
Exchange difference arising on the translation of non-monetary
assets at the date of re-classification is accumulated in foreign
currency translation reserve

Changes in Classification (Non-Integral to Integral):

Translation procedure as applicable to integral should be applied

from the date of change
Translated amount of non-monetary items at the date of change are
treated as historical cost
:
 Exchange difference lying in foreign currency translation reserve is
not to be recognized as income or expense till the disposal of the
operation even if the foreign operation becomes integral

Category III (Forward Exchange Contracts):

A forward contract is an agreement between two parties whereby

one party agrees to buy from or sell to the other party an asset at
future date for an agreed price, in case of forward exchange contract
the asset is "foreign currency“

Purpose:

1. For managing risk (Hedging)

2. For speculation or trading

Question 3: Ms. Shiney (Bengaluru) wants to import machinery worth

USD1,00,000 from the USA. The payment shall be made after 3
months of the import i.e. 1-6-2008 (1USD=INR45). She entered into
a forward contract for 1USD=INR45.25. The date of settlement is 31-
8-2008 (1USD=INR47.40).

How should the transaction be recorded in the books of accounts as

per AS 11?

Answer 3:

Forward Premium = (45.25 – 45) x USD 1,00,000 = INR 25,000

Exchange Difference = (47.40 – 45) x USD 1,00,000 = INR 2,40,000

The gain (INR 2,40,000) should be credited to the P&L A/c.

Note: If the contract was cancelled or renewed and the profit/loss

arising on it should be recognized in the P&L A/c.
:
 The forward premium should be amortized as expense within 3
months (1.6.2008 – 31.8.2008)

Question 4: A dealer has bought a three months forward contract for

USD 1,00,000 at Rs. 47.10 per USD on 1-6-2008. The dealer closes
its account on 30th June every year. Exchange rate on 1-6-2008
was Rs. 47.02 per USD and on 30-6-2008 Rs. 47.15 per USD. Two
months forward contract was selling on 30-6-2008 at Rs. 47.18 per
USD. This forward contract is entered into for speculative/trading
purposes.

How should the transaction be recorded in the books of accounts as

per AS 11?

Answer 4:

Exchange Rate Difference = (47.18 - 47.10) x 1,00,000 = 8,000

The profit to be booked on 30/6/2008 is INR 8,000

Applications of AS 11:

Question 5: ABC Ltd purchased a fixed asset for USD50,00,000

costing INR 18,25,00,000 on 1.4.2010 and the same was fully
financed by the foreign currency loan, repayable in five equal
installments annually. The exchange rate at the time of purchase was
1 USD= INR 36.50. On 31.3.2011, the first installment was paid when
the exchange rate was (1USD=INR41.50). The entire loss was
included in the cost of goods sold. ABC Ltd normally provided a
depreciation on its fixed assets at 20% on WDV basis and exercised
the option to adjust the cost of asset for exchange difference arising
out of loan restatement and payment.

Answer 5:
:
 Exchange loss on loan (31.3.2011) = (41.5 – 36.5) x 50,00,000 =
2,50,00,000

i.e.

Loss on 1st repayment of Loan on 31.3.2011 = USD 10,00,000 @

(41.5-36.5) = 50,00,000

Loss on outstanding loan repayment on 31.3.2011 = USD 40,00,000 x

(41.5-36.5)

= 2,00,00,000

Therefore the cost of the Asset on 31.3.2011 = 18,25,00,000 +

2,50,00,000 = 20,75,00,000

Depreciation on asset as on 31.3.2011 = 20,75,00,000 @ 20% =

4,15,00,000

Trial Balance of ABC’s Branch in Sydney, Australia as on 31/3/2010

Particulars Debit (AUS $) Credit (AUS $)

Plant and Machinery (Cost)

Depreciation on P&M (Accumulated)

200
Debtors/Creditors
60
Stock (1/4/2009)
20 130
Cash/Bank Balance
10 30
Purchase/Sales
20 123
Goods received from Head Office
5 100
Wages/Salaries
45 7
Rent
12 390
:
 Office Expenses 18

Commission Receipts 390

Branch Head Office Current a/c

Total

Additional Information:

Goods sent by head office - INR 1,00,000

Branch a/c in head office - INR 1,20,000
Stock at Sydney Branch on 31/3/2010 is $3,125
Exchange rate- Opening: 1 AUD$ = INR 20; Closing: INR 24; Average:
INR 22
Exchange rate for fixed assets- 1 AUD$ = INR 18

Translate the Branch’s Trial Balance of ABC is:

1. Integral Foreign Operation of ABC

2. Non-Integral Foreign Operation

Trial Balance of ABC’s Branch in Sydney, Australia as on 31/3/2010

(Integral Foreign Operation)

Exchange Rate Debit Credit

Particulars
(INR) (INR) (INR)
Plant and Machinery (Cost)

Depreciation on P&M
(Accumulated)

Debtors/Creditors 36,00,000

Stock (1/4/2009) 18 14,40,000

Cash/Bank Balance 18 4,00,000 23,40,000

24 2,40,000
:
 Purchase/Sales 20 4,40,000 7,20,000

Goods received from Head 24 1,00,000 27,06,000

Office
22 9,90,000 22,00,000
Wages/Salaries
22 2,64,000 1,20,000
Rent
22 3,96,000 80,86,000
Office Expenses
22 78,70,000 80,86,000
Commission Receipts
22 2,16,000
Branch Head Office Current
a/c 80,86,000

Exchange Loss (balancing

figure)

Total

Trial Balance of ABC’s Branch in Sydney, Australia as on 31/3/2010

(Non-Integral Foreign Operation)

Exchange Rate Debit Credit

Particulars
(INR) (INR) (INR)
Plant and Machinery (Cost)

Depreciation on P&M
(Accumulated)

Debtors/Creditors
48,00,000
24
Stock (1/4/2009)
14,40,000 31,20,000
24
Cash/Bank Balance
4,00,000 7,20,000
24
Purchase/Sales
2,40,000 27,06,000
20
Goods received from Head
Office 4,40,000 22,00,000
24
:
 Wages/Salaries 22 1,00,000 1,20,000

Rent 22 9,90,000 88,86,000

Office Expenses 22 2,64,000 2,04,000

Commission Receipts 22 3,96,000 90,70,000

Branch Head Office Current 22 90,70,000

a/c
90,70,000
Exchange Profit (balancing
figure)

Total

Question 6: XYZ (India) Ltd. Entered into a forward contract as

under:

Amount of Foreign currency- USD1,00,000

Date of the contract entered- 28.2.2007

Exchange rate on 28.2.2007- 1USD=INR47

Forward Rate- INR 48

Period of Forward Cover- 3 months (31.5.2007)

Spot Rate on reporting date(31.3.2007)- INR 47.75

Forward rate for other similar contracts on the reporting date:

(Current Market Value) INR 47.50

Forward cover has been entered into for sole purchase of managing
risk associated with change of exchange rate for payment to supplier
against purchase.
:
 You are required to compute the following:

(a) Calculate the forward premium/discount

(b) Accounting for such forward premium/discount

(c) Calculate the exchange difference on 31-3-2004 (reporting date)

(d) If the forward contract entered into is for speculation, what is the
profit/loss for the period

Answer 6:

A) Forward Premium/Discount-

(48-47) x USD100,000 = INR 1,00,000

B) Treatment of Premium:

Amount of premium to be amortized on 31.3.2007 = 33,333

(1,00,000 x 1/3)

Amount to be amortized for April & May 2007 = 66,667 (1,00,000

x 2/3)

C) Exchange Difference on 31.3.2007-

(47.75 – 47) x 1,00,000 = INR 75,000

(This profit of INR 75,000 has to be credited to the P&L A/c.)

D) If it were for speculation:

(48 - 47.5) x 100000 = INR 50,000 (Loss)

(This loss of INR 50,000 has to be debited to the P&L A/c.)

:
 Question 7: A Company had imported raw material worth USD
2,50,000 on 15th January, 20IO when the exchange rate was Rs. 46
per USD. The company had recorded the transaction at that rate.
The payment for imports was made on 15th April, 2010 when the
exchange rate was Rs. 49 per USD. However, on 31st March, 2010
the rate of exchange was Rs. 50 per USD. The company passed an
entry on 31st March, 2010 adjusting the cost of raw materials
consumed for the difference between Rs. 49 and Rs. 46 per USD.
State your views as an auditor.

Answer 7:

The AS 11 requires that on every balance sheet date, monetary items

denominated in foreign currency should be reported at the closing
rate.
In this case, the Company has reported at the rate on repayment
date (INR 49) instead of reporting it at the rate on closing date (INR
50)
Hence, the accounting treatment given by the company is wrong.
The AS 11 requirements are not followed by the company.

UNIT 4 - ACCOUNTING STANDARDS 13 & 16

AS 13 - Accounting for Investments

Investment: the assets held for earning income by way of-

Dividend
Interest and rentals
For capital appreciation
Or for other benefits

Classification of Investment:
:
 Current Investments- readily realizable, not intended to be held for
more than 12 months
Long-term Investments- all investments other that current
investments

Cost of Investment:

1. At Cost- purchase price and acquisition price (brokerage, fees

and duties)
2. Acquired by issue of shares/other securities- the purchase price
is the Fair Value of the securities issued
3. Acquired in exchange for another asset- the fair value of the
asset given up/fair value of the investment received if its more
clearly evident/measurable
4. Pre-acquisition Interest- if pre-acquisition interest is included in
the cost of investment, then it has to be deducted from the cost
5. Dividend- dividend from the pre-acquisition profits, received by
the investor later, then it should be deducted from the cost
6. Rights Shares-

1. If offered and subscribed, the cost of the rights shares is added

to the carrying amount of investment
2. If offered and not subscribed but the right is sold, the sale
proceeds to the P&L a/c

Carrying Amount of Investment:

Current Investment- cost or realizable value whichever is lower

If any reduction in the realizable value, it is to be debited to the P&L

a/c
If any increase in the realizable value, it should be credited to the
P&L a/c
:
 Long-term Investment- carried always at cost

If there is a decline in the value and it is not temporary, then the

carrying amount is reduced by the amount of such decline
Such reduction is charged to the P&L a/c and reversed when the
value increases permanently

Disposal of Investment:

When an investment is disposed of, the difference (Carrying amount

- Net sale proceeds) is recognized in the P&L a/c
When part of the investment is disposed of, the carrying amount is
the average carrying amount of the total investment

Reclassification of Investments:

From Long-term to Current- cost or carrying amount whichever is

lower
From Current to Long-term- fair value or cost whichever is lower

Question 1: ABC Ltd. wants to reclassify its investments in

accordance with AS 13. You are expected to decide on the amount of
transfer from the following information:

1. Portion of current investment purchased for Rs. 20,00,000 to be

reclassified as long-term investments as the company has
decided to retain that. The market value as on the date of
balance sheet was Rs. 25,00,000.
2. Another portion of current investment purchased for Rs.
15,00,000 to be reclassified as long-term investment. The
market value of these investments as on the data of the balance
sheet was Rs. 6,50,000.
3. Certain long-term investments are no longer considered for
holding purposes, and now are to be reclassified as current
:
 investments. The original cost of these investments was Rs.
18,00,000 but had been written down to Rs. 12,00,000 to
recognize the permanent decline as per AS 13.

Answer 1:

(a) In accordance with AS 13, when an investment is reclassified from

current to long-term, the cost of valuation is either the fair value
amount or the cost, whichever is lower. In this situation, the cost of
the asset was Rs. 20,00,000 and the market value of the investment
as on the date of the balance sheet was Rs. 25,00,000. Therefore,
the valuation amount of the investment upon reclassification will be
Rs. 20,00,000.

(b) In accordance with AS 13, when an investment is reclassified

from current to long-term, the cost of valuation is either the fair value
amount or the cost, whichever is lower. In this situation, the cost of
the asset was Rs. 15,00,000 and the market value of the investment
as on the date of the balance sheet was Rs. 6,50,000. Therefore, the
valuation amount of the investment upon reclassification will be Rs.
6,50,000.

(c) In accordance with AS 13, when an investment is reclassified from

long-term to current, the cost of valuation is either the carrying
amount or the cost, whichever is lower. In this situation, the cost of
the asset was Rs. 18,00,000 and the written-down carrying amount
of the investment upon reclassification was Rs. 12,00,000. Therefore,
the valuation amount of the investment upon reclassification will be
Rs. 12,00,000.

Question 2: C Ltd. purchased 10,000 shares of A Ltd. and issued

5,000 shares to a Ltd. The nominal value of the shares of C Ltd. and
A Ltd. is Rs. 10. The fair value of C Ltd. and A Ltd. are Rs. 11.50 and
Rs. 12 respectively. Calculate the cost of acquisition of the
:
 investment.

Answer 2:

Original Cost of the shares:

C Ltd. - 10,000 x 10 = 1,00,000 ; A Ltd - 5,000 x 10 = 50,000

Fair Value of the shares:

C Ltd. - 10,000 x 12 = 1,20,000 ; A Ltd. - 5,000 x 11.50 = 57,500

As per AS 13, when an asset is acquired in exchange for another

asset, the amount for valuation will be the fair value of the asset
given up or the fair value of the investment received, whichever is
clearly evident/measurable. In this situation, both the fair value
amounts are clearly evident. Hence, the cost of acquisition of the
investment will be determined by the fair value of the asset given up.
C Ltd. gave up 5,000 shares at a fair value of Rs. 11.50 per share.
Hence, the cost of acquisition of the investment will be Rs. 57,500
(5,000 x 11.50)

Question 3: TI Ltd. acquired 10,000 shares of Rs. 10 each of AI Ltd. at

Rs. 12 per share in the year 2000. In 2002, TI Ltd. acquired another
5,000 shares of Rs. 10 each of AI Ltd. at Rs. 21 per share on
right basis. Calculate the cost of acquisition of the 15,000 shares. If
the right shares were not subscribed but were sold in the market at
the rate of Rs. 15 each, then calculate the cost of acquisition of
shares. Give the treatment of sale proceeds received against the sale
of right shares.

Answer 3: In accordance with AS 13, the assets are being held for a
period of more than 12 months. Hence the assets will be classified as
long-term investments.
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 Question 4: A Ltd. 10,000 shares of Insight India Ltd. at Rs. 100 per
share. Immediately thereafter, Insight India Ltd. offered 1 right share
for every 4 shares held at Rs. 60 per share. A Ltd. did not exercise
the right but sold at Rs. 20 share. The market price for the share of
Insight India Ltd. fell to Rs. 85 per share. Calculate the value of
investment.

AS 16 - Borrowing Costs

Objective of AS 16:

Borrowing involves a cost to any enterprise.

It should be capitalized or charged to the P&L a/c

According to AS 16, Borrowing Costs are to be capitalized if it is a

Qualifying Asset.

Qualifying Asset:

A qualifying asset is one that necessarily takes a substantial period

of time to get ready for its intended use. Eg- a business park with
several buildings, each of which can be used individually, is an
example of qualifying asset for which each part is capable of being
used while construction continues on other parts.

Borrowing Costs:

Interest and other costs incurred relating to the borrowing of funds.

The following are included as borrowing costs:

Interest and commitment charges on borrowing

Amortization of discounts or premiums relating to borrowing
Amortization of ancillary costs incurred in connection with
:
 arrangement of borrowings
Finance charges when the asset acquired under finance leases
Exchange difference arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs

Note- this does not include cost of owners’ equity, including

preference share capital

Conditions for Capitalizing of Borrowing Costs:

Those borrowing costs, which are directly attributable to the

acquisition, construction or production of qualifying asset
Directly attributable costs are those costs that would have been
avoided if the expenditure on the qualifying asset had not been made
Qualifying assets will give future economic benefits to the enterprise
and the cost can be measured reliably

Amount of Borrowing Costs Eligible for Capitalization:

Actual borrowing costs incurred during the period - any income on

the temporary investment of borrowed amount

Cessation of Capitalizing the Borrowing Costs:

It should cease when substantially all the activities necessary to

prepare the qualifying assets for its intended use or sale are
completed
If construction of the qualifying asset is carried in phases/parts and
each part/phase can be used independently, required activities are
completed for such phase and it ready for intended use or sale,
capitalization of borrowing cost for such phase/part will cease

Substantial Period is ordinarily, a period of 12 months unless a

shorter or longer period can be justified on the basis of facts and
:
 circumstances of the case.

Question 1: ABC Ltd. begins construction of a new building on 1st

January, 2022. It obtained a loan of Rs. 1,00,000 to finance the
construction of the building on 1st January, 2022 @ 10%. The
company’s other outstanding debts during 2022 consists of two
loans i.e. Rs. 6,00,000 (11%) and Rs. 8,00,000 (13%). Expenditures
made on the building during the year are as follows-

January 2022- Rs. 2,00,000

April 2022- Rs. 3,00,000

July 2022- Rs. 4,00,000

December 2022- Rs. 1,20,000

Compute the cost to be capitalized including the borrowing costs.

Answer 1: According to AS 16, borrowing costs that are directly

attributable to the acquisition, construction, or production of a
qualifying asset should be capitalized as part of the cost of that
asset.

Directly Attributable Borrowing Costs:

Loan amount: Rs. 1,00,000

Interest rate: 10%

Interest for the year: Rs. 1,00,000 x 10% = Rs. 10,000

Weighted Average Borrowing Cost:

Total outstanding debts: Rs. 6,00,000 + Rs. 8,00,000 = Rs.

14,00,000
:
 Weighted average interest rate = [(6,00,000 * 11%) + (8,00,000 *
13%)] / 14,00,000

[(66,000) + (1,04,000)] / 14,00,000 = 1,70,000 / Rs. 14,00,000 =

0.1214 or 12.14%

Compute Capitalization of Borrowing Costs:

January 2022: Rs. 2,00,000 x 12.14% = Rs. 24,280

April 2022: Rs. 3,00,000 x 12.14% = Rs. 36,420

July 2022: Rs. 4,00,000 x 12.14% = Rs. 48,560

December 2022: Rs. 1,20,000 x 12.14% = Rs. 14,568

Total Capitalized Cost:

Total capitalized expenditures = Rs. 24,280 + Rs. 36,420 + Rs.

48,560 + Rs. 14,568

= Rs. 1,23,828

Total capitalized borrowing costs = Rs. 10,000

Total cost to be capitalized = Rs. 1,23,828 (expenditures) + Rs.

10,000 (borrowing costs)

= Rs. 1,33,828

So, the cost to be capitalized, including borrowing costs as per AS

16, is Rs. 1,33,828.

Question 2: On 30-04-2022 JLC Ltd. obtained a loan from the bank

for Rs. 50 lakhs to be utilized as under:

Construction of a shed - Rs. 20 Iakhs

:
 Purchase of Machinery - Rs. 15 lakhs

Working Capital - Rs. 10 lakhs

Advance for Purchase of truck - Rs. 5 lakhs

In March 2023 construction of shed was completed and machinery

installed. Delivery of truck was not received. Total interest charged
by the bank for the year ending 31-03-2023 was Rs. 9 lakhs. Show
the treatment of interest under AS-16.

Answer 2:

Directly Attributable Borrowing Costs:

Loan amount: Rs. 50,00,000

Allocation:

Construction of shed: Rs. 20,00,000

Purchase of machinery: Rs. 15,00,000

Total directly attributable amount = Rs. 20,00,000 + Rs. 15,00,000 =

Rs. 35,00,000

Allocate Borrowing Costs to Qualifying Assets:

Now, we calculate the proportion of the total interest that should be

allocated to the shed and machinery.

Shed: (20,00,000 / 35,00,000) x Rs. 9,00,000 = Rs. 5,14,000

Machinery: (15,00,000 / 35,00,000) x Rs. 9,00,000 = Rs. 3,86,000

So, under AS-16, the treatment of interest for JLC Ltd. would be as
follows:
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 Interest attributable to the construction of the shed: Rs. 5,14,000

Interest attributable to the purchase of machinery: Rs. 3,86,000

Question 3: AD Softex made the following borrowings:

Rs. 6,00,000 @ 15% on 1-1-2022 for general purpose. Related

expense amounts to Rs. 50,000

Rs. 4,00,000 @ 14.5% on 1-7-2022 for acquisition of P&M. Related

expense amounts to Rs. 20,000

Rs. 5,00,000 @ 14% for general purpose. Related expense amounts

to Rs. 40,000

Qualifying assets for borrowing are:

Factory Shed - Rs. 1,00,000

Plant & Machinery - Rs. 9,00,000

Other Fixed Assets - Rs. 1,00,000

Assume that project is ready for commercial production as on 1-1-

2023. How the borrowing cost should be capitalized?

Answer 3:
: