Test Series: March, 2018

MOCK TEST PAPER

FINAL (NEW) COURSE: GROUP – I
PAPER 1: FINANCIAL REPORTING
ANSWERS
1. (a) (i) For classification of assets
Para 6 of Ind AS 16 ‘Property, Plant and Equipment’ inter alia, states that Property, plant
and equipment are tangible items are held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes.
As per para 6 of Ind AS 40 ‘Investment property’, Investment property is property held to
earn rentals or for capital appreciation or both, rather than for use in the production or
supply of goods or services or for administrative purposes; or sale in the ordinary course
of business.
According, to the facts given in the questions, since Property 1 and 2 are used as factory
buildings, their classification as PPE is correct. However, Property 3 is held to earn
rentals; hence, it should be classified as Investment Property. Thus, its classification as
PPE is not correct. Property ‘3’ shall be presented as separate line item as Investment
Property as per Ind AS 1.
(ii) For valuation of assets
Paragraph 29 of Ind AS 16 states that an entity shall choose either the cost model or the
revaluation model as its accounting policy and shall apply that policy to an entire class of
property, plant and equipment. Also, paragraph 36 of Ind AS 16 states that If an item of
property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued.
However, for investment property, paragraph 30 of Ind AS 40 states that an entity shall
adopt as its accounting policy the cost model to all of its investment property”.
Also, paragraph 79 (e) of Ind AS 40 inter alia requires that an entity shall disclose the fair
value of investment property.
Since property 1 and 2 is used as factory building, they should be classified under same
category or class i.e. ‘factory building’. Therefore, both the properties should be valued
either at cost model or revaluation model. Hence, the valuation model adopted by A Ltd.
is not consistent and correct as per Ind AS 16.
In respect to property ‘3’ being classified as Investment Property, there is no alternative of
revaluation model i.e. only cost model is permitted for subsequent measurement.
However, A Ltd. is required to disclose the fair value of the investment property in the
Notes to Accounts.
(iii) For changes in value on account of revaluation and treatment thereof
Paragraph 39 of Ind AS 16 states that if an asset’s carrying amount is increased as a
result of a revaluation, the increase shall be recognised in other comprehensive income
and accumulated in equity under the heading ‘revaluation surplus’. However, the increase
shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of
the same asset previously recognised in profit or loss. Accordingly, the revaluation gain
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 shall be recognised in other comprehensive income and accumulated in equity under the
heading of revaluation surplus.
(iv) For treatment of depreciation
Paragraph 52 of Ind AS 16 states that Depreciation is recognised even if the fair value of
the asset exceeds its carrying amount, as long as the asset’s residual value does not
exceed its carrying amount.
Accordingly, A Ltd. is required to depreciate these properties irrespective of that their fair
value exceeds the carrying amount.
(v) Rectified presentation in the balance sheet
As per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation of these
three properties in the balance sheet should be as follows:
Case 1: If A Ltd. has applied the Cost Model to an entire class of property, plant and
equipment.
Balance Sheet extracts as at 31 st March 20X2 INR in lakhs
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 450
Property ‘2’ 180 630
Investment Property
Property ‘3’ (Fair value being 330 lakhs) (Cost = 300-30) 270

Case 2: If A Ltd. has applied the Revaluation Model to an entire class of property, plant
and equipment.
Balance Sheet extracts as at 31 st March 20X2 INR in lakhs
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 550
Property ‘2’ 220 770
Investment Properties
Property ‘3’ (Fair value being 330 lakhs) (Cost = 300-30) 270
Equity and Liabilities
Other Equity
Revaluation Reserve*
Property ‘1’ (550-450) 100
Property ‘2’ (220-180) 40 140

*The revaluation reserve should be routed through Other Comprehensive Income (OCI)
(subsequently not reclassified to Profit and Loss) in the Statement of Profit and Loss and
shown as a separate column in Statement of Changes in Equity.

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 (b) Items impacting the Statement of Profit and Loss for the year ended 31 st March, 20X1
(`)
Current service cost 1,75,000
Gains and losses arising from translating the monetary assets in foreign 75,000
currency
Income tax expense 35,000
Share based payments cost 3,35,000

Items impacting the other comprehensive income for the year ended 31 st March, 20X1
(`)
Remeasurement of defined benefit plans 2,57,000
Changes in revaluation surplus 1,25,000
Gains and losses arising from translating the financial statements of a foreign 65,000
operation
Gains and losses from investments in equity instruments designated at fair value 1,00,000
through other comprehensive income
2. (a) Consolidated Balance Sheet as on 31.3.20X1
Particulars Note No. `
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,00,000
(b) Reserves and Surplus 2 1,20,700
(2) Minority Interest 20,000
(3) Current Liabilities
(a) Trade Payables 3 23,000
(b) Short Term Provisions 4 24,500
Total 2,88,200
II. Assets
(1) Non-current assets
(a) Fixed assets
Tangible assets 5 2,15,500
(b) Non-current investment 6 17,200
(2) Current assets 7 55,500
Total 2,88,200

Notes to Accounts
`
1. Share Capital
Called up equity shares of ` 1 each 1,00,000
2. Reserves and Surplus
General Reserve 40,000
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 Profit and Loss A/c (W.N.3) 80,700 1,20,700
3. Trade Payables
Holding & Subsidiary 20,000
Joint Venture (50%) 3,000 23,000
4. Short term provisions
Provisions for Tax
Holding & Subsidiary 19,000
Joint Venture (50%) 5,500 24,500
5. Tangibles Assets
Holding & Subsidiary 1,95,000
Joint Venture (50%) 20,500 2,15,500
6. Non-current investment
Investment in Associate (W.N.4) 17,200
7. Current Asset
Holding & Subsidiary 21,000
Joint Venture (50%) 34,500 55,500

Working Notes:
1. Analysis of Profit & Loss of Associate / Joint Venture
Pre-acquisition Post-acquisition
` `
Profit as on 31.3.20X1 27,000 16,000 11,000
Share of Associate company (20%) 3,200 2,200
Analysis of Profit and Loss of Joint Venture Nil 83,000
Share of Joint Venture (50%) 41,500

2. Calculation of Goodwill/Capital Reserve

Associate Joint Venture
` `
Investment 15,000 5,000
Less: Nominal Value 8,000 5,000
Capital Profit 3,200 (11,200) - (5,000)
Goodwill 3,800 Nil
3. Calculation of Consolidated Profit and Loss Account
`
Profit and Loss Account of Holding & Subsidiary 37,000
Add: Share of Associate (W.N.1) 2,200
Joint Venture (W.N.1) 41,500
80,700

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 4. Calculation of Investment in Associate
`
Goodwill (W.N.2) 3,800
Net worth 11,200
Cost 15,000
Add: Share of Revenue Profit 2,200
17,200

Note: Out of ` 17,000 existed at the time of acquisition, only ` 16,000 (Opening Balance) is
continuing in the books of the associate. Therefore, ` 16,000 is taken as capital profit
assuming that it is a part of that ` 17,000 existed at the time of acquisition.
(b) A. Financial Capital maintenance
Under this concept, a profit is earned only if the financial amount of the net assets at the
end of the period exceeds the financial amount of net assets at the beginning of the
period, after excluding any distribution to, and contribution from, owners during the period.
B. Physical Capital maintenance
Under this conept, a profit is earned only if the physical productive or operating capability
of the entity at the the end of the period exceeds the physical productive capacity at the
beginning of the period, after excluding any distributions to, and contributions from,
owners during the period.
Major differences between Physical Capital & Financial Capital
 The physical capital maintenance concept requires the adoption of the current cost basis
as measurement whereas financial capital maintenance concept does not require the use
of a particular basis of measuerment.
 Financial capital maintenance where capital is defined in terms of nominal monetary units,
profit represents the increase in nominal money capital over the period . When the concept
of financial capital maintenance is defined in terms of constant purchasing power units,
profit represents the increase in invested purchasing power over the period. Thus, o nly
that part of the increase in the prices of assets that exceeds the increase in the general
level of prices is regarded as profit.
Under the concept of physical capital maintenance when capital is defined in terms of the
physical productive capacity, profit represents the increase in that capital over the period.
All price changes affecting the assets and liabilities of the entity are viewed as changes in
the measurement of the physical productive capacity of the entity; hence, they are treated
as capital maintenance adjustments that are part of equity and not as profit.
3. (a) (i) Paragraph 75 of Ind AS 1, inter alia, provides, “An entity classifies the liability as non -
current if the lender agreed by the end of the reporting period to provide a period of grace
ending at least twelve months after the reporting period, within which the entity can rectify
the breach and during which the lender cannot demand immediate repayment.” In the
present case, following the default, grace period within which an enti ty can rectify the
breach is less than twelve months after the reporting period. Hence as on March 31,
20X2, the loan will be classified as current.

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 (ii) Ind AS 1 deals with classification of liability as current or non -current in case of breach of
a loan covenant and does not deal with the classification in case of expectation of breach.
In this case, whether actual breach has taken place or not is to be assessed on
June 30, 20X2, i.e., after the reporting date. Consequently, in the absence of actual
breach of the loan covenant as on March 31, 20X2, the loan will retain its classification as
non-current.
(b) Either
X Ltd. should determine the fair value of revenue by calculating the present value of the cash
flows receivable.
Total amount receivable = ` 40,00,000 x 1.03 = ` 41,20,000.
Present Value of receivable (Revenue) = ` 41,20,000/1.08 = ` 38,14,815.
Interest income = ` 41,20,000 - ` 38,14,815 = ` 3,05,185.
Therefore, on transaction date, ` 38,14,815 will be recognised as revenue from sale of goods
and ` 3,05,185 will be recognised as interest income receivable for the period in accordance
with Ind AS 109.
Or
The difference of ` 10,000 between the carrying value of interest receivable of ` 10,000 and its
tax base of NIL is a taxable temporary difference.
A Limited has to recognise a deferred tax liability of ` 2,500 (` 10,000 x 25%) in its financial
statements for the reporting period ended on December 31, 20X1.
It will not recognise the deferred tax liability @ 30% because as on December 31, 20X1, this
tax rate was neither substantively enacted or enacted on the reporting date. However, if the
effect of this change is material, A Limited should disclose this difference in its financial
statements.
(c) The new turbine will produce economic benefits to MS Ltd., and the cost is measurable. Hence,
the item should be recognised as an asset. The original invoice for the machine did not specify
the cost of the turbine; however, the cost of the replacement (` 45,00,000) can be used as an
indication (usually by discounting) of the likely cost, six years previously.
If an appropriate discount rate is 5% per annum, ` 45,00,000 discounted back six years
amounts to ` 33,57,900 [` 45,00,000 / (1.05) 6], i.e., the approximate cost of turbine before 6
years.
The current carrying amount of the turbine which is required to be replaced of ` 13,43,160
would be derecognised from the books of account, (i.e., Original Cost ` 33,57,900 as reduced
by accumulated depreciation for past 6 years ` 20,14,740, assuming depreciation is charged
on straight-line basis.)
The cost of the new turbine, ` 45,00,000 would be added to the cost of machine, resulting in a
revision of carrying amount of machine to ` 71,56,840. (i.e., ` 40,00,000* – ` 13,43,160 +
` 45,00,000).
*Original cost of machine ` 1,00,00,000 reduced by accumulated depreciation (till the end of 6
years) ` 60,00,000.

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4. (a) Identifying the acquirer
As a result of Entity A issuing 150 ordinary shares, Entity B’s shareholders own 60 per cent of
the issued shares of the combined entity (i.e., 150 of the 250 total issued shares). The
remaining 40 per cent are owned by Entity A’s shareholders. Thus, the transaction is
determined to be a reverse acquisition in which Entity B is identified as the accounting acquirer
while Entity A is the legal acquirer.
Calculating the fair value of the consideration transferred
If the business combination had taken the form of Entity B issuing additional ordinary shares to
Entity A’s shareholders in exchange for their ordinary shares in Entity A, Entity B would have
had to issue 40 shares for the ratio of ownership interest in the combined entity to be the
same. Entity B’s shareholders would then own 60 of the 100 issued shares of Entity B — 60
per cent of the combined entity. As a result, the fair value of the consideration effectively
transferred by Entity B and the group’s interest in Entity A is 1,600 (40 shares with a fair value
per share of 40).
The fair value of the consideration effectively transferred should be based on the most reliable
measure. Here, the quoted market price of Entity A’s shares provides a more reliable basis for
measuring the consideration effectively transferred than the estimated fair value of the shares
in Entity B, and the consideration is measured using the market price of Entity A’s shares —
100 shares with a fair value per share of 16.
Measuring goodwill
Goodwill is measured as the excess of the fair value of the consideration effectively transferred
(the group’s interest in Entity A) over the net amount of Entity A’s recognised identifiable
assets and liabilities, as follows:
Consideration effectively transferred 1,600
Net recognised values of Entity A’s identifiable assets and liabilities
Current assets 500
Non-current assets 1,500
Current liabilities (300)
Non-current liabilities (400) (1,300)
Goodwill 300

Consolidated statement of financial position at September 30, 20X1

The consolidated statement of financial position immediately after the business combination is:
Current assets [700 + 500] 1,200
Non-current assets [3,000 + 1,500] 4,500
Goodwill 300
Total assets 6,000
Current liabilities [600 + 300] 900
Non-current liabilities [1,100 + 400] 1,500
Total liabilities 2,400
Shareholders’ equity
Issued equity 250 ordinary shares [600 + 1,600] 2,200

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 Retained earnings 1,400
Total shareholders’ equity 3,600
Total liabilities and shareholders’ equity 6,000

The amount recognised as issued equity interests in the consolidated financial statements
(2,200) is determined by adding the issued equity of the legal subsidiary immediately before
the business combination (600) and the fair value of the consideration effectively transferred
(1,600). However, the equity structure appearing in the consolidated financial statements (i.e.,
the number and type of equity interests issued) must reflect the equity structure of the legal
parent, including the equity interests issued by the legal parent to effect the combination.
Earnings per share
Earnings per share for the annual period ended December 31, 20X1 is calculated as follows:

Number of shares deemed to be outstanding for the period from January 1, 20X1 to 150
the acquisition date (i.e., the number of ordinary shares issued by Entity A (legal
parent, accounting acquiree) in the reverse acquisition)
Number of shares outstanding from the acquisition date to December 31, 20X1 250
Weighted average number of ordinary shares outstanding [(150 × 9/12) + (250 × 175
3/12)]
Earnings per share [800 / 175] 4.57

Restated earnings per share for the annual period ended December 31, 20X0 is 4.00
[calculated as the earnings of Entity B of 600 divided by the number of ordinary shares Entity A
issued in the reverse acquisition (150)].
(b) (i) Value Added Statement of A Ltd. for the period ended on 31.3.20X1
(` in lakhs)
Sales (net) (2,500 – 35) 2,465
Less: Cost of Bought in Materials and Services:
Raw material consumed (180 + 714 – 240) 654
Printing and stationary 24
Auditors’ remuneration 15
Rent paid 172
Other expenses 88 (953)
Value added by manufacturing and trading activities 1,512

Application of Value Added

(` in lakh) (` in lakh) %
To Pay Employees:
Wages and salaries 352
Employees state insurance 32
Provident fund contribution 26 410 27.12
To Pay Government:
Income-tax 280 18.52

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 To Pay Providers of Capital:
Interest on borrowings 40
Dividend 85 125 8.27

To Provide for maintenance and expansion

of the company:
Depreciation 132
Transfer to reserve 120
Retained profit 445 697 46.09
1,512 100

(ii) Value Added Per Employee = Value Added/ No. of Employees

= 1,512 \ 87 = 17.38
(iii) Average Earnings Per Employee = Average Earnings of Employee / No. of
Employees
= 410/87 = 4.71
5. (a) The repayment schedule for the original debt till the date of renegotiation is as below:

Date / year ended Opening Interest Cash flows Closing balance

balance accrual
1 January 20X0 10,00,000 10,00,000
31 December 20X0 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X1 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X2 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X3 10,00,000 1,00,000 (1,00,000) 10,00,000
31 December 20X4 10,00,000 1,00,000 (1,00,000) 10,00,000

On 1 January 20X5, the discounted present value of the remaining cash flows of the original
financial liability is ` 10,00,000.
On this date, Preet Ltd. will compute the present value of:
 cash flows under the new terms – i.e. ` 15,00,000 payable on 31 December 20Y1 and
` 50,000 payable for each of the 7 years ending 31 December 20Y1.
 any fee paid (net of any fee received) – i.e. ` 1,00,000
using the original effective interest rate of 10%.
The total of these amounts to ` 11,13,158 (Refer Working Note). This differs from the
discounted present value of the remaining cash flows of the original financial liability by
11.32% i.e. by more than 10%. Hence, extinguishment accounting applies.
The next step is to estimate the fair value of the modified liability. This is determined as the
present value of the future cash flows (interest and principal), using an interest rate of 11%
(the market rate at which Preet Ltd. could issue new bonds with similar terms). The estimated
fair value on this basis is ` 958,097 (Refer Working Note). A gain or loss on modification is
then determined as:
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 Gain (loss) = carrying value of existing liability - fair value of modified liability - fees and costs
incurred i.e. ` 10,00,000 – ` 9,58,097 – ` 1,00,000 = Loss of ` 58,097
Working Note:

Year Discount factor @ 10% Discount factor @ 11%

1 0.909091 0.900901
2 0.826446 0.811622
3 0.751315 0.731191
4 0.683013 0.658731
5 0.620921 0.593451
6 0.564474 0.534641
7 0.513158 0.481658
Annuity 4.868418 4.712195

Amount Discounting Present Discounting Present

factor @ 10% value factor @ 11% value
15,00,000 0.513158 7,69,737 0.481658 7,22,487
1,00,000 1,00,000
50,000 for 7 years 4.868418 2,43,421 4.712195 2,35,610
11,13,158 9,58,097

PV of original cash (10,00,000)

flows @ original EIR
Difference 1,13,158
Difference % 11.32%

(b) The following Guiding Principles underpin the preparation and presentation of an integrated
report, informing the content of the report and how information is presented:
1. Strategic Focus and Future Orientation
An integrated report should provide insight into the organization’s strategy and how it
relates to the organization’s ability to create value and to its use of and effects on the
capitals in short, medium and long term period. The report should clearly show the
linkages between strategy, risks and opportunities, current performance, as well as future
outlook and targets.
2. Connectivity of Information
An integrated report shows the connections between the different components:
 Organisation's business model
 External factors that affect the organisation
 Various resources and relationships on which the organisation and its performance
are dependent upon

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 3. Stakeholder Relationships
An integrated report should provide insight into nature and quality of the organization’s
relationships with its key stakeholders including how and to what extent the organization
understands, takes into account and responds to their legitimate needs and inte rests.
4. Materiality
A focus on materiality should assist in avoiding irrelevant and detailed information from
cluttering the report. The integrated report is a high-level, concise report that contains
only the most material matters and information affecting the organisation and its ability to
create value over time. Additional information can be placed in supporting reports.
5. Conciseness
An integrated report should be concise. It implies that the information should be
accessible through crisp presentation, the omission of immaterial information, and a
logical easy-to-follow structure.
6. Reliability and Completeness
An integrated report should include all material matters, both positive and negative, in a
balanced way and without material error. Integrated reporting requires that consideration
is given to both good and bad news and performance. Furthermore, both the increases
and reductions in the value of the important capitals should be reflected.
6. (a) Since the earnings of the entity is non-market related, hence it will not be considered in fair
value calculation of the shares given. However, the same will be considered while calculating
number of shares to be vested.
Workings:
20X1 20X2 20X3
Total employees 500 500 500
Employees left (Actual) (29) (58) (79)
Employees expected to leave in the next year (31) (23) -
Year end – No of employees 440 419 421
Shares per employee 100 100 100
Fair value of share at grant date 122 122 122
Vesting period 1/2 2/3 3/3
Expenses-20X1 (Note 1) 26,84,000
Expenses-20X2 (Note 2) 7,23,867
Expenses-20X3 (Note 3) 17,28,333
Note 1:
Expenses for 20X1 = No. of employees x Shares per employee x Fair value of share x
Proportionate vesting period
= 440 x 100 x 122 X ½
= 26,84,000
Note 2:
Expenses for 20X2 = (No of employees x Shares per employee x Fair value of share x
Proportionate vesting period) – Expenses recognized in year 20X1
= (419 x 100 x 122 x 2/3) – 26,84,000 = 7,23,867
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 Note 3:
Expenses for 20X3 = (No of employees x Shares per employee x Fair value of share x
Proportionate vesting period) – Expenses recognized in year 20X1 and 20X2
= (421 x 100 x 122 x 3/3) – (26,84,000 + 7,23,867) = 17,28,333.
Journal Entries
31-Dec-20X1
Employee benefits expenses Dr. 26,84,000
To Share based payment reserve (equity) 26,84,000
(Equity settled shared based payment expected vesting amount)
31-Dec-20X2
Employee benefits expenses Dr. 7,23,867
To Share based payment reserve (equity) 7,23,867
(Equity settled shared based payment expected vesting amount)
31-Dec-20X3
Employee benefits expenses Dr. 17,28,333
To Share based payment reserve (equity) 17,28,333
(Equity settled shared based payment expected vesting amount)
Share based payment reserve (equity) Dr. 51,36,200
To Share Capital 51,36,200
(Share capital Issued)

(b) Threshold amount is ` 10,00,000 (` 1,00,00,000 × 10%).

Segment A exceeds the quantitative threshold (` 30,00,000 > ` 10,00,000) and hence
reportable segment.
Segment D exceeds the quantitative threshold (` 54,00,000 > ` 10,00,000) and hence
reportable segment.
Segment B & C do not meet the quantitative threshold amount and may not be classified as
reportable segment.
However, the total external revenue generated by these two segments A & D represent only
70% (` 35,000/50,000 x 100) of the entity’s total external revenue. If the total external
revenue reported by operating segments constitutes less than 75% of the entity total external
revenue, additional operating segments should be identified as reportable segments until at
least 75% of the revenue is included in reportable segments.
In case of X Ltd., it is given that Segment C is a new business unit and management expect
this segment to make a significant contribution to external revenue in coming years. In
accordance with the requirement of Ind AS 108, X Ltd. designates this start -up segment C as a
reportable segment, making the total external revenue attributable to reportable segment s 87%
(` 43,50,000/ 50,00,000 x 100) of total entity revenues.

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 Test Series: April, 2018
MOCK TEST PAPER – 2
FINAL COURSE: GROUP – I
PAPER – 2: STRATEGIC FINANCIAL MANAGEMENT (NEW COURSE)
SUGGESTED ANSWERS/HINTS
1. (a) Market price per share (MPS) = EPS X P/E ratio or P/E ratio = MPS/EPS
(i) Calculation of EPS, P/E ratio, ROE and BVPS of BA Ltd. and DA Ltd.
BA Ltd. DA Ltd.
Earnings After Tax (EAT) Rs. 2,10,000 Rs. 99,000
No. of Shares (N) 100000 80000
EPS (EAT/N) Rs. 2.10 Rs. 1.2375
Market price per share (MPS) 40 15
P/E Ratio (MPS/EPS) 19.05 12.12
Equity Funds (EF) Rs. 12,00,000 Rs. 8,00,000
BVPS (EF/N) 12 10
ROE (EAT/EF) × 100 17.50% 12.37%
(ii) Calculation of growth rates in EPS for BA Ltd. and DA Ltd.
Retention Ratio (1-D/P ratio) 0.6 0.4
Growth Rate (ROE × Retention Ratio) 10.50% 4.95%
(iii) Evaluation of justifiable equity shares exchange ratio
(a) Intrinsic value based = Rs.20 / Rs.40 = 0.5:1 (upper limit)
(b) Market price based = MPSDA/MPSBA = Rs.15 / Rs.40 =0.375:1(lower limit)
Since, BA Ltd. has a higher EPS, ROE, P/E ratio and even higher EPS growth expectations,
the negotiable terms would be expected to be closer to the lower limit, based on the existing
share prices.
(iv) Calculation of post-merger EPS and its effects
Particulars BA Ltd. DA Ltd. Combined
EAT (Rs.) (i) 2,10,000 99,000 3,09,000
Share outstanding (ii) 100000 80000 132000*
EPS (Rs.) (i) / (ii) 2.1 1.2375 2.341
EPS Accretion (Re.) 0.241 (0.301**)
(Dilution)
* Shares outstanding (combined) = 100000 shares + (.40 × 80000)= 132000 shares
** EPS claim per old share = Rs.2.34 × 0.4 Rs. 0.936
EPS dilution = Rs.1.2375 – Rs. 0.936 Rs. 0.3015
(b) Differences between a startup and entrepreneurship
Startups are different from entrepreneurship. The major differences between them have been
discussed in the following paragraphs:
(i) Start up is a part of entrepreneurship. Entrepreneurship is a broader concept and it includes
a startup firm.
(ii) The main aim of startup is to build a concern, conceptualize the idea which it has developed
into a reality and build a product or service. On the other hand, the major objective of an

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 already established entrepreneurship concern is to attain opportunities with regard to the
resources they currently control.
(iii) A startup generally does not have a major financial motive whereas an established
entrepreneurship concern mainly operates on financial motive.
Priorities and challenges which startups in India are facing
The priority is on bringing more and more smaller firms into existence. So, the focus is on need
based, instead of opportunity based entrepreneurship. Moreover, the trend is to encourage self -
employment rather than large, scalable concerns.
The main challenge with the startup firms is getting the right talent. And, paucity of skilled workforce
can hinder the chances of a startup organization’s growth and development. Further, startups had
to comply with numerous regulations which escalates it’s cost. It leads to further delaying the
chances of a breakeven or even earning some amount of profit.
2. (a) (i) Recommendation of Expected Share Price
= Rs.120X 0.05 + Rs.140X 0.20 + Rs.160X 0.50 + Rs.180X 0.10 + Rs.190X 0.15
= Rs.6 + Rs.28 + Rs.80 + Rs.18 + Rs.28.50 = Rs.160.50
(ii) Analysis of Value of Call Option
In case if exercise price prevail the value of call option shall be Nil (Rs.150 - Rs.150) as strike
price and spot price are same.
(iii) Calculation of expected Value of Call Option if the option is held till maturity
Expected price (X) Value of call (C) Probability CP
(P)
Rs. 120 0 0.05 0
Rs. 140 0 0.20 0
Rs. 160 Rs. 10 0.50 Rs. 5
Rs. 180 Rs. 30 0.10 Rs. 3
Rs. 190 Rs. 40 0.15 Rs. 6
Total Rs. 14
Alternatively, it can also be calculated as follows:
Expected Value of Option
(120 – 150) X 0.1 Not Exercised*
(140 – 150) X 0.2 Not Exercised*
(160 – 150) X 0.5 5
(180 – 150) X 0.1 3
(190 – 150) X 0.15 6
14
* If the strike price goes below Rs. 150, option is not exercised at all.
(b) Analysis of hedging of interest rate risk thorough Cap Option
First of all we shall calculate premium payable to bank as follows:
rp rp
P= X A or A
 1  PVAF(3.5%,4)
(1  i) - 
 i  (1  i)t 

2
© The Institute of Chartered Accountants of India
 Where
P = Premium
A = Principal Amount
rp = Rate of Premium
i = Fixed Rate of Interest
t = Time
0.01 0.01
= × £15,000,000 or × £15,000,000
 1  (0.966 + 0.933 + 0.901+ 0.871)
(1/ 0.035) - 0.035  1.0354 

0.01 £150,000
= × £15,000,000 or = £ 40,861
 1  3.671
(28.5714) - 0.04016 

Please note above solution has been worked out on the basis of four decimal points at each stage.
Now we see the net payment received from bank
Reset Additional interest due to
Amount Premium paid to Net Amt. received
Period rise in interest ratereceived from bank from bank
bank
1 £ 75,000 £ 75,000 £ 40,861 £34,139
2 £ 112,500 £ 112,500 £ 40,861 £71,639
3 £ 150,000 £ 150,000 £ 40,861 £109,139
TOTAL £ 337,500 £ 337,500 £122,583 £ 214,917
Analysis: Thus, from above it can be seen that interest rate risk amount of £ 337,500 reduced by
£ 214,917 by using of Cap option.
Note: It may be possible that student may compute upto three decimal points or may use diff erent
basis. In such case their answer is likely to be different.
(c) Explanation of four features of VAR are as below:
(i) Components of Calculations: VAR calculation is based on following three components:
(a) Time Period
(b) Confidence Level – Generally 95% and 99%
(c) Loss in percentage or in amount
(ii) Statistical Method: It is a type of statistical tool based on Standard Deviation.
(iii) Time Horizon: VAR can be applied for different time horizons say one day, one week, one month
and so on.
(iv) Probability: Assuming the values are normally attributed, probability of maximum loss can be
predicted.
3. (a) (i) Calculation of Beta of Portfolio
Investment No. of shares Market Market Value Dividend Dividend Composition β Weighted
Price Yield β
I. 60,000 4.29 2,57,400 19.50% 50,193 0.2339 1.16 0.27
II. 80,000 2.92 2,33,600 24.00% 56,064 0.2123 2.28 0.48
III. 1,00,000 2.17 2,17,000 17.50% 37,975 0.1972 0.90 0.18
IV. 1,25,000 3.14 3,92,500 26.00% 1,02,050 0.3566 1.50 0.53
11,00,500 2,46,282 1.0000 1.46

3
© The Institute of Chartered Accountants of India
 2,46,282
Return of the Portfolio  0.2238
11,00,500
Beta of Port Folio 1.46
Market Risk implicit
0.2238 = 0.11 + β× (0.19 – 0.11)
Or, 0.08 β + 0.11 = 0.2238
0.2238  0.11
β=  1.42
0.08
Market β implicit is 1.42 while the port folio β is 1.46. Thus the portfolio is marginall y risky
compared to the market.
(ii) Reconciliation of the decision of XYZ about whether he should change the composition
of its portfolio
The decision regarding change of composition may be taken by comparing the dividend yield
(given) and the expected return as per CAPM as follows:
Expected return Rs as per CAPM is:
Rs = IRF + (RM – I RF) 
For investment I Rs = IRF + (RM – IRF) 
= .11 + (.19 - .11) 1.16
= 20.28%
For investment II, R s = .11 + (.19 - .11) 2.28 = 29.24%
For investment III, Rs = .11 + (.19 - .11) .90
= 18.20%
For investment IV, Rs = .11 + (.19 - .11) 1.50
= 23%
Comparison of dividend yield with the expected return R s shows that the dividend yields of
investment I, II and III are less than the corresponding R s,. So, these investments are over-
priced and should be sold by the investor. However, in case of investment IV, the dividend
yield is more than the corresponding R s, so, XYZ Ltd. should increase its proportion.
(b) Calculation of Number of GDR to be issued and Cost of GDR to Odessa Ltd
Net Issue Size = $15 million
$15 million
Gross Issue = = $15.306 million
0.98
Issue Price per GDR in Rs. (300 x 3 x 90%) Rs. 810
Issue Price per GDR in $ (Rs. 810/ Rs. 60) $13.50
Dividend Per GDR (D 1) = Rs. 2* x 3 = Rs. 6
* Assumed to be on based on Face Value of Rs. 10 each share.
Net Proceeds Per GDR = Rs. 810 x 0.98 = Rs. 793.80
(a) Number of GDR to be issued
$15.306 million
= 1.1338 million
$13.50

4
© The Institute of Chartered Accountants of India
 (b) Cost of GDR to Odessa Ltd.
6.00
ke = + 0.20 = 20.76%
793.80
(c) Description of any four constituents of International Financial Centre (IFC) is as follows:
(i) Highly developed Infrastructure: - A leading edge infrastructure is prerequisite for creating a
platform to offer internationally completive financial services.
(ii) Stable Political Environment: - Destabilized political environment brings country risk investment
by foreign nationals. Hence, to accelerate foreign participation in growth of financial center, stable
political environment is prerequisite.
(iii) Strategic Location: - The geographical location of the finance center should be strategic such as
near to airport, seaport and should have friendly weather.
(iv) Quality Life: - The quality of life at the center showed be good as center retains highly paid
professional from own country as well from outside.
4. (a) (i) Calculation of Expected Return from Portfolio
Security Beta Expected Return (r) Amount Weights wr
(β) as per CAPM (Rs. Lakhs) (w)
Moderate 0.50 8%+0.50(10% - 8%) = 9% 60 0.115 1.035
Better 1.00 8%+1.00(10% - 8%) = 10% 80 0.154 1.540
Good 0.80 8%+0.80(10% - 8%) = 9.60% 100 0.192 1.843
Very Good 1.20 8%+1.20(10% - 8%) = 10.40% 120 0.231 2.402
Best 1.50 8%+1.50(10% - 8%) = 11% 160 0.308 3.388
Total 520 1 10.208
Thus Expected Return from Portfolio 10.208% say 10.21%.
Alternatively, it can be computed as follows:
60 80 100 120 160
Average β = 0.50 x + 1.00 x + 0.80 x + 1.20 x + 1.50 x = 1.104
520 520 520 520 520
As per CAPM
= 0.08 + 1.104(0.10 – 0.08) = 0.10208 i.e. 10.208%
(ii) Evaluation of the advice of replacing Security ‘Better’ with NIFTY.
As computed above the expected return from Better is 10% same as from Nifty, hence there
will be no difference even if the replacement of security is made. The main logic behind this
neutrality is that the beta of security ‘Better’ is 1 which clearly indicates that this security shall
yield same return as market return.
(b) Evaluation of:
(i) The price at which the shares can be repurchased
Let P be the buyback price decided by Abhishek Ltd.
Market Capitalisation After Buyback:
1.1 P (Original Shares – Shares Bought back)
 30% of 90 lakhs 
= 1.1P (10 Lakhs  
 P 
= 11 Lakhs x P – 27 lakhs x 1.1= 11 lakhs x P – 29.7 lakhs

5
© The Institute of Chartered Accountants of India
 Market capitalization rate after buyback is 200 lakhs.
Thus, we have:
11 Lakhs x P – 29.7 lakhs = Rs.200 lakhs
or 11P = 200 + 29.7
229.7
or P =  ` 20.88
11
(ii) Number of shares than can be re-purchased
The Number of shares to be bought back:
27 Lakhs
  1.29 lakhs ( Approximaely )
20.88
(iii) The impact of share re-purchase on the EPS
New Equity Shares
= (10 – 1.29) lakhs = 8.71 lakhs
3 10 lakhs 30 L
EPS =   Rs. 3.44
8.71lakhs 8.71L
Thus EPS of Abhishek Ltd., increases to Rs.3.44
(c) Random Walk Theory
Random Walk hypothesis states that the behaviour of stock market prices is unpredictable and that
there is no relationship between the present prices of the shares and their future prices. Basic
premises of the theory are as follows:
 Prices of shares in stock market can never be predicted. The reason is that the price trends
are not the result of any underlying factors, but that they represent a statistical expression of
past data.
 There may be periodical ups or downs in share prices, but no connection can be established
between two successive peaks (high price of stocks) and troughs (low price of stocks).
5. (a) Net Asset Value per unit of the Scheme Rudolf
Shares No. of shares Price Amount (Rs.)
Nairobi Ltd. 25,000 20.00 5,00,000
Dakar Ltd. 35,000 300.00 1,05,00,000
Senegal Ltd. 29,000 380.00 1,10,20,000
Cairo Ltd. 40,000 500.00 2,00,00,000
4,20,20,000
Less: Accrued Expenses 2,50,000
Other Liabilities 2,00,000
Total Value 4,15,70,000
No. of Units 10,00,000
NAV per Unit (4,15,70,000/10,00,000) 41.57

(b) (i) Calculation of Stock value or conversion value of bond

12 × 20 = Rs. 240

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© The Institute of Chartered Accountants of India
 (ii) Calculation of Percentage of the downside risk
Rs. 265 -Rs. 235 RRs. 265 - Rs. 235
= 0.1277 or 12.77% or = 0.1132 or 11.32%
Rs. 235 Rs. 265
This ratio gives the percentage price decline experienced by the bond if the stock becomes
worthless.
(iii) Calculation of Conversion Premium
Market Pr ice  Conversion Value
 100
Conversion Value
Rs. 265 -Rs. 240
 100 = 10.42%
Rs. 240
(iv) Calculation of Conversion Parity Price
Bond Pr ice
No. of Shares on Conversion
Rs. 265
 Rs. 13.25
20
This indicates that if the price of shares rises to Rs. 13.25 from Rs. 12 the investor will neither
gain nor lose on buying the bond and exercising it. Observe that Rs. 1.25 (Rs. 13.25 –
Rs. 12.00) is 10.42% of Rs. 12, the Conversion Premium.
(c) Characteristics of Financial Instruments
The important characteristics of financial instruments are enumerated as below:
(a) Liquidity: Financial instruments provide liquidity. These can be easily and quickly converted
into cash.
(b) Marketing: Financial instruments facilitate easy trading on the market. They have a ready
market.
(c) Collateral value: Financial instruments can be pledged for getting loans.
(d) Transferability: Financial instruments can be transferred from one person to another.
(e) Maturity period: The maturity period of financial instruments may be short term, medium
term or long term.
(f) Transaction cost: Financial instruments involve buying and selling cost. The buying and
selling costs are called transaction costs.
(g) Risk: Financial instruments carry risk. Equity based instruments are riskier in comparison to
debt based instruments because the payment of dividend is uncertain. A company may not
declare dividend in a particular year. However, payment of principle or interest is more or less
certain unless the company gets insolvent.
(h) Future trading: Financial instruments facilitate future trading so as to cover risks arising out
of price fluctuations, interest rate fluctuations etc.
OR
(c) Problems faced in growth of Securitization of instruments especially in Indian context is as
follows:
(i) Stamp Duty: Stamp Duty is one of the obstacle in India. Under Transfer of Property Act,
1882, a mortgage debt stamp duty which even goes upto 12% in some states of India and this

7
© The Institute of Chartered Accountants of India
 impeded the growth of securitization in India. It should be noted that since pass through
certificate does not evidence any debt only able to receivable, they are exempted from stamp
duty.
Moreover, in India, recognizing the special nature of securitized instruments in some states
has reduced the stamp duty on them.
(ii) Taxation: Taxation is another area of concern in India. In the absence of any specific
provision relating to securitized instruments in Income Tax Act experts’ opinion differ a lot.
Some are of opinion that in SPV as a trustee is liable to be taxed in a representative capacity
then other are of view that instead of SPV, investors will be taxed on their share of income.
Clarity is also required on the issues of capital gain implications on passing payments to the
investors.
(iii) Accounting: Accounting and reporting of securitized assets in the books of originator is
another area of concern. Although securitization is slated to an off-balance sheet instrument
but in true sense receivables are removed from originator’s balance sheet. Problem arises
especially when assets are transferred without recourse.
(iv) Lack of standardization: Every originator follows own format for documentation and
administration have lack of standardization is another obstacle in growth of securitization.
(v) Inadequate Debt Market: Lack of existence of a well-developed debt market in India is
another obstacle that hinders the growth of secondary market of securitized or asset backed
securities.
(vi) Ineffective Foreclosure laws: For last many years there are efforts are going on for effective
foreclosure but still foreclosure laws are not supportive to lending institutions and this makes
securitized instruments especially mortgaged backed securities less attractive as lenders face
difficulty in transfer of property in event of default by the borrower.
6. (a) (i) Calculation of Business Value
(Rs. Lakhs)
77 110
Profit before tax
1  0.30
Less: Extraordinary income (8)
Add: Extraordinary losses 10
112
Profit from new product (Rs. Lakhs)
Sales 70
Less: Material costs 20
Labour costs 12
Fixed costs 10 (42) 28

140.00
Less: Taxes @30% 42.00
Future Maintainable Profit after taxes 98.00
Relevant Capitalisation Factor 0.14
Value of Business (Rs.98/0.14) 700

8
© The Institute of Chartered Accountants of India
 (ii) Calculation of Market Price of Equity Share
Future maintainable profits (After Tax) Rs. 98,00,000
Less: Preference share dividends 1,00,000 shares of Rs. 100 @ 13% Rs. 13,00,000
Earnings available for Equity Shareholders Rs. 85,00,000
No. of Equity Shares 50,00,000
Rs. 85,00,000 Rs. 1.70
Earning per share = =
50,00,000
PE ratio 10
Market price per share Rs. 17

(b) (i) Calculation of Intrinsic value of Bond

PV of Interest + PV of Maturity Value of Bond
Forward rate of interests
1st Year 12%
2nd Year 11.25%
3rd Year 10.75%
Rs.90 Rs.90 Rs.90
PV of interest = + + = Rs. 217.81
(1+ 0.12) (1+ 0.12)(1+ 0.1125) (1+ 0.12)(1+ 0.1125)(1+ 0.1075)

Rs.1000
PV of Maturity Value of Bond = = Rs. 724.67
(1+ 0.12)(1+ 0.1125)(1+ 0.1075)
Intrinsic value of Bond = Rs. 217.81 + Rs. 724.67 = Rs. 942.48
(ii) Calculation of Expected Price in the bond market
Expected Price = Intrinsic Value x Beta Value
= Rs. 948.48 x 1.02 = Rs. 961.33
(c) (i) Forward contract: Dollar needed in 180 days = £3,00,000 x $ 1.96 = $5,88,000/-
(ii) Money market hedge
: Borrow $, convert to £, invest £, repay $ loan in 180 days
Amount in £ to be invested = 3,00,000/1.045 = £ 2,87,081
Amount of $ needed to convert into £ = 2,87,081 x 2 = $ 5,74,162
Interest and principal on $ loan after 180 days = $5,74,162 x 1.055 = $ 6,05,741
(iii) Call option:
Expected Spot Prem./unit Exercise Total price Total price Prob. Pi pixi
rate in 180 Option per unit for
days £3,00,000xi
1.91 0.04 No 1.95 5,85,000 0.25 1,46,250
1.95 0.04 No 1.99 5,97,000 0.60 3,58,200
2.05 0.04 Yes 2.01* 6,03,000 0.15 90,450
5,94,900
Add: Interest on Premium @ 5.5% (12,000 x 5.5%) 660
5,95,560
* ($1.97 + $0.04)

9
© The Institute of Chartered Accountants of India
 (iv) No hedge option:
Expected Future spot rate Dollar needed Prob. Pi Pi xi
Xi
1.91 5,73,000 0.25 1,43,250
1.95 5,85,000 0.60 3,51,000
2.05 6,15,000 0.15 92,250
5,86,500
Recommendation: No hedging strategy i.e. keeping the position open appears to be most
preferable because least number of $ are needed under this option to arrange £3,00,000.

10
© The Institute of Chartered Accountants of India
 Test Series: August, 2018
MOCK TEST PAPER – 1
FINAL COURSE: GROUP – I
PAPER – 2: STRATEGIC FINANCIAL MANAGEMENT
SUGGESTED ANSWERS/HINTS

1. (a) (i) SWAP ratio based on current market prices:

EPS before acquisition:
Mani Ltd. : Rs.2,000 lakhs / 200 lakhs: Rs.10
Ratnam Ltd.: Rs.4,000 lakhs / 1,000 lakhs: Rs. 4
Market price before acquisition:
Mani Ltd.: Rs.10 × 10 Rs.100
Ratnam Ltd.: Rs.4 × 5 Rs. 20
SWAP ratio: 20/100 or 1/5 i.e. 0.20
(ii) EPS after acquisition:
Rs. (2,000 + 4,000) Lakhs
= Rs.15.00
(200 + 200) Lakhs
(iii) Market Price after acquisition:
EPS after acquisition : Rs.15.00
P/E ratio after acquisition 10 × 0.9 9
Market price of share (Rs. 15 X 9) Rs.135.00
(iv) Market value of the merged Co.:
Rs.135 × 400 lakhs shares Rs. 540.00 Crores
or Rs. 54,000 Lakhs
(v) Gain/loss per share: Rs. Crore
Mani Ltd. Ratnam Ltd.
Total value before Acquisition 200 200
Value after acquisition 270 270
Gain (Total) 70 70
No. of shares (pre-merger) (lakhs) 200 1,000
Gain per share (Rs.) 35 7
(b) If foreign exchange risk is hedged
Total (Rs.)
Sum due Yen 78,00,000 US$1,02,300 Euro 95,920
Unit input price Yen 650 US$10.23 Euro 11.99
Unit sold 12000 10000 8000
Variable cost per unit Rs.225/- 395 510
Variable cost Rs. 27,00,000 Rs. 39,50,000 Rs. 40,80,000 Rs. 1,07,30,000

© The Institute of Chartered Accountants of India

 Three months forward 2.427 0.0216 0.0178
rate for selling
Rupee value of receipts Rs.32,13,844 Rs. 47,36,111 Rs. 53,88,764 Rs. 1,33,38,719
Contribution Rs.5,13,844 Rs. 7,86,111 Rs. 13,08,764 Rs. 26,08,719
Average contribution to sale 19.56%
ratio
If risk is not hedged
Rupee value of receipt Rs.31,72,021 Rs. 47,44,898 Rs. 53,58,659 Rs. 1,32,75,578
Total contribution Rs. 25,45,578
Average contribution to sale 19.17%
ratio
AKC Ltd. Is advised to hedge its foreign currency exchange risk.
(c) Key elements of a well-functioning financial system are explained as below:
(i) A strong legal and regulatory environment – Capital market is regulated by SEBI which
acts a watchdog of the securities market. This has been ensured through the passing of
SEBI Act, Securities Contract Regulation Act and numerous SEBI rules, regulations and
guidelines. Likewise money market and foreign exchange market is regulated by RBI and
this has been ensured through various provisions of the RBI Act, Foreign Exchange
Management Act etc. Thus, a strong legal system protects the rights and interests of
investors and acts as a most important element of a sound financial system.
(ii) Stable money – Money is an important part of an economy. Frequent fluctuations and
depreciations in the value of money lead to financial crises and restrict the economic
growth.
(iii) Sound public finances and public debt management – Sound public finances means
setting and controlling public expenditures and increase revenues to fund these
expenditures efficiently. Public debt management is the process of establishing and
executing a strategy for managing the government's debt in order to raise the required
amount of funding. It also includes developing and maintaining an efficient market for
government securities.
(iv) A central bank – A central bank supervises and regulates the operations of the banking
system. It acts as a banker to the banks and government, manager of money market and
foreign exchange market and also lender of the last resort. The monetary policy of the
Central Bank is used to keep the pace of economic growth on a higher path.
(v) Sound banking system – A well-functioning financial system must have large variety of
banks both in the private and public sector having both domestic and international
operations with an ability to withstand adverse national and international events. They
perform varied functions such as operating the payment and clearing system, and foreign
exchange market. Banks also undertake credit risk analysis and assess the expected ris k
and return of a project before giving any loan for a proposed project.
(vi) Information System – All the participants in the financial system requires information at
some stage or the other. Proper information disclosure practices form basis of a sound
financial system for e.g. the corporates has to disclose their financial performance in the
financial statements. Similarly, at the time of initial public offering, the companies have to
disclose a host of information disclosing their financial health and efficiency.

© The Institute of Chartered Accountants of India

 (vii) Well functioning securities market – A securities market facilitates the issuance of both
equity and debt. An efficient securities market helps in the deployment of funds raised
through the capital market to the required sections of the economy, lowering the cost of
capital for the firms, enhancing liquidity and attracting foreign investment.
2. (a) (i) Portfolio Beta
0.20 x 0.40 + 0.50 x 0.50 + 0.30 x 1.10 = 0.66
(ii) Residual Variance
To determine Residual Variance first of all we shall compute the Systematic Risk as follows:
β2A  σ M
2
= (0.40) 2(0.01) = 0.0016

βB2  σ M
2
= (0.50) 2(0.01) = 0.0025

β2C  σ M
2
= (1.10) 2(0.01) = 0.0121
Residual Variance
A 0.015 – 0.0016 = 0.0134
B 0.025 – 0.0025 = 0.0225
C 0.100 – 0.0121 = 0.0879
(iii) Portfolio variance using Sharpe Index Model
Systematic Variance of Portfolio = (0.10) 2 x (0.66)2 = 0.004356
Unsystematic Variance of Portfolio = 0.0134 x (0.20) 2 + 0.0225 x (0.50) 2 + 0.0879 x (0.30) 2
= 0.014072
Total Variance = 0.004356 + 0.014072 = 0.018428
(iv) Portfolio variance on the basis of Markowitz Theory
= (wA x wAx σ A ) + (wA x wBxCovAB) + (wA x wCxCovAC) + (wB x wAxCovAB) + (wB x wBx σ B ) +
2 2

(wB x wCxCovBC) + (wC x wAxCovCA) + (wC x wBxCovCB) + (wC x wCx σ c )

2

= (0.20 x 0.20 x 0.015) + (0.20 x 0.50 x 0.030) + (0.20 x 0.30 x 0.020) + (0.20 x 0.50 x
0.030) + (0.50 x 0.50 x 0.025) + (0.50 x 0.30 x 0.040) + (0.30 x 0.20 x 0.020) + (0.30 x 0.50
x 0.040) + (0.30 x 0.30 x 0.10)
= 0.0006 + 0.0030 + 0.0012 + 0.0030 + 0.00625 + 0.0060 + 0.0012 + 0.0060 + 0.0090
= 0.0363
(b) Duration of Bond X
Year Cash flow P.V. @ 10% Proportion of bond value Proportion of bond
value x time (years)
1 1070 .909 972.63 1.000 1.000
Duration of the Bond is 1 year
Duration of Bond Y
Year Cash flow P.V. @ 10% Proportion of bond Proportion of bond
value value x time (years)
1 80 .909 72.72 0.077 0.077
2 80 .826 66.08 0.071 0.142

© The Institute of Chartered Accountants of India

 3 80 .751 60.08 0.064 0.192
4 1080 .683 737.64 0.788 3.152
936.52 1.000 3.563
Duration of the Bond is 3.563 years
Let x1 be the investment in Bond X and therefore investment in Bond Y shall be (1 - x1). Since the
required duration is 2 year the proportion of investment in each of these two securities shall be
computed as follows:
2 = x1 + (1 - x1) 3.563
x1 = 0.61
Accordingly, the proportion of investment shall be 61% in Bond X and 39% in Bond Y
respectively.
Amount of investment
Bond X Bond Y
PV of Rs. 1,00,000 for 2 years @ 10% x 61% PV of Rs. 1,00,000 for 2 years @ 10% x 39%
= Rs. 1,00,000 (0.826) x 61% = Rs. 1,00,000 (0.826) x 39%
= Rs. 50,386 = Rs. 32,214
No. of Bonds to be purchased No. of Bonds to be purchased
= Rs. 50,386/Rs. 972.73 = 51.79 i.e. approx. = Rs. 32,214/Rs. 936.52 = 34.40 i.e. approx. 34
52 bonds bonds
Note: The investor has to keep the money invested for two years. Therefore, the investor can
invest in both the bonds with the assumption that Bond X will be reinvested for another one year
on same returns.
(c) The concept of sustainable growth can be helpful for planning healthy corporate growth. This
concept forces managers to consider the financial consequences of sales increases and to set
sales growth goals that are consistent with the operating and financial policies of the firm. Often,
a conflict can arise if growth objectives are not consistent with the value of the organization's
sustainable growth. Question concerning right distribution of resources may take a difficult shape
if we take into consideration the rightness not for the current stakeholders but for the future
stakeholders also. To take an illustration, let us refer to fuel industry where resources are limited
in quantity and a judicial use of resources is needed to cater to the need of the future customers
along with the need of the present customers. One may have noticed the save fuel campaign, a
demarketing campaign that deviates from the usual approach of sales growth strategy and
preaches for conservation of fuel for their use across generation. This is an example of stable
growth strategy adopted by the oil industry as a whole under resource constraints and the long
run objective of survival over years. Incremental growth strategy, profit strategy and pause
strategy are other variants of stable growth strategy.
Sustainable growth is important to enterprise long-term development. Too fast or too slow growth
will go against enterprise growth and development, so financial should play important role in
enterprise development, adopt suitable financial policy initiative to make sure enterprise growth
speed close to sustainable growth ratio and have sustainable healthy development.
The sustainable growth rate (SGR), concept by Robert C. Higgins, of a firm is the maximum rate
of growth in sales that can be achieved, given the firm's profitability, asset utilization, and desired
dividend payout and debt (financial leverage) ratios. The sustainable growth rate is a measure of
how much a firm can grow without borrowing more money. After the firm has passed this rate, it
must borrow funds from another source to facilitate growth. Variables typically include the net
4

© The Institute of Chartered Accountants of India

 profit margin on new and existing revenues; the asset turnover ratio, which is the ratio of sales
revenues to total assets; the assets to beginning of period equity ratio; and the retention rate,
which is defined as the fraction of earnings retained in the business.
SGR = ROE x (1- Dividend payment ratio)
Sustainable growth models assume that the business wants to: 1) maintain a target capital
structure without issuing new equity; 2) maintain a target dividend payment ratio; and 3) increase
sales as rapidly as market conditions allow. Since the asset to beginning of period equity ratio i s
constant and the firm's only source of new equity is retained earnings, sales and assets cannot
grow any faster than the retained earnings plus the additional debt that the retained earnings can
support. The sustainable growth rate is consistent with the observed evidence that most
corporations are reluctant to issue new equity. If, however, the firm is willing to issue additional
equity, there is in principle no financial constraint on its growth rate.
3. (a)
Business Segment Capital-to-Sales Segment Sales Theoretical Values
Wholesale 0.85 €225000 €191250
Retail 1.2 €720000 €864000
General 0.8 €2500000 €2000000
Total value €3055250
Business Segment Capital-to-Assets Segment Assets Theoretical Values
Wholesale 0.7 €600000 €420000
Retail 0.7 €500000 €350000
General 0.7 €4000000 €2800000
Total value €3570000

Business Capital-to- Operating Income Operating Income Theoretical Values

Segment
Wholesale 9 €75000 €675000
Retail 8 €150000 €1200000
General 4 €700000 €2800000
Total value €4675000
3055250  3570000  4675000
Average theoretical value   3766750
3
Average theoretical value of Cranberry Ltd. = €3766750
(b) Calculation of Income available for Distribution
Units (Lakh) Per Unit Total
(Rs.) (Rs. In lakh)
Income from April 300 0.0765 22.9500
Add: Dividend equalization collected on issue 6 0.0765 0.4590
306 0.0765 23.4090
Add: Income from May 0.1125 34.4250
306 0.1890 57.8340
Less: Dividend equalization paid on repurchase 3 0.1890 (0.5670)
303 0.1890 57.2670

© The Institute of Chartered Accountants of India

 Add: Income from June 0.1500 45.4500
303 0.3390 102.7170
Less: Dividend Paid 0.2373 (71.9019)
303 0.1017 30.8151
Calculation of Issue Price at the end of April
Rs.
Opening NAV 18.750
Add: Entry Load 2% of Rs. 18.750 (0.375)
19.125
Add: Dividend Equalization paid on Issue Price 0.0765
19.2015
Calculation of Repurchase Price at the end of May
Rs.
Opening NAV 18.750
Less: Exit Load 2% of Rs. 18.750 (0.375)
18.375
Add: Dividend Equalization paid on Issue Price 0.1890
18.564
Closing NAV
Rs. (Lakh)
Opening Net Asset Value (Rs. 18.75 × 300) 5625.0000
Portfolio Value Appreciation 425.4700
Issue of Fresh Units (6 × 19.2015) 115.2090
Income Received (22.950 + 34.425 + 45.450) 102.8250
6268.504
Less: Units repurchased (3 × 18.564) -55.692
Income Distributed -71.9019 (-127.5939)
Closing Net Asset Value 6140.9101
Closing Units (300 + 6 – 3) lakh 303 lakh
 Closing NAV as on 30 th June Rs. 20.2670
(c) There are two types of commodity swaps: fixed-floating or commodity-for-interest.
(a) Fixed-Floating Swaps: They are just like the fixed-floating swaps in the interest rate swap
market with the exception that both indices are commodity based indices.
General market indices in the international commodities market with which many people
would be familiar include the S&P Goldman Sachs Commodities Index (S&PGSCI) and the
Commodities Research Board Index (CRB). These two indices place different weights on
the various commodities so they will be used according to the swap agent's requirements.
(b) Commodity-for-Interest Swaps: They are similar to the equity swap in which a total return on
the commodity in question is exchanged for some money market rate (plus or minus a
spread).

© The Institute of Chartered Accountants of India

4. (a) Impact of Financial Restructuring
(i) Benefits to Grape Fruit Ltd.
(a) Reduction of liabilities payable
Rs. in lakhs
Reduction in equity share capital (6 lakh shares x Rs.75 per share) 450
Reduction in preference share capital (2 lakh shares x Rs.50 per share) 100
Waiver of outstanding debenture Interest 26
Waiver from trade creditors (Rs.340 lakhs x 0.25) 85
661
(b) Revaluation of Assets
Appreciation of Land and Building (Rs.450 lakhs - Rs.200 lakhs) 250
Total (A) 911
Amount of Rs.911 lakhs utilized to write off losses, fictious assets and over- valued assets.
Writing off profit and loss account 525
Cost of issue of debentures 5
Preliminary expenses 10
Provision for bad and doubtful debts 15
Revaluation of Plant and Machinery 120
(Rs.300 lakhs – Rs.180 lakhs)
Total (B) 675
Capital Reserve (A) – (B) 236
(ii) Balance sheet of Grape Fruit Ltd as at 31 st March 2011 (after re-construction)
(Rs. in lakhs)
Liabilities Amount Assets Amount
12 lakhs equity shares of 300 Land & Building 450
Rs. 25/- each
10% Preference shares 100 Plant & Machinery 180
of Rs. 50/- each
Capital Reserve 236 Furnitures & Fixtures 50
9% debentures 200 Inventory 150
Loan from Bank 74 Sundry debtors 70
Trade Creditors 255 Prov. for Doubtful Debts -15 55
Cash-at-Bank (Balancing 280
figure)*
1165 1165
*Opening Balance of Rs.130/- lakhs + Sale proceeds from issue of new equity shares
Rs.150/- lakhs.
e rt  d
(b) p =
ud
ert = e0.036
d = 411/421 = 0.976
u = 592/421 = 1.406

© The Institute of Chartered Accountants of India

 e 0.036  0.976 1.037  0.976 0.061
p= = = = 0.1418
1.406  0.976 0.43 0.43
Thus, probability of rise in price 0.1418
(c) There are four asset allocation strategies:
(a) Integrated Asset Allocation: Under this strategy, capital market conditions and investor
objectives and constraints are examined and the allocation that best serves the investor’s
needs while incorporating the capital market forecast is determined.
(b) Strategic Asset Allocation: Under this strategy, optimal portfolio mixes based on returns,
risk, and co-variances is generated using historical information and adjusted periodically to
restore target allocation within the context of the investor’s objectives and constraints.
(c) Tactical Asset Allocation: Under this strategy, investor’s risk tolerance is assumed constant
and the asset allocation is changed based on expectations about capital market conditions.
(d) Insured Asset Allocation: Under this strategy, risk exposure for changing portfolio values
(wealth) is adjusted; more value means more ability to take risk.
(d) Although there are many constituents for IFC but some of the important constituent are as
follows:
(i) Highly developed Infrastructure: - A leading edge infrastructure is prerequisite for creating a
platform to offer internationally completive financial services.
(ii) Stable Political Environment: - Destabilized political environment brings country risk
investment by foreign nationals. Hence, to accelerate foreign participation in growth of
financial center, stable political environment is prerequisite.
(iii) Strategic Location: - The geographical location of the finance center should be strategic
such as near to airport, seaport and should have friendly weather.
(iv) Quality Life: - The quality of life at the center showed be good as center retains highly paid
professional from own country as well from outside.
(v) Rationale Regulatory Framework: - Rationale legal regulatory framework is another
prerequisite of international finance center as it should be fair and transparent.
(vi) Sustainable Economy: - The economy should be sustainable and should possess capacity
to absorb all the shocks as it will boost investors’ confidence.
5. (a) (i) Straight Value of Bond
Rs. 85 x 0.9132 + Rs. 85 x 0.8340 + Rs. 1085 x 0.7617 = Rs. 974.96
(ii) Conversion Value
Conversion Ration x Market Price of Equity Share
= Rs. 45 x 25 = Rs. 1,125
(iii) Conversion Premium
Conversion Premium = Market Conversion Price - Market Price of Equity Share
Rs.1,175
= - Rs. 45 = Rs. 2
25
or = Rs. 1,175 - Rs. 45 x 25 = Rs. 50
Rs. 1,175 - Rs.1,125
or = 4.47%
Rs. 1,125

© The Institute of Chartered Accountants of India

 (iv) Percentage of Downside Risk
Rs. 1,175 - Rs. 974.96 Rs. 1,175 - Rs. 974.96
= ×100 = 20.52% or  17.02%
Rs. 974.96 Rs.1,175
(v) Conversion Parity Price
Bond Price
No. of Share on Conversion
Rs. 1,175
= = Rs. 47
25
(b) First of all we shall calculate premium payable to bank as follows:
rp rp
P= X A or A
 1  PVAF(3.5%,4)
(1  i) - 
 i  (1  i)t 
Where
P = Premium
A = Principal Amount
rp = Rate of Premium
i = Fixed Rate of Interest
t = Time
0.01 0.01
= × £15,000,000 or × £15,000,000
 1  (0.966 + 0.933 + 0.901+ 0.871)
(1/ 0.035) - 0.035  1.0354 

0.01 £150,000
= × £15,000,000 or = £ 40,861
 1  3.671
(28.5714) - 0.04016 

Please note above solution has been worked out on the basis of four decimal points at each
stage.
Now we see the net payment received from bank
Reset Period Additional interest due Amount Premium paid Net Amt.
to rise in interest rate received from to bank received from
bank bank
1 £ 75,000 £ 75,000 £ 40,861 £34,139
2 £ 112,500 £ 112,500 £ 40,861 £71,639
3 £ 150,000 £ 150,000 £ 40,861 £109,139
TOTAL £ 337,500 £ 337,500 £122,583 £ 214,917
Thus, from above it can be seen that interest rate risk amount of £ 337,500 reduced by £ 214,917
by using of Cap option.
Note: It may be possible that student may compute upto three decimal points or may use different
basis. In such case their answer is likely to be different.

© The Institute of Chartered Accountants of India

 (c) Stages of Venture Capital Funding
1. Seed Money: Low level financing needed to prove a new idea.
2. Start-up: Early stage firms that need funding for expenses associated with marketing and
product development.
3. First-Round: Early sales and manufacturing funds.
4. Second-Round: Working capital for early stage companies that are selling product, but not
yet turning in a profit.
5. Third Round: Also called Mezzanine financing, this is expansion money for a newly
profitable company.
6. Fourth-Round: Also called bridge financing, it is intended to finance the "going public"
process.
6. (a) Calculation of NPV
Year 0 1 2 3
Inflation factor in India 1.00 1.10 1.21 1.331
Inflation factor in Africa 1.00 1.40 1.96 2.744
Exchange Rate (as per IRP) 6.00 7.6364 9.7190 12.3696
Cash Flows in Rs.’000
Real -50000 -1500 -2000 -2500
Nominal (1) -50000 -1650 -2420 -3327.50
Cash Flows in African Rand ’000
Real -200000 50000 70000 90000
Nominal -200000 70000 137200 246960
In Indian ` ’000 (2) -33333 9167 14117 19965
Net Cash Flow in Rs. ‘000 (1)+(2) -83333 7517 11697 16637
PVF@20% 1 0.833 0.694 0.579
PV -83333 6262 8118 9633
NPV of 3 years = -59320 (Rs. ‘000)
16637
NPV of Terminal Value = × 0.579 = 48164 (Rs.’000)
0.20
Total NPV of the Project = -59320 (Rs. ‘000) + 48164 (Rs.’000) = -11156 (Rs.’000)
(b) Following are main features of VAR
(i) Components of Calculations: VAR calculation is based on following three components :
(a) Time Period
(b) Confidence Level – Generally 95% and 99%
(c) Loss in percentage or in amount
(ii) Statistical Method: It is a type of statistical tool based on Standard Deviation.
(iii) Time Horizon: VAR can be applied for different time horizons say one day, one week, one
month and so on.
(iv) Probability: Assuming the values are normally attributed, probability of maximum loss can
be predicted.
10

© The Institute of Chartered Accountants of India

 (v) Control Risk: Risk can be controlled by selling limits for maximum loss.
(vi) Z Score: Z Score indicates how many standard Deviations is away from Mean value of a
population. When it is multiplied with Standard Deviation it provides VAR.
(c) Primary Participants are main parties to this process. The primary participants in the process of
securitization are as follows:
(i) Originator: It is the initiator of deal or can be termed as securitizer. It is an entity which sells
the assets lying in its books and receives the funds generated through the sale of such
assets. The originator transfers both legal as well as beneficial interest to the Special
Purpose Vehicle (discussed later).
(ii) Special Purpose Vehicle: Also, called SPV is created for the purpose of executing the deal.
Since issuer originator transfers all rights in assets to SPV, it holds the legal title of these
assets. It is created especially for the purpose of securitization only and normally could be
in form of a company, a firm, a society or a trust.
The main objective of creating SPV to remove the asset from the Balance Sheet of
Originator. Since, SPV makes an upfront payment to the originator, it holds the key position
in the overall process of securitization. Further, it also issues the securities (called Asset
Based Securities or Mortgage Based Securities) to the investors.
(iii) The Investors: Investors are the buyers of securitized papers which may be an individual, an
institutional investor such as mutual funds, provident funds, insurance companies, mutual
funds, Financial Institutions etc.
Since, they acquire a participating in the total pool of assets/receivable, they receive their
money back in the form of interest and principal as per the terms agree.
Or
The securitization has the following features:
(i) Creation of Financial Instruments – The process of securities can be viewed as process of
creation of additional financial product of securities in market backed by collaterals.
(ii) Bundling and Unbundling – When all the assets are combined in one pool it is bundling and
when these are broken into instruments of fixed denomination it is unbundling.
(iii) Tool of Risk Management – In case of assets are securitized on non-recourse basis, then
securitization process acts as risk management as the risk of default is shifted.
(iv) Structured Finance – In the process of securitization, financial instruments are tailor
structured to meet the risk return trade of profile of investor, and hence, these securitized
instruments are considered as best examples of structured finance.
(v) Trenching – Portfolio of different receivable or loan or asset are split into several parts
based on risk and return they carry called ‘Trenche’. Each Trench carries a different level of
risk and return.
(vi) Homogeneity – Under each trenche the securities are issued of homogenous nature and
even meant for small investors the who can afford to invest in small amounts.

11

© The Institute of Chartered Accountants of India

 Rs. 1,300crores
(d) No. of Shares = = 32.5 Crores
Rs. 40
PAT
EPS =
No.of shares
` 290 crores
EPS = = Rs. 8.923
32.5 crores
FCFE = Net income – [(1-b) (capex – dep) + (1-b) ( ΔWC )]
FCFE = 8.923 – [(1-0.27) (47-39) + (1-0.27) (3.45)]
= 8.923 – [5.84 + 2.5185] = 0.5645
Cost of Equity = R f + ß (Rm – Rf)
= 8.7 + 0.1 (10.3 – 8.7) = 8.86%
FCFE(1 g) 0.5645(1.08) 0.60966
Po = =  = Rs. 70.89
Ke  g 0.0886  .08 0.0086

12

© The Institute of Chartered Accountants of India

 Test Series: October, 2018
MOCK TEST PAPER – 2
FINAL COURSE: GROUP – I
PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT (NEW)

SUGGESTED ANSWERS/HINTS

1. (a) (i) Calculation of Profit after tax (PAT)

Rs.
Profit before interest and tax (PBIT) 32,00,000
Less: Debenture interest (Rs. 64,00,000 × 12/100) 7,68,000
Profit before tax (PBT) 24,32,000
Less: Tax @ 35% 8,51,200
Profit after tax (PAT) 15,80,800
Less: Preference Dividend
(Rs. 40,00,000 × 8/100) 3,20,000
Equity Dividend (Rs. 80,00,000 × 8/100) 6,40,000 9,60,000
Retained earnings (Undistributed profit) 6,20,800
Calculation of Interest and Fixed Dividend Coverage
PAT  Debenture interest
=
Debenture interest  Preference dividend

15,80,800  7,68,000 23,48,800

= = = 2.16 times
7,68,000  3,20,000 10,88,000
(ii) Calculation of Capital Gearing Ratio
Fixed interest bearing funds
Capital Gearing Ratio =
Equity shareholders' funds

Preference Share Capital  Debentures 40,00,000  64,00,000 1,04,00,000

= = = = 0.93
Equity Share Capital  Reserves 80,00,000  32,00,000 1,12,00,000
(iii) Calculation of Yield on Equity Shares:
Yield on equity shares is calculated at 50% of profits distributed and 5% on undistributed
profits:
(Rs.)
50% on distributed profits (Rs. 6,40,000 × 50/100) 3,20,000
5% on undistributed profits (Rs. 6,20,800 × 5/100) 31,040
Yield on equity shares 3,51,040
Yield on shares
Yield on equity shares % =  100
Equity share capital

3,51,040
=  100 = 4.39% or, 4.388%.
80,00,000

© The Institute of Chartered Accountants of India

 Calculation of Expected Yield on Equity shares
(A) Interest and fixed dividend coverage of Sun Ltd. is 2.16 times, but the industry average
is 3 times. Therefore, risk premium is added to Sun Ltd. Shares @ 1% for every 1 time
of difference. Hence,
Risk Premium = 3.00 – 2.16 (1%) = 0.84 (1%) = 0.84%
(B) Capital Gearing ratio of Sun Ltd. is 0.93 but the industry average is 0.75 times.
Therefore, risk premium is added to Sun Ltd. shares @ 2% for every 1 time of
difference. Hence,
Risk Premium = (0.75 – 0.93) (2%) = 0.18 (2%) = 0.36%
(%)
Normal return expected 9.60
Add: Risk premium for low interest and fixed dividend coverage 0.84
Add: Risk premium for high interest gearing ratio 0.36
10.80
Value of Equity Share
Actual yield 4.39
=  Paid-up value of share =  100 = Rs. 40.65
Expected yield 10.80
(b)
Shares No. of shares Price Amount (Rs.)
Nairobi Ltd. 25,000 20.00 5,00,000
Dakar Ltd. 35,000 300.00 1,05,00,000
Senegal Ltd. 29,000 380.00 1,10,20,000
Cairo Ltd. 40,000 500.00 2,00,00,000
4,20,20,000
Less: Accrued Expenses 2,50,000
Other Liabilities 2,00,000
Total Value 4,15,70,000
No. of Units 10,00,000
NAV per Unit (4,15,70,000/10,00,000) 41.57
(c) The Dow Theory is based upon the movements of two indices, constructed by Charles Dow, Dow
Jones Industrial Average (DJIA) and Dow Jones Transportation Average (DJTA). These averages
reflect the aggregate impact of all kinds of information on the market. The movements of the
market are divided into three classifications, all going at the same time; the primary movement,
the secondary movement, and the daily fluctuations. The primary movement is the main trend of
the market, which lasts from one year to 36 months or longer. This trend is commonly called bear
or bull market. The secondary movement of the market is shorter in duration than the primary
movement, and is opposite in direction. It lasts from two weeks to a month or more. The daily
fluctuations are the narrow movements from day-to-day. These fluctuations are not part of the
Dow Theory interpretation of the stock market. However, daily movements must be carefully
studied, along with primary and secondary movements, as they go to make up the longer
movement in the market.

© The Institute of Chartered Accountants of India

 Thus, the Dow Theory’s purpose is to determine where the market is and where is it going,
although not how far or high. The theory, in practice, states that if the cyclical swings of the stock
market averages are successively higher and the successive lows are higher, then the market
trend is up and a bullish market exists. Contrarily, if the successive highs and successive lows
are lower, then the direction of the market is down and a bearish market exists.
2. (a) Return of the stock under APT
Factor Actual value in Expected Difference Beta Diff. х Beta
% value in %
GNP 7.70 7.70 0.00 1.20 0.00
Inflation 7.00 5.50 1.50 1.75 2.63
Interest rate 9.00 7.75 1.25 1.30 1.63
Stock index 12.00 10.00 2.00 1.70 3.40
Ind. Production 7.50 7.00 0.50 1.00 0.50
8.16
Risk free rate in % 9.25
Return as per APT 17.41
(b) Financial Analysis whether to set up the manufacturing units in India or not may be carried using
NPV technique as follows:
I. Incremental Cash Outflows
$ Million
Cost of Plant and Machinery 500.00
Working Capital 50.00
Release of existing Working Capital (15.00)
535.00
II. Incremental Cash Inflow after Tax (CFAT)
(a) Generated by investment in India for 5 years
$ Million
Sales Revenue (5 Million x $80) 400.00
Less: Costs
Variable Cost (5 Million x $20) 100.00
Fixed Cost 30.00
Depreciation ($500Million/5) 100.00
EBIT 170.00
Taxes@35% 59.50
EAT 110.50
Add: Depreciation 100.00
CFAT (1-5 years) 210.50
Cash flow at the end of the 5 years (Release of Working Capital) 35.00
(b) Cash generation by exports
$ Million
Sales Revenue (1.5 Million x $80) 120.00
Less: Variable Cost (1.5 Million x $40) 60.00
3

© The Institute of Chartered Accountants of India

 Contribution before tax 60.00
Tax@35% 21.00
CFAT (1-5 years) 39.00
(c) Additional CFAT attributable to Foreign Investment
$ Million
Through setting up subsidiary in India 210.50
Through Exports in India 39.00
CFAT (1-5 years) 171.50
III. Determination of NPV
Year CFAT ($ Million) PVF@12% PV($ Million)
1-5 171.50 3.6048 618.2232
5 35 0.5674 19.8590
638.0822
Less: Initial Outflow 535.0000
103.0822
Since NPV is positive the proposal should be accepted.
(c) Credit Rating means an assessment made from credit-risk evaluation, translated into a current
opinion as on a specific date on the quality of a specific debt security issued or on obligation
undertaken by an enterprise in terms of the ability and willingness of the obligator to meet
principal and interest payments on the rated debt instrument in a timely manner.
Thus, Credit Rating is:
(1) An expression of opinion of a rating agency.
(2) The opinion is in regard to a debt instrument.
(3) The opinion is as on a specific date.
(4) The opinion is dependent on risk evaluation.
(5) The opinion depends on the probability of interest and principal obligations being met timely.
Such opinions are relevant to investors due to the increase in the number of issues and in the
presence of newer financial products viz. asset backed securities and credit derivatives.
3. (a)
Date Closing Sensex Sign of Price Charge
1.10.17 2800
3.10.17 2780 -
4.10.17 2795 +
5.10.17 2830 +
8.10.17 2760 -
9.10.17 2790 +
10.10.17 2880 +
11.10.17 2960 +
12.10.17 2990 +
15.10.17 3200 +
4

© The Institute of Chartered Accountants of India

 16.10.17 3300 +
17.10.17 3450 +
19.10.17 3360 -
22.10.17 3290 -
23.10.17 3360 +
24.10.17 3340 -
25.10.17 3290 -
29.10.17 3240 -
30.10.17 3140 -
31.10.17 3260 +
Total of sign of price changes (r) = 8
No of Positive changes = n 1 = 11
No. of Negative changes = n 2 = 8
2n1n2
r= 1
n1  n2
2  11 8
 =  1 = 176/19 + 1 = 10.26
11  8

 = 2n1n2 (2n12n2  n1  n2 )
r (n1  n2 ) (n1  n2  1)

 = (2  11 8) (22 11 8  11  8) = 176 2 157 = 4.252 = 2.06
r (11  8) (11  8  1) (19) (18)

Since too few runs in the case would indicate that the movement of prices is not random. We
employ a two- tailed test the randomness of prices.
Test at 5% level of significance at 18 degrees of freedom using t- table
The lower limit

=  – t ×  =10.26 – 2.101 × 2.06 = 5.932
r

Upper limit

=  + t ×  =10.26 + 2.101 × 2.06 = 14.588
r

At 10% level of significance at 18 degrees of freedom

Lower limit
= 10.26 – 1.734 × 2.06 = 6.688
Upper limit
= 10.26 + 1.734 × 2.06 = 13.832
As seen r lies between these limits. Hence, the market exhibits weak form of efficiency .
*For a sample of size n, the t distribution will have n-1 degrees of freedom.

© The Institute of Chartered Accountants of India

 (b) Let the probability of attaining the maximum price be p
(500 - 420) х p+(400 - 420) х (1-p) = 420 х (e0.02-1)
or, 80p - 20(1 - p) = 420 х 0.0202
or, 80p – 20 + 20p = 8.48
or, 100p = 28.48
p= 0.2848
0.2848x(500  450) 0.2848x50
The value of Call Option in Rs. = = =13.96
1.0202 1.0202
(c) The financial risk can be evaluated from different point of views as follows:
(i) From stakeholder’s point of view: Major stakeholders of a business are equity shareholder s
and they view financial gearing i.e. ratio of debt in capital structure of company as risk since
in event of winding up of a company they will be least prioritized.
Even for a lender, existing gearing is also a risk since company having high gearing faces
more risk in default of payment of interest and principal repayment.
(ii) From Company’s point of view: From company’s point of view if a company borrows
excessively or lend to someone who defaults, then it can be forced to go into liquidation.
(iii) From Government’s point of view: From Government’s point of view, the financial risk can
be viewed as failure of any bank or (like Lehman Brothers) down grading of any financial
institution leading to spread of distrust among society at large. Even this risk also includes
willful defaulters. This can also be extended to sovereign debt crisis.
4. (a) (i) The pay-off of each leg shall be computed as follows:
Cap Receipt
Max {0, [Notional principal x (LIBOR on Reset date – Cap Strike Rate) x
Number of days in the settlement period
}
365

Floor Pay-off
Max {0, [Notional principal x (Floor Strike Rate – LIBOR on Reset date) x
Number of days in the settlement period
}
365
Statement showing effective interest on each re-set date

Reset Date LIBOR Days Interest Cap Floor Pay- Effective

(%) Payment ($) Receipts off Interest
LIBOR+0.50% ($) ($)
31-12-2013 6.00 184 3,27,671 0 0 3,27,671
30-06-2014 7.50 181 3,96,712 24,795 0 3,71,917
31-12-2014 5.00 184 2,77,260 0 0 2,77,260
30-06-2015 4.00 181 2,23,151 0 0 2,23,151
31-12-2015 3.75 184 2,14,247 0 12,603 2,26,850
30-06-2016 4.25 182 2,36,849 0 0 2,36,849
Total 1096 16,63,698

© The Institute of Chartered Accountants of India

 (ii) Average Annual Effective Interest Rate shall be computed as follows:
16,63,698 365
  100 = 5.54%
1,00,00,000 1096
(b) Market Risk Premium (A) = 14% – 7% = 7%
Share Beta Risk Premium Risk Free Return Return
(Beta x A) % Return % % `
Oxy Rin Ltd. 0.45 3.15 7 10.15 8,120
Boxed Ltd. 0.35 2.45 7 9.45 14,175
Square Ltd. 1.15 8.05 7 15.05 33,863
Ellipse Ltd. 1.85 12.95 7 19.95 89,775
Total Return 1,45,933
Total Investment ` 9,05,000
` 1,45,933
(i) Portfolio Return =  100 = 16.13%
` 9,05,000
(ii) Portfolio Beta
Portfolio Return = Risk Free Rate + Risk Premium х β = 16.13%
7% + 7 = 16.13%
β = 1.30
Alternative Approach
First, we shall compute Portfolio Beta using the weighted average method as follows:
0.80 1.50 2.25 4.50
BetaP = 0.45X + 0.35X + 1.15X + 1.85X
9.05 9.05 9.05 9.05
= 0.45x0.0884+ 0.35X0.1657+ 1.15X0.2486+ 1.85X0.4972 = 0.0398+ 0.058 + 0.2859 +
0.9198 = 1.3035
Accordingly,
(i) Portfolio Return using CAPM formula will be as follows:
RP= RF + BetaP(RM – RF)
= 7% + 1.3035(14% - 7%) = 7% + 1.3035(7%)
= 7% + 9.1245% = 16.1245%
(ii) Portfolio Beta
As calculated above 1.3035
(c) Cluster based approach to lending is intended to provide a full-service approach to cater to the
diverse needs of the MSE sector which may be achieved through extending banking services to
recognized MSE clusters. A cluster based approach may be more beneficial (a) in dealing with
well-defined and recognized groups (b) availability of appropriate information for risk assessment
(c) monitoring by the lending institutions and (d) reduction in costs. The banks have, therefore,
been advised to treat it as a thrust area and increasingly adopt the same for SME financing.
United Nations Industrial Development Organisation (UNIDO) has identified 388 clusters spread
over 21 states in various parts of the country. The Ministry of Micro, Small and Medium
7

© The Institute of Chartered Accountants of India

 Enterprises has also approved a list of clusters under the Scheme of Fund for Regeneration of
Traditional Industries (SFURTI) and Micro and Small Enterprises Cluster Development
Programme (MSE-CDP) located in 121 Minority Concentration Districts. Accordingly, banks have
been advised to take appropriate measures to improve the credit flow to the identified
clusters. Banks have also been advised that they should open more MSE focused branch offices
at different MSE clusters which can also act as counseling. Centres for MSEs. Each lead bank of
the district may adopt at least one cluster (Refer circular RPCD.SME &
NFS.No.BC.90/06.02.31/2009-10 dated June 29, 2010 ).
5. (a) Bank will buy from customer at the agreed rate of Rs. 65.40. In addition to the same if bank will
charge/ pay swap difference and interest on outlay funds.
(i) Swap Difference
Bank Sells at Spot Rate on 28 November 2015 Rs. 65.22
Bank Buys at Forward Rate of 31 December 2015 (65.27 + 0.15)Rs. 65.42
Swap Loss per US$ Rs. 00.20
Swap loss for US$ 1,00,000 Rs. 20,000
(ii) Interest on Outlay Funds
On 28th November Bank sells at Rs. 65.22
It buys from customer at Rs. 65.40
Outlay of Funds per US$ Rs. 00.18
Interest on Outlay fund for US$ 1,00,000 for 31 days Rs. 275.00
(US$100000 x 00.18 x 31/365 x 18%)
(iii) Charges for early delivery
Swap loss Rs. 20,000.00
Interest on Outlay fund for US$ 1,00,000 for 31 days Rs. 275.00
Rs. 20,275.00
(iv) Net Inflow to Mr. X
Amount received on sale (Rs. 65.40 x 1,00,000) Rs. 65,40,000
Less: Charges for early delivery payable to bank (Rs. 20,275)
Rs. 65,19,725
(b) As per T Ltd.’s Offer
Rs. in lakhs
(i) Net Consideration Payable
7 times EBIDAT, i.e. 7 x Rs. 115.71 lakh 809.97
Less: Debt 240.00
569.97
(ii) No. of shares to be issued by T Ltd
Rs. 569.97 lakh/Rs. 220 (rounded off) (Nos.) 2,59,000
(iii) EPS of T Ltd after acquisition
Total EBIDT (Rs. 400.86 lakh + Rs. 115.71 lakh) 516.57
8

© The Institute of Chartered Accountants of India

 Less: Interest (Rs. 58 lakh + Rs. 30 lakh) 88.00
428.57
Less: 30% Tax 128.57
Total earnings (NPAT) 300.00
Total no. of shares outstanding 14.59 lakh
(12 lakh + 2.59 lakh)
EPS (Rs. 300 lakh/ 14.59 lakh) Rs. 20.56

(iv) Expected Market Price:

Rs. in lakhs
Pre-acquisition P/E multiple:
EBIDAT 400.86
10
Less: Interest ( 580 X ) 58.00
100
342.86
Less: 30% Tax 102.86
240.00
No. of shares (lakhs) 12.00
EPS Rs. 20.00
220
Hence, PE multiple 11
20
Expected market price after acquisition (Rs. 20.56 x 11) Rs. 226.16
As per E Ltd’s Plan
Rs. in lakhs
(i) Net consideration payable
6 lakhs shares x Rs. 110 660
(ii) No. of shares to be issued by T Ltd
Rs. 660 lakhs ÷ Rs. 220 or 6 lakh x 0.50 3 lakh
(iii) EPS of T Ltd after Acquisition
NPAT (as per earlier calculations) 300.00
Total no. of shares outstanding (12 lakhs + 3 lakhs) 15 lakh
Earning Per Share (EPS) Rs. 300 lakh/15 lakh Rs. 20.00
(iv) Expected Market Price (Rs. 20 x 11) 220.00
(c) Difference between Pass Through Certificates (PTCs) and Pay Through Security (PTS)
Pass Through Certificates (PTCs)
As the title suggests originator (seller of eh assets) transfers the entire receipt of cash in form of
interest or principal repayment from the assets sold. Thus, these securities represent direct claim
of the investors on all the assets that has been securitized through SPV.

© The Institute of Chartered Accountants of India

 Since all cash flows are transferred the investors carry proportional beneficial interest in the
asset held in the trust by SPV.
It should be noted that since it is a direct route any prepayment of principal is also proportionately
distributed among the securities holders. Further, due to these characteristics on completion of
securitization by the final payment of assets, all the securities are terminated simultaneously.
Skewness of cash flows occurs in early stage if principals are repaid before the scheduled time.
Pay Through Security (PTS)
As mentioned earlier, since, in PTCs all cash flows are passed to the performance of the
securitized assets. To overcome this limitation and limitation to single mature there is another
structure i.e. PTS.
In contrast to PTC in PTS, SPV debt securities backed by the assets and hence it can restructure
different tranches from varying maturities of receivables.
In other words, this structure permits desynchronization of servicing of securities issued from
cash flow generating from the asset. Further, this structure also permits the SPV to reinvest
surplus funds for short term as per their requirement.
Since, in Pass Through, all cash flow immediately in PTS in case of early retirement of
receivables plus cash can be used for short term yield. This structure also provides the freedom
to issue several debt trances with varying maturities.
OR
It is the Citi Bank who pioneered the concept of securitization in India by bundling of auto loans in
securitized instruments. Thereafter many organizations securitized their receivables. Although
started with securitization of auto loans it moved to other types of receivables such as sales tax
deferrals, aircraft receivable etc.
In order to encourage securitization, the Government has come out with Se curitization and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002,
to tackle menace of Non-Performing Assets (NPAs) without approaching to Court. With growing
sophistication of financial products in Indian Capital Market, securitization has occupied an
important place.
As mentioned above, though, initially started with auto loan receivables, it has become an
important source of funding for micro finance companies and NBFCs and even now a days
commercial mortgage backed securities are also emerging.The important highlight of the
scenario of securitization in Indian Market is that it is dominated by a few players e.g. ICICI Bank,
HDFC Bank, NHB etc.
As per a report of CRISIL, securitization transactions in India scored to the highest level of
approximately Rs. 70000 crores, in Financial Year 2016. (Business Line, 15th June, 2016) In
order to further enhance the investor base in securitized debts, SEBI allowed FPIs to invest in
securitized debt of unlisted companies upto a certain limit.
6. (a) (i) Total premium paid on purchasing a call and put option
= (Rs. 30 per share × 100) + (Rs. 5 per share × 100).
= 3,000 + 500 = Rs. 3,500
In this case, X exercises neither the call option nor the put option as both will result in a loss
for him.
Ending value = - Rs. 3,500 + zero gain = - Rs. 3,500
i.e Net loss = Rs. 3,500

10

© The Institute of Chartered Accountants of India

 (ii) Since the price of the stock is below the exercise price of the call, the call will not be
exercised. Only put is valuable and is exercised.
Total premium paid = Rs.3,500
Ending value = – Rs. 3,500 + Rs.[(450 – 350) × 100] = – Rs.3,500 + Rs.10,000 = Rs.6,500
 Net gain = Rs. 6,500
(iii) In this situation, the put is worthless, since the price of the stock exceeds the put’s exercise
price. Only call option is valuable and is exercised.
Total premium paid = Rs. 3,500
Ending value = -3,500 +[(600 – 550) × 100]
Net Gain = -3,500 + 5,000 = Rs.1,500
(b) The only thing lefts Rohit and Bros to cover the risk in the money market. The following steps are
required to be taken:
(i) Borrow pound sterling for 3- months. The borrowing has to be such that at the end of three
months, the amount becomes £ 500,000. Say, the amount borrowed is £ x. Therefore
 3
x 1  0.05   = 500,000 or x = £493,827
 12 
(ii) Convert the borrowed sum into rupees at the spot rate. This gives: £493,827 × Rs. 56 =
Rs. 27,654,312
(iii) The sum thus obtained is placed in the money market at 12 per cent to obtain at the end of
3- months:
 3
S = Rs. 27,654,312 × 1  0.12   = Rs. 28,483,941
 12 
(iv) The sum of £500,000 received from the client at the end of 3- months is used to refund the
loan taken earlier.
From the calculations. It is clear that the money market operation has resulted into a net
gain of Rs. 483,941 (Rs. 28,483,941 – Rs. 500,000 × 56).
If pound sterling has depreciated in the meantime. The gain would be even bigger.
(c) Pitch deck presentation is a short and brief presentation (not more than 20 minutes) to investors
explaining about the prospects of the company and why they should invest into the startup
business. So, pitch deck presentation is a brief presentation basically using PowerPoint to
provide a quick overview of business plan and convincing the investors to put some money into
the business. Pitch presentation can be made either during face to face meetings or online
meetings with potential investors, customers, partners, and co-founders. Here, some of the
methods have been highlighted below as how to approach a pitch presentation:
(i) Introduction
To start with, first step is to give a brief account of yourself i.e. who are you? What are you
doing? But care should be taken to make it short and sweet.
(ii) Team
The next step is to introduce the audience the people behind the scenes. The reason is that the
investors will want to know the people who are going to make the product or service successful.

11

© The Institute of Chartered Accountants of India

 (iii) Problem
Further, the promoter should be able to explain the problem he is going to solve and solutions
emerging from it. Further the investors should be convinced that the newly introduced product or
service will solve the problem convincingly.
(iv) Solution
It is very important to describe in the pitch presentation as to how the company is planning to
solve the problem.
(v) Marketing/Sales
This is a very important part where investors will be deeply interested. The market size of the
product must be communicated to the investors. This can include profiles of target customers,
but one should be prepared to answer questions about how the promoter is planning to attract
the customers.
(vi) Projections or Milestones
It is true that it is difficult to make financial projections for a startup concern. If an organization
doesn’t have a long financial history, an educated guess can be made. Projected financial
statements can be prepared which gives an organization a brief idea about where is the
business heading? It tells us that whether the business will be making profit or loss?
(vii) Competition
Every business organization has competition even if the product or service offered is new and
unique. It is necessary to highlight in the pitch presentation as to how the products or services
are different from their competitors.
(viii) Business Model
The term business model is a wide term denoting core aspects of a business including
purpose, business process, target customers, offerings, strategies, infrastructure, organizational
structures, sourcing, trading practices, and operational processes and policies including culture.
Every investor wants to get his money back, so it's important to tell them in a pitch presentation
as to how they should plan on generating revenue. It is better to show the investors a list of the
various revenue streams for a business model and the timeline for each of them.
(ix) Financing
If a startup business firm has raised money, it is preferable to talk about how much money has
already been raised, who invested money into the business and what they did about it.

12

© The Institute of Chartered Accountants of India

 Test Series: October, 2019
MOCK TEST PAPER 1
FINAL (NEW) COURSE
PAPER 1: FINANCIAL REPORTING
ANSWERS
1. (i) 1. Property, plant and equipment: As the land held for capital appreciation purposes
qualifies as investment property, such investment property should be reclassified
from property, plant and equipment (PPE) to investment property and presented
separately. As the Company has adopted the previous GAAP carrying values as
deemed cost, all items of PPE and investment property should be carried at its
previous GAAP carrying values. As such, the past capitalised exchange
differences require no adjustment in this case.
2. Investment in subsidiary: On first time adoption of Ind AS, a parent company has
an option to carry its investment in subsidiary at fair value as at the date of transition
in its separate financial statements. As such, the company can recognise such
investment at a value of Rs. 68,00,000.
3. Financial instruments: As the deferral loan is a financial liability under
Ind AS 109, that liability should be recognised at its present value discounted at an
appropriate discounting factor. Consequently, the deferral loan should be
recognised at Rs. 37,25,528 and the remaining Rs. 22,74,472 would be recognised
as deferred government grant.
4. ESOPs: Ind AS 101 provides an exemption of not restating the accounting as per
the previous GAAP in accordance with Ind AS 102 for all options that have vested
by the transition date. Accordingly, out of 1000 ESOPs granted, the first-tim e
adoption exemption is available on 800 options that have already vested. As such,
its accounting need not be restated. However, the 200 options that are not vested
as at the transition date, need to be restated in accordance with Ind AS 102. As
such, the additional impact of Rs. 1,000 (i.e., 9,000 less 8,000) would be recognised
in the opening Ind AS balance sheet.
5. Cumulative translation difference: As per paragraph D12 of Ind AS 101, the first-
time adopter can avail an exemption regarding requirements of Ind AS 21 in context
of cumulative translation differences. If a first-time adopter uses this exemption the
cumulative translation differences for all foreign operation are deemed to be zero as
at the transition date. In that case, the balance is transferred to retained earnings.
As such, the balance of Rs. 1,00,000 should be transferred to retained earnings.

© The Institute of Chartered Accountants of India

 6. Retained earnings should be increased by Rs. 20,99,000 on account of the following:
Rs.
Increase in fair value of investment in subsidiary (note 2) 20,00,000
Additional ESOP charge on unvested options (note 4) (1,000)
Transfer of cumulative translation difference balance to retained 1,00,000
earnings (note 5)
After the above adjustments, the carrying values of assets and liabilities for the
purpose of opening Ind AS balance sheet of Company H should be as under:
Particular Notes Previous Adjustments Ind AS GAAP
Non-Current Assets
Property, plant and 1 1,34,50,000 (4,50,000) 1,30,00,000
equipment
Investment property 1 0 4,50,000 4,50,000
Investment in S Ltd. 2 48,00,000 20,00,000 68,00,000
Advances for 50,00,000
purchase of inventory 50,00,000
Current Assets
Debtors 2,00,000 2,00,000
Inventory 8,00,000 8,00,000
Cash 49,000 49,000
Total assets 2,42,99,000 20,00,000 2,62,99,000
Non-current Liabilities
Deferral loan 3 60,00,000 (22,74,472) 37,25,528
Deferred government 3 0 22,74,472 22,74,472
grant
Current Liabilities
Creditors 30,00,000 30,00,000
Short term borrowing 8,00,000 8,00,000
Provisions 12,00,000 12,00,000
Total liabilities 1,10,00,000 1,10,00,000
Share capital 1,30,00,000 1,30,00,000
Reserves:

© The Institute of Chartered Accountants of India

 Cumulative
translation difference 5 1,00,000 (1,00,000) 0
ESOP reserve 4 20,000 1,000 21,000
Other reserves 6 1,79,000 20,99,000 22,78,000
Total equity 1,32,99,000 20,00,000 1,52,99,000
Total equity and 2,42,99,000 20,00,000 2,62,99,000
liabilities
(b) (a) Value of investment in Meru Ltd. as on 31 st March, 20X2 as per equity
method in the consolidated financial statements of Sumeru Ltd.
Rs.
Cost of Investment 3,00,00,000
Less: Share in Post-acquisition Loss (1,00,00,000 x 35%) (35,00,000)
Less: Unrealised gain on inventory left unsold with Meru Ltd.
[{(50,000/3,00,000) x 1,00,000} x 35%] (5,833)
Carrying value as per Equity method 2,64,94,167

(b) Value of investment in Meru Ltd. as on 31 st March, 20X2 as per equity

method in the consolidated financial statements of Sumeru Ltd.
Rs.
Cost of Investment 3,00,00,000
Add: Share in Post-Acquisition Profit (1,50,00,000 x 35%) 52,50,000
Less: Unrealised gain on inventory left unsold with Meru Ltd.
[{(50,000/3,00,000) x 1,00,000} x 35%] (5,833)
Less: Dividend (75,00,000 x 35%) (26,25,000)
Carrying value as per Equity method 3,26,19,167
2. (a) Extract of the Balance Sheet of RKA Private Ltd as at 31 st March, 20X2
Rs. in lacs
Closing net defined liability (1,580 – 1,275) lacs 305
Extract of the Statement of Profit or Loss of RKA Private Ltd for the year ended
31st March, 20X2
Particulars Rs. in lacs
Service cost 55
Net interest (Refer W.N.1) 21
3

© The Institute of Chartered Accountants of India

 Profit or loss 76
Other comprehensive income:
Remeasurements (Refer W.N.2) 80
Total 156
(b) Journal entries in the books of RKA Private Ltd
Particulars Rs in lacs Rs in lacs
Profit & Loss Dr. 76
Other comprehensive income Dr. 80
To Cash (Contribution) 111
To Net defined benefit liability (Refer WN 3) 45

Working Notes:
1. Computation of Net interest taken to the Statement of Profit or Loss
= Discount rate x Opening net defined benefit liability
= 8% x (1,400 – 1,140) lacs
= 8% x 260 lacs
= 21 lacs (Rounded off to nearest lacs)
2. Computation of Remeasurements
Actuarial gain or loss on defined benefit liability:
Particulars Rs. in lacs
Opening balance of liability 1,400
Current service cost 55
Interest on opening liability (1,400 x 8%) 112
Actuarial loss (Bal. fig) 13
Closing balance of liability 1,580

Actual return on plan assets:

Particulars Amount Rs. In lacs
Opening balance of asset 1,140
Cash contribution 111
Actual return (Bal. fig) 24
Closing balance of asset 1,275

© The Institute of Chartered Accountants of India

 Net interest on opening balance of plan asset = Rs. 91 lacs (i.e. Rs. 1,140 lacs x
8%) (Rounded off to nearest lacs)
Hence there is a decrease in plan assets due to remeasurement for which
computation is as follows:
Actual Return – Net interest on opening plan asset
= Rs. 24 lacs – Rs. 91 lacs
= Rs. 67 lacs.
Net remeasurement would be computed as follows:
Actuarial loss on liability + Loss on return
= Rs. 13 lacs + Rs. 67 lacs
= Rs. 80 lacs.
3. Computation of increase/ decrease in net defined benefit liability:

Particulars ` in lacs
Opening net liability (` 1,400 lacs – ` 1,140 lacs) 260
Closing net liability (` 1,580 lacs – ` 1,275 lacs) 305
Increase in liability 45

(b) Paragraph 37 of Ind AS 103, inter alia, provides that the consideration transferred in a
business combination should be measured at fair value, which should be calculated as
the sum of (a) the acquisition-date fair values of the assets transferred by the acquirer,
(b) the liabilities incurred by the acquirer to former owners of the acquiree and (c) the
equity interests issued by the acquirer.
Further, paragraph 39 of Ind AS 103 provides that the consideration the acquirer transfers
in exchange for the acquiree includes any asset or liability resulting from a contingent
consideration arrangement. The acquirer shall recognise the acquisition-date fair value of
contingent consideration as part of the consideration transferred in exchange for the
acquiree.
With respect to contingent consideration, obligations of an acquirer under contingent
consideration arrangements are classified as equity or a liability in accordance with Ind
AS 32 or other applicable Ind AS, i.e., for the rare case of non-financial contingent
consideration. Paragraph 40 provides that the acquirer shall classify an obligation to pay
contingent consideration that meets the definition of a financial instrument as a financial
liability or as equity on the basis of the definitions of an equity instrument and a fina ncial
liability in paragraph 11 of Ind AS 32, Financial Instruments: Presentation. The acquirer
shall classify as an asset a right to the return of previously transferred consideration if
5

© The Institute of Chartered Accountants of India

 specified conditions are met. Paragraph 58 of Ind AS 103 provides guidance on the
subsequent accounting for contingent consideration.
i) In the given case the amount of purchase consideration to be recognised on initial
recognition shall be as follows:
Fair value of shares issued (10,00,000 x Rs. 20) Rs. 2,00,00,000
Fair value of contingent consideration Rs. 25,00,000
Total purchase consideration Rs. 2,25,00,000

Subsequent measurement of contingent consideration payable for business

combination
In general, an equity instrument is any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities. Ind AS 32 describes an
equity instrument as one that meets both of the following conditions:
❖ There is no contractual obligation to deliver cash or another financial asset to
another party, or to exchange financial assets or financial liabilities with another
party under potentially unfavourable conditions (for the issuer of the
instrument).
❖ If the instrument will or may be settled in the issuer's own equity instruments,
then it is:
▪ a non-derivative that comprises an obligation for the issuer to deliver a
fixed number of its own equity instruments; or
▪ a derivative that will be settled only by the issuer exc hanging a fixed
amount of cash or other financial assets for a fixed number of its own
equity instruments.
In the given case, given that the acquirer has an obligation to issue fixed number of
shares on fulfilment of the contingency, the contingent consideration will be classified
as equity as per the requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity
should not be re-measured and its subsequent settlement should be accounted for
within equity.
Here, the obligation to pay contingent consideration amounting to Rs. 25,00,000 is
recognised as a part of equity and therefore not re-measured subsequently or on
issuance of shares.

© The Institute of Chartered Accountants of India

 ii) The amount of purchase consideration to be recognised on initial recognition is shall
be as follows:
Fair value shares issued (10,00,000 x Rs. 20) Rs. 2,00,00,000
Fair value of contingent consideration Rs. 25,00,000
Total purchase consideration Rs. 2,25,00,000
Subsequent measurement of contingent consideration payable for business
combination
The contingent consideration will be classified as liability as per Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration not classified as equity
should be measured at fair value at each reporting date and changes in fair value
should be recognised in profit or loss.
As at 31 March 20X2, (being the date of settlement of contingent consideration), the
liability would be measured at its fair value and the resulting loss of Rs. 15,00,000
(Rs. 40,00,000 - Rs. 25,00,000) should be recognised in the profit or loss for the
period. A Ltd. would recognise issuance of 160,000 (Rs. 40,00,000/ 25) shares at a
premium of Rs. 15 per share.
3. (a) Threshold amount is Rs. 10,00,000 (Rs. 1,00,00,000 x 10%).
Segment A exceeds the quantitative threshold (Rs. 30,00,000 > Rs. 10,00,000) and hence
reportable segment.
Segment D exceeds the quantitative threshold (Rs. 54,00,000 > Rs. 10,00,000) and hence
reportable segment.
Segment B & C do not meet the quantitative threshold amount and may not be classified
as reportable segment.
However, the total external revenue generated by these two segments A & D represent
only 70% (Rs. 35,00,000 / 50,00,000 x 100) of the entity’s total external revenue. If the
total external revenue reported by operating segments constitutes less than 75% of the
entity total external revenue, additional operating segments should be identified as
reportable segments until at least 75% of the revenue is included in reportable segments.
In case of X Ltd., it is given that Segment C is a new business unit and management
expect this segment to make a significant contribution to external revenue in coming
years. In accordance with the requirement of Ind AS 108, X Ltd. designates this start-up
segment C as a reportable segment, making the total external revenue attributable to
reportable segments 87% (Rs. 43,50,000 / 50,00,000 x 100) of total entity revenues.
(b) As per Ind AS 17, Leases:
(a) Since sale price is equal to fair value, profit of Rs. 10 lakhs (i.e., Rs. 60 lakhs –
7

© The Institute of Chartered Accountants of India

 Rs. 50 lakhs) is to be recognised as income immediately.
(b) Assuming, the loss is not compensated by future lease payments at below market
price, the loss of Rs. 5 lakhs (i.e., Rs. 50 lakhs – Rs. 45 lakhs) should be recognised
immediately in the profit and loss account. In case, the loss is compensated by future
lease payments at below market price, then the loss of Rs. 5 lakhs should be
deferred and amortised in proportion to the lease payments over the period for which
the asset is expected to be used.
(c) Profit of Rs. 7 lakhs (i.e., Rs. 62 lakhs – Rs. 55 lakhs) should be deferred and
amortised over the period for which the asset is expected to be used. Profit of
Rs. 5 lakhs (i.e., Rs. 55 lakhs – Rs. 50 lakhs) should be recognised immediately.
(d) Rs. 3 lakhs (i.e., Rs. 48 lakhs – Rs. 45 lakhs) should be deferred and amortised over
the period for which the asset is expected to be used. Loss of Rs. 5 lakhs (i.e.,
Rs. 50 lakhs – Rs. 45 lakhs) should be recognised immediately in the profit and loss
account.
(c) As per para 7 of Ind AS 110 / IFRS 10, an investor controls an investee if and only if the
investor has all the following:
1. Power over the investee
Further, as per para 10 of the standard, an investor has power over an investee when
the investor has existing rights that give it the current ability to direct the relevant
activities, ie the activities that significantly affect the investee’s returns.
2. Exposure, or rights, to variable returns from its involvement with the investee
As per para 15 of the standard, an investor is exposed, or has rights, to variable
returns from its involvement with the investee when the investor’s returns from its
involvement have the potential to vary as a result of the investee’s performance.
3. The ability to use its power over the investee to affect the amount of the investor’s
returns
An investor is exposed, or has rights, to variable returns from its involvement with
the investee when the investor’s returns from its involvement have the potential to
vary as a result of the investee’s performance. The investor’s returns can be only
positive, only negative or both positive and negative.
Based on the above guidance, following can be concluded:
(a) Tee limited has acquired 48% in Kay Limited. The purpose of acquiring the
shares by Tee limited in it is to substantiate their position in the industry. Kay
Limited is a specialist entity that is engaged in advanced research in weapons.
Acquiring Kay Limited will help Tee limited to gain access to their research
8

© The Institute of Chartered Accountants of India

 which would complement Tee limited’s operations and business of developing
light weight and medium weight guns.
The key management personnel who holds 52% shares of Kay Limited are key
for running Kay Limited’s business of advanced research and will help Tee
limited to acquire the market through ground breaking advanced researches of
Kay Limited. In case of acquisition of 52% stake of Kay Limited, the key
management personnel may leave the organisation and in such a situation Tee
limited will not enjoy any economic benefit or infact will lose the benefit of
unique technical knowledge of those 11 experts.
Hence, Tee limited would not be able to use its power over Kay Limited to affect
the amount of its returns which is one of the essential criteria to assess the
control, so there is no control of Tee limited on Kay Limited.
(b) Even though Tee limited has acquired 51% stake in Kay Limited yet it does not
have power over Kay Limited as it would not be able to exercise its existing
rights that give it the current ability to direct the relevant activities, ie the
activities that significantly affect the investee’s returns. In other words, the
relevant activity of Kay Limited is advance research in weapons which will help
Tee limited to substantiate their position. However, the research, development
and production will start only after stringent approval process of the defence
ministry of the Central Government. Thus regulations prevent Tee limited to
direct the relevant activity of Kay Limited which ultimately lead to prevent Tee
Limited to have control.
(d) (i) As per para 14 (b) of Ind AS 33 “Earnings per share”, “The after-tax amount of
preference dividends that is deducted from profit or loss is the after-tax amount of
the preference dividends for cumulative preference shares required for the period,
whether or not the dividends have been declared. The amount of preference
dividends for the period does not include the amount of any preference dividends for
cumulative preference shares paid or declared during the current period in respect
of previous periods”.
In the given case, the amount of preference dividends Rs.1.75 crores declared for
the year ended March 31, 20X2 (i.e., the current period) is to be deducted from profit
or loss for calculating EPS.
(ii) As per para 36 of Ind AS 33 “Earnings per share’, “For the purpose of calculating
diluted earnings per share, the number of ordinary shares shall be the weighted
average number of ordinary shares plus the weighted average number of ordinary
shares that would be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares. Dilutive potential ordinary shares shall be deemed to
have been converted into ordinary shares at the beginning of the period or, if later,
the date of the issue of the potential ordinary shares”.

© The Institute of Chartered Accountants of India

4. (a) (a) Points earned on Rs. 10,00,000 @ 10 points on every Rs. 500 = [(10,00,000/500) x
10] = 20,000 points.
Value of points = 20,000 points x Rs. 0.5 each point = Rs. 10,000
Revenue recognized for sale Rs. 9,90,099 [10,00,000 x
of goods (10,00,000/10,10,000)]
Revenue for points deferred Rs. 9,901 [10,00,000 x (10,000/10,10,000)]
Journal Entry
Rs. Rs.
Bank A/c Dr. 10,00,000
To Sales A/c 9,90,099
To Liability under Customer Loyalty programme 9,901
(b) Points earned on Rs. 50,00,00,000 @ 10 points on every Rs. 500 =
[(50,00,00,000/500) x 10] = 1,00,00,000 points.
Value of points = 1,00,00,000 points x Rs. 0.5 each point = Rs. 50,00,000
Revenue recognized for sale of goods = Rs. 49,50,49,505 [50,00,00,000 x
(50,00,00,000 / 50,50,00,000)]
Revenue for points = Rs. 49,50,495 [50,00,00,000x (50,00,000 / 50,50,00,000)]
Journal Entry in the year 20X1
Rs. Rs.
Bank A/c Dr. 50,00,00,000
To Sales A/c 49,50,49,505
To Liability under Customer Loyalty 49,50,495
programme
(On sale of Goods)
Liability under Customer Loyalty Dr. 42,11,002
programme
To Sales A/c 42,11,002
(On redemption of (100 lakhs -18 lakhs)
points)

Revenue for points to be recognized

Undiscounted points estimated to be recognized next year 18,00,000 x 80%
= 14,40,000 points
Total points to be redeemed within 2 years = [(1,00,00,000-18,00,000) + 14,40,000]
10

© The Institute of Chartered Accountants of India

 = 96,40,000
Revenue to be recognised with respect to discounted point
= 49,50,495 x (82,00,000/96,40,000) = 42,11,002
(c) Revenue to be deferred with respect to undiscounted point in 20X1-20X2
= 49,50,495 – 42,11,002 = 7,39,493
(d) In 20X2-20X3, KK Ltd. would recognize revenue for discounting of 60% of
outstanding points as follows:
Outstanding points = 18,00,000 x 60% = 10,80,000 points
Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points
Revenue to be recognized in the year 20X2-20X3
= [{49,50,495 x (92,80,000 / 96,40,000)} - 42,11,002] = Rs. 5,54,620.
Liability under Customer Loyalty programme Dr. 5,54,620
To Sales A/c 5,54,620
(On redemption of further 10,80,000 points)

The Liability under Customer Loyalty programme at the end of the year 20X2-20X3
will be Rs. 7,39,493 – 5,54,620 = 1,84,873.
(e) In the year 20X3-20X4, the merchant will recognized the balance revenue of Rs.
1,84,873 irrespective of the points redeemed as this is the last year for redeeming
the points. Journal entry will be as follows:
Liability under Customer Loyalty programme Dr. 1,84,873
To Sales A/c 1,84,873
(On redemption of remaining points)
(b) Statement of cash flows
Particulars Amount (Rs.)
Cash flows from operating activities
Profit before taxation (10,00,000 + 18,00,000) 28,00,000
Adjustment for unrealised exchange gains/losses:
Foreign exchange gain on long term loan
[€ 2,00,000 x Rs. (50 – 45)] (10,00,000)
Decrease in trade payables
[1,00,000 x Rs. (50 – 45)] (5,00,000)
Operating Cash flow before working capital changes 13,00,000

11

© The Institute of Chartered Accountants of India

 Changes in working capital (Due to increase in trade
payables) 50,00,000
Net cash inflow from operating activities 63,00,000
Cash inflow from financing activity 50,00,000
Net increase in cash and cash equivalents 1,13,00,000
Cash and cash equivalents at the beginning of the 2,00,000
period
Cash and cash equivalents at the end of the period 1,15,00,000
5. (a) This is a compound financial instrument with two components – liability representing
present value of future cash outflows and balance represents equity component.
a. Computation of Liability & Equity Component
Date Particulars Cash Discount Net present
Flow Factor Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.869565 130,434.75
31-Mar-20X3 Dividend 150,000 0.756144 113,421.6
31-Mar-20X4 Dividend 150,000 0.657516 98,627.4
31-Mar-20X5 Dividend 150,000 0.571753 85,762.95
31-Mar-20X6 Dividend 150,000 0.497177 74,576.55
Total Liability 502,823.25
Component
Total Proceeds 1,500,000.00
Total Equity
Component (Bal fig) 997,176.75
b. Allocation of transaction costs

Particulars Amount Allocation Net Amount

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

c. Accounting for liability at amortised cost:

- Initial accounting = Present value of cash outflows less transaction costs
- Subsequent accounting = At amortised cost, ie, initial fair value adjusted for
interest and repayments of the liability.
12

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 Assume the effective interest rate is 15.86%
Opening Interest Cash Closing
Financial B Flow Financial
Liability C Liability
A A+B-C
01-Apr-20X1 492,767 - - 4,92,767
31-Mar-20X2 492,767 78,153 150,000 4,20,920
31-Mar-20X3 420,920 66,758 150,000 3,37,678
31-Mar-20X4 337,678 53,556 150,000 2,41,234
31-Mar-20X5 241,234 38,260 150,000 1,29,494
31-Mar-20X6 129,494 20,506 150,000 -
d. Journal Entries to be recorded for entire term of arrangement are as follows:
Date Particulars Debit Credit
01-Apr-20X1 Bank A/c Dr. 1,470,000
To Preference Shares A/c 492,767
To Equity Component of Preference 977,233
shares A/c
(Being compulsorily convertible preference
shares issued. The same are divided into
equity component and liability component as
per the calculation)
31-Mar-20X2 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10%
paid to the shareholders)
31-Mar-20X2 Finance cost A/c Dr. 78,153
To Preference Shares A/c 78,153
(Being interest as per EIR method recorded)
31-Mar-20X3 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10%
paid to the shareholders)
31-Mar-20X3 Finance cost A/c Dr. 66,758
To Preference Shares A/c 66,758
(Being interest as per EIR method recorded)

13

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 31-Mar-20X4 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10%
paid to the shareholders)
31-Mar-20X4 Finance cost A/c Dr. 53,556
To Preference Shares A/c 53,556
(Being interest as per EIR method recorded)
31-Mar-20X5 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10%
paid to the shareholders)
31-Mar-20X5 Finance cost A/c Dr. 38,260
To Preference Shares A/c 38,260
(Being interest as per EIR method recorded)
31-Mar-20X6 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10%
paid to the shareholders)
31-Mar-20X6 Finance cost A/c Dr. 20,506
To Preference Shares A/c 20,506
(Being interest as per EIR method recorded)
31-Mar-20X6 Equity Component of Preference shares 977,233
A/c Dr.
To Equity Share Capital A/c 50,000
To Securities Premium A/c 927,233
(Being Preference shares converted in
equity shares and remaining equity
component is recognised as securities
premium)
(b) At 31st March, 20X4:
`
Asset at valuation (1) 1,26,600
Accumulated depreciation Nil
Decommissioning liability (11,600)

14

© The Institute of Chartered Accountants of India

 Net assets 1,15,000
Retained earnings (2) (10,600)
Revaluation surplus (3) 5,600

Notes:
(1) When accounting for revalued assets to which decommissioning liabilities attach,
it is important to understand the basis of the valuation obtained. For example:
(a) if an asset is valued on a discounted cash flow basis, some valuers may value
the asset without deducting any allowance for decommissioning costs (a
‘gross’ valuation), whereas others may value the asset after deducting an
allowance for decommissioning costs (a ‘net’ valuation), because an entity
acquiring the asset will generally also assume the decommissioning
obligation. For financial reporting purposes, the decommissioning obligation
is recognised as a separate liability, and is not deducted from the asset.
Accordingly, if the asset is valued on a net basis, it is necessary to adjust the
valuation obtained by adding back the allowance for the liability, so that the
liability is not counted twice.
(b) if an asset is valued on a depreciated replacement cost basis, the valuation
obtained may not include an amount for the decommissioning component of
the asset. If it does not, an appropriate amount will need to be added to the
valuation to reflect the depreciated replacement cost of that component.
Since, the asset is valued on a net basis, it is necessary to adjust the valuation
obtained by adding back the allowance for the liability. Valuation obtained of `
1,15,000 plus decommissioning costs of ` 11,600, allowed for in the valuation but
recognised as a separate liability = ` 1,26,600.
(2) Three years’ depreciation on original cost ` 1,20,000 × 3/40 = ` 9,000 plus
cumulative discount on ` 10,000 at 5 per cent compound = ` 1,600; total ` 10,600.
(3) Revalued amount ` 1,26,600 less previous net book value of ` 1,11,000 (cost `
120,000 less accumulated depreciation ` 9,000).
The depreciation expense for 20X4-20X5 is therefore ` 3,420 (` 1,26,600 x 1 / 37) and
the discount expense for 20X5 is ` 600. On 31st March, 20X5, the decommissioning
liability (before any adjustment) is ` 12,200. However, as per estimate of the entity, the
present value of the decommissioning liability has decreased by ` 5,000. Accordingly,
the entity adjusts the decommissioning liability from ` 12,200 to ` 7,200.
The whole of this adjustment is taken to revaluation surplus, because it does not exceed
the carrying amount that would have been recognised had the asset been carried under

15

© The Institute of Chartered Accountants of India

 the cost model. If it had done, the excess would have been taken to profit or loss. The
entity makes the following journal entry to reflect the change:
` `
Provision for decommissioning liability Dr. 5,000
To Revaluation surplus 5,000
As at 31st March, 20X5, the entity revalued its asset at ` 1,07,000, which is net of an
allowance of ` 7,200 for the reduced decommissioning obligation that should be
recognised as a separate liability. The valuation of the asset for financial reporting
purposes, before deducting this allowance, is therefore ` 1,14,200. The following
additional journal entry is needed:
Notes:
` `
Accumulated depreciation (1) Dr. 3,420
To Asset at valuation 3,420
Revaluation surplus (2) Dr. 8,980
To Asset at valuation (3) 8,980

(1) Eliminating accumulated depreciation of ` 3,420 in accordance with the entity’s

accounting policy.
(2) The debit is to revaluation surplus because the deficit arising on the revaluation
does not exceed the credit balance existing in the revaluation surplus in respect of
the asset.
(3) Previous valuation (before allowance for decommissioning costs) ` 1,26,600, less
cumulative depreciation ` 3,420, less new valuation (before allowance for
decommissioning costs) ` 1,14,200.
Following this valuation, the amounts included in the balance sheet are:
Asset at valuation 1,14,200
Accumulated depreciation Nil
Decommissioning liability (7,200)
Net assets 1,07,000
Retained earnings (1) (14,620)
Revaluation surplus (2) 11,620

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© The Institute of Chartered Accountants of India

 Notes:
(1) ` 10,600 at 31st March, 20X4, plus depreciation expense of ` 3,420 and discount
expense of ` 600 = ` 14,620.
(2) ` 15,600 at 31st March, 20X4, plus ` 5,000 arising on the decrease in the liability,
less ` 8,980 deficit on revaluation = ` 11,620.
Following this valuation, the amounts included in the balance sheet are:
Asset at valuation 1,14,200
Accumulated depreciation Nil
Decommissioning liability (7,200)
Net assets 1,07,000
Retained earnings (1) (14,620)
Revaluation surplus (2) 11,620
Notes:
(1) ` 10,600 at 31st March, 20X4, plus depreciation expense of ` 3,420 and discount
expense of ` 600 = ` 14,620.
(2) ` 15,600 at 31st March, 20X4, plus ` 5,000 arising on the decrease in the liability,
less ` 8,980 deficit on revaluation = ` 11,620.
6. (a) Ind AS 38 specifically prohibits recognising advertising expenditure as an intangible asset.
Irrespective of success probability in future, such expenses have to be recognized in profit
or loss. Therefore, the treatment given by the accountant is correct since such costs
should be recognised as expenses.
However, the costs should be recognised on an accruals basis.
Therefore, of the advertisements paid for before 31st March, 20X2, Rs. 7,00,000 would be
recognised as an expense and Rs. 1,00,000 as a pre-payment in the year ended
31st March 20X2.
Rs. 4,00,000 cost of advertisements paid for since 31 st March, 20X2 would be charged as
expenses in the year ended 31st March, 20X3.
OR
As at 31st March, 20X1, the mature plantation would have been valued at 17,100
(171 x 100).
As at 31st March, 20X2, the mature plantation would have been valued at 16,500
(165 x 100).

17

© The Institute of Chartered Accountants of India

 Assuming immaterial cash flow between now and the point of harvest, the fair value (and
therefore the amount reported as an asset on the statement of financial position) of the
plantation is estimated as follows:
As at 31st March, 20X1: 17,100 x 0.312 = 5,335.20.
As at 31st March, 20X2: 16,500 x 0.331 = 5,461.50.
Gain or loss
The difference in fair value of the plantation between the two year end dates is 126.30
(5,461.50 – 5,335.20), which will be reported as a gain in the statement or profit or loss
(regardless of the fact that it has not yet been realised).
(b) A company which meets the net worth, turnover or net profits criteria in immedi ate
preceding financial year will need to constitute a CSR Committee and comply with
provisions of sections 135 (2) to (5) read with the CSR Rules.
As per the criteria to constitute CSR committee -
1) Net worth greater than or equal to Rs. 500 Crores: This criterion is not satisfied.
2) Sales greater than or equal to Rs. 1000 Crores: This criterion is not satisfied.
3) Net Profit greater than or equal to Rs. 5 Crores: This criterion is satisfied in financial
year ended March 31, 20X3 ie immediate preceding financial year.
Hence, the Company will be required to form a CSR committee.
(c) (a) It seems that the equity shares are acquired for the purpose of selling it in the near
term and therefore are held for trading. Such investments have been appropriately
classified as subsequently measured at fair value through profit or loss. Such
investments in equity shares cannot be classified as subsequently measured at fair
value through other comprehensive income. The option to measure investment in
equity shares at fair value through other comprehensive income has to be made at
initial recognition. Therefore, equity shares that were held for trading previously
cannot be reclassified to fair value through other comprehensive income due to
change in business model to not held for trading.
(b) In absence of contractual terms of NCDs, it is assumed that the contractual terms
give rise on specified dates to cash flows that are solely payment of principal and
interest on the principal outstanding. The business model also includes sales of
these instruments on a regular basis. Hence, these instruments will be classified as
FVTOCI. Therefore, such NCD investments shall be classified as subsequently
measured at Fair Value through Other Comprehensive Income. The classification
does not change based on whether the investment is current or non-current as the
end of the reporting period. It seems the company has previously classified these
investments at fair value through profit or loss. The company must rectify this by
reclassifying as FVTOCI.
18

© The Institute of Chartered Accountants of India

 Test Series: May, 2020
MOCK TEST PAPER 1
FINAL (NEW) COURSE
PAPER 1: FINANCIAL REPORTING
ANSWERS
1. (a) Statement showing Cost of production line:
Particulars Amount
Rs.’000
Purchase cost 10,000
Goods and services tax – recoverable goods and services tax not included -
Employment costs during the period of getting the production line ready for use 800
(1,200 x 2 months / 3 months)
Other overheads – abnormal costs 600
Payment to external advisors – directly attributable cost 500
Dismantling costs – recognized at present value where an obligation exists 1,360
(2,000 x 0.68)
Total 13,260
Carrying value of production line as on 31 st March, 20X2:
Particulars Amount
Rs. ’000
Cost of Production line 13,260
Less: Depreciation (W.N.1) (1,694)
Net carrying value carried to Balance Sheet 11,566
Provision for dismantling cost:
Particulars Amount
Rs. ’000
Non-current liabilities 1,360
Add: Finance cost (WN3) 57
Net book value carried to Balance Sheet 1,417
Extract of Statement of Profit & Loss
Particulars Amount
Rs. ’000
Depreciation (W.N.1) 1,694
Finance cost (W.N.2) 57
Amounts carried to Statement of Profit & Loss 1,751
Extract of Balance Sheet
Particulars Amount
Rs. ’000
Assets
Non-current assets

© The Institute of Chartered Accountants of India

 Property, plant and equipment 11,566
Equity and liabilities
Non-current liabilities
Other liabilities
Provision for dismantling cost 1417
Working Notes:
1. Calculation of depreciation charge
Particulars Amount
Rs. ’000
In accordance with Ind AS 16 the asset is split into two depreciable
components: Out of the total capitalization amount of 13,260,
Depreciation for 3,000 with a useful economic life (UEL) of four years
(3,000x ¼ x10/12). 625
This is related to a major overhaul to ensure that it generates economic
benefits for the second half of its useful life
For balance amount, depreciation for 10,260 with an useful economic life 1,069
(UEL) of eight years will be : 10,260 x 1/8 x 10/12
Total (To Statement of Profit & Loss for the year ended 31st March 20X2) 1,694
2. Finance costs
Particulars Amount
Rs. ’000
Unwinding of discount (Statement of Profit and Loss – finance cost) 57
1,360 x 5% x 10/12
To Statement of Profit & Loss for the year ended 31 st March 20X2 57
(b) Method I : NCI measured at Fair value
Method II: NCI measured at proportionate share of identifiable net assets
Method I Method II
Rs.’000 Rs.’000
Cost of investment
Share exchange (12 million x 75% x2/3 xRs.6·50) 39,000 39,000
Deferred consideration (7.15 million/1.10) 6,500 6,500
Contingent consideration 25,000 25,000
Non-controlling interest at date of acquisition:
Fair value – 3 million x Rs.6·00 18,000
% of net assets – 68,000 (W.N.1) x 25% 17,000
88,500 87,500
Net assets at date of acquisition (W.N.1) (68,000) (68,000)
Goodwill on acquisition 20,50019,500

© The Institute of Chartered Accountants of India

 Impairment – 10% 2,050 1,950
Where the NCI is measured at fair value, the impairment should be attributed partly to retained
earnings and partly to NCI. The allocation is normally based on the group structure (75/25 in this
case).
Where the NCI is measured at % of net assets, the impairment should be attributed wholly to
retained earnings.
Working Notes:
1. Net assets at date of acquisition
Rs. ’000
Fair value at acquisition date 70,000
Deferred tax on fair value adjustments (20% x(70,000 – 60,000)) (2,000)
68,000
2. (a) As per Ind AS 8 ‘Accounting Policies, Accounting Estimates and Errors, prospective application of a
change in accounting policy has to be done since retrospective application is not practicable.
Property, plant and equipment at the end of 31st March,20X2:
Rs.
As per the engineering survey:
Valuation of PPE 17,000
Estimated residual value 3,000
Average remaining asset life (years) 7
Depreciation expense on existing property, plant and equipment
for 20X1-20X2 (new basis)(17,000 – 3,000)/7 2,000
From the start of 20X1-20X2, Blue Ocean group changed its accounting policy for depreciating
property, plant and equipment, so as to apply components approach, whilst at the same time
adopting the revaluation model. Management takes the view that this policy provides reliable and
more relevant information because it deals more accurately with the components of property,
plant and equipment and is based on up-to-date values.
The policy has been applied prospectively from the start of the year 20X1-20X2 because it was
not practicable to estimate the effects of applying the policy either retrospectively or prospectively
from any earlier date. Accordingly, the adoption of the new policy has no effect on prior years.
The impact on the financial statements for 20X1-20X2 would be as under:
Particulars Rs.
Increase the carrying amount of property, plant and equipment at the start of 6,000
the year (17,000-11,000)
Increase the opening deferred tax provision (6,000 x 30%) 1,800
Create a revaluation surplus at the start of the year (6,000 – 1,800) 4,200
Increase depreciation expense by (Rs.2,000 – Rs.1,500) 500
Reduce tax expense on depreciation (30%) 150

© The Institute of Chartered Accountants of India

 (b) Balance Sheet as at 31st March, 20X2 (Extracts)
Financial Assets: Rs.
Interest rate option (W.N.1) 15,250
6% Debentures in Fox Ltd. (W.N.2) 1,53,000
Shares in Cox Ltd. (W.N.3) 1,87,500
Statement of Profit and Loss (Extracts)
Finance Income:
Gain on interest rate option (W.N.1) 5,250
Effective interest on 6% Debentures (W.N.2) 12,000
Working Notes:
1. Interest rate option
This is a derivative and so it must be treated as at fair value through profit or loss
Particulars Rs. Rs.
Initial measurement (at cost)
Financial Asset Dr. 10,000
To Cash A/c 10,000
At 31st March, 20X2
Particulars Rs. Rs.
(Re-measured to fair value)
Financial Asset (Rs. 15,250 - Rs.10,000) Dr. 5,250
To Profit and loss A/c 5,250
Financial Assets (Rs.10,000 + Rs.5,250) = Rs.15,250 (Balance Sheet)
Gain on interest option = Rs.5,250 (Statement of Profit and Loss)
2. Debentures
On the basis of information provided, this can be treated as a held-to-maturity investment
Particulars Rs. Rs.
Initial measurement (at cost)
Financial Asset Dr. 1,50,000
To Cash A/c 1,50,000
At 31st March, 20X2 (Amortized cost)
Particulars Rs. Rs.
Financial Asset (Rs.1,50,000 x 8%) Dr. 12,000
To Finance Income 12,000

Cash (Rs. 1,50,000 x 6%) Dr. 9,000

To Financial asset 9,000

© The Institute of Chartered Accountants of India

 Amortized cost at 31st March, 20X2
(Rs. 150,000 + Rs. 12,000 – Rs. 9,000) = Rs. 153,000 (Balance Sheet)
Effective interest on 6% debenture = Rs. 12,000 (Statement of Profit and Loss)
3. Shares in Cox Ltd.
These are treated as an available for sale financial asset (shares cannot normally be held to
maturity and they are clearly not loans or receivables)
Particulars Rs. Rs.
Initial measurement (at cost)
Financial Asset (Rs.50,000 x Rs.3.50) Dr. 1,75,000
To Cash A/c 1,75,000
At 31stMarch, 20X2 (Re-measured at fair value)
Particulars Rs. Rs.
Financial Asset [(Rs.50,000 x 3.75) – 1,75,000] Dr. 12,500
To Other Equity A/c 12,500
Shares in Cox Ltd (Rs.1,75,000 + Rs.12,500) = Rs.1,87,500 (Balance Sheet)
(c) As per paragraph 9 of Ind AS 24, Related Party Disclosures, “Key management personnel are
those persons having authority and responsibility for planning, directing and controlling the
activities of the entity, directly or indirectly, including any director (whether executive or
otherwise) of that entity.”
Accordingly, key management personnel (KMP) includes any director of the entity who are having
authority and responsibility for planning, directing and controlling the activities of the entity.
Hence, independent director Mr. Atul and non-executive director Mr. Naveen are covered under
the definition of KMP in accordance with Ind AS.
Also as per paragraph 7 and 9 of Ind AS 19, ‘Employee Benefits’, an employee may provide
services to an entity on a full-time, part-time, permanent, casual or temporary basis. For the
purpose of the Standard, Employees include directors and other management personnel.
Therefore, contention of the Accountant is wrong that they are not employees of X Ltd.
Paragraph 17 of Ind AS requires disclosure about employee benefits for key management
personnel. Therefore, an entity shall disclose key management personnel compensation in total
i.e. disclosure of directors’ fee of (Rs. 10,00,000 + Rs. 7,50,000) Rs. 17,50,000 is to be made as
employees benefits (under various categories).
Since short-term employee benefits are expected to be settled wholly before twelve months after
the end of the annual reporting period in which the employees render the related services, the
sitting fee paid to directors will fall under it (as per Ind AS 19) and is required to be disclosed in
accordance with the paragraph 17 of Ind AS 24.
3 (a) This information will be incorporated into the consolidated statement of cash flows as follows:
Statement of cash flows for 20X2 (extract) Amount Amount
(Rs.) (Rs.)
Cash flows from operating activities
Profit before taxation 70,000
Adjustments for non-cash items:
Depreciation 30,000
5

© The Institute of Chartered Accountants of India

 Decrease in inventories (Note 1) 9,000
Decrease in trade receivables (Note 2) 4,000
Decrease in trade payables (Note 3) (24,000)
Interest paid to be included in financing activities 4,000
Taxation (11,000 + 15,000 – 12,000) (14,000)
Net cash inflow from operating activities 79,000
Cash flows from investing activities
Cash paid to acquire subsidiary (74,000 – 2,000) (72,000)
Net cash outflow from investing activities (72,000)
Cash flows from financing activities
Interest paid (4,000)
Net cash outflow from financing activities (4,000)
Increase in cash and cash equivalents 3,000
Cash and cash equivalents at the beginning of the year 5,000
Cash and cash equivalents at the end of the year 8,000
Working Notes:
1. Inventories
Total inventories of the Group at the end of the year Rs. 30,000
Inventories acquired during the year from subsidiary (Rs. 4,000)
Rs. 26,000
Opening inventory (Rs. 35,000)
Decrease in inventory Rs. 9,000
2. Trade Receivables
Total trade receivables of the Group at the end of the year Rs.54,000
Trade receivables acquired during the year from subsidiary (Rs.8,000)
Rs.46,000
Opening trade receivables (Rs.50,000)
Decrease in trade receivables Rs. 4,000
3. Trade Payables
Trade payables at the end of the year Rs. 68,000
Trade payables of the subsidiary assumed during the year (Rs.32,000)
Rs. 36,000
Opening Trade payable (Rs. 60,000)
Decrease in Trade payables Rs. 24,000
(b) The amount recognized as an expense in each year and as a liability at each year end is as
follows:
Year Expense Liability Calculation of Liability
Rs. Rs.
31 December 20X5 2,16,000 2,16,000 = 36 x 1,000 x 12 x ½

© The Institute of Chartered Accountants of India

 31 December 20X6 72,000 2,88,000 = 36 x 1,000 x 8
31 December 20X7 1,62,000 3,90,000 =30 x 1,000 x 13
Expense comprises an increase in the
liability of Rs. 102,000 and cash paid to
those exercising their SARs of
Rs. 60,000(6 x 1,000 x 10).
31 December 20X8 (30,000) 0 Liability extinguished.
Excess liability reversed, because cash
paid to those exercising their SARs
Rs. 3,60,000 (30 x 1,000x 12) was less
than the opening liability Rs.3,90,000.

Journal Entries
31 December 20X5
Employee benefits expenses Dr. 2,16,000
To Share based payment liability 2,16,000
(Fair value of the SAR recognized)
31 December 20X6
Employee benefits expenses Dr. 72,000
To Share based payment liability 72,000
(Fair value of the SAR re-measured)
31 December 20X7
Employee benefits expenses Dr. 1,62,000
To Share based payment liability 1,62,000
(Fair value of the SAR recognized)
Share based payment liability Dr. 60,000
To Cash 60,000
(Settlement of SAR)
31 December 20X8
Share based payment liability Dr. 30,000
To Employee benefits expenses 30,000
(Fair value of the SAR recognized)
Share based payment liability Dr. 3,60,000
To Cash 3,60,000
(Settlement of SAR)
4. (a) As per Ind AS 116, Company EFG would first calculate the lease liability as the present value of the
annual lease payments, less the lease incentive paid in year 2, plus the exercise price of the purchase
option using the rate implicit in the lease of approximately 9.04%.
PV of lease payments, less lease incentive (W.N. 1) Rs. 37,39,648
PV of purchase option at end of lease term (W.N. 2) Rs. 12,60,000
Total lease liability Rs.49,99,648 or Rs.50,00,000
(approx.)

© The Institute of Chartered Accountants of India

 The right-of-use asset is equal to the lease liability because there is no adjustment required for
initial direct costs incurred by Company EFG, lease payments made at or before the lease
commencement date, or lease incentives received prior to the lease commencement date.
Entity EFG would pass the following journal entry on the lease commencement date.
Right-of-use Asset Dr. Rs. 50,00,000
To Lease Liability Rs. 50,00,000
To record ROU asset and lease liability at the commencement date.

Since the purchase option is reasonably certain to be exercised, EFG would amortize the right -of-
use asset over the economic life of the underlying asset (40 years). Annual amortization expense
would be Rs. 1,25,000 (Rs. 50,00,000 / 40 years)
Interest expense on the lease liability would be calculated as shown in the following table. This
table includes all expected cash flows during the lease term, including the lease incentive paid by
Entity H and Company EFG’s purchase option.
Year Payment Principal Interest Interest expense Lease
paid at the paid Liability (end
beginning of of the year
the year
a b= a-c c = (d of d = [(e of pvs. e = (e of pvs.
pvs. year) year- a) x year + d – a)
9.04%]
Commencement 50,00,000
Year 1 5,00,000 5,00,000 - 4,06,800 49,06,800
Year 2 3,15,000* (91,800) 4,06,800 4,15,099 50,06,899
Year 3 5,30,450 1,15,351 4,15,099 4,04,671 48,81,120
Year 4 5,46,364 1,41,693 4,04,671 3,91,862 47,26,618
Year 5 5,62,754 1,70,892 3,91,862 3,76,413 45,40,277
Year 6 5,79,637 2,03,224 3,76,413 3,58,042 43,18,682
Year 7 5,97,026 2,38,984 3,58,042 3,36,438 40,58,094
Year 8 6,14,937 2,78,499 3,36,438 3,11,261 37,54,418
Year 9 6,33,385 3,22,124 3,11,261 2,82,141 34,03,174
Year 10 6,52,387 3,70,246 2,82,141 2,49,213** 30,00,000
Year 10 30,00,000 27,50,787 2,49,213* - -
Total 85,31,940 50,00,000 35,31,940 35,31,940
*(5,00,000 + increased by 3% - lease incentive paid amounting to 2,00,000)
**Difference of Rs. 542 (Rs. 2,48,671 and Rs. 2,49,213) is due to rounding of interest expense
calculated @ 9.04%.
Although the lease was for 10 years, the asset had an economic life of 40 years. When Company
EFG exercises its purchase option at the end of the 10-year lease, it would have fully
extinguished its lease liability but continue depreciating the asset over the remaining useful life.

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 Working Notes:
1. Calculating PV of lease payments, less lease incentive:
Year Lease Payment (A) Present value factor Present value of lease
@ 9.04% (B) payments (A x B=C)
Year 1 5,00,000 1 5,00,000
Year 2 3,15,000 0.92 2,89,800
Year 3 5,30,450 0.84 4,45,578
Year 4 5,46,364 0.77 4,20,700
Year 5 5,62,754 0.71 3,99,555
Year 6 5,79,637 0.65 3,76,764
Year 7 5,97,026 0.59 3,52,245
Year 8 6,14,937 0.55 3,38,215
Year 9 6,33,385 0.50 3,16,693
Year 10 6,52,387 0.46 3,00,098
Total 37,39,648
2. Calculating PV of purchase option at end of lease term:
Year Payment on purchase Present value Present value of
option factor @ 9.04% purchase option
(A) (B) (A x B=C)
Year 10 30,00,000 0.42 12,60,000
Total 12,60,000
The discount rate for year 10 is different in the above calculations because in the earlier one
its beginning of year 10 and in the later one its end of the year 10.
(b) The values of the liability and equity components are calculated as follows:
Present value of principal payable at the end of 3 years (Rs. 10 lakhs discounted at 13% for 3
years) = Rs. 6,93,050
Present value of interest payable in arrears for 3 years (Rs. 100,000 discounted at 13% for each
of 3 years) = Rs. 2,36,115
Paragraph AG31 of Ind AS 32 states that a common form of compound financial instruments is a
debt instrument with an embedded conversion option, such as a bond convertible into ordinary
shares of the issuer, and without any other embedded derivatives features.
The liability component = Present value of principal + Present value of Interest
= Rs. 6,93,050 + Rs.2,36,115 = Rs. 9,29,165
Equity Component = Rs. 10,00,000 –Rs. 9,29,165 = Rs. 70,835
5. (a) Consolidated Balance Sheet of the Group as on 31st March, 20X2
Particulars Note No. (Rs. in lakh)
ASSETS
Non-current assets
Property, plant and equipment 1 980

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 Current assets
(a) Inventory 2 338
(b) Financial assets
Trade receivables 3 580
Bills receivable 4 2
Cash and cash equivalents 5 308
Total assets 2,208
EQUITY & LIABILITIES
Equity attributable to owners of the parent
Share capital 600
Other Equity
Reserves (W.N.5) 194
Retained Earnings (W.N.5) 179.8
Capital Reserve (W.N.3) 188
Non-controlling interests (W.N.4) 166.2
Total equity 1,328
LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 6 880
Total liabilities 880
Total equity and liabilities 2,208

Notes to Accounts (Rs. in lakh)

1. Property, Plant & Equipment
P Ltd. 320
S Ltd. 360
SS Ltd. 300 980
2. Inventories
P Ltd. 220
S Ltd. (70-2) 68
SS Ltd. 50 338
3. Trade Receivables
P Ltd. 260
S Ltd. 100
SS Ltd. 220 580
4. Bills Receivable
P Ltd. (72-70) 2
SS Ltd. (30-30) - 2
5. Cash & Cash equivalents
P Ltd. 228
S Ltd. 40
SS Ltd. 40 308

10

© The Institute of Chartered Accountants of India

 6. Trade Payables
P Ltd.
S Ltd. 470
SS Ltd. 230
180 880
Working Notes:
1. Analysis of Reserves and Surplus (Rs. in lakh)
S Ltd. SS Ltd.
Reserves as on 31.3.20X1 80 60
Increase during the year 20X1-20X2 20 20
Increase for the half year till 30.9.20X1 10 10
Balance as on 30.9.20X1 (A) 90 70
Total balance as on 31.3.20X2 100 80
Post-acquisition balance 10 10

S Ltd. SS Ltd.
Retained Earnings as on 31.3.20X1 20 30
Increase during the year 20X1-20X2 30 30
Increase for the half year till 30.9.20X1 15 15
Balance as on 30.9.20X1 (B) 35 45
Total balance as on 31.3.20X2 50 60
Post-acquisition balance 15 15
Less: Unrealised Gain on inventories (10 x 25%) - (2)
Post-acquisition balance for CFS 15 13
Total balance on the acquisition date ie.30.9.20X1 125 115
(A +B)
2. Calculation of Effective Interest of P Ltd. in SS Ltd.
Acquisition by P Ltd. in S Ltd. = 80%
Acquisition by S Ltd. in SS Ltd. = 75%
Acquisition by Group in SS Ltd. (80% x 75%) = 60%
Non Controlling Interest = 40%
3. Calculation of Goodwill / Capital Reserve on the acquisition date
S Ltd. SS Ltd.
Investment or consideration 340 (280 × 80%) 224
Add: NCI at Fair value
(400 x 20%) 80
(320 x 40%) 128
420 352
Less: Identifiable net assets (Share
capital + Increase in the
11

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 Reserves and Surplus till (400+125) (525) (320+115) (435)
acquisition date)
Capital Reserve 105 83
Total Capital Reserve (105 + 83) 188
4. Calculation of Non-Controlling Interest
S Ltd. SS Ltd.
At Fair Value (See Note 3) 80 128
Add: Post Acquisition Reserves (See Note 1) (10× 20%) 2 (10× 40%) 4
Add: Post Acquisition Retained Earnings (See (15× 20%) 3 (13× 40%) 5.2
Note 1)
Less: NCI share of investment in SS Ltd. (280x20%) (56)*
29 137.2
Total (29+ 137.2) 166.2

* Note: The Non-controlling interest in S Ltd. will take its proportion in SS Ltd. so they
have to bear their proportion in the investment by S Ltd. (in SS Ltd.) also.
5. Calculation of Consolidated Other Equity
Reserves Retained Earnings
P Ltd. 180 160
Add: Share in S Ltd. (10 x 80%) 8 (15× 80%) 12
Add: Share in SS Ltd. (10× 60%)6 (13× 60%)7.8
194 179.8
(b) The entity considers the requirements in paragraphs 56–58 of Ind AS 115 on constraining
estimates of variable consideration to determine whether the estimated amount of variable
consideration of Rs. 48,500 (Rs. 50 × 970 products not expected to be returned) can be included
in the transaction price. The entity considers the factors in paragraph57 of Ind AS 115 and
determines that although the returns are outside the entity's influence, it has significant
experience in estimating returns for this product and customer class. In addition, the uncertainty
will be resolved within a short time frame (ie the 30-day return period). Thus, the entity concludes
that it is highly probable that a significant reversal in the cumulative amount of revenue
recognised (i.e. Rs. 48,500) will not occur as the uncertainty is resolved (i.e. over the return
period).
The entity estimates that the costs of recovering the products will be immaterial and expects that
the returned products can be resold at a profit.
Upon transfer of control of the 1,000 products, the entity does not recognise revenue for the 30
products that it expects to be returned. Consequently, in accordance with paragraphs 55 and B21
of Ind AS 115, the entity recognises the following:
(a) revenue of Rs. 48,500 (Rs. 50 × 970 products not expected to be returned);
(b) a refund liability of Rs. 1,500 (Rs. 50 refund × 30 products expected to be returned); and
(c) an asset of Rs. 900 (Rs. 30 × 30 products for its right to recover products from customers
on settling the refund liability).

12

© The Institute of Chartered Accountants of India

6. (a) Reconciliation of Plan asset and Defined benefit obligations
Plan Asset Defined
Rs. benefitoblig
ations
Rs.
Fair value/present value as at 1st April 20X1 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
Contributions received 4,25,000 -
Benefits paid (2,55,000) (2,55,000)
Return on gain (assets) (balancing figure) 68,000 -
Actuarial Loss (balancing figure) - 2,33,750
Closing balance as at March 31,20X2 23,80,000 27,20,000

In the Statement of Profit and loss, the following will be recognised:

Rs.
Current service cost 5,10,000
Net interest on net defined liability (Rs. 1,06,250–Rs. 1,02,000) 4,250
Defined benefit re-measurements recognised in other comprehensive income:
Rs.
Loss on defined benefit obligation (2,33,750)
Gain on plan assets 68,000
(1,65,750)
In the Balance sheet, the following will be recognised:
Rs.
Net defined liability (Rs. 27,20,000 – Rs. 23,80,000) 3,40,000
(b) Since all customers will receive a 10% discount on purchases during the next 30 days, the only
additional discount that provides the customer with a material right is the incremental discount of
30% on the products purchased. The entity accounts for the promise to provide the incremental
discount as a separate performance obligation in the contract for the sale of Product A.
The entity believes there is 80% likelihood that a customer will redeem the voucher and on an
average, a customer will purchase Rs. 500 of additional products. Consequently, the entity’s
estimated stand-alone selling price of the discount voucher is Rs. 120 (Rs. 500 average purchase
price of additional products x 30% incremental discount x 80% likelihood of exercising the
option). The stand-alone selling prices of Product A and the discount voucher and the resulting
allocation of the Rs. 1,000 transaction price are as follows:
Performance obligations Stand-alone selling price
Product A Rs. 1,000
Discount voucher Rs. 120
Total Rs. 1,120

13

© The Institute of Chartered Accountants of India

 Performance Allocated transaction price
obligations (to nearest Rs.10)
Product A (Rs. 1000 ÷ Rs. 1120 × Rs. 1000) Rs. 890
Discount voucher (Rs. 120 ÷ Rs. 1120 × Rs. 1000) Rs. 110
Total Rs. 1000
The entity allocates Rs. 890 to Product A and recognises revenue for Product A when control
transfers. The entity allocates Rs. 110 to the discount voucher and recognises revenue for the
voucher when the customer redeems it for goods or services or when it expires.
(c) Journal Entries showing accounting for the significant financing component:
(a) Recognise a contract liability for the Rs. 4,000 payment received at contract inception:
Cash Dr. Rs. 4,000
To Contract liability Rs. 4,000
(b) During the two years from contract inception until the transfer of the asset, the entity adjusts
the promised amount of consideration and accretes the contract liability by recognising
interest on Rs. 4,000 at 6% for two years:
Interest expense Dr. Rs. 494*
To Contract liability Rs. 494
* Rs. 494 = Rs. 4,000 contract liability × (6% interest per year for two years).
(c) Recognise revenue for the transfer of the asset:
Contract liability Dr. Rs. 4,494
To Revenue Rs. 4,494
(d) As per para 20 of Ind AS 33, Earnings per share, the weighted average number of ordinary
shares outstanding during the period reflects the possibility that the amount of shareholders’
capital varied during the period as a result of a larger or smaller number of shares being
outstanding at any time. The weighted average number of ordinary shares outst anding during the
period is the number of ordinary shares outstanding at the beginning of the period, adjusted by
the number of ordinary shares bought back or issued during the period multiplied by a time -
weighting factor. The time weighting factor is the number of days that the shares are outstanding
as a proportion of the total number of days in the period; a reasonable approximation of the
weighted average is adequate in many circumstances.
Formula
The weighted average number of shares is calculated as follows:
Number of shares x (number of days the shares were held during the year / 365)
Following the above formula, the weighted average number of shares for calculation of EPS for
the year 20X1-20X2 will be as follows:
Sr. Date Particulars No of No of days Weighted
No. shares shares were average no
outstanding of shares
1 1April 20X1 Opening balance of
outstanding equity shares 1,00,000 365 1,00,000
2 15June Issue of equity shares 75,000 290 59,589
20X1

14

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 3 8November Conversion of convertible
20X1 preference shares in Equity
50,000 144 19,726
4 22February Buy back of shares
20X2 (20,000) (38)* (2,082)
5 31March Closing balance of
20X2 outstanding equity shares 2,05,000 1,77,233

*These shares had already been considered in the shares issued. The same has been deducted
assuming that the bought back shares have been extinguished immediately.
OR
A company which meets the net worth, turnover or net profits criteria in immediate preceding
financial year will need to constitute a CSR Committee and comply with provisions of sections
135(2) to (5) read with the CSR Rules.
As per the criteria to constitute CSR committee -
(1) Net worth greater than or equal to Rs. 500 Crore: This criterion is not satisfied.
(2) Sales greater than or equal to Rs. 1000 Crore: This criterion is not satisfied.
(3) Net profit greater than or equal to Rs. 5 crore: This criterion is satisfied in financial year
ended March 31, 20X3 ie immediate preceding financial year.
Hence, the Company will be required to form a CSR committee.

15

© The Institute of Chartered Accountants of India

 Test Series: October, 2020
MOCK TEST PAPER
FINAL (NEW) COURSE
PAPER 1: FINANCIAL REPORTING
ANSWERS
1. (a) Consolidated Balance Sheet of PN Ltd. and its subsidiary SR Ltd. as on 31 March 2020
Particulars Note No. `
I. Assets
(1) Non-current assets
(i) Property, Plant & Equipment 1 26,83,200
(ii) Goodwill 2 89,402
(2) Current Assets
(i) Inventories 3 5,34,800
(ii) Financial Assets
(a) Trade Receivables 4 3,11,300
(b) Cash & Cash equivalents 5 70,100
Total Assets 36,88,802
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 6 15,60,000
(ii) Other Equity 7 11,39,502
(2) Non-controlling Interest (W.N.3) 5,07,300
(3) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 8 2,12,400
(b) Short term borrowings 9 2,69,600
Total Equity & Liabilities 36,88,802
Notes to accounts
`
1. Property, Plant & Equipment
Land & Building (4,68,000 + 5,61,600 + 3,12,000) 13,41,600
Plant & Machinery (W.N.5) 13,41,600 26,83,200
2. Goodwill (W.N.4) 89,402
3. Inventories
PN Ltd. 3,74,400
SR Ltd. (1,13,600 +46,800) 1,60,400 5,34,800
4. Trade Receivables
PN Ltd. 1,86,500
SR Ltd. 1,24,800 3,11,300
5. Cash & Cash equivalents
PN Ltd. 45,200
SR Ltd. 24,900 70,100

© The Institute of Chartered Accountants of India

 8. Trade Payables
PN Ltd. 1,46,900
SR Ltd. (34,300 + 31,200) 65,500 2,12,400
9. Short-term borrowings
PN Ltd. 2,49,600
SR Ltd. 20,000 2,69,600
Statement of Changes in Equity:
6. Equity share Capital
Balance at the beginning of the Changes in Equity share Balance at the end of
reporting period capital during the year the reporting period
` ` `
15,60,000 0 15,60,000
7. Other Equity
Reserves & Surplus Total
Capital Retained Other
reserve Earnings Reserves
` ` ` `
Balance at the beginning of the reporting 0 9,36,000 9,36,000
period
Total comprehensive income for the year 0 1,78,400 1,78,400
Dividends 0 (52,416) (52,416)
Total comprehensive income attributable to 0 77,518 77,518
parent (W.N.2)
Gain on Bargain purchase 0 0
Balance at the end of reporting period 2,03,502 9,36,000 11,39,502
Working Notes:
1. Adjustments of Fair Value
The Plant & Machinery of SR Ltd. would stand in the books at ` 4,44,600 on
 4,21,200 
1 October 2019, considering only six months’ depreciation on `   = 4,68,000;
 90% 
total depreciation being ` 4,68,000 ×10% × 6 = 23,400 . Being the fair value of the asset
12
` 6,24,000, there is an appreciation to the extent of ` 1,79,400 (` 6,24,000 – ` 4,44,600).
Acquisition date profits of SR Ltd. `
Reserves on 1.4.2019 3,12,000
Profit& Loss Account Balance on 1.4.2019 93,600
Profit for 2019-2020: Total [`2,55,800-(93,600-74,880)]x 6/12 i.e.
` 1,18,540 upto 1.10.2019 1,18,540
Total Appreciation 5,07,000*
Total 10,31,140
Holding Co. Share (70%) 7,21,798
NCI 3,09,342

© The Institute of Chartered Accountants of India

 *Appreciation = Land & Building ` 3,12,000 + Inventories ` 46,800+ Plant & Machinery
` 1,79,400 –Trade Payables (` 31,200) = ` 5,07,000
2. Post-acquisition profits of SR Ltd. `
Profit after 1.10.2019 [2,55,800 - (93,600-74,880)] x 6/12 1,18,540
Less:10% depreciation on `6,24,000 for 6 months less depreciation already
charged for 2 nd half of 2019-2020 on `4,68,800 (ie 31,200-23,400) (7,800)
Total 1,10,740
Share of holding Co. (70%) 77,518
Share of NCI (30%) 33,222
3. Non-controlling Interest `
Par value of 1872 shares 1,87,200
Add:30% Acquisition date profits [(10,31,140 – 74,880) x 30%] 2,86,878
30% Post-acquisition profits [W.N.2] 33,222
5,07,300
4. Goodwill `
Amount paid for 4,368 shares 12,48,000
Less : Par value of shares 4,36,800
Acquisition date profits-share of PN Ltd. (W.N.1) 7,21,798 (11,58,598)
Goodwill 89,402
5. Value of Plant & Machinery: `
PN Ltd. 7,48,800
SR Ltd. 4,21,200
Add: Appreciation on 1.10.2019 1,79,400
6,00,600
Add: Depreciation for 2nd half charged on pre-revalued value 23,400
Less: Depreciation on ` 6,24,000 for 6 months (31,200) 5,92,800
13,41,600
6. Consolidated Profit & Loss account `
PN Ltd. (as given) 1,78,400
Less: Dividend (52,416) 1,25,984
Share of PN Ltd. in post-acquisition profits (W.N.2) 77,518
2,03,502
(b) Costs incurred in creating computer software, should be charged to research & development
expenses when incurred until technical feasibility/asset recognition criteria have been established
for the product. Here, technical feasibility is established after completion of detailed program
design.
In this case, ` 5,30,000 (salary cost of ` 1,50,000, program design cost of ` 3,00,000 and coding
and technical feasibility cost of ` 80,000) would be recorded as expense in Profit and Loss since
it belongs to research phase.
Cost incurred from the point of technical feasibility are capitalised as software costs. But the
conference cost of `60,000 would be expensed off.

© The Institute of Chartered Accountants of India

 In this situation, direct cost after establishment of technical feasibility of ` 3,00,000 and testing
cost of ` 90,000 will be capitalised.
The cost of software capitalised is = ` (3,00,000 + 90,000) = ` 3,90,000.
2. (a) Carrying amount of asset on 31 March 2020 = ` 6,60,000
Calculation of Value in Use
Year ended Cash flow Discount factor @ 9% Amount
` `
31st March, 2021 2,76,000 0.9174 2,53,202
31st March, 2022 1,92,000 0.8417 1,61,606
31st March, 2023 1,20,000 0.7722 92,664
31st March, 2024 1,14,000 0.7084 80,758
Total (Value in Use) 5,88,230
Calculation of Recoverable amount
Particulars Amount (`)
Value in use 5,88,230
Fair value less costs of disposal (6,00,000 – 96,000) 5,04,000
Recoverable amount 5,88,230
(Higher of value in use and fair value less costs of disposal)
Calculation of Impairment loss
Particulars Amount (`)
Carrying amount 6,60,000
Less: Recoverable amount (5,88,230)
Impairment loss 71,770
Calculation of Revised carrying amount
Particulars Amount (`)
Carrying amount 6,60,000
Less: Impairment loss (71,770)
Revised carrying amount 5,88,230
Calculation of Revised Depreciation:
Revised carrying amount – Residual value
Remaining life = (5,88,230 - 0) / 4 = ` 1,47,058 per annum
Set off of Impairment loss:
The impairment loss of ` 71,770 must first be set off against any revaluation surplus in relation to
the same asset. Therefore, the revaluation surplus of ` 36,000 is eliminated against impairment
loss, and the remainder of the impairment loss ` 35,770 (` 71,770 – ` 36,000) is charged to
profit and loss.

© The Institute of Chartered Accountants of India

 Treatment of Government compensation:
Any compensation by government would be accounted for as such when it becomes receivable.
At this time, the government has only stated that it may reimburse the company and therefore
credit should not be taken for any potential government receipt.
(b) Reconciliation of Plan assets and Defined benefit obligation
Plan Assets Defined benefit
obligation
` `
Fair value/present value as at 1 st April 2019 20,40,000 21,25,000
Interest @ 5% 1,02,000 1,06,250
Current service cost 5,10,000
Contributions received 4,25,000 -
Benefits paid (2,55,000) (2,55,000)
Return or gain (assets) (balancing figure) 68,000 -
Actuarial Loss (balancing figure) - 2,33,750
Closing balance as at 31 March 2020 23,80,000 27,20,000
In the Statement of Profit and loss, the following will be recognized:
`
Current service cost 5,10,000
Net interest on net defined liability (` 1,06,250 – ` 1,02,000) 4,250

Defined benefit re-measurements recognized in Other Comprehensive Income:

`
Loss on defined benefit obligation (2,33,750)
Gain on plan assets 68,000
(1,65,750)
In the Balance sheet, the following will be recognized :
`
Net defined liability (` 27,20,000 – ` 23,80,000) 3,40,000
(c) (i) At the time of initial recognition
`
Liability component
Present value of 5 yearly interest payments of ` 40,000, discounted at
12% annuity (40,000 x 3.605) 1,44,200
Present value of ` 5,00,000 due at the end of 5 years, discounted at
12%, compounded yearly (5,00,000 x 0.567) 2,83,500
4,27,700
Equity component
(` 5,00,000 – ` 4,27,700) 72,300
Total proceeds 5,00,000
5

© The Institute of Chartered Accountants of India

 Note: Since ` 105 is the conversion price of debentures into equity shares and not the
redemption price, the liability component is calculated @ ` 100 each only.
Journal Entry
` `
Bank Dr. 5,00,000
To 8% Debentures (Liability component) 4,27,700
To 8% Debentures (Equity component) 72,300
(Being Debentures are initially recorded a fair value)
(ii) At the time of repurchase of convertible debentures
The repurchase price is allocated as follows:
Carrying Fair Value Difference
Value @ 12% @ 9%
` ` `
Liability component
Present value of 2 remaining yearly
interest payments of ` 40,000, discounted
at 12% and 9%, respectively 67,600 70,360
Present value of ` 5,00,000 due in 2
years, discounted at 12% and 9%,
compounded yearly, respectively 3,98,500 4,21,000
Liability component 4,66,100 4,91,360 (25,260)
Equity component 72,300 33,640* 38,660
Total 5,38,400 5,25,000 13,400

*(5,25,000 – 4,91,360) = 33,640

Journal Entries
` `
8% Debentures (Liability component) Dr. 4,66,100
Profit and loss A/c (Debt settlement expense) Dr. 25,260
To Bank A/c 4,91,360
(Being the repurchase of the liability component recognised)
8% Debentures (Equity component) Dr. 72,300
To Bank A/c 33,640
To Reserves and Surplus A/c 38,660
(Being the cash paid for the equity component recognised)
3. (a) Paragraph 42 of Ind AS 103 provides that in a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and
recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income, as
appropriate. In prior reporting periods, the acquirer may have recognized changes in the value of its
equity interest in the acquiree in other comprehensive income. If so, the amount that was recognised
in other comprehensive income shall be recognised on the same basis as would be required if the
acquirer had disposed of directly the previously held equity interest.

© The Institute of Chartered Accountants of India

 Applying the above, Deepak Ltd. records the following entry in its consolidated financial
statements:
(` in crore)
Debit Credit
Identifiable net assets of Shaun Ltd. Dr. 16,200
Goodwill (W.N.1) Dr. 2,160
Foreign currency translation reserve Dr. 54
PPE revaluation reserve Dr. 27
To Cash 13,500
To Investment in associate (4,320 + 378 + 54 + 27) 4,779
To Retained earnings (W.N.2) 27
To Gain on previously held interest in Shaun Ltd. recognised in
Profit or loss (W.N.3) 135
(Recognition of acquisition of Shaun Ltd.)
Working Notes:
1. Calculation of Goodwill
` in crore
Cash consideration 13,500
Add: Fair value of previously held equity interest in Shaun Ltd. 4,860
Total consideration 18,360
Less: Fair value of identifiable net assets acquired (16,200)
Goodwill 2,160
2. The credit to retained earnings represents the reversal of the unrealized gain of
` 27 crore in Other Comprehensive Income related to the revaluation of property, plant and
equipment. In accordance with Ind AS 16, this amount is not reclassified to profit or loss.
3. The gain on the previously held equity interest in Shaun Ltd. is calculated as follows:
` in crore
Fair Value of 30% interest in Shaun Ltd. at 1 st April, 2020 4,860
Carrying amount of interest in Shaun Ltd. at 1 st April, 2020 (4,779)
81
Unrealised gain previously recognised in OCI 54
Gain on previously held interest in Shaun Ltd. recognised in profit or loss 135
(b) In accordance with paragraph 72 of Ind AS 37, ‘Provisions, Contingent Liabilities and Contingent
Assets’, a constructive obligation to restructure arises only when an entity has detailed formal
plan for restructuring identifying the business or part of business concerned; the principal
locations affected; the location, function, and approximate number of employees who will be
compensated for terminating their services; the expenditures that will be undertaken; and when
the plan will be implemented; and has raised a valid expectation in those affected that it will carry
out the restructuring by starting to implement that plan or announcing its main features to those
affected by it.
Further, paragraph 75 of Ind AS 37 provides that a management or board decision to restructure
taken before the end of the reporting period does not give rise to a constructive obligation at the
end of the reporting period unless the entity has, before the end of the reporting period
(a) started to implement the restructuring plan; or
7

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 (b) announced the main features of the restructuring plan to those affected by it in a sufficiently
specific manner to raise a valid expectation in them that the entity will carry out the
restructuring.
In the given case, since COVID-19 pandemic impact started during March 2020, it is likely that
the senior management started drawing up the plan for restructuring some of its business
activities after the end of the reporting period, i.e., 2019-2020. If that be so, as per Ind AS 37,
the management decisions subsequent to reporting date do not give rise to constructive
obligation as of reporting date and no provision is required for restructuring costs as at
31 March 2020.
In this regard, paragraph 75 of Ind AS 37 provides that if an entity starts to implement a
restructuring plan, or announces its main features to those affected, only after the reporting
period, disclosure is required under Ind AS 10, Events after the Reporting Period, if the
restructuring is material and non-disclosure could influence the economic decisions that users
make on the basis of the financial statements.
(c) Scenario (i)
Since the loan is repayable on demand, it has fair value equal to cash consideration given.
KK Ltd. and YK Ltd. should recognize financial asset and liability, respectively, at the amount of
loan given (assuming that loan is repayable within a year). Upon, repayment, both the entities
should reverse the entries that were made at the origination.
Journal entries in the books of KK Ltd.
At origination
Loan to YK Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000
On repayment
Bank A/c Dr. ` 10,00,000
To Loan to YK Ltd. A/c ` 10,00,000
Journal entries in the books of YK Ltd.
At origination
Bank A/c Dr. ` 10,00,000
To Loan from KK Ltd. A/c ` 10,00,000
On repayment
Loan from KK Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan receivable
and loan payable will get set off.
Scenario (ii)
Applying the guidance in Ind AS 109, a ‘financial asset’ shall be recorded at its fair value upon
initial recognition. Fair value is normally the transaction price. However, sometimes certain type
of instruments may be exchanged at off market terms (ie, different from market terms for a similar
instrument if exchanged between market participants).
If a long-term loan or receivable that carries no interest while similar instruments if exchange d
between market participants carry interest, then fair value for such loan receivable will be lower
from its transaction price owing to the loss of interest that the holder bears. In such cases where
part of the consideration given or received is for something other than the financial instrument, an

© The Institute of Chartered Accountants of India

 entity shall measure the fair value of the financial instrument. The difference in fair value and
transaction cost will treated as investment in Subsidiary YK Ltd.
Both KK Ltd. and YK Ltd. should recognise financial asset and liability, respectively, at fair value
on initial recognition, i.e., the present value of ` 10,00,000 payable at the end of 3 years using
discounting factor of 10%. Since the question mentions fair value of the loan at initial recognition
as ` 8,10,150, the same has been considered. The difference between the loan amount and its
fair value is treated as an equity contribution to the subsidiary. This represents a further
investment by the parent in the subsidiary.
Journal entries in the books of KK Ltd. (for one year)
At origination
Loan to YK Ltd. A/c Dr. ` 8,10,150
Investment in YK Ltd. A/c Dr. ` 1,89,850
To Bank A/c ` 10,00,000
During periods to repayment- to recognise interest
Year 1 – Charging of Interest
Loan to YK Ltd. A/c Dr. ` 81,015
To Interest income A/c ` 81,015
Transferring of interest to Profit and Loss
Interest income A/c Dr. ` 81,015
To Profit and Loss A/c ` 81,015
On repayment
Bank A/c Dr. ` 10,00,000
To Loan to YK Ltd. A/c ` 10,00,000
Note- Interest needs to be recognised in statement of profit and loss. The same cannot
be adjusted against capital contribution recognised at origination.
Journal entries in the books of YK Ltd. (for one year)

At origination
Bank A/c Dr. ` 10,00,000
To Loan from KK Ltd. A/c ` 8,10,150
To Equity Contribution in KK Ltd. A/c ` 1,89,850
During periods to repayment- to recognise interest
Year 1
Interest expense A/c Dr. ` 81,015
To Loan from KK Ltd. A/c ` 81,015
On repayment
Loan from KK Ltd. A/c Dr. ` 10,00,000
To Bank A/c ` 10,00,000
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
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© The Institute of Chartered Accountants of India

 Scenario (iii)
Generally, a loan which is repayable when funds are available, cannot be stated as loan
repayable on demand. Rather the entity needs to estimate the repayment date and determine its
measurement accordingly by applying the concept prescribed in Scenario (ii).
In the consolidated financial statements, there will be no entry in this regard since loan and
interest income/expense will get set off.
In case the subsidiary YK Ltd. is planning to grant interest free loan to KK Ltd., then the
difference between the fair value of the loan on initial recognition and its nominal value should be
treated as dividend distribution by YK Ltd. and dividend income by the parent KK Ltd.
4. Transition date (opening) IND-AS BALANCE SHEET of SHAURYA LIMITED
As at 1 April 2018
(All figures are in ’000, unless otherwise specified)
Particulars Previous Transitional Ind Opening Ind AS
GAAP AS adjustments Balance sheet
ASSETS
Non-current assets
Property, plant and equipment (Note 1) 20,00,000 5,00,000 25,00,000
Goodwill (Note 2) 1,00,000 - 1,00,000
Other Intangible assets (Note 3) 2,00,000 - 2,00,000
Financial assets:
Investment 5,00,000 - 5,00,000
Loans (Note 4) 40,000 10,000 50,000
Other financial assets 1,10,000 - 1,10,000
Other non-current assets 2,00,000 - 2,00,000
Current assets
Inventories 12,50,000 - 12,50,000
Financial assets
Investment (Note 5) 18,00,000 30,000 18,30,000
Trade receivables (Note 6) 9,00,000 - 9,00,000
Cash and cash 10,00,000 - 10,00,000
equivalents/Bank
Other financial assets 3,50,000 - 3,50,000
Other current assets 50,000 - 50,000
TOTAL ASSETS 85,00,000 5,40,000 90,40,000
EQUITY AND LIABILITIES
Equity
Equity share capital 10,00,000 - 10,00,000
Other equity 25,00,000 7,90,000 32,90,000
Non-current liabilities
Financial liabilities
Borrowings (Note-7) 4,50,000 - 4,50,000

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 Provisions 3,50,000 - 3,50,000
Deferred tax liabilities (Net) 3,50,000 (50,000) 3,00,000
Current liabilities
Financial liabilities
Trade payables 22,00,000 - 22,00,000
Other financial liabilities 3,90,000 - 3,90,000
Other current liabilities 60,000 - 60,000
Provisions (Note-8) 12,00,000 (2,00,000) 10,00,000
TOTAL EQUITY AND LIABILITIES 85,00,000 5,40,000 90,40,000
OTHER EQUITY
Retained Earnings (`) Fair value reserve Total
As at 31 March, 2018 27,90,000 (W.N.1) 5,00,000 32,90,000
Working Note 1:
Retained earnings balance:
Balance as per Earlier GAAP 25,00,000
Transitional adjustment due to loan’s fair value 10,000
Transitional adjustment due to increase in mutual fund’s fair value 30,000
Transitional adjustment due to decrease in deferred tax liability 50,000
Transitional adjustment due to decrease in provisions (dividend) 2,00,000
Total 27,90,000
Disclosure forming part of financial statements:
Proposed dividend on equity shares is subject to the approval of the shareholders of the company at
the annual general meeting and should not recognized as liability as at the Balance Sheet date.
Note 1: Property, plant & Equipment:
As per para D5 of Ind AS 101,an entity may elect to measure an item of property, plant and equipment
at the date of transition to Ind AS at its fair value and use that fair value as its deemed cost at that
date.
Note 2: Goodwill:
Ind AS 103 mandatorily requires measuring the assets and liabilities of the acquiree at its fair value as
on the date of acquisition. However, a first time adopter may elect to not apply the provisions of
Ind AS 103 with retrospective effect that occurred prior to the date of transition to Ind AS.
Hence company can continue to carry the goodwill in its books of account as per the previous GAAP.
Note 3: Intangible assets:
Para D7 read with D6 of Ind AS 101 states that a first-time adopter may elect to use a previous GAAP
revaluation at, or before, the date of transition to Ind AS as deemed cost at the date of the revaluation,
if the revaluation was, at the date of the revaluation, broadly comparable to:
(a) Fair value; or
(b) Cost or depreciated cost in accordance with Ind AS, adjusted to reflect, for example, changes in
a general or specific price index.

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 However, there is a requirement that Intangible assets must meet the definition and recognition criteria
as per Ind AS 38.
Hence, company can avail the exemption given in Ind AS 101 as on the date of transition to use the
carrying value as per previous GAAP.
Note 4: Loan:
Para B8C of Ind AS 101 states that if it is impracticable (as defined in Ind AS 8) for an entity to apply
retrospectively the effective interest method in Ind AS 109, the fair v alue of the financial asset or the
financial liability at the date of transition to Ind ASs shall be the new gross carrying amount of that
financial asset or the new amortised cost of that financial liability at the date of transition to Ind AS.
Accordingly, ` 50,000 would be the gross carrying amount of loan and difference of ` 10,000
(` 50,000 – ` 40,000) would be adjusted to retained earnings.
Note 5: Mutual Funds:
Para 29 of Ind AS 101 states that an entity is permitted to designate a previously reco gnised financial
asset as a financial asset measured at fair value through profit or loss in accordance with paragraph
D19A. The entity shall disclose the fair value of financial assets so designated at the date of
designation and their classification and carrying amount in the previous financial statements.
D19A states that an entity may designate a financial asset as measured at fair value through profit or
loss in accordance with Ind AS 109 on the basis of the facts and circumstances that exist at the date
of transition to Ind AS.
Note 6: Trade receivables:
Para 14 of Ind AS 101 states that an entity’s estimates in accordance with Ind ASs at the date of
transition to Ind AS shall be consistent with estimates made for the same date in accordance with
previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is
objective evidence that those estimates were in error.
Para 15 of Ind AS 101 further states that an entity may receive information after the date of transition
to Ind ASs about estimates that it had made under previous GAAP. In accordance with paragraph 14,
an entity shall treat the receipt of that information in the same way as non -adjusting events after the
reporting period in accordance with Ind AS 10, Events after the Reporting Period.
The entity shall not reflect that new information in its opening Ind AS Balance Sheet (unless the
estimates need adjustment for any differences in accounting policies or there is objective evidence
that the estimates were in error). Instead, the entity shall reflect that new information in profit or loss
(or, if appropriate, other comprehensive income) for the year ended 31 March 2019.
Note 7: Government Grant:
Para 10A of Ind AS 20 states that the benefit of a government loan at a below-market rate of interest
is treated as a government grant. The loan shall be recognised and measured in accordance with
Ind AS 109, Financial Instruments. The benefit of the below-market rate of interest shall be measured
as the difference between the initial carrying value of the loan determined in accordance with
Ind AS 109, and the proceeds received. The benefit is accounted for in accordance with this
Standard.
However, Para B10 of Ind AS 101 states, a first-time adopter shall classify all government loans
received as a financial liability or an equity instrument in accordance with Ind AS 32, Financial
Instruments: Presentation. Except as permitted by paragraph B11, a first-time adopter shall apply the
requirements in Ind AS 109, Financial Instruments, and Ind AS 20, Accounting for Government Grants
and Disclosure of Government Assistance, prospectively to government loans existing at the date of
transition to Ind ASs and shall not recognise the corresponding benefit of the governme nt loan at a
below-market rate of interest as a government grant. Consequently, if a first-time adopter did not,
under its previous GAAP, recognise and measure a government loan at a below -market rate of interest
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 on a basis consistent with Ind AS requirements, it shall use its previous GAAP carrying amount of the
loan at the date of transition to Ind AS as the carrying amount of the loan in the opening Ind AS
Balance Sheet. An entity shall apply Ind AS 109 to the measurement of such loans after the date of
transition to Ind AS.
Note 8: Dividend
Dividend should be deducted from retained earnings during the year when it has been declared and
approved. Accordingly, the provision declared for preceding year should be reversed (to rectify the
wrong entry). Retained earnings would increase proportionately due to such adjustment.
5. (a) As per Ind AS 23, when an entity borrows funds specifically for the purpose of obtai ning a
qualifying asset, the entity should determine the amount of borrowing costs eligible for
capitalisation as the actual borrowing costs incurred on that borrowing during the period less
any investment income on the temporary investment of those borrow ings.
The amount of borrowing costs eligible for capitalization, in cases where the funds are borrowed
generally, should be determined based on the expenditure incurred in obtaining a qualifying
asset. The costs incurred should first be allocated to the specific borrowings.
Analysis of expenditure:
Date Expenditure Amount allocated in Weighted for period
general borrowings outstanding
(`) (`) (`)
1 April 2019 2,00,000 0 0
30 June 2019 6,00,000 1,00,000* 1,00,000 × 9/12 = 75,000
31 Dec 2019 12,00,000 12,00,000 12,00,000 × 3/12 = 3,00,000
31 March 2020 2,00,000 2,00,000 2,00,000 × 0/12 = 0
Total 22,00,000 3,75,000

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

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 (b) Following adjustments /rectifications are required to be done
1. Reserve for foreseeable loss for ` 400 lakh, due within 6 months, should be a part of
provisions. Hence, it needs to be regrouped. If it was also part of previous year’s
comparatives, a note should be added in the notes to account on the regrouping done this
year.
2. Interest accrued and due of ` 700 lakh on term loan will be a part of current liabilities.
Thus, it should be shown under the heading “Other Current Liabilities”.
3. As per Ind AS 2, inventories are measured at the lower of cost and net realisable value.
The amount of any write down of inventories to net realisable value is recognised as an
expense in the period the write-down occurs. Hence, the inventories should be valued at
` 1,200 lakh and write down of ` 300 lakh (` 1,500 lakh – ` 1,200 lakh) will be added to the
operating cost of the entity.
4. In the absence of the declaration date of dividend in the question, it is presumed that the
dividend is declared after the reporting date. Hence, no adjustment for the same is made in
the financial year 2019-2020. However, a note will be given separately in this regard (not
forming part of item of financial statements).
5. Accrued income will be shown in the Statement of Profit and Loss as ‘Other Income’ and as
‘Other Current Asset’ in the Balance Sheet.
6. Since the deferred tax liabilities and deferred tax assets relate to taxes on income levied by
the same governing taxation laws, these shall be set off, in accordance with Ind AS 12. The
net DTA of ` 300 lakh will be shown in the balance sheet.
7. As per Division II of Schedule III to the Companies Act, 2013, the Statement of Profit and
Loss should present the Earnings per Equity Share.
8. The presentation of the notes to ‘Trade Receivables’ will be modified as per the
requirements of Division II of Schedule III.
Balance Sheet of Abraham Ltd.
For the year ended 31 March 2020
Note No. ( ` in lakh)
ASSETS
Non-current assets
Property, plant and equipment 5,000
Deferred tax assets 1 300
Current assets
Inventories 1,200
Financial assets
Trade receivables 2 1,100
Cash and cash equivalents 2,000
Others financial asset (accrued interest) 300
TOTAL 9,900
EQUITY AND LIABILITIES
Equity
Equity share capital 3 1,000
Other equity 4 2,000

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 Non-current liabilities
Financial liabilities
Long-term borrowings 5 5,000
Current liabilities
Financial liabilities
Trade payables 300
Others 6 710
Short-term provisions (300 + 400) 7 700
Other current liabilities 8 190
TOTAL 9,900
Statement of Profit and Loss of Abraham Ltd.
For the year ended 31 st March, 2020
Note No. ( ` in lakh)
Revenue from operations 6,000
Other income 300
Total income 6,300
Expenses
Operating costs 9 3,199
Change in inventories cost 300
Employee benefits expense 1,200
Depreciation 450
Total expenses 5,149
Profit before tax 1,151
Tax expense (201)
Profit for the period 950

Earnings per equity share

Basic 9.5
Diluted 9.5
Number of equity shares (face value of ` 10 each) 100 lakh

Statement of Changes in Equity of Abraham Ltd.

For the year ended 31 March 2020
3. Equity Share Capital (` in lakh)
Balance at the beginning of the Changes in Equity share Balance at the end of
reporting period capital during the year the reporting period
1,000 0 1,000

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 4. Other Equity (` in lakh)
Particulars Reserves & Surplus Total
Capital reserve Retained Earnings
Balance at the beginning of the year 500* 550 1,050
Total comprehensive income for the year 950 950
Balance at the end of the year 500 1,500 2,000

*Note: Capital reserve given in the Note 1 of the question is assumed to be brought forward from
the previous year. However, alternatively, if it may be assumed as created during the year.
1. Deferred Tax ( ` in lakh)
Deferred Tax Asset 700
Deferred Tax Liability 400
300

2. Trade Receivables ( ` in lakh)

Trade receivables considered good 1,065
Trade receivables which have significant increase in credit risk 40
Less: Provision for doubtful debts (5) 35
Total 1,100
5. Long Term Borrowings ( ` in lakh)
Term Loan from Bank (5,700 - 700) 5,000
Total 5,000
6. Other Financial Liabilities ( ` in lakh)
Unclaimed dividends 10
Interest on term loan 700
Total 710
7. Short-term provisions ( ` in lakh)
Provisions 300
Foreseeable loss against a service contract 400
Total 700
8. Other Current Liabilities ( ` in lakh)
Billing in Advance 150
Other 40
Total 190
9. Dividends not recognised at the end of the reporting period
At year end, the directors have recommended the payment of dividend of 10% ie
` 1 per equity share. This proposed dividend is subject to the approval of shareholders in
the ensuing annual general meeting.

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6. (a) (i) The land and government grant should be recognized by A Ltd. at fair value of ` 12,00,000
and this government grant should be presented in the books as deferred income.
Alternatively, if the company is following the policy of recognising non-monetary grants at
nominal value, the company will not recognise any government grant. Land will be shown
in the financial statements at ` 1)
(ii) As per para 10A of Ind AS 20 ‘Accounting for Government Grants and Disclosure of
Government Assistance’, loan at concessional rates of interest is to be measured at fair
value and recognised as per Ind AS 109. Value of concession is the difference between the
initial carrying value of the loan determined in accordance with Ind AS 109, and the
proceeds received. The benefit is accounted for as Government grant.
(iii) ` 25 lakh has been received by D Ltd. for immediate start-up of business. Since this grant
is given to provide immediate financial support to an entity, it should be recognised in the
Statement of Profit and Loss immediately with disclosure to ensure that its effect is clearly
understood, as per para 21 of Ind AS 20.
(iv) ` 10 lakh should be recognized by S Ltd. as deferred income and will be transferred to profit
and loss over the useful life of the asset. In this case, ` 1,00,000 [` 10 lakh/10 years]
should be credited to profit and loss each year over period of 10 years. Alternatively, if the
company is following the policy of recognising non-monetary grants at nominal value, the
company will not recognise any government grant. The machinery will be recognised at
` 70 lakh (` 80 lakh - ` 10 lakh). Reduced depreciation will be charged to the Statement of
Profit or Loss.
(v) As per para 12 of Ind AS 20, the entire grant of ` 25 lakh should be recognized immediately
as deferred income and charged to profit and loss over a period of two years based on the
related costs for which the grants are intended to compensate provided that there is
reasonable assurance that U Ltd. will comply with the conditions attached to the grant.
(b) (a) Points earned on ` 10,00,000 @ 10 points on every ` 500 = [(10,00,000 / 500) x 10] = 20,000
points.
Value of points = 20,000 points x ` 0.5 each point = ` 10,000
Revenue recognized for sale of ` 9,90,099 [10,00,000 x (10,00,000/10,10,000)]
goods
Revenue for points deferred ` 9,901 [10,00,000x (10,000/10,10,000)]
Journal Entry
` `
Bank A/c Dr. 10,00,000
To Sales A/c 9,90,099
To Liability under Customer Loyalty programme 9,901
(b) Points earned on ` 50,00,00,000 @ 10 points on every ` 500 = [(50,00,00,000/500) x 10] =
1,00,00,000 points.
Value of points = 1,00,00,000 points x ` 0.5 each point = ` 50,00,000
Revenue recognized for sale of goods = ` 49,50,49,505 [50,00,00,000 x (50,00,00,000/
50,50,00,000)]
Revenue for points = ` 49,50,495 [50,00,00,000 x (50,00,000/ 50,50,00,000)]
Journal Entry in the year 2019
` `
Bank A/c Dr. 50,00,00,000
17

© The Institute of Chartered Accountants of India

 To Sales A/c 49,50,49,505
To Liability under Customer Loyalty programme 49,50,495
(On sale of Goods)
Liability under Customer Loyalty programme Dr. 42,11,002
To Sales A/c 42,11,002
(On redemption of (100 lakhs -18 lakhs) points)
Revenue for points to be recognized
Undiscounted points estimated to be recognized next year 18,00,000 x 80% = 14,40,000 points
Total points to be redeemed within 2 years = [(1,00,00,000-18,00,000) + 14,40,000]
= 96,40,000
Revenue to be recognised with respect to discounted point = 49,50,495 x
(82,00,000/96,40,000) = 42,11,002
(c) Revenue to be deferred with respect to undiscounted point in 2019-2020 = 49,50,495 –
42,11,002 = 7,39,493
(d) In 2020-2021, KK Ltd. would recognize revenue for discounting of 60% of outstanding points as
follows:
Outstanding points = 18,00,000 x 60% = 10,80,000 points
Total points discounted till date = 82,00,000 + 10,80,000 = 92,80,000 points
Revenue to be recognized in the year 2020-2021 = [{49,50,495 x (92,80,000 / 96,40,000)} -
42,11,002] = ` 5,54,620.
Liability under Customer Loyalty Programme Dr. ` 5,54,620
To Sales A/c ` 5,54,620
(On redemption of further 10,80,000 points)

The Liability under Customer Loyalty programme at the end of the year 20 20-2021 will be
` 7,39,493 – ` 5,54,620 = ` 1,84,873.
(e) In the year 2021-2022, the merchant will recognize the balance revenue of ` 1,84,873
irrespective of the points redeemed as this is the last year for redeeming the points. Journal entry
will be as follows:
Liability under Customer Loyalty programme Dr. ` 1,84,873
To Sales A/c ` 1,84,873
(On redemption of balance points)

(c) Allocation of proceeds of the bond issue:

Liability component (W.N.1) ` 18,47,720
Equity component ` 1,52,280
` 2,000,000
The liability and equity components would be determined in accordance with Ind AS 32. These
amounts are recognised as the initial carrying amounts of the liability and equity components.
The amount assigned to the issuer conversion option equity element is an addition to equity and
is not adjusted.

18

© The Institute of Chartered Accountants of India

 Basic earnings per share Year 1:
` 10,00,000
= ` 0.83 per ordinary share
12,00,000
Diluted earnings per share Year 1:
It is presumed that the issuer will settle the contract by the issue of ordinary shares. The dilutive
effect is therefore calculated in accordance with the Standard.

` 10,00,000 + ` 1,66,295 (W.N.2)

= ` 0.69 per ordinary share
12,00,000 + 5,00,000 (W.N.3)
Working Notes:
1. This represents the present value of the principal and interest discounted at 9%
1,20,000 x 2.531 = Rs. 3,03,720
20,00,000 x 0.772 = Rs. 15,44,000
Rs. 18,47,720
2. Profit is adjusted for the accretion of ` 1,66,295 (` 18,47,720 × 9%) of the liability because
of the passage of time. However, it is assumed that interest @ 6% for the year has already
been adjusted.
3. 5,00,000 ordinary shares = 250 ordinary shares x 2,000 convertible bonds
OR
XYZ Ltd. would include the total revenue of ` 68,00,000 (` 60,00,000 + ` 8,00,000) from
ABC Ltd. received / receivable in the year ended 31st March 2020 within its revenue and show
` 18,00,000 within trade receivables at 31 March 2020.
Mrs. P would be regarded as a related party of XYZ Ltd. because she is a close family member of
one of the key management personnel of XYZ Ltd.
From 1st June 2019, ABC Ltd. would also be regarded as a related party of XYZ Ltd. because
from that date ABC Ltd. is an entity controlled by another related party.
Since ABC Ltd. is a related party with whom XYZ Ltd. has transactions, XYZ Ltd. should disclose:
– The nature of the related party relationship.
– The revenue of ` 60,00,000 from ABC Ltd. since 1st June 2019.
– The outstanding balance of ` 18,00,000 at 31st March 2020.
In the current circumstances it may well be necessary for XYZ Ltd. to also disclose the
favourable terms under which the transactions are carried out.

19

© The Institute of Chartered Accountants of India

 Test Series: March, 2021
MOCK TEST PAPER 1
FINAL (NEW) COURSE
PAPER 1: FINANCIAL REPORTING
ANSWERS
1. (a) Consolidated Balance Sheet of DEF Ltd. and its subsidiary, XYZ Ltd. as on
31st March, 20X2
Particulars Note No. Rs.
I. Assets
(1) Non-current assets
(i) Property Plant & Equipment 1 86,00,000
(2) Current Assets
(i) Inventories 2 17,14,000
(ii) Financial Assets
(a) Trade Receivables 3 9,98,000
(b) Cash & Cash equivalents 4 2,25,000
Total Assets 1,15,37,000
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 5 50,00,000
(ii) Other Equity 6 49,92,000
(2) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 7 7,45,000
(b) Short term borrowings 8 8,00,000
Total Equity & Liabilities 1,15,37,000
Notes to Accounts
Rs.
1. Property Plant & Equipment
Land & Building 43,00,000
Plant & Machinery (W.N. 7) 43,00,000 86,00,000
2. Inventories
DEF Ltd. 12,00,000
XYZ Ltd. 5,14,000 17,14,000
3. Trade Receivables
DEF Ltd. 5,98,000
XYZ Ltd. 4,00,000 9,98,000
4. Cash & Cash equivalents
DEF Ltd. 1,45,000
XYZ Ltd. 80,000 2,25,000
1

© The Institute of Chartered Accountants of India

 7. Trade payable
DEF Ltd. 4,71,000
XYZ Ltd. 2,74,000 7,45,000
8. Shorter-term borrowings
Bank overdraft 8,00,000
Statement of Changes in Equity:
5. Equity share Capital
Balance at the beginning Changes in Equity share Balance at the end of
of the reporting period capital during the year the reporting period
50,00,000 0 50,00,000
6. Other Equity
Share Equity Reserves & Surplus Total
application component Capital Retained Other
money of compound reserve Earnings Reserves
pending financial
allotment instrument
Balance at
the 0 24,00,000 24,00,000
beginning
Total
comprehensi
ve income
for the year 0 5,72,000 5,72,000
Dividends 0 (2,00,000) (2,00,000)
Total
comprehensi
ve income
attributable
0 3,35,000 3,35,000
to parent
Gain on
Bargain
purchase 18,85,000 18,85,000
Balance at
the end of
reporting 18,85,000 7,07,000 24,00,000 49,92,000
period
It is assumed that there exists no clear evidence for classifying the acquisition of the subsidiary
as a bargain purchase and, hence, the bargain purchase gain has been recognized directly in
capital reserve. If, however, there exists such a clear evidence, the bargain purchase gain would
be recognized in other comprehensive income and then accumulated in capital reserve. In both
the cases, closing balance of capital reserve will be Rs. 18,85,000.

© The Institute of Chartered Accountants of India

 Working Notes:
1. Adjustments of Fair Value
The Plant & Machinery of XYZ Ltd. would stand in the books at Rs. 14,25,000 on
1st October, 20X1, considering only six months’ depreciation on Rs. 15,00,000 total
depreciation being Rs. 1,50,000. The value put on the assets being Rs. 20,00,000 there is
an appreciation to the extent of Rs. 5,75,000.
2. Acquisition date profits of XYZ Ltd. Rs.
Reserves on 1.4. 20X1 10,00,000
Profit & Loss Account Balance on 1.4. 20X1 3,00,000

Profit for 20X2: Total Rs. 8,20,000 less Rs. 1,00,000 (3,00,000 – 3,60,000
2,00,000) i.e. Rs. 7,20,000; for 6 months i.e. up to 1.10.20X1
Total Appreciation including machinery appreciation (10,00,000 16,25,000
1,50,000 + 5,75,000 – 1,00,000)
Share of DEF Ltd. 32,85,000
3. Post-acquisition profits of XYZ Ltd. Rs.
Profit after 1.10. 20X1 [8,20,000-1,00,000]x 6/12 3,60,000
Less: 10% depreciation on Rs. 20,00,000 for 6 months less (25,000)
nd
depreciation already charged for 2 half of 20X1-20X2 on
Rs. 15,00,000 (1,00,000-75,000)
Share of DEF Ltd. 3,35,000

4. Consolidated total comprehensive income Rs.

DEF Ltd.
Retained earnings on 31.3.20X2 5,72,000
Less: Retained earnings as on 1.4.20X1 Profits (0)
for the year 20X1-20X2 5,72,000
Less: Elimination of intra-group dividend (2,00,000)
Adjusted profit for the year 3,72,000
XYZ Ltd.
Adjusted profit attributable to DEF Ltd. (W.N.3) 3,35,000
Consolidated profit or loss for the year 7,07,000

5. No Non-controlling Interest as 100% shares of XYZ Ltd. are held by DEF Ltd.
6. Gain on Bargain Purchase Rs.
Amount paid for 20,000 shares 34,00,000
Par value of shares 20,00,000
DEF Ltd.’s share in acquisition date profits of XYZ Ltd. 32,85,000 (52,85,000)
Gain on Bargain Purchase 18,85,000

7. Value of Plant & Machinery Rs.

DEF Ltd. 24,00,000
XYZ Ltd. 13,50,000
Add: Appreciation on 1.10. 20X1 5,75,000
3

© The Institute of Chartered Accountants of India

 19,25,000
Add: Depreciation for 2nd half charged on pre-
revalued value 75,000
Less: Depreciation on Rs. 20,00,000 for 6 (1,00,000) 19,00,000
months 43,00,000
(b) Accounting treatment for:
1. First Grant
The first grant for ‘Clear River Project’ involving research into effects of various chemicals
waste from the industrial area in Madhya Pradesh, seems to be unconditional as no details
regarding its refund has been mentioned. Even though the research has not been started
nor any major steps have been completed by Rainbow Limited to commence the research,
yet the grant will be recognised immediately in profit or loss for the year ended 31 st March,
20X2.
Alternatively, in case, the grant is conditional as to expenditure on research, the grant will
be recognised in the books of Rainbow Limited over the years the expenditure is being
incurred.
2. Second Grant
The second grant related to commercial development of a new equipment is a grant related
to depreciable asset. As per the information given in the question, the equipment will be
available for sale in the market from April, 20X3. Hence, by that time, grant relates to the
construction of an asset and should be initially recognised as deferred income.
The deferred income should be recognised as income on a systematic and rational basis
over the asset’s useful life.
The entity should recognise a liability on the balance sheet for the years ending
31st March, 20X2 and 31st March, 20X3. Once the equipment starts being used in the
manufacturing process, the deferred grant income of Rs. 100,000 should be recognised
over the asset’s useful life to compensate for depreciation costs.
Alternatively, as per Ind AS 20, Rainbow Limited would also be permitted to offset the
deferred income of Rs. 100,000 against the cost of the equipment in April, 20X3.
3. For flood related compensation
Rainbow Limited will be able to submit an application form only after 31 st May, 20X2 ie in
the year 20X2-20X3. Although flood happened in September, 20X1 and loss was incurred
due to flood related to the year 20X1-20X2, the entity should recognise the income from the
government grant in the year when the application form related to it is submitted and
approved by the government for compensation.
Since, in the year 20X1-20X2, the application form could not be submitted due to adoption
of financials with respect to sales figure before flood occurred, Rainbow Limited should not
recognise the grant income as it has not become receivable as on 31 st March,20X2.
2. (a) Cheery Limited
Extract from the Statement of profit and loss
(Restated)
20X4-X5 20X3-X4
Rs. Rs.
Sales 1,04,000 73,500
Cost of goods sold (80,000) (60,000)
4

© The Institute of Chartered Accountants of India

 Profit before income taxes 24,000 13,500
Income taxes (7,200) (4,050)
Profit 16,800 9,450
Basic and diluted EPS 3.36 1.89
Cheery Limited
Statement of Changes in Equity
Share Retained Total
capital earnings
Balance at 31st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31 March, 20X4 as
st

restated 9,450 9,450

Balance at 31st March, 20X4 50,000 29,450 79,450
Profit for the year ended 31 st March, 20X5 16,800 16,800
Balance at 31st March, 20X5 50,000 46,250 96,250
Extract from the Notes
Some products that had been sold in 20X3-X4 were incorrectly included in inventory at
31st March, 20X4 at Rs. 6,500. The financial statements of 20X3-X4 have been restated to
correct this error. The effect of the restatement on those financial statements is summarized
below:
Effect on 20X3-X4
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses 1,950
(Decrease) in profit (4,550)
(Decrease) in basic and diluted EPS (0.91)
(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)
There is no effect on the balance sheet at the beginning of the preceding period i.e.
1st April, 20X3.
(b) (a) Entity I is likely to provide a price concession and accept an amount less than
Rs. 2 million in exchange for the machinery. The consideration is therefore variable. The
transaction price in this arrangement is Rs. 1.75 million, as this is the amount which entity I
expects to receive after providing the concession and it is not constrained under the variable
consideration guidance. Entity I can also conclude that the collectability threshold is met for Rs.
1.75 million and therefore contract exists.
(b) The transaction price is Rs. 90 per container based on entity J's estimate of total sales
volume for the year, since the estimated cumulative sales volume of 2.8 million containers
would result in a price per container of Rs. 90. Entity J concludes that based on a
transaction price of Rs. 90 per container, it is highly probable that a significant reversal in
the amount of cumulative revenue recognised will not occur when the uncertainty is
resolved. Revenue is therefore recognised at a selling price of Rs. 90 per container as each
container is sold. Entity J will recognise a liability for cash received in excess of the
transaction price for the first 1 million containers sold at Rs. 100 per container (that is,

© The Institute of Chartered Accountants of India

 Rs. 10 per container) until the cumulative sales volume is reached for the next pricing tier
and the price is retroactively reduced.
For the quarter ended 31 st March, 20X8, entity J recognizes revenue of Rs. 63 million
(700,000 containers x Rs. 90) and a liability of Rs. 7 million [700,000 containers x (Rs. 100 -
Rs. 90)].
Entity J will update its estimate of the total sales volume at each reporting date until the
uncertainty is resolved.
(c) Entity K records sales to the retailer at a transaction price of Rs. 47.50 (Rs. 50 less 25% of
Rs. 10). The difference between the per unit cash selling price to the retailers and the
transaction price is recorded as a liability for cash consideration expected to be paid to the
end customer. Entity K will update its estimate of the rebate and the transaction price at
each reporting date if estimates of redemption rates change.
(d) The transaction price is Rs. 950, because the expected reimbursement is Rs. 50. The
expected payment to the retailer is reflected in the transaction price at contract inception, as
that is the amount of consideration to which the manufacturer expects to be entitled after the
price protection. The manufacturer will recognise a liability for the difference between the
invoice price and the transaction price, as this represents the cash that it expects to refund
to the retailer. The manufacturer will update its estimate of expected reimbursement at each
reporting date until the uncertainty is resolved.
3. (a) As per Ind AS 10, the treatment of stated issues would be as under:
(i) Adjusting event: It is an adjusting event as it is the settlement after the reporting period of
a court case that confirms that the entity had a present obligation at the end of the reporting
period. Even though winning of award is favorable to the company, it should be accounted
in its books as receivable since it is an adjusting event.
(ii) Adjusting event: The sale of inventories after the reporting period may give evidence about
their net realizable value at the end of the reporting period, hence it is an adjusting event as
per Ind AS 10. Zoom Limited should value its inventory at Rs. 40,00,000. Hence,
appropriate provision must be made for Rs. 15 lakh.
(iii) Adjusting event: As per Ind AS 10, the receipt of information after the reporting period
indicating that an asset was impaired at the end of the reporting period, or that the amount
of a previously recognised impairment loss for that asset needs to be adjusted.
The bankruptcy of a customer that occurs after the reporting period usually confirms that the
customer was credit-impaired at the end of the reporting period.
(iv) Non – adjusting event:
Announcing or commencing the implementation of a major restructuring after reporting
period is a non-adjusting event as per Ind AS 10. Though this is a non-adjusting event
occurred after the reporting period, yet it would result in disclosure of the event in the
financial statements,if restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was not
taken before or on the reporting date. Hence, it does not give rise to a constructive
obligation at the end of the reporting period to create a provision.
(b) Ind AS 108 ‘Operating Segments’ requires operating segments to be aggregated to present a
reportable segment if the segments have similar economic characteristics, and the segments
are similar in each of the following aggregation criteria:
(a) The nature of the products and services
(b) The nature of the production process
6

© The Institute of Chartered Accountants of India

 (c) The type or class of customer for their products and services
(d) The methods used to distribute their products or provide their services
(e) If applicable, the nature of the regulatory environment
While the products and services are similar, the customers for those products and services are
different.
In Segment 1, the decision to award the contract is in the hands of the local authority, which also
sets prices and pays for the services. The company is not exposed to passenger revenue risk,
since a contract is awarded by competitive tender.
On the other hand, in the inter-city segment, the customer determines whether a bus route is
economically viable by choosing whether or not to buy tickets. T Ltd sets the ticket prices but will
be affected by customer behavior or feedback. T Ltd is exposed to passenger revenue-risk, as it
sets prices which customers may or may not choose to pay.
Operating Segment provides information that makes the financial statements more useful to
investors. In making the investment decisions, investors and creditors consider the returns they
are likely to make on their investment. This requires assessment of the amount, timing and
uncertainty of the future cash flows of T Ltd as well as of management's stewardship of T Ltd’s
resources. How management derives profit is therefore relevant information to an investor.
Inappropriately aggregating segments reduces the usefulness of segment disclosures to
investors. Ind AS 108 requires information to be disclosed that is not readily available elsewhere
in the financial statements, therefore it provides additional information which aids an investor's
understanding of how the business operates and is managed.
In T Ltd.’s case, if the segments are aggregated, then the increased profits in segment 2 will hide
the decreased profits in segment 1. However, the fact that profits have sharply declined in
segment 1 would be of interest to investors as it may suggest that future cash flows from this
segment are at risk.
(c) Investment property is held to earn rentals or for capital appreciation or both. Ind AS 40 shall be
applied in the recognition, measurement and disclosure of investment property. An investment
property shall be measured initially at its cost. After initial recognition, an entity shall measure all
of its investment properties in accordance with the requirement of Ind AS 16 for cost model.
The measurement and disclosure of Investment property as per Ind AS 40 in the balance sheet
would be depicted as follows:
INVESTMENT PROPERTIES:
Particulars Period ended 31st
March, 20X2
(Rs. in crore)
Gross Amount:
Opening balance (A) 10.00
Additions during the year (B) 2.00
Closing balance (C) = (A) + (B) 12.00
Depreciation:
Opening balance (D) 2.50
Depreciation during the year (E) (0.5 + 0.05) 0.55
Closing balance (F) = (D) + (E) 3.05
Net balance (C) - (F) 8.95

© The Institute of Chartered Accountants of India

 The changes in the carrying value of investment properties for the year ended
31st March, 20X2 are as follows:
Amount recognised in Profit and Loss with respect to Investment Properties
Particulars Period ending
31st March, 20X2
(Rs. in crore)
Rental income from investment properties (0.75 + 0.25) 1.00
Less: Direct operating expenses generating rental income
(5+1+2.5+1.5+2+1) (0.13)
Profit from investment properties before depreciation and indirect
expenses 0.87
Less: Depreciation (0.55)
Profit from earnings from investment properties before indirect
expenses 0.32
Disclosure Note on Investment Properties acquired by the entity
The investment properties consist Property A and Property B. As at 31 st March, 20X2, the fair
value of the properties is Rs.10.50 crore. The valuation is performed by independent valuers,
who are specialists in valuing investment properties. A valuation model as recommended by
International Valuation Standards Committee has been applied. The Company considers factors
like management intention, terms of rental agreements, area leased out, life of the assets etc. to
determine classification of assets as investment properties.
The Company has no restrictions on the realisability of its investment properties and no
contractual obligations to purchase, construct or develop investment properties or for repairs,
maintenance and enhancements.
Description of valuation techniques used and key inputs to valuation on investment properties:
Valuation Significant unobservable inputs Range (Weighted
technique average)
Discounted - Estimated rental value per sq. ft. per - Rs. 50 to Rs. 60
cash flow (DCF) month
method - Rent growth per annum - 10% every 3 years
- Discount rate - 12% to 13%
4. (a) The preference shares provide the holder with the right to receive a predetermined amount of annual
dividend out of profits of the company, together with a fixed amount on redemption.
Whilst the legal form is equity, the shares are in substance debt. The fixed level of dividend is
interest and the redemption amount is equivalent to the repayment of a loan.
Under Ind AS 32 ‘Financial Instruments: Presentation’ these instruments should be classified as
financial liabilities because there is a contractual obligation to deliver cash. The preference
shares should be accounted for at amortised cost using the effective interest rate of 18%.
Year 1 April, 20X5 Interest @18% Paid at 4% 31 March, 20X6
Rs. Rs. Rs. Rs.
20X5-20X6 480,000 86,400 (19,200) 547,200
Accordingly, the closing balance of Preference shares at year end i.e. 31 st March, 20X6 would be
Rs. 5,47,200.

© The Institute of Chartered Accountants of India

 Accountant has inadvertently debited interest of Rs. 19,200 in the profit and loss. However, the
interest of Rs. 86,400 should have been debited to profit and loss as finance charge.
Similarly, amount of Rs. 5,47,200 should be included in borrowings (non-current liabilities) and
consequently, Equity should be reduced by Rs. 480,000 proceeds of issue and
Rs. 67,200 (86,400 – 19,200) i.e. total by 5,47,200.
Necessary adjusting journal entry to rectify the books of accounts will be:
Rs. Rs.
Preference share capital (equity) (Balance sheet) Dr. 4,80,000
Finance costs (Profit and loss) Dr. 86,400
To Equity – Retained earnings (Balance sheet) 19,200
To Preference shares (Long-term Borrowings) (Balance 5,47,200
sheet)
(b) According to paragraph 35 of Ind AS 16, when an item of property, plant and equipment is
revalued, the carrying amount of that asset is adjusted to the revalued amount. At the date of
the revaluation, the asset is treated in one of the following ways:
(a) The gross carrying amount is adjusted in a manner that is consistent with the revaluation of
the carrying amount of the asset. For example, the gross carrying amount may be restated
by reference to observable market data or it may be restated proportionately to the change
in the carrying amount. The accumulated depreciation at the date of the revaluation is
adjusted to equal the difference between the gross carrying amount and the carrying
amount of the asset after taking into account accumulated impairment losses.
In such a situation, the revised carrying amount of the machinery will be as follows:
Gross carrying amount Rs. 250 [(200/120) x 150]
Net carrying amount Rs. 150
Accumulated depreciation Rs. 100 (Rs. 250 – Rs. 150)
Journal entry
Plant and Machinery (Gross Block) Dr. Rs. 50
To Accumulated Depreciation Rs. 20
To Revaluation Reserve Rs. 30
Depreciation subsequent to revaluation
Since the Gross Block has been restated, the depreciation charge will be Rs. 25 per annum
(Rs. 250/10 years).
Journal entry
Accumulated Depreciation Dr. Rs. 25 p.a.
To Plant and Machinery (Gross Block) Rs. 25 p.a.
(b) The accumulated depreciation is eliminated against the gross carrying amount of the asset.
The amount of the adjustment of accumulated depreciation forms part of the increase or
decrease in carrying amount that is accounted for in accordance with the paragraphs 39 and
40 of Ind AS 16.
In this case, the gross carrying amount is restated to Rs. 150 to reflect the fair value and
accumulated depreciation is set at zero.

© The Institute of Chartered Accountants of India

 Journal entry
Accumulated Depreciation Dr. Rs. 80
To Plant and Machinery (Gross Block) Rs. 80
Plant and Machinery (Gross Block) Dr. Rs. 30
To Revaluation Reserve Rs. 30
Depreciation subsequent to revaluation
Since the revalued amount is the revised gross block, the useful life to be considered is th e
remaining useful life of the asset which results in the same depreciation charge of Rs. 25
per annum as per Option A (Rs. 150 / 6 years).
Journal entry
Accumulated Depreciation Dr. Rs. 25 p.a.
To Plant and Machinery (Gross Block) Rs. 25 p.a.
(c) Para 36 of Ind AS 7 inter alia states that when it is practicable to identify the tax cash flow with
an individual transaction that gives rise to cash flows that are classified as investing or financing
activities the tax cash flow is classified as an investing or financing activity as appropriate. When
tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is
disclosed.
Accordingly, the transactions are analysed as follows:
Particulars Amount (in crore) Activity
Sale Consideration 100 Investing Activity
Capital Gain Tax (20) Investing Activity
Business profits 30 Operating Activity
Tax on Business profits (3) Operating Activity
Dividend Payment (20) Financing Activity
Dividend Distribution Tax (2) Financing Activity
Income Tax Refund 1.5 Operating Activity
Total Cash flow 86.5

Activity wise Amount (in crore)

Operating Activity 28.5
Investing Activity 80
Financing Activity (22)
Total 86.5
(d) (i) Various categories of capital are:
 Financial
 Manufactured
 Intellectual
 Human
 Social and Relationship
 Natural
Organizations preparing an integrated report are not required to adopt this categorization or
to structure their report along the above lines of the capitals.
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 (ii) The Framework is written primarily in the context of private sector, for-profit companies of
any size but it can also be applied, adapted as necessary, by public sector and not-for-profit
organizations.
(iii) An integrated report may be prepared in response to existing compliance requirements. For
example, an organization may be required by local law to prepare a management
commentary or other report that provides context for its financial statements. If that report is
also prepared in accordance with this Framework, it can be considered an integrated report.
If the report is required to include specified information beyond that required by this
Framework, the report can still be considered an integrated report if that other information
does not obscure the concise information required by this Framework.
5. (a) Journal of Enterprise Ltd.
(Rs. in crores)

Dr. Cr.
(1) Loan Funds Dr. 300
Current Liabilities Dr. 400
Provision for Depreciation Dr. 400
To Property, Plant and Equipment 500
To Current Assets 500
To Capital Reserve 100
(Being division Mobiles along with its assets and liabilities
sold to Turnaround Ltd. for Rs. 25 crores)
Notes :
(1) Any other alternative set of entries, with the same net effect on various accounts, may be
given by the students.
(2) In the given scenario, this demerger will meet the definition of common control transaction.
Accordingly, the transfer of assets and liabilities will be derecognized and recognized as per
book value and the resultant loss or gain will be recorded as capital reserve in the books of
demerged entity (Enterprise Ltd).
Enterprise Ltd.
Balance Sheet after reconstruction (Rs. R in crores)
ASSETS Note No. Amount
Non-current assets
Property, Plant and Equipment 25
Current assets
Other current assets 200
225
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of Rs. 10 each) 25
Other equity (Surplus) 175
Liabilities

11

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 Current liabilities
Current liabilities 25
225
Notes to Accounts
(Rs. in crores)
1. Other Equity
Surplus (175-100) 75
Add: Capital Reserve on reconstruction 100
175
Notes to Accounts: Consequent on transfer of Division Mobiles to newly incorporated company
Turnaround Ltd., the members of the company have been allotted 1 crore equity shares of
Rs. 10 each at a premium of Rs. 15 per share of Turnaround Ltd., in full settlement of the
consideration in proportion to their shareholding in the company.
Balance Sheet of Turnaround Ltd.
(Rs. in crores)
ASSETS Note No. Amount
Non-current assets
Property, Plant and Equipment 100
Current assets
Other current assets 500
600
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of Rs. 10 each) 1 10
Other equity 2 (110)
Liabilities
Non-current liabilities
Financial liabilities
Borrowings 300
Current liabilities
Current liabilities 400
600
Notes to Accounts
(Rs. in
crores)
1. Share Capital:
Issued and Paid-up capital
1 crore Equity shares of Rs. 10 each fully paid up 10
(All the above shares have been issued for consideration other than
cash, to the members of Enterprise Ltd. on takeover of Division
12

© The Institute of Chartered Accountants of India

 Mobiles from Enterprise Ltd.)
2. Other Equity:
Securities Premium 15
Capital reserve [25- (600 – 700)] (125)
(110)
Working Note:
In the given case, since both the entities are under common control, this will be accounted as
follows:
• All assets and liabilities will be recorded at book value
• Identity of reserves to be maintained.
• No goodwill will be recorded.
• Securities issued will be recorded as per the nominal value.
(b) On Initial recognition
Debit (Rs.) Credit (Rs.)
Financial asset-FVOCI Dr. 1,000
To Cash 1,000
On Impairment of debt instrument
Debit Credit
(Rs.) (Rs.)
Impairment expense (P&L) Dr. 30
Other comprehensive income Dr. 20
To Financial asset-FVOCI 50
The cumulative loss in other comprehensive income at the reporting date was Rs. 20. That
amount consists of the total fair value change of Rs. 50 (that is, Rs. 1,000-Rs. 950) offset by the
change in the accumulated impairment amount representing 12-month ECL, that was recognized
(Rs. 30).
On Sale of debt instrument
Debit Credit
(Rs.) (Rs.)
Cash 950
To Financial asset –FVOCI 950
Loss on sale (P&L) 20
To Other comprehensive income 20
(c) Calculation of capitalization rate on borrowings other than specific borrowings
Nature of general Period of Amount of loan Rate of Weighted average
borrowings outstanding (Rs.) interest p.a. amount of interest
balance (Rs.)
a b c d = [(b x c) x (a/12)]
9% Debentures 12 months 30,00,000 9% 2,70,000
Bank overdraft 9 months 4,00,000 12% 36,000
13

© The Institute of Chartered Accountants of India

 2 months 4,00,000 15% 10,000
1 month 8,00,000 15% 10,000
46,00,000 3,26,000

Weighted average cost of borrowings

= {30,00,000 x(12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12)}
= 34,33,334
Capitalisation rate = (Weighted average amount of interest / Weighted average of general
borrowings) x 100
= (3,26,000 / 34,33,334) x 100 = 9.50% p.a.
6. (a) Calculation of the value in use of the machine owned by East Ltd. (East) includes the projected
cash inflow (i.e. sales income) from the continued use of the machine and projected cash
outflows that are necessarily incurred to generate those cash inflows (i.e cost of goods sold).
Additionally, projected cash inflows include Rs. 80,000 from the disposal of the asset in March,
20X8. Cash outflows include routing capital expenditures of Rs. 50,000 in 20X5-X6
As per Ind AS 36, estimates of future cash flows shall not include:
• Cash inflows from receivables
• Cash outflows from payables
• Cash inflows or outflows expected to arise from future restructuring to which an entity is not
yet committed
• Cash inflows or outflows expected to arise from improving or enhancing the asset’s
performance
• Cash inflows or outflows from financing activities
• Income tax receipts or payments.
Hence in this case, cash flows do not include financing interest (i.e. 10%), tax (i.e. 30%) and
capital expenditures to which East has not yet committed (i.e. Rs. 100 000). They also do not
include any savings in cash outflows from these capital expenditure, as required by Ind AS 36.
The cash flows (inflows and outflows) are presented below in nominal terms. They include an
increase of 3% per annum to the forecast price per unit (B), in line with forecast inflation. The
cash flows are discounted by applying a discount rate (8%) that is also adjusted for inflation.
Note: Figures are calculated on full scale and then rounded off to the nearest absolute value.
Year ended 20X3-X4 20X4-X5 20X5-20X6 20X6-X7 20X7-X8 Value in
use
Rs. Rs. Rs. Rs. Rs. Rs.
Quantity (A) 10,000 10,500 11,025 11,576 12,155
Price per 200 206 212 219 225
unit(B)
Estimated cash 20,00,000 21,63,000 23,37,300 25,35,144 27,34,875
inflows (C=A x
B)
Misc. cash 80 000
inflow disposal
proceeds (D)
Total 20,00,000 21,63,000 23,37,300 25,35,144 28,14,875
14

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 estimated cash
inflows
(E=C+D)
Cost per unit 160 162 165 168 171
(F)
Estimated cash (16,00,000) (17,01,000) (18,19,125) (19,44,768) (20,78,505)
outflows (G =
A x F)
Misc. cash (50,000)
outflow:
maintenance
costs (H)
Total (16,00,000) (17,01,000) (18,69,125) (19,44,768) (20,78,505)
estimated cash
outflows
(I=G+H)
Net cash flows 4,00,000 4,62,000 4,68,175 5,90,376 7,36,370
(J=E-I)
Discount factor 0.9259 0.8573 0.7938 0.7350 0.6806
8% (K)
Discounted 3,70,360 3,96,073 3,71,637 4,33,926 5,01,173 20,73,169
future cash
flows
(L=J x K)
(b) The revenue from sale of goods shall be recognised at the fair value of the consideration
received or receivable. The fair value of the consideration is determined by discounting all future
receipts using an imputed rate of interest where the receipt is deferred beyond normal credit
terms. The difference between the fair value and the nominal amount of the consideration is
recognised as interest revenue.
The fair value of consideration (cash price equivalent) of the sale of goods is calculated as
follows: Rs.
Year Consideration Present value Present value of
(Installment) factor consideration
Time of sale 3,33,333 - 3,33,333
End of 1st year 3,33,333 0.949 3,16,333
End of 2nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000
The Company that agrees for deferring the cash inflow from sale of goods will recognise the
revenue from sale of goods and finance income as follows:
Initial recognition of sale of goods Rs. Rs.
Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt of
second installment
Cash Dr. 3,33,333
To Interest Income 33,053

15

© The Institute of Chartered Accountants of India

 To Trade Receivable 3,00,280
Recognition of interest expense and payment of
final installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 16,947
To Trade Receivable 3,16,387
Statement of Profit and Loss (extracts)
for the year ended 31 st March, 20X2 and 31 st March, 20X3
Rs.
As at 31st March, 20X2 As at 31st March, 20X3
Income
Sale of Goods 9,50,000 -
Other Income (Finance 33,053 16,947
income)
Balance Sheet (extracts) as at 31 st March, 20X2 and 31 st March, 20X3 Rs.
As at 31st March, 20X2 As at 31st March, 20X3
Assets
Current Assets
Financial Assets
Trade Receivables 3,16,387 -
(c) Either
Functional currency is the currency of the primary economic environment in which the entity
operates. In this regard, the primary economic environment will normally be the one in which it
primarily generates and expends cash i.e. it operates. The functional currency is normally the
currency of the country in which the entity is located. It might, however, be a different currency.
The following are the factors that influence determination of an appropriate functional currency:
1. Primary indicators:
(a) the currency:
i. that mainly influences sales prices for its goods and services. This will often be the
currency in which sales prices are denominated and settled; and
ii. of the country whose competitive forces and regulations mainly determine the
sales prices of its goods and services.
iii. the currency that mainly influences labour, material and other costs of providing
goods and services. This will often be the currency in which these costs are
denominated and settled.
2. Secondary indicators: Other factors that may provide supporting evidence to determine an
entity’s functional currency are-
(a) the currency in which funds from financing activities (i.e. issuing debt and equity
instruments) are generated; and
(b) the currency in which receipts from operating activities are usually retained.

16

© The Institute of Chartered Accountants of India

 OR
Basic EPS is Rs. 0.50 per share (ie 500,000/1,000,000)
The earnings per incremental share for the convertible bonds is calculated as follows:
Earnings effect = No. of bonds x nominal value x interest cost x (1 – applicable tax rate)
= 1,000 x 100 x 10% x (1- 0.21) = Rs. 7,900.
Incremental shares calculation
Assume all bonds are converted to shares, even though this converts Rs. 100 worth of
bonds into 20 shares worth only Rs. 90 and is therefore not economically rational.
This gives 1000 x 20 = 20,000 additional shares.
Earnings per incremental share = Rs. 7,900 / 20,000 = Rs. 0.395
Diluted EPS = (Rs. 500,000 + Rs. 7,900) / (1,000,000 + 20,000) = Rs. 0.498 per share.

17

© The Institute of Chartered Accountants of India

 Test Series: April, 2021
MOCK TEST PAPER 2
FINAL (NEW) COURSE
PAPER 1: FINANCIAL REPORTING
ANSWERS
1. (a) Balance Sheet of Master Creator Private Limited as at 31 st March, 20X2
Particulars Working/ (Rs.)
Note
reference
ASSETS
Non-current assets
Property, plant and equipment 1 49,87,750
Capital work-in-progress 2 20,01,600
investment Property 3 15,48,150
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 4 17,33,480
Current assets
Inventories 5,98,050
Financial assets
Investments (55,000 + 5,000) 5 60,000
Trade receivables 6 7,25,000
Cash and cash equivalents 7 1,16,950
Other financial assets 8 1,27,370
Other current assets (Prepaid expenses) 8 90,000
TOTAL ASSETS 1,24,50,850
EQUITY AND LIABILITIES
Equity
Equity share capital A 10,00,000
Other equity B 28,44,606
Non-current liabilities
Financial liabilities
8% Convertible loan 11 60,60,544
Long term provisions 5,24,436
Deferred tax liability 12 2,20,700
Current liabilities
Financial liabilities
Trade payables 13 6,69,180
Other financial liabilities 14 1,19,299
Other current liabilities (TDS payable) 15 81,265

© The Institute of Chartered Accountants of India

 Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,24,50,850
Statement of changes in equity
For the year ended 31 st March, 20X2
A. Equity Share Capital
Balance (Rs.)
As at 31 st March, 20X1 10,00,000
Changes in equity share capital during the year -
As at 31 st March, 20X2 10,00,000
B. Other Equity
Retained Equity Total
Earnings component of (Rs.)
(Rs.) Compound
Financial
Instrument
(Rs.)
As at 31 st March, 20X1 21,25,975 - 21,25,975
Total comprehensive income for the year
(25,00,150 + 5,000 - 85,504- 21,25,975) 2,93,671 - 2,93,671
Issue of compound financial instrument
during the year - 4,24,960 4,24,960
As at 31 st March, 20X2 24,19,646 4,24,960 28,44,606
Disclosure forming part of Financial Statements:
Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance Sheet
date. (Note 9)
Notes/ Workings: (for adjustments/ explanations)
1. Property, plant and equipment are tangible items that: (a) are held for use in the
production or supply of goods or services, for rental to others, or for administrative
purposes; and (b) are expected to be used during more than one period. Therefore, the
items of PPE are Buildings (Rs. 37,50,250) and Vehicles (Rs. 12,37,500), since those
assets are held for administrative purposes.
2. Property, plant and equipment which are not ready for intended use as on the date of
Balance Sheet are disclosed as “Capital work-in-progress”. It would be classified from
PPE to Capital work-in-progress.
3. Investment property is property (land or a building—or part of a building—or both) held
(by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes;
or
(b) sale in the ordinary course of business.
Therefore, Land held for capital appreciation should be classified as Investment property
rather than PPE.
2

© The Institute of Chartered Accountants of India

 4. Assets for which the future economic benefit is the receipt of goods or services, rather
than the right to receive cash or another financial asset, are not financial assets.
5. Current investments here are held for the purpose of trading. Hence, it is a financial
asset classified as FVTPL. Any gain in its fair value will be recognised through profit or
loss. Hence, Rs. 5,000 (60,000 – 55,000) increase in fair value of financial asset will be
recognised in profit and loss.
6. A contractual right to receive cash or another financial asset from another entity is a
financial asset. Trade receivables is a financial asset in this case and hence should be
reclassified.
7. Cash is a financial asset. Hence it should be rec lassified.
8. Other current financial assets:
Particulars Amount (Rs.)
Interest accrued on bank deposits 57,720
Royalty receivable from dealers 69,650
Total 1,27,370
Prepaid expenses does not result into receipt of any cash or financial asset. However, it
results into future goods or services. Hence, it is not a financial asset.
9. As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after the
reporting period but before the financial statements are approved for issue, the dividends
are not recognized as a liability at the end of the reporting period because no obligation
exists at that time. Such dividends are disclosed in the notes in accordance with Ind AS 1 ,
Presentation of Financial Statements.
10. ‘Other Equity’ cannot be shown under ‘Non-current liabilities’. Accordingly, it is
reclassified under ‘Equity’.
11. There are both ‘equity’ and ‘debt’ features in the instrument. An obligation to pay cash
i.e. interest at 8% per annum and a redemption amount will be treated as ‘financial
liability’ while option to convert the loan into equity shares is the equity element in the
instrument. Therefore, convertible loan is a compound financial instrument.
Calculation of debt and equity component and amount to be recognised in the
books:
S. No Year Interest amount @ Discounting factor @ Amount
8% 10%
Year 1 20X2 5,12,000 0.91 4,65,920
Year 2 20X3 5,12,000 0.83 4,24,960
Year 3 20X4 5,12,000 0.75 3,84,000
Year 4 20X5 69,12,000 0.68 47,00,160
Amount to be recognised as a liability 59,75,040
Initial proceeds (64,00,000)
Amount to be recognised as equity 4,24,960

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

© The Institute of Chartered Accountants of India

 Presentation in the Financial Statements:
In Statement of Profit and Loss for the year ended on 31 March 20 X2
Finance cost to be recognised in the Statement of Profit and Loss Rs. 5,97,504
(59,75,040 x 10%)
Less: Already charged to the Statement of Profit and Loss (Rs.5,12,000)
Additional finance charge required to be recognised in the Statement
of Profit and Loss Rs. 85,504

In Balance Sheet as at 31 March 20X2

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

12. Since entity has the intention to set off deferred tax asset against deferred tax liability and
the entity has a legally enforceable right to set off taxes, hence their balance on net basis
should be shown as:
Particulars Amount (Rs.)
Deferred tax liability 4,74,850
Deferred tax asset (2,54,150)
Deferred tax liability (net) 2,20,700
13. A liability that is a contractual obligation to deliver cash or another financial asset to
another entity is a financial liability. Trade payables is a financial liability in this case.
14. ‘Other current financial liabilities’:
Particulars Amount (Rs.)
Wages payable 21,890
Salary payable 61,845
Interest accrued on trade payables 35,564
Total 1,19,299
15. Liabilities for which there is no contractual obligation to deliver cash or other financial
asset to another entity, are not financial liabilities. Hence, TDS payable should be
reclassified from ‘Other current financial liabilities’ to ‘Other current liabilities’ since it is
not a contractual obligation.
(b) The loans from ABC Bank carry interest @ 10% and 12% for 5 year term and 3 year term
respectively. Additionally, there is a processing fee payable @ 1% on the principal amount on
date of transaction. It is assumed that ABC Bank charges all customers in a similar manner
and hence this is representative of the market rate of interest.
Amortised cost is computed by discounting all future cash flows at market rate of interest.
Further, any transaction fees that are an integral part of the transaction are adjusted in the
effective interest rate and recognised over the term of the instrument.

© The Institute of Chartered Accountants of India

 Hence loan processing fees shall be reduced from the principal amount to arrive the value on
day 1 upon initial recognition.
Fair value (5 year term loan) = 10,00,000 – 10,000 (1% x 10,00,000) = 9,90,000
Fair value (3 year term loan) = 8,00,000 – 8,000 (1% x 8,00,000) = 7,92,000.
Now, effective interest rate shall be higher than the interest rate of 10% and 12% on 5 year
loan and 3 year loan respectively, so that the processing fees gets recognised as interest over
the respective term of loans.
2. (a) Calculation of discounting factor based on yield @ 6% p.a.
Date Spot rate at Forward rate for Discount factor @ 6%
indicated 30th September p.a. on quarter basis
date 20X1
1st April, 20X1 76 0.971
30th June 20X1 74 0.985
30th September, 20X1 72 71 1
Determination of fair value change
1st April, 30th June, 30th September,
20X1 20X1 20X1
a Nominal value in Rs. @ Rs. 76 / USD 7,600 7,600 7,600
b Nominal value in USD (100 kg for USD
100) 100 100 100
c Forward rate for 30 th September, 20X1 76 74 71
d Value in Rs. (b x c) 7,600 7,400 7,100
e Difference (a-d) 0 200 500
f Discount factor (as calculated in the
above table) 0.971 0.985 1
g Fair value (e x f) 0 197 500
h Fair value change for the period 0 197 303*
* 500 – 197= 303
Journal Entries
Date Particulars Dr. Cr.
1st April, 20X1 No entry as initial fair value is zero
30th June, 20X1 Future Contract Dr. 197
To Cash Flow Hedge Reserve (Other Equity)- OCI 197
(Being Change in Fair Value of Hedging Instrument
recognised in OCI accumulated in a separate component
in Equity)
30th September, Future Contract Dr. 303
20X1 To Cash Flow Hedge Reserve (Other Equity) - OCI 303
(Being change in fair value of the hedging instrument
recognised in OCI)
30th September, Bank/Trade Receivable Dr. 7,200

© The Institute of Chartered Accountants of India

 20X1 To Revenue from Contracts with Customers 7,200
(Being sale of 100 kgs. of copper for USD 100
recognised at spot rate of Rs. 72 for USD 1)
30th September, Cash Flow Hedge Reserve (Other Equity) - OCI Dr. 500
20X1 To Revenue from Contracts with Customers 500
(Being fair value change in forward contract reclassified
to profit and loss and recognised in the line item affected
by the hedge item)
30th September, Bank / Cash Dr. 500
20X1 To Future Contract 500
(b) In the given case, Lessee calculates the ROU asset and the lease liabilities before
modification as follows:
Lease Liability ROU asset
Year Initial Lease Interest Closing Initial Depreciation Closing
value payments expense @ balance Value balance
8%
a b c = a x 8% d = a-b + c e f g
1 4,02,600* 60,000 32,208 3,74,808 4,02,600 40,260 3,62,340
2 3,74,808 60,000 29,985 3,44,793 3,62,340 40,260 3,22,080
3 3,44,793 60,000 27,583 3,12,376 3,22,080 40,260 2,81,820
4 3,12,376 60,000 24,990 2,77,366 2,81,820 40,260 2,41,560
5 2,77,366 60,000 22,189 2,39,555 2,41,560 40,260 2,01,300
6 2,39,555 2,01,300
* Initial value of ROU asset and lease liability = Annual lease payment x annuity factor @ 8%
= 60,000 x 6.71 = Rs. 4,02,600
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the
lease liability based on:
(a) a five-year remaining lease term,
(b) annual payments of Rs. 35,000 and
(c) Lessee’s incremental borrowing rate of 6% p.a.
Present value of modified lease = Annual lease payment x annuity factor @ 6% = 35,000 x
4.212 = 1,47,420
Lessee determines the proportionate decrease in the carrying amount of the ROU Asset on the
basis of the remaining ROU Asset (i.e., 3,000 square metres corresponding to 50% of the
original ROU Asset).
50% of the pre-modification ROU Asset (Rs. 2,01,300) is Rs. 1,00,650
50% of the pre-modification lease liability (Rs. 2,39,555) is Rs. 1,19,777.50.
Consequently, Lessee reduces the carrying amount of the ROU Asset by Rs. 1,00,650 and the
carrying amount of the lease liability by Rs. 1,19,777.50. Lessee recognises the difference
between the decrease in the lease liability and the decrease in the ROU Asset
(Rs. 1,19,777.50 – Rs. 1,00,650 = Rs. 19,127.50) as a gain in profit or loss at the effective
date of the modification (at the beginning of Year 6).

© The Institute of Chartered Accountants of India

 Lessee recognises the difference between the remaining lease liability of Rs. 1,19,777.50 and
the modified lease liability of Rs. 1,47,420 (which equals Rs. 27,642.50) as an adjustment to
the ROU Asset reflecting the change in the consideration paid for the lease and t he revised
discount rate.
3. (a) Consolidated Balance Sheet of David Ltd as on 1 st April, 20X1 (Rs. in lakh)
Amount
Assets
Non-current assets:
Property, plant and equipment 850.00
Investment 500.00
Current assets:
Inventories 400.00
Financial assets:
Trade receivables 600.00
Cash and cash equivalents 350.00
Others 600.00
Total 3,300.00
Equity and Liabilities
Equity
Share capital - Equity shares of Rs. 100 each 514.00
Other Equity 1,067.49
Non Controlling Interest 173.70
Non-current liabilities:
Financial liabilities:
Long term borrowings 500.00
Long term provisions (100+80+23.81) 203.81
Deferred tax 11.00
Current liabilities:
Financial liabilities:
Short term borrowings 300.00
Trade payables 520.00
Provision for law suit damages 10.00
Total 3,300.00
Working Notes:
a. Fair value adjustment- As per Ind AS 103, the acquirer is required to record the assets
and liabilities at their respective fair value. Accordingly, the PPE will be recorded at
Rs. 450 lakh.
b. The value of replacement award is allocated between consideratio n transferred and post
combination expense. The portion attributable to purchase consideration is determined
based on the fair value of the replacement award for the service rendered till the date of
the acquisition. Accordingly, Rs. 3 lakh (6 x 2/4) is considered as a part of purchase
7

© The Institute of Chartered Accountants of India

 consideration and is credited to David Ltd equity as this will be settled in its own equity.
The balance of Rs. 3 lakh will be recorded as employee expense in the books of Parker
Ltd over the remaining life, which is 1 year in this scenario.
c. There is a difference between contingent consideration and deferred consideration. In the
given case, Rs. 30 lakh is the minimum payment to be paid after 3 years and accordingly
will be considered as deferred consideration. The other element is if company meet
certain target then they will get 25% of that or Rs. 30 lakh whichever is higher. In the
given case, since the criteria is the minimum what is expected to be paid, the fair value of
the contingent consideration has been considered as zero. The impact of time value on
deferred consideration has been given @ 8%.
d. The additional consideration of Rs. 25 lakh to be paid to the founder shareholder is
contingent to him/her continuing in employment and hence this will be considered as
employee compensation and will be recorded as post combination expenses in the
income statement of Parker Ltd.
Working Notes:
1. Computation of Purchase Consideration Rs. in lakh
Particulars Amount
Share capital of Parker Ltd. 400
Number of shares 4,00,000
Shares to be issued 2:1 2,00,000
Fair value per share 50
Purchase consideration (2,00,000x70%xRs. 50 per share) (A) 70.00
Deferred consideration after discounting Rs. 30 lakh for 3 years
@ 8% (B) 23.81
Replacement award - Market based measure of the acquiree award
ie Fair value of original award (6) x ratio of the portion of the
vesting period completed (2) / greater of the total vesting period (3)
or the original vesting period (4) of the acquiree award ie (6 x 2 / 4)
(C) 3.00
Purchase consideration (A+B+C) 96.81
2. Allocation of Purchase consideration
Particulars Book Fair FV
value value adjustment
(A) (B) (A-B)
Property, plant and equipment 600 450 (150)
Investment 200 200 -
Inventories 100 100 -
Financial assets: -
Trade receivables 200 200 -
Cash and cash equivalents 200 200 -
Others 300 300
Less: Financial Liabilities
Long term borrowings (300) (300) -
Long term provisions (80) (80) -
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 Deferred tax (55) (55) -
Financial Liabilities
Short term borrowings (170) (170) -
Trade payables (320) (320) -
Contingent liability - (10) (10)
Net assets (X) 675 515 (160)
Deferred tax asset on fair value adjustment
(160 x 40%) (Y) 64 160
Net assets (X+Y) 579
Non-controlling interest (NCI)
(579 x 30%) rounded off 173.70
Capital reserve (Net assets – NCI – PC) 308.49
Purchase consideration (PC) 96.81
3. Computation of Consolidated amounts of consolidated financial statements
David Parker Ltd. PPA Total
Ltd. (pre- Allocation
acquisition)
Assets
Non-current assets:
Property, plant and equipment 400 600 (150) 850
Investment 300 200 500
Current assets:
Inventories 300 100 400
Financial assets:
Trade receivables 400 200 600
Cash and cash equivalents 150 200 350
Others 300 300 600
Total 1,850 1,600 (150) 3300
Equity and Liabilities
Equity
Share capital- Equity shares 500
of Rs. 100 each
Shares allotted to Parker Ltd.
(2,00,000 x 70% x Rs. 10 per 14 514
share)
Other Equity
Other Equity 700 700
Replacement award 3 3
Security premium
(2,00,000 shares x 70% x Rs. 40) 56 56
Capital reserve 308.49 308.49
Non-controlling interest 0 173.70 173.70

© The Institute of Chartered Accountants of India

 Non-current liabilities:
Financial Liabilities
Long term borrowings 200 300 500
Long term provisions 100 80 23.81 203.81
Deferred tax 20 55 (64) 11
Current liabilities:
Financial Liabilities
Short term borrowings 130 170 300
Trade payable 200 320 0 520
Liability for lawsuit damages 10 10
Total 1,850 925 525 3,300
(b)
Particulars Amount (Rs.)
Fair value as at 1 st April, 20X1 13,750
Increase due to Price change [250 x {60 - (13,750/250)}] 1,250
Increase due to Physical change [250 x {75-60}] 3,750
Fair value as at 31 st March, 20X2 18,750
4. (a) Calculation of the liability and equity components on 6% Convertible debentures:
Present value of principal payable at the end of 4 th year (Rs. 1,80,000 thousand x 0.74)
= Rs. 1,33,200 thousand
Present value of interest payable annually for 4 years (Rs. 1,80,000 thousand x 6% x 3.31)
= Rs. 35,748 thousand
Total liability component = Rs. 1,68,948 thousand
Therefore, equity component = Rs. 1,80,000 thousand – Rs. 1,68,948 thousand
= Rs. 11,052 thousand
Calculation of finance cost and closing balance of 6% convertible debentures
Year Opening balance Finance cost Interest paid Closing
Rs. in ’000 @ 8% @ 6% balance
Rs. in ’000 Rs. in ’000 Rs. in ’000
a b = a x 8% c d=a+b-c
31.3.20X2 1,68,948 13,516 10,800 1,71,664
31.3.20X3 1,71,664 13,733 10,800 1,74,597
Finance cost of convertible debentures for the year ended 31.3. 20X3 is Rs. 13,733 thousand
and closing balance as on 31.3.20X3 is Rs. 1,74,597 thousand.
Calculation of Basic EPS Rs. in ’000
Profit for the year 39,000
Less: Dividend on preference shares (80,000 thousand x Rs. 0.05) (4,000)
Profit attributable to equity shareholders 35,000
Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)}

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 = 23,75,00,000 shares or 2,37,500 thousand shares
Basic EPS = Rs. 35,000 thousand / 2,37,500 thousand shares
= Rs. 0.147
Calculation of Diluted EPS Rs. in ’000
Profit for the year 39,000
Less: Dividend on preference shares (80,000 x 0.05) (4,000)
35,000
Add: Finance cost (as given in the above table) 13,733
Less: Tax @ 25% (3,433.28) 10,300
45,300
Weighted average number of shares = 20,00,00,000 + {5,00,00,000 x (9/12)} + 10,00,00,000
= 33,75,00,000 shares or 3,37,500 thousand shares
Diluted EPS = Rs. 45,300 thousand / 3,37,500 thousand shares
= Rs. 0.134
(b)
Particulars Year 20X0-20X1 Year 20X1-20X2
Annual Salary Rs. 30,00,000 Rs. 30,00,000
No. of working days (A) 300 days 300 days
Leaves Allowed 10 days 10 days
Leaves Taken (B) 7 days 13 days
Therefore, No. of days worked (A – B) 293 days 287 days
Expense proposed to be recognized by Rs. 30,00,000 Rs. 30,00,000
Infotech Ltd.
Based on the evaluation above, Mr. Niranjan has worked for 6 days more (293 days –
287 days) in 20X0-20X1 as compared to 20X1-20X2.
Since he has worked more in 20X0-20X1 as compared to 20X1-20X2, the accrual concept
requires that the expenditure to be recognized in 20X0-20X1 should be more as compared to
20X1-20X2.
Thus, if Infotech Ltd. recognizes the same expenditure of Rs. 30,00,000 for each year, it would
be in violation of the accrual concept.
The expenditure to be recognized will be as under:
Particulars Year 20X0-20X1 Year 20X1-20X2
Annual salary (A) Rs. 30,00,000 Rs. 30,00,000
No. of working days (B) 300 days 300 days
Salary cost per day (A ÷ B) Rs. 10,000 per day Rs. 10,000 per day
No. of days worked (from above) 293 days 287 days
Expense to be recognised:
In 20X0-20X1:Rs. 30,00,000 + [Rs. 10,000 per
day x 3 days (leaves unutilized expected to be Rs. 30,30,000
utilized subsequently)]
In 20X1-20X2:Rs. 30,00,000 – [Rs. 10,000 per
day – 3 days (excess leave utilized in Rs. 29,70,000
20X1-20X2)]

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 Journal Entry for 20X0-20X1
Employee Benefits Expense Account Dr. 30,30,000
To Bank Account 30,00,000
To Provision for Leave Encashment 30,000
Journal Entry for 20X1-20X2
Employee Benefits Expense Account Dr. 29,70,000
Provision for Leave Encashment Account Dr. 30,000
To Bank Account 30,00,000
5. (a) In the instant case, the quarterly net profit has not been correctly stated. As per Ind AS 34,
Interim Financial Reporting, the quarterly net profit should be adjusted and restated as follows:
(i) The treatment of bad debts is not correct as the expenses incurred during an interim
reporting period should be recognised in the same period. Accordingly, Rs. 50,000
should be deducted from Rs. 20,00,000.
(ii) Recognising additional depreciation of Rs. 4,50,000 in the same quarter is correct and is
in tune with Ind AS 34.
(iii) Treatment of exceptional loss is not as per the principles of Ind AS 34, as the entire
amount of Rs. 28,000 incurred during the third quarter should be recognized in the same
quarter. Hence Rs. 14,000 which was deferred should be deducted from the profits of
third quarter only.
(iv) As per Ind AS 34 the income and expense should be recognised when they are earned
and incurred respectively. As per para 39 of Ind AS 34, the costs should be anticipated or
deferred only when:
(i) it is appropriate to anticipate or defer that type of cost at the end of the financial
year, and
(ii) costs are incurred unevenly during the financial year of an enterprise.
Therefore, the treatment done relating to deferment of Rs. 5,00,000 is not correct as
expenditures are uniform throughout all quarters.
Thus, considering the above, the correct net profits to be shown in Interim Financial
Report of the third quarter shall be Rs. 14,36,000 (Rs. 20,00,000 -Rs. 50,000 - Rs.14,000
- Rs. 5,00,000).
(b) In determining the transaction price, Buildings Limited separately estimates variable
consideration for each element of variability ie the early completion bonus and the quality
bonus.
Buildings Limited decides to use the expected value method to estimate the variable
consideration associated with the early completion bonus because there is a range of possible
outcomes and the entity has experience with a large number of similar contracts that provide a
reasonable basis to predict future outcomes. Therefore, the entity expects this method to best
predict the amount of variable consideration associated with the early completion bonus.
Buildings Ltd.’s best estimate of the early completion bonus is Rs. 2.125 crore, calculated as
shown in the following table:

Bonus % Amount of bonus (Rs. in Probability Probability-weighted

crore) amount (Rs. in crore)
15% 3.75 25% 0.9375
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 10% 2.50 40% 1.00
5% 1.25 15% 0.1875
0% - 20% -
100% 2.125

Buildings Limited decides to use the most likely amount to estimate the variable consideration
associated with the potential quality bonus because there are only two possible outcomes
(Rs. 2 crore or Rs. Nil) and this method would best predict the amount of consideration
associated with the quality bonus. Buildings Limited believes the most likely amount of the
quality bonus is Rs. 2 crore.
Total variable consideration = 4.125 crore (2.125 crore + 2 crore).
(c) Paragraph 20 of Ind AS 115, inter alia, states that, “An entity shall account for a contract
modification as a separate contract if both of the following conditions are present:
(a) the scope of the contract increases because of the addition of promised goods or services
that are distinct (in accordance with paragraphs 26–30); and
(b) the price of the contract increases by an amount of consideration that reflects the entity’s
stand-alone selling prices of the additional promised goods or services and any
appropriate adjustments to that price to reflect the circumstances of the particular
contract.
In accordance with the above, it may be noted that a contract modification should be accounted
for prospectively if the additional promised goods or services are distinct and the pricing for
those goods or services reflects their stand-alone selling price.
In the given case, even though the remaining services to be provided are distinct, the
modification should not be accounted for as a separate contract because the price of the
contract did not increase by an amount of consideration that reflects the standalone selling
price of the additional services. The modification would be accounted for, from the date of the
modification, as if the existing arrangement was terminated and a new contract created (i.e. on
a prospective basis) because the remaining services to be provided are distinct.
AB Ltd. should reallocate the remaining consideration to all of the remaining services to be
provided (i.e. the obligations remaining from the original contract and the new obligations ).
AB Ltd. will recognise a total of Rs.4,20,000 (Rs.1,20,000 + Rs.3,00,000) over the remaining
four-year service period (one year remaining under the original contract plus three additional
years) or Rs.1,05,000 per year.
(d) Paragraph 41 of Ind AS 8 states as follows: “Errors can arise in respect of the recognition,
measurement, presentation or disclosure of elements of financial statements. Financial
statements do not comply with Ind AS if they contain either material errors or immaterial errors
made intentionally to achieve a particular presentation of an entity’s financial position, financial
performance or cash flows. Potential current period errors discovered in that period are
corrected before the financial statements are approved for issue. However, material errors are
sometimes not discovered until a subsequent period, and these prior period errors are
corrected in the comparative information presented in the financial statements for that
subsequent period.”
In accordance with the above, the reclassification of expenses from finance costs to other
expenses would be considered as correction of an error under Ind AS 8. Accordingly, in the

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 financial statements for the year ended 31 st March, 20X2, the comparative amounts for the
year ended 31 st March 20X1 would be restated to reflect the correct classification.
Ind AS 1 requires an entity to present a third balance sheet as at the beginning of the
preceding period in addition to the minimum comparative financial statements if, inter alia, it
makes a retrospective restatement of items in its financial statements and the restatement has
a material effect on the information in the balance sheet at the beginning of the preceding
period.
In the given case, the retrospective restatement of relevant items in statement of profit and
loss has no effect on the information in the balance sheet at the beginning of th e preceding
period (1 st April 20X0). Therefore, the entity is not required to present a third balance sheet.
6. (a) Ind AS 102 defines grant date and measurement dates as follows:
(a) Grant date: The date at which the entity and another party (including an employee) agree
to a share-based payment arrangement, being when the entity and the counterparty have
a shared understanding of the terms and conditions of the arrangement. At grant date the
entity confers on the counterparty the right to cash, other assets, or equity instruments of
the entity, provided the specified vesting conditions, if any, are met. If that agreement is
subject to an approval process (for example, by shareholders), grant date is the date
when that approval is obtained.
(b) Measurement date: The date at which the fair value of the equity instruments granted is
measured for the purposes of this Ind AS. For transactions wit h employees and others
providing similar services, the measurement date is grant date. For transactions with
parties other than employees (and those providing similar services), the measurement
date is the date the entity obtains the goods or the counterparty renders service.
Applying the above definitions in the given scenarios following would be the conclusion
based on the assumption that the approvals have been received prospectively:
Scenario Grant date Measureme Base for grant date Base for
nt date measurement date
(i) 30th June, 30th June, The date on which the For employees, the
20X1 20X1 scheme was approved measurement date is
by the employees grant date
(ii) 1st April, 30th July, The date when the entity The date when the
20X1 20X1 and the counterparty entity obtains the
entered a contract and goods from the
agreed for settlement by counterparty
equity instruments
(iii) 30th 30th The date when the For employees, the
September, September, approval by measurement date is
20X1 20X1 shareholders was grant date
obtained

(b) Items impacting the Statement of Profit and Loss for the year ended 31 st March, 20X1 (Rs.)
Current service cost 1,75,000
Gains and losses arising from translating the monetary assets in foreign 75,000
currency
Income tax expense 35,000
Share based payments cost 3,35,000

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 Items impacting the other comprehensive income for the year ended 31 st March, 20X1 (Rs.)
Remeasurement of defined benefit plans 2,57,000
Changes in revaluation surplus 1,25,000
Gains and losses arising from translating the financial statements of a foreign
operation 65,000
Gains and losses from investments in equity instruments designated at fair
value through other comprehensive income 1,00,000

(c) (a) A Ltd. has entered into an arrangement wherein against the borrowing, A Ltd. has
contractual obligation to make stream of payments (including interest and principal). This
meets definition of financial liability.
(b) Let’s compute the amount required to be settled and any differential arising upon one time
settlement at the end of 6 th year –
 Loan principal amount = Rs. 10,00,000
 Amount payable at the end of 6 th year = Rs. 12,54,400 [10,00,000 x 1.12 x 1.12
(Interest for 5 th & 6th year in default plus principal amount)]
 One time settlement = INR 13,00,000
 Additional amount payable = Rs. 45,600
The above represents a contractual obligation to pay cash against settlement of a financial
liability under conditions that are unfavorable to A Ltd. (owing to additional amount p ayable in
comparison to amount that would have been paid without one time settlement). Hence the
rescheduled arrangement meets definition of ‘financial liability’.
(d) Either
The major changes in Ind AS 2 vis-à-vis AS 2 with respect to following are as follows:
(i) Machinery Spares: AS 2 explains that 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. Such items are accounted for in
accordance with AS 10. Ind AS 2 does not contain specific explanation in respect of such
spares as this aspect is covered under Ind AS 16.
(ii) Subsequent Assessment of Net Realisable Value (NRV): Ind AS 2 provides detailed
guidance in case of subsequent assessment of net realisable value. It also deals with the
reversal of the write-down of inventories to net realisable value to the extent of the
amount of original write-down, and the recognition and disclosure thereof in the financial
statements. AS 2 does not deal with such reversal.
(iii) Cost Formulae: AS 2 specifically provides that the formula used in determining the cost of
an item of inventory should reflect the fairest possible approximation to the cost incurred
in bringing the items of inventory to their present location and condition whereas Ind AS 2
does not specifically state so and requires the use of consistent cost formulas for all
inventories having a similar nature and use to the entity.
OR

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 Determining whether a good or service represents a performance obligation on its own or is
required to be aggregated with other goods or services can have a significant impact on the
timing of revenue recognition. While the customer may be able to benefit from each promised
good or service on its own (or together with other readily available resources), they do not
appear to be separately identifiable within the context of the contract. That is, the promised
goods and services are subject to significant integration, and as a result will be treated as a
single performance obligation.
This is consistent with a view that the customer is primarily interested in acquiring a single
asset (a water purification plant) rather than a collection of related components and services.

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 Test Series: October, 2021
MOCK TEST PAPER 1
FINAL (NEW) COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (a) Full Retrospective Approach:
Under the full retrospective approach, the lease liability and the ROU asset are measured on the
commencement date (i.e., 1 st April, 20X1 in this case) using the incremental borrowing rate at
lease commencement date (i.e., 12% p.a. in this case). The lease liability is accounted for by the
interest method subsequently and the ROU asset is subject to depreciation on the straight-line
basis over the lease term of three years. The Lease Liability and ROU Asset are as follows:
Year Payments Present Discounted Cash
(Cash flows) Value Factor flows / Present
@ 12% Value
31 Mar 20X2 2,00,000 0.8929 1,78,580
31 Mar 20X3 2,00,000 0.7972 1,59,440
31 Mar 20X4 2,00,000 0.7118 1,42,360
6,00,000 4,80,380

Lease Liability Schedule:

Year Opening Interest Expense @ 12% Payments Closing
31 Mar 20X2 4,80,380 57,646 (2,00,000) 3,38,026
31 Mar 20X3 3,38,026 40,563 (2,00,000) 1,78,589
31 Mar 20X4 1,78,589 21,411* (2,00,000) -
*Difference is due to approximation
ROU Asset Schedule:
Year Opening Depreciation Closing
31 Mar 20X2 4,80,380 (1,60,126) 3,20,254
31 Mar 20X3 3,20,254 (1,60,127) 1,60,127
31 Mar 20X4 1,60,127 (1,60,127) -
The following table shows account balances under this method beginning at lease commencement:
Date ROU Asset Lease Interest Depreciation Retained
Liability Expense Expense Earnings
1 Apr 20X1 4,80,380 4,80,380 - - -
31 Mar 20X2 3,20,254 3,38,026 - - -
1 Apr 20X2 3,20,254 3,38,026 (17,772)
31 Mar 20X3 1,60,127 1,78,589 40,563 1,60,127 -
1 Apr 20X3 1,60,127 1,78,589 - - -
31 Mar 20X4 - - 21,411 1,60,127 -

© The Institute of Chartered Accountants of India

 Ind AS 116 is applicable for the financial year beginning from 1 st April, 20X3. Hence, 20X3-20X4
is the first year of adoption and using Full retrospective method the comparative for 20 X2-20X3
needs to be restated and 1 st April, 20X2 (i.e the opening of the comparative) is taken as transition
date for adoption of this standard. At adoption, the lessee would record the ROU asset and
lease liability at the 1 st April, 20X2 by taking values from the above table, with the difference
between the ROU asset and lease liability going to retained earnings as of 1 st April, 20X2
(assuming that only the 20X2-20X3 financial information is included as comparatives).

ROU Asset Dr. 3,20,254

Retained Earnings Dr. 17,772
To Lease Liability 3,38,026
To initially recognise the lease-related asset and liability as of 1 April 20X2.

The following journal entries would be recorded during 20X2-20X3:

Interest expense Dr. 40,563
To Lease Liability 40,563
To record interest expense and accrete the lease liability using the interest method.
Depreciation expense Dr. 1,60,127
To ROU Asset 1,60,127
To record depreciation expense on the ROU asset.
Lease Liability Dr. 2,00,000
To Cash 2,00,000
To record lease payment.

The following journal entries would be recorded during 20X3-20X4:

Interest expense Dr. 21,411

To Lease Liability 21,411
To record interest expense and accrete the lease liability using the interest method.
Depreciation expense Dr. 1,60,127
To ROU Asset 1,60,127
To record depreciation expense on the ROU asset.
Lease Liability Dr. 2,00,000
To Cash 2,00,000
To record lease payment.

Modified Retrospective Approach (When ROU asset is not equal to lease liability):
Under the modified retrospective approach (Alternative 1), the lease liability is measured based on
the remaining lease payments (i.e., from the date of transition to the lease end date, viz.,
1st April, 20X3 to 31st March, 20X4 in this case) discounted using the incremental borrowing rate
as of the date of initial application being 1 st April, 20X3 (i.e. 10% p.a. in this case). The ROU
asset is at its carrying amount as if Ind AS 116 had been applied since the commencement date

© The Institute of Chartered Accountants of India

 (i.e., 1st April 20X1 in this case) by using incremental borrowing rate as at transition date. The
Lease Liability and ROU Asset are as follows:
Year Payments (Cash Discounting Discounted Cash flows /
flows) Factor @10% Present Value
31 Mar 20X4 2,00,000 0.9091 1,81,820
2,00,000 1,81,820

Lease Liability Schedule:

Year Opening Balance Interest Expense Payments Closing Balance
@ 10%
31 Mar 20X4 1,81,820 18,180* (2,00,000) -

*Difference is due to approximation

ROU Asset Schedule:
Year Opening Balance Depreciation Closing Balance
31 Mar 20X4 1,65,787*** (1,65,787) -
***(Refer W.N.3)
The following table shows account balances under this method beginning at lease commencement:
Date ROU Lease Interest Depreciation Retained
Asset Liability Expense Expense Earnings
1 Apr 20X1 4,97,360* 4,97,360** - - -
31 Mar 20X2 3,31,574 3,47,096 49,736 1,65,786 -
31 Mar 20X3 1,65,787 1,81,806 34,710 1,65,787 (16,019)
1 Apr 20X3 1,65,787 1,81,806 - - -
31 Mar 20X4 - - 18,194 1,65,787 -
*(Refer W.N.1)
**(Refer W.N.2)
At adoption, the lessee would record the ROU asset and lease liability at 1 st April 20X3 by taking
values from the above table, with the difference between the ROU asset and lease liability going
to retained earnings as 1 st April 20X3.
ROU Asset Dr. 1,65,787
Retained Earnings Dr. 16,019
To Lease Liability 1,81,806
To initially recognise the lease-related asset and liability as of 1 st April 20X3.

The following journal entries would be recorded during 20X3-20X4:

Interest expense Dr. 18,194

To Lease Liability 18,194
To record interest expense and accrete the lease liability using the interest method.

© The Institute of Chartered Accountants of India

 Depreciation expense Dr. 1,65,787
To ROU Asset 1,65,787
To record depreciation expense on the ROU asset.
Lease Liability Dr. 2,00,000
To Cash 2,00,000
To record lease payment.
Working Notes
1. Calculation of Present value of lease payments as at commencement date i.e.,
1st April, 20X1
Year Payments Discounting Discounted Cash
(Cash flows) Factor @10% flows / Present
Value
31 Mar 20X2 2,00,000 0.9091 1,81,820
31 Mar 20X3 2,00,000 0.8264 1,65,280
31 Mar 20X4 2,00,000 0.7513 1,50,260
6,00,000 4,97,360
2. Lease Liability Schedule:
Year Opening Interest Expense @ 10% Payments Closing
31 Mar 20X2 4,97,360 49,736 (2,00,000) 3,47,096
31 Mar 20X3 3,47,096 34,710 (2,00,000) 1,81,806
31 Mar 20X4 1,81,806 18,194* (2,00,000) -
*Difference is due to approximation
3. Calculation of ROU asset as at transition date i.e., 1st April, 20X3
Year Opening Depreciation Closing
31 Mar 20X2 4,97,360 (1,65,786) 3,31,574
31 Mar 20X3 3,31,574 (1,65,787) 1,65,787
31 Mar 20X4 1,65,787 (1,65,787) -
(b) (a) Paragraph 66 (c) of Ind AS 1 provides that an asset shall be classified as current when an
entity expects to realise the asset within a period of twelve months after the reporting period.
To determine the expectation of the entity, the commercial reality of the transaction should
also be considered. If the loans have been given with an understanding that these loans
would not be called for repayment even though a clause may have been added that these are
recoverable on demand, it should be classified as a non-current asset.
(b) Paragraph 69(c) of Ind AS 1 provides that a liability should be classified as current if the
liability is due to be settled within twelve months after the reporting period. Since the
loan/inter- corporate deposit would become due immediately as and when demanded and
presuming that the entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period, it should be classified as current
liability.
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2. (a) Ind AS 102 ‘Share-based Payments’ requires a company to remeasure the fair value of a
liability to pay cash-settled share-based payments at each reporting date and the settlement
date until the liability is settled. Share Appreciation rights fall under this category. Hence, the
company should recognize a liability of ` 80 million (` 8 x 10 million) at 31 st March, 20X4, the
vesting date.
The liability recognised at 31 st March, 20X4 was in fact based on the share price at the previous
year-end and would have been shown at ` 6 x ½ x 10 million shares – half the cost as the SARs
vest over 2 years. This liability at 31st March, 20X4 has not been changed since the previous year-
end by the company.
The SARs vest over a two-year period and hence on 31 st March, 20X4 there would be a weighting
of the eventual cost by 1 year / 2 year. Therefore, an additional liability of ` 50 million (30 million
+ 20 million) should be accounted for in the financial statements at 31 st March, 20X4.
The SARs would be settled on 1 st May, 20X4 at ` 90 million (` 9 x 10 million). The increase of
` 10 million (over and above ` 80 million) in the value of the SARs is a non-adjusting event. Hence,
the change in the fair value of ` 10 million during the year 20X4-20X5 would be charged to profit
and loss for the year ended 31 st March, 20X5 and not 31st March, 20X4.
(b) Table showing classification of various items:
S. No. Item Classification
(1) Cash deposited in banks Financial Instrument
(2) Gold deposited in banks Not a financial instrument
(3) Trade receivables Financial Instrument
(4) Investments in debt instruments Financial Instrument
(5) Investments in equity instruments Financial Instrument
(6) Prepaid expenses Not a financial instrument
(7) Inter-corporate loans and deposits Financial Instrument
(8) Deferred revenue Not a financial instrument
(9) Tax liability Not a financial instrument
(10) Provision for estimated litigation losses Not a financial instrument

(c) Considering that the remaining goods or services are not distinct, the modification will be
accounted for on a cumulative catch-up basis, as given below:
Particulars Hours Rate (`) Amount (`)
Initial contract amount 200 150 30,000
Modification in contract 50 100 5,000
Contract amount after modification 250 140* 35,000
Revenue to be recognised 100 140 14,000
Revenue already booked 100 150 15,000
Adjustment in revenue (1,000)
*` 35,000 / 250 hours = ` 140.

© The Institute of Chartered Accountants of India

 (d) The contract includes a significant financing component. This is evident from the difference
between the amount of promised consideration of ` 1,21,000 and the cash selling price of
` 1,00,000 at the date that the goods are transferred to the customer.
The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that over
24 months discounts the promised consideration of ` 1,21,000 to the cash selling price of
` 1,00,000). The entity evaluates the rate and concludes that it is commensurate with the rate that
would be reflected in a separate financing transaction between the entity and its customer at
contract inception.
Until the entity receives the cash payment from the customer, interest revenue would be recognised
in accordance with Ind AS 109. In determining the effective interest rate in accordance with
Ind AS 109, the entity would consider the remaining contractual term.
Calculation of interest income:
Year Opening balance Interest @ 10% Payment Closing balance
(a) (b) = (a) x 10% (c) (d) = (a) + (b) -(c)
1 1,00,000 10,000 - 1,10,000
2 1,10,000 11,000 1,21,000 -
Hence, the interest revenue with respect to financing component of the transaction to be
recognized in the Year 1 and Year 2 is ` 10,000 and ` 11,000 respectively.
3. (a) In 2010, the International Integrated Reporting Council (IIRC) was set up which aims to cre ate the
globally accepted integrated reporting framework.
The International Integrated Reporting Council (IIRC) is a global coalition of:
• Regulators
• Investors
• Companies
• Standard setters
• The accounting profession and NGOs
Together, this coalition shares the view that communication about value creation should be the
next step in the evolution of corporate reporting. With this purpose, they issued the International
Integrated Reporting (IR) Framework.
The framework has been developed keeping in mind the greater flexibility to be given to the entity
and the management in the reporting but at the same time should target to report the value created
by the organisation through various capital.
(b) Consolidated Balance Sheet of A Ltd. and its subsidiary, S Ltd.
as at 31 st March, 20X3
Particulars ` in 000s
I. Assets
(1) Non-current assets
(i) Property Plant & Equipment (W.N.4) 7,120.00
(ii) Intangible asset – Goodwill (W.N.3) 1,032.00
(2) Current Assets
(i) Inventories (550 + 100) 650.00
6

© The Institute of Chartered Accountants of India

 (ii) Financial Assets
(a) Trade Receivables (400 + 200) 600.00
(b) Cash & Cash equivalents (200 + 50) 250.00
Total Assets 9,652.00
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital (2,000 + 200) 2,200.00
(ii) Other Equity
(a) Retained Earnings (W.N.6) 1190.85
(b) Securities Premium 160.00
(2) Non-Controlling Interest (W.N.5) 347.40
(3) Non-Current Liabilities (3,000 + 400) 3,400.00
(4) Current Liabilities (W.N.8) 2,353.75
Total Equity & Liabilities 9,652.00
Working Notes:
1. Calculation of purchase consideration at the acquisition date i.e. 1 st April, 20X1
` in 000s
Payment made by A Ltd. to S Ltd.
Cash 1,000.00
Equity shares (2,00,000 shares x ` 1.80) 360.00
Present value of deferred consideration (` 5,00,000 x 0.75) 375.00
Total consideration 1,735.00
2. Calculation of net assets i.e. net worth at the acquisition date i.e. 1 st April, 20X1
` in 000s
Share capital of S Ltd. 500.00
Reserves of S Ltd. 125.00
Fair value increase on Property, Plant and Equipment 200.00
Net worth on acquisition date 825.00
3. Calculation of Goodwill at the acquisition date i.e. 1 st April, 20X1 and 31 st March, 20X3
` in 000s
Purchase consideration (W.N.1) 1,735.00
Non-controlling interest at fair value (as given in the question) 380.00
2,115.00
Less: Net worth (W.N.2) (825.00)
Goodwill as on 1 st April 20X1 1,290.00
Less: Impairment (as given in the question) 258.00
Goodwill as on 31 st March 20X3 1,032.00

© The Institute of Chartered Accountants of India

 4. Calculation of Property, Plant and Equipment as on 31 st March 20X3
` in 000s
A Ltd. 5,500.00
S Ltd. 1,500.00
Add: Net fair value gain not recorded yet 200.00
Less: Depreciation [(200/5) x 2] (80.00) 120.00 1,620.00
7,120.00
5. Calculation of Post-acquisition gain (after adjustment of impairment on goodwill) and
value of NCI as on 31 st March 20X3
` in 000s ` in 000s
NCI A Ltd.
(20%) (80%)
Acquisition date balance 380.00 Nil
Closing balance of Retained Earnings 300.00
Less: Pre-acquisition balance (125.00)
Post-acquisition gain 175.00
Less: Additional Depreciation on PPE [(200/5) x 2] (80.00)
Share in post-acquisition gain 95.00 19.00 76.00
Less: Impairment on goodwill 258.00 (51.60) (206.40)
347.40 (130.40)
6. Consolidated Retained Earnings as on 31 st March 20X3
` in 000s
A Ltd. 1,400.00
Add: Share of post-acquisition loss of S Ltd. (W.N.5) (130.40)
Less: Finance cost on deferred consideration (37.5 + 41.25) (W.N.7) (78.75)
Retained Earnings as on 31 st March 20X3 1,190.85
7. Calculation of value of deferred consideration as on 31 st March 20X3
` in 000s
Value of deferred consideration as on 1 st April 20X1 (W.N.1) 375.00
Add: Finance cost for the year 20X1-20X2 (375 x 10%) 37.50
412.50
Add: Finance cost for the year 20X2-20X3 (412.50 x 10%) 41.25
Deferred consideration as on 31 st March 20X3 453.75
8. Calculation of current Liability as on 31 st March 20X3
` in 000s
A Ltd. 1,250.00

© The Institute of Chartered Accountants of India

 S Ltd. 650.00
Deferred consideration as on 31 st March 20X3 (W.N.7) 453.75
Current Liability as on 31 st March 20X3 2,353.75
4. (a)
1st April, 20X1 31st March, 20X2 31st March, 20X3
` ` `
Equity alternative (1,500 x 102) 1,53,000
Cash alternative (1,000 x 113) 1,13,000
Equity option (1,53,000 - 40,000
1,13,000)
Cash Option (cumulative) (1,000 x 120 x ½)
(using period end fair value) 60,000 1,32,000
Equity Option (cumulative) (40,000 x ½) 40,000
20,000
Expense for the period
Equity option 20,000 20,000
Cash Option 60,000 72,000
Total 80,000 92,000

Journal Entries

31st March, 20X2 `

Employee benefits expenses Dr. 80,000
To Share based payment reserve (equity)* 20,000
To Share based payment liability 60,000
(Recognition of Equity option and cash settlement option)
31st March, 20X3
Employee benefits expenses Dr. 92,000
To Share based payment reserve (equity)* 20,000
To Share based payment liability 72,000
(Recognition of Equity option and cash settlement option)
Share based payment liability Dr. 1,32,000
To Bank/ Cash 1,32,000
(Settlement in cash)

*The equity component recognized (` 40,000) shall remain within equity. By electing to receive
cash on settlement, the employees forfeited the right to receive equity instruments. However,
ABC Limited may transfer the share-based payment reserve within equity, i.e. a transfer from one
component of equity to another.
(b) Purchase Consideration: ` 25 Cr
Non-Controlling Interest [{(12 Cr x (20% / 80%)} x ` 2 per share] ` 6 Cr

© The Institute of Chartered Accountants of India

 Computation of Net Assets of B Ltd.
As per books ` 23.00 Cr
Add: Fair value differences not recognized in books of B Ltd.:
Property (18 Cr – 15 Cr) ` 3.00 Cr
Plant and Equipment (13 Cr – 11 Cr) ` 2.00 Cr
Inventory (3 Cr – 2.5 Cr) ` 0.50 Cr
` 28.5 Cr
Less: Deferred tax liability on fair value difference @ 20%
[(3 Cr + 2 Cr + 0.50 Cr) x 20%] (` 1.10 Cr)
Total Net Assets at Fair Value ` 27.40 Cr
Computation of Goodwill:
Purchase Consideration ` 25.00 Cr
Add: Non-Controlling Interest ` 6.00 Cr
` 31.00 Cr
Less: Net Assets at Fair Value (` 27.40 Cr)
Goodwill on acquisition date ` 3.60 Cr
(c) As per para 30(c) of Ind AS 34 ‘Interim Financial Reporting’, income tax expense is recognised in
each interim period based on the best estimate of the weighted average annual income tax rate
expected for the full financial year.
If different income tax rates apply to different categories of income (such as capital gains or income
earned in particular industries) to the extent practicable, a separate rate is applied to each
individual category of interim period pre-tax income.
`
Estimated annual income exclusive of estimated capital gain
(33,00,000 – 8,00,000) (A) 25,00,000
Tax expense on other income:
30% on ` 5,00,000 1,50,000
40% on remaining ` 20,00,000 8,00,000
(B) 9,50,000
B 9,50,000
Weighted average annual income tax rate = = = 38%
A 25,00,000

Tax expense to be recognised in each of the quarterly reports

`
Quarter I - ` 7,00,000 x 38% 2,66,000
Quarter II - ` 8,00,000 x 38% 3,04,000
Quarter III - ` (12,00,000 - 8,00,000) x 38% 1,52,000
` 8,00,000 x 12% 96,000 2,48,000
Quarter IV - ` 6,00,000 x 38% 2,28,000
10,46,000
10

© The Institute of Chartered Accountants of India

5. (a) This is a compound financial instrument with two components – liability representing present
value of future cash outflows and balance represents equity component.
a. Computation of Liability & Equity Component
Date Particulars Cash Discount Net present
Flow Factor Value
1 Apr 20X1 0 1 0.00
31 Mar 20X2 Dividend 1,50,000 0.870 1,30,500
31 Mar 20X3 Dividend 1,50,000 0.756 1,13,400
31 Mar 20X4 Dividend 1,50,000 0.658 98,700
31 Mar 20X5 Dividend 1,50,000 0.572 85,800
31 Mar 20X6 Dividend 1,50,000 0.497 74,550
Total Liability Component 5,02,950
Total Proceeds 15,00,000
Total Equity Component 9,97,050
(Bal fig)

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount
Liability Component 5,02,950 10,059 4,92,891
Equity Component 9,97,050 19,941 9,77,109
Total Proceeds 15,00,000 30,000 14,70,000

c. Accounting for liability at amortised cost:

- Initial accounting = Present value of cash outflows less transaction costs
- Subsequent accounting = At amortised cost, ie, initial fair value adjusted for interest
and repayments of the liability.
The effective interest rate is 15.86%
Opening Financial Interest Cash Flow Closing Financial
Liability Liability
A B C A+B-C
1 Apr 20X1 4,92,891 - - 4,92,891
31 Mar 20X2 4,92,891 78,173 1,50,000 4,21,064
31 Mar 20X3 4,21,064 66,781 1,50,000 3,37845
31 Mar 20X4 3,37,845 53,582 1,50,000 2,41,427
31 Mar 20X5 2,41,427 38,290 1,50,000 1,29,717
31 Mar 20X6 1,29,717 20,283 1,50,000 -

d. Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit
1 Apr 20X1 Bank A/c Dr. 14,70,000
To Preference Shares A/c 4,92,891
To Equity Component of Preference shares A/c 9,77,109

11

© The Institute of Chartered Accountants of India

 (Being compulsorily convertible preference shares
issued. The same are divided into equity
component and liability component as per the
calculation)
31 Mar 20X2 Preference shares A/c Dr. 1,50,000
To Bank A/c 1,50,000
(Being Dividend at the coupon rate of 10% paid to
the shareholders)
31 Mar 20X2 Finance cost A/c Dr. 78,173
To Preference Shares A/c 78,173
(Being interest as per EIR method recorded)
31 Mar 20X3 Preference shares A/c Dr. 1,50,000
To Bank A/c 1,50,000
(Being Dividend at the coupon rate of 10% paid to
the shareholders)
31 Mar 20X3 Finance cost A/c Dr. 66,781
To Preference Shares A/c 66,781
(Being interest as per EIR method recorded)
31 Mar 20X4 Preference shares A/c Dr. 1,50,000
To Bank A/c 1,50,000
(Being Dividend at the coupon rate of 10% paid to
the shareholders)
31 Mar 20X4 Finance cost A/c Dr. 53,582
To Preference Shares A/c 53,582
(Being interest as per EIR method recorded)
31 Mar 20X5 Preference shares A/c Dr. 1,50,000
To Bank A/c 1,50,000
(Being Dividend at the coupon rate of 10% paid to
the shareholders)
31 Mar 20X5 Finance cost A/c Dr. 38,290
To Preference Shares A/c 38,290
(Being interest as per EIR method recorded)
31-Mar-20X6 Preference shares A/c Dr. 1,50,000
To Bank A/c 1,50,000
(Being Dividend at the coupon rate of 10% paid to
the shareholders)
31 Mar 20X6 Finance cost A/c Dr. 20,283
To Preference Shares A/c 20,283
(Being interest as per EIR method recorded)
31 Mar 20X6 Equity Component of Preference shares A/c Dr. 9,77,109
To Equity Share Capital A/c 50,000
To Securities Premium A/c 9,27,109
(Being Preference shares converted in equity
shares and remaining equity component is
recognised as securities premium)

12

© The Institute of Chartered Accountants of India

 (b) Current tax= Taxable profit x Tax rate = ` 104 thousand x 25% = ` 26 thousand
Computation of Taxable Profit:
` in thousand
Accounting profit 100
Add: Donation not deductible 8
Less: Excess Depreciation (6 - 2) (4)
Total Taxable profit 104

` in thousand ` in thousand
Profit & loss A/c Dr. 26
To Current Tax 26
Deferred tax:
Machine’s carrying amount according to Ind AS = ` 118 thousand (` 120 thousand – ` 2 thousand)
Machine’s carrying amount for taxation purpose = ` 114 thousand (` 120 thousand – ` 6 thousand)
Deferred Tax Liability = ` 4 thousand x 25%
` in thousand
Profit & loss A/c Dr. 1
To Deferred Tax Liability 1

Tax reconciliation in absolute numbers:

` in thousand
Profit before tax according to Ind AS 100
Applicable tax rate @ 25%
Tax 25
Expenses not deductible for tax purposes (` 8 thousand x 25%) 2
Tax expense (Current and deferred) 27
Tax rate reconciliation
Applicable tax rate 25%
Expenses not deductible for tax purposes 2%
Average effective tax rate 27%

6. (a) 1. The annual depreciation charges prior to the change in estimate were:
Buildings : ` 1,50,00,000 / 15 = ` 10,00,000
Plant and machinery : ` 1,00,00,000 / 10 = ` 10,00,000
Furniture and fixtures : ` 35,00,000 / 7 = ` 5,00,000
Total = ` 25,00,000 (A)
2. The revised annual depreciation for the year ending 31st December, 20X4, would be
Buildings : [` 1,50,00,000 – (` 10,00,000 × 3)]/10 = ` 12,00,000

13

© The Institute of Chartered Accountants of India

 Plant and machinery : [` 1,00,00,000 – (` 10,00,000 × 3)]/7 = ` 10,00,000
Furniture and fixtures : [` 35,00,000 – (` 5,00,000 × 3)]/5 = ` 4,00,000
Total = ` 26,00,000 (B)
3. The impact on Statement of profit and loss for the year ending 31st March, 20X5
= (B) – (A)
= ` 26,00,000 – ` 25,00,000
= ` 1,00,000
Change in the useful lives of the various items of property, plant and equipment is a change in
accounting estimate. Change in accounting estimate is to be adjusted prospectively in the period
in which the estimate is amended and, if relevant, to future periods if they are also affected.
(b) The EPS computations for Year 1 as per Ind AS 33 are as follows.

Basic EPS Diluted EPS

1. Determine the numerator 1. Identify Potential Ordinary Shares
No adjustment is necessary until the (POSs)
convertible bonds are converted and The convertible bonds are the only POSs.
ordinary shares are issued. The
numerator is net profit ie.
` 46,00,000.
2. Determine the denominator 2. For each POS, calculate Earnings per
There is no change in the number of Incremental Share (EPIS)
outstanding shares during the year. Since Zio Life Limited has the choice of
The denominator is therefore settlement, for the purpose of determining
30,00,000. the EPIS, it assumes the share-settlement
assumption.
Potential adjustment to the numerator for
EPIS:
The convertible bonds, when settled in
ordinary shares, would increase profit or
loss for the year by the post-tax amount of
the interest expense:
(Interest expense on the convertible bonds)
x (1 - income tax rate) =
(` 1,800) x (1 - 40%) = ` 1,080
Potential adjustment to the denominator
for EPIS:
The convertible bonds, when settled in
ordinary shares, would increase the
number of outstanding shares by 2,00,000
(20,00,000 / 10).
EPIS is calculated as follows:
EPIS = 1,080 / 2,00,000 = 0.01

14

© The Institute of Chartered Accountants of India

 3. Determine basic EPS 3. Rank the POSs
Basic EPS = 46,00,000 / 30,00,000 This step does not apply, because the
= 1.53 convertible bonds are the only class of
POSs.
4. Identify dilutive POSs and determine
diluted EPS
The potential impact of convertible bonds is
determined as follows. (Refer W.N. below)
Accordingly, Zio Life Limited includes the impact
of the convertible bonds in diluted EPS.
Diluted EPS = ` 1.44

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

(c) Either
(i) A company which meets the net worth, turnover or net profits criteria in immediately
preceding financial year will need to constitute a CSR Committee and comply with
provisions of sections 135(2) to (5) read with the CSR Rules.
As per the criteria to constitute CSR committee -
(1) Net worth should be greater than or equal to ` 500 Crore: This criterion is not satisfied
as per the facts given in the question.
(2) Sales should be greater than or equal to ` 1,000 Crore: This criterion is not satisfied
as per the facts given in the question.
(3) Net profit should be greater than or equal to ` 5 Crore: as per the facts given in the
question, this criterion is satisfied in financial year ended 31 st March, 20X3 i.e.
immediate preceding financial year.
Hence, the Company will be required to form a CSR committee.
(ii) The Companies Act, 2013 mandated the corporate entities that the expenditure incurred for
Corporate Social Responsibility (CSR) should not be the expenditure incurred for the
activities in the ordinary course of business. If expenditure incurred is for the activities in
the ordinary course of business, then it will not be qualified as expenditure incurred on CSR
activities.
Further, it is presumed that the commercial activities performed at concession al rates are
the activities done in the ordinary course of business of the company other than the
activities defined in Schedule VII of the Companies Act, 2013. Therefore, the treatment
done by the Management by showing the expenditure incurred on such co mmercial
activities in its financial statements as the expenditure incurred on activities undertaken to
discharge CSR, is not correct.

15

© The Institute of Chartered Accountants of India

 (c) OR
T Ltd. concludes that the modem and router are each distinct and that the arrangement includes
three performance obligations (the modem, the router and the internet services) based on the
following evaluation:
Criterion 1: Capable of being distinct
• C can benefit from the modem and router on their own because they can be resold for more
than scrap value.
• C can benefit from the internet services in conjunction with readily available resources –
i.e. either the modem and router are already delivered at the time of contract set- up, they
could be bought from alternative retail vendors or the internet service could be used with
different equipment.
Criterion 2: Distinct within the context of the contract
• T Ltd. does not provide a significant integration service.
• The modem, router and internet services do not modify or customise one another.
• C could benefit from the internet services using routers and modems that are not sold by
T Ltd. Therefore, the modem, router and internet services are not highly dependent on or
highly inter-related with each other.

16

© The Institute of Chartered Accountants of India

 Test Series: November, 2021
MOCK TEST PAPER - 2
FINAL (NEW) COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (a) Monetary items are units of currency held and assets and liabilities to be received or paid in a
fixed or determinable number of units of currency. Para 15 of Ind AS 21 states that the essential
feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or determinable
number of units of currency. Similarly, a contract to receive (or deliver) a variable number of the
entity’s own equity instruments or a variable amount of assets in which the fair value to be
received (or delivered) equals a fixed or determinable number of units of currency is a monetary
item.
Conversely, the essential feature of a non‑monetary item is the absence of a right to
receive (or an obligation to deliver) a fixed or determinable number of units of currency.
On the basis of above principles, the line items of trial balance should be bifurcated as
follows:
Particulars Monetary item / Non-
monetary item
Share Capital Non-monetary item
Securities Premium reserve on issue of equity shares Non-monetary item
Retained earnings Non-monetary item
Long-term borrowings Monetary item
Deferred tax liability Non-monetary item
Income tax payable Monetary item
Import duty payable Monetary item
Employee benefits payable Monetary item
Sundry trade payables Monetary item
Property, plant and equipment (net of depreciation) Non-monetary item
Computer software (net of amortization) Non-monetary item
Inventories purchased (there is no indicator of impairment) Non-monetary item
Cash and bank balance Monetary item
Sundry trade receivables Monetary item
Allowance for doubtful trade receivables Monetary item

As per para 38 of Ind AS 21, an entity may present its financial statements in any currency
(or currencies). If the presentation currency differs from the entity’s functional currency, it
translates its results and financial position into the presentation currency. For example, when a
group contains individual entities with different functional currencies, the results and financial

© The Institute of Chartered Accountants of India

 position of each entity are expressed in a common currency so that consolidated financial
statements may be presented.
(b) Translation of the balances for the purpose of consolidation
Particulars INR in Rate Amount in
crore (GBP) GBP
Property, plant and equipment (net of depreciation) 550.0 0.0109 5.995
Computer software (net of amortization) 70.0 0.0109 0.763
Inventories 200.0 0.0109 2.18
Cash and bank balance 5.0 0.0109 0.0545
Sundry trade receivables net of allowance for doubtful
trade receivables (17.0-2.0) 15.0 0.0109 0.1635
Total Assets 840.0 9.156
Share Capital 500.0 0.0123 6.15
Securities Premium reserve 150.0 0.0123 1.845
Retained earnings 110.0 0.0116 1.276
Long-term borrowings 30.0 0.0109 0.327
Deferred tax liability 10.0 0.0109 0.109
Income tax payable 25.0 0.0109 0.2725
Import duty payable 5.0 0.0109 0.0545
Employee benefits payable 7.5 0.0109 0.08175
Sundry trade payables 2.5 0.0109 0.02725
Foreign Currency Translation reserve recognised in
OCI (balancing figure) (0.987)
Total Equity and liabilities 840.0 9.156

(b) As illustrated in per para 32 of Ind AS 8, Change in method of depreciation is a change in

accounting estimates.
Considerations in determining whether the change in depreciation methodology is
appropriate:
Paragraphs 60 and 61 of Ind AS 16, Property, Plant and Equipment, state that the
depreciation method used shall reflect the pattern in which the asset’s future economic benefits
are expected to be consumed by the entity.
The depreciation method applied to an asset shall be reviewed at least at each financial
year-end and, if there has been a significant change in the expected pattern of consumption of
the future economic benefits embodied in the asset, the method shall be changed to reflect the
changed pattern.
Accounting procedure:

© The Institute of Chartered Accountants of India

 Such a change is accounted for as a change in an accounting estimate in accordance with
Ind AS 8.
Depreciation is a function of several factors, with extent of usage and efflux of time being its
primary determinants. The hours-in-use method relates the amount of periodic depreciation
charge only to one of the above two factors, namely, the extent of usage as reflected by the
number of hours. This method may therefore be said to be appropriate as per para 62 of Ind AS
16.
Determination of depreciation method involves an accounting estimate; depreciation method
is not a matter of an accounting policy. Accordingly, as per Ind AS 8 and Ind AS 16, a change in
depreciation method shall be accounted for as a change in accounting estimate, i.e;
prospectively.
However, given the possibility that the asset will be depreciated over a period longer than it
would be under SLM basis, the company will need to assess if there are any impairment triggers
and carry out impairment testing as required under Ind AS 36.
2. (a) Computation of the cost of the factory
Description Included in P.P.E. Explanation
` ’000
Purchase of land 10,000 Both the purchase of the land and the
associated legal costs are direct costs
of constructing the factory.
Preparation and levelling 300 A direct cost of constructing the factory
Materials 6,080 A direct cost of constructing the factory
Employment costs of 1,400 A direct cost of constructing the factory
construction workers for a seven-month period
Direct overhead costs 700 A direct cost of constructing the factory
for a seven-month period
Allocated overhead costs Nil Not a direct cost of construction
Income from use as a car Nil Not essential to the construction so
park recognised directly in profit or loss
Relocation costs Nil Not a direct cost of construction
Opening ceremony Nil Not a direct cost of construction
Finance costs 612.50 Capitalise the interest cost incurred in a
seven-month period (purchase of land
would not trigger off capitalisation since
land is not a qualifying asset. Infact,
the construction started from 1st May,
20X1)
Investment income on (100) offset against the amount capitalised
temporary investment of the
loan proceeds
Demolition cost recognised Where an obligation must recognise as
3

© The Institute of Chartered Accountants of India

 as a provision 920 part of the initial cost
Total 19,912.50

© The Institute of Chartered Accountants of India

 Computation of accumulated depreciation
Total depreciable amount 9,912.50 All of the net finance cost of 512.50
(612.50 – 100) has been allocated to
the depreciable amount.
Depreciation must be in two parts:
Depreciation of roof component
Depreciation of remainder
49.56 9,912.50 x 30% x 1/20 x 4/12
57.82 9,912.50 x 70% x 1/40 x 4/12
Total depreciation 107.38
Computation of carrying amount 19,805.12 19,912.50 – 107.38

(b) (i) Assessment of manufacturing unit whether to be classified as held for sale
The manufacturing unit can be classified as held for sale due to the following reasons:
(a) The disposal group is available for immediate sale and in its present condition. The
regulatory approval is customary and it is expected to be received in one year. The
date at which the disposal group is classified as held for sale will be 31st July, 20X2,
i.e. the date at which management becomes committed to the plan.
(b) The sale is highly probable as the appropriate level of management i.e., board of
directors in this case have approved the plan.
(c) A firm purchase agreement has been entered with the buyer.
(d) The sale is expected to be complete by 31st March, 20X3, i.e., within one year from the
date of classification.
(ii) Measurement of the manufacturing unit as on the date of classification as held for
sale
Following steps need to be followed:
Step 1: Immediately before the initial classification of the asset (or disposal group) as held
for sale, the carrying amounts of the asset (or all the assets and liabilities in the group) shall
be measured in accordance with applicable Ind AS.
This has been done and the carrying value of the disposal group as on 31st July, 20X2 is
determined at ` 5,200 lakh. The difference between the carrying value as on
31st December, 20X1 and 31st July, 20X2 is accounted for as per Ind AS 36.
Step 2: An entity shall measure a non-current asset (or disposal group) classified as held
for sale at the lower of its carrying amount and fair value less costs to sell.
The fair value less cost to sell of the disposal group as on 31 st July, 20X2 is
` 3,500 lakh (i.e. ` 3,700 lakh - ` 200 lakh). This is lower than the carrying value of
` 5,200 lakh. Thus, an impairment loss needs to be recognised and allocated first towards
goodwill and thereafter pro-rata between assets of the disposal group which are within the
scope of Ind AS 105 based on their carrying value.

© The Institute of Chartered Accountants of India

 Thus, the assets will be measured as under: (` in lakh)
Particulars Carrying value – Impairment Carrying value as
31st July, 20X2 per Ind AS 105 –
31st July, 20X2
Goodwill 1,000 (1,000) -
(Refer WN)
Plant and Machinery 1,800 (229) 1,571
(Refer WN)
Building 3,700 (471) 3,229
Debtors 2,100 - 2,100
Inventory 800 - 800
Creditors (500) - (500)
Loans (3,700) - (3,700)
5,200 (1,700) 3,500

Working Note:
Allocation of impairment loss to Plant and Machinery and Building
After adjustment of impairment loss of ` 1,000 lakh from the full value of goodwill, the
balance ` 700 lakh (` 1,700 lakh – ` 1,000 lakh) is allocated to plant and machinery and
Building on proportionate basis.
Plant and machinery – ` 700 lakh x ` 1,800 lakh / ` 5,500 lakh = ` 229 lakh (rounded off)
Building – ` 700 lakh x ` 3,700 lakh / ` 5,500 lakh = ` 471 lakh (rounded off)
(iii) Measurement of the manufacturing unit as on the date of classification as at the year
end
The measurement as at the year-end shall be on similar lines as done above.
The assets and liabilities in the disposal group not within the scope of this Standard are
measured as per the respective standards.
The fair value less cost to sell of the disposal group as a whole is calculated. This fair value
less cost to sell as at the year-end shall be compared with the carrying value as at the date
of classification as held for sale. It is provided that the fair value as on the year end is less
than the carrying amount as on that date – thus the impairment loss shall be allocated in the
same way between the assets of the disposal group falling within the scope of this standard
as shown above.
Measurement of the manufacturing unit as on the date of classification as at the year-end
shall be on similar lines as done above.
3. (a) If Ind AS is applicable to any company, then Ind AS shall automatically be made applicable to all
the subsidiaries, holding companies, associated companies, and joint ventures of that company,
irrespective of individual qualification of set of standards on such companies.
6

© The Institute of Chartered Accountants of India

 In the given case it has been mentioned that the financials of Iktara Ltd. are prepared as per
Ind AS. Accordingly, the results of its subsidiary Softbharti Pvt. Ltd. should also have been
prepared as per Ind AS. However, the financials of Softbharti Pvt. Ltd. have been presented as
per accounting standards (AS).
Hence, it is necessary to revise the financial statements of Softbharti Pvt. Ltd. as per
Ind AS after the incorporation of necessary adjustments mentioned in the question.
The revised financial statements of Softbharti Pvt. Ltd. as per Ind AS and Division II to
Schedule III of the Companies Act, 2013 are as follows:
STATEMENT OF PROFIT AND LOSS
for the year ended 31st March, 20X2
Particulars Amount (`)
Revenue from operations 10,00,000
Other Income (1,00,000 + 20,000) (refer note -1) 1,20,000
Total Revenue 11,20,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase) / Decrease in stock in trade (50,000)
Employee benefits expense 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses 7,45,000
Profit before tax 3,75,000
Current tax 1,25,700
Deferred tax (W.N.1) 4,800
Total tax expense 1,30,500
Profit for the year (A) 2,44,500
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified to Profit or Loss:
Remeasurements of net defined benefit plans 1,000
Tax liabilities relating to items that will not be reclassified to Profit or
Loss
Remeasurements of net defined benefit plans (tax) [1000 x 30%] (300)
Other Comprehensive Income for the period (B) 700
Total Comprehensive Income for the period (A+B) 2,45,200

© The Institute of Chartered Accountants of India

 BALANCE SHEET
as at 31st March, 20X2

Particulars (`)
ASSETS
Non-current assets
Property, plant and equipment 1,00,000
Financial assets
Other financial assets (Long-term loans and advances) 40,000
Other non-current assets (capital advances) (refer note-2) 50,000

Current assets
Inventories 80,000
Financial assets
Investments (30,000 + 20,000) (refer note -1) 50,000
Trade receivables 55,000
Cash and cash equivalents/Bank 1,15,000
Other financial assets (Interest receivable from trade receivables) 51,000
TOTAL ASSETS 5,41,000
EQUITY AND LIABILITIES
Equity
Equity share capital 1,00,000
Other equity 2,45,200
Non-current liabilities
Provision (25,000 – 1,000) 24,000
Deferred tax liabilities (4,800 + 300) 5,100
Current liabilities
Financial liabilities
Trade payables 11,000
Other financial liabilities (Refer note 5) 15,000
Other current liabilities (Govt. statuary dues) (Refer note 3) 15,000
Current tax liabilities 1,25,700
TOTAL EQUITY AND LIABILITIES 5,41,000

© The Institute of Chartered Accountants of India

 STATEMENT OF CHANGES IN EQUITY
For the year ended 31st March, 20X2
A. EQUITY SHARE CAPITAL
Balance
(`)
As at 31st March, 20X1 -
Changes in equity share capital during the year 1,00,000
As at 31st March, 20X2 1,00,000
B. OTHER EQUITY
Reserves & Surplus
Retained Earnings
(`)
As at 31st March, 20X1 -
Profit for the year 2,44,500
Other comprehensive income for the year 700
Total comprehensive income for the year 2,45,200
Less: Dividend on equity shares (refer note – 4) -
As at 31st March, 20X2 2,45,200

DISCLOSURE FORMING PART OF FINANCIAL STATEMENTS:

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance Sheet
date.
(refer note 4)
Notes:
1. Current investment are held for the purpose of trading. Hence, it is a financial asset
classified as FVTPL. Any gain in its fair value will be recognised through profit or loss.
Hence, ` 20,000 (` 50,000 – ` 30,000) increase in fair value of financial asset will be
recognised in profit and loss. However, it will attract deferred tax liability on increased value
(Refer W.N).
2. Assets for which the future economic benefit is the receipt of goods or services, rather than
the right to receive cash or another financial asset, are not financial assets.
3. Liabilities for which there is no contractual obligation to deliver cash or other financial asset
to another entity, are not financial liabilities.
4. As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after the
reporting period but before the financial statements are approved for issue, the dividends
are not recognized as a liability at the end of the reporting period because no obligation
exists at that time. Such dividends are disclosed in the notes in accordance with Ind AS 1,
Presentation of Financial Statements.

© The Institute of Chartered Accountants of India

 5. Other current financial liabilities:
(`)
Balance of other current liabilities as per financial statements 45,000
Less: Dividend declared for FY 20X1 – 20X2 (Note – 4) (15,000)
Reclassification of government statuary dues payable to
‘other current liabilities’ (15,000)
Closing balance 15,000
Working Note:
Calculation of deferred tax on temporary differences as per Ind AS 12 for financial year
20X1 – 20X2
Item Carrying Tax base Difference DTA / DTL @
amount 30% (`)
(`) (`)
(`)
Property, Plant and Equipment 1,00,000 80,000 20,000 6,000-DTL
Pre-incorporation expenses Nil 24,000 24,000 7,200-DTA
Current Investment 50,000 30,000 20,000 6,000-DTL
Net DTL 4,800-DTL

(b) The income of ` 60,000 should be recognised over the three year period to compensate for
the related costs.
Calculation of Grant Income and Deferred Income:
Year Labour Grant Deferred
Cost Income Income
` ` `
1 1,30,000 21,667 60,000 x (130/360) 18,333 (40,000 – 21,667)
2 1,10,000 18,333 60,000 x (110/360) 10,000 (50,000 – 21,667 – 18,333)
3 1,20,000 20,000 60,000 x (120/360) - (60,000 – 21,667 – 18,333 –
20,000)
3,60,000 60,000
Therefore, Grant income to be recognised in Profit & Loss for years 1, 2 and 3 are ` 21,667,
` 18,333 and ` 20,000 respectively.
Amount of grant that has not yet been credited to profit & loss i.e; deferred income is to be
reflected in the balance sheet. Hence, deferred income balance as at year end 1, 2 and 3 are `
18,333,
` 10,000 and Nil respectively.

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© The Institute of Chartered Accountants of India

4. (a) Consolidated Balance Sheet of Ram Ltd. and its subsidiary, Krishan Ltd.
as on 31st March, 20X2
Particulars Note `
No.
I. Assets
(1) Non-current assets
(i) Property, Plant & Equipment 1 17,20,000
(ii) Goodwill 2 1,65,800
(2) Current Assets
(i) Inventories 3 3,42,800
(ii) Financial Assets
(a) Trade Receivables 4 1,99,600
(b) Cash & Cash equivalents 5 45,000
Total Assets 24,73,200
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital 6 10,00,000
(ii) Other Equity 7 7,30,600
(2) Non-controlling Interest (WN 4) 4,33,600
(3) Current Liabilities
(i) Financial Liabilities
(a) Trade Payables 8 1,49,000
(b) Short term borrowings 9 1,60,000
Total Equity & Liabilities 24,73,200
Notes to accounts
`
1. Property Plant & Equipment
Land & Building (3,00,000 + (3,60,000 + 2,00,000)) 8,60,000
Plant & Machinery (W.N.6) 8,60,000 17,20,000
2. Goodwill 1,65,800
3. Inventories
Ram Ltd. 2,40,000
Krishan Ltd. (72,800 + 30,000) 1,02,800 3,42,800

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 4. Trade Receivables
Ram Ltd. 1,19,600
Krishan Ltd. 80,000 1,99,600
5. Cash & Cash equivalents
Ram Ltd. 29,000
Krishan Ltd. 16,000 45,000
8. Trade Payables
Ram Ltd. 94,200
Krishan Ltd. (34,800 + 20,000) 54,800 1,49,000
9. Short-term borrowings
Bank overdraft 1,60,000

Statement of Changes in Equity:

6. Equity share Capital
Balance at the Changes in Equity share Balance at the end of the
beginning of the capital during the year reporting period
reporting period
10,00,000 0 10,00,000
7. Other Equity
Reserves & Surplus Total
Capital Retained Other
reserve Earnings Reserves
Balance at the beginning of the
reporting period 0 6,00,000 6,00,000
Total comprehensive income
for the year 1,14,400 1,14,400
0
Dividends 0 (24,000) (24,000)
Total comprehensive income
attributable to parent 0 40,200 40,200
Balance at the end of reporting
period 1,30,600 6,00,000 7,30,600
Working Notes:
1. Adjustments of Fair Value
The Plant & Machinery of Krishan Ltd. would stand in the books at ` 2,85,000 on
1st October, 20X1, considering only six months’ depreciation on ` 3,00,000 total
depreciation being ` 30,000. The value put on the assets being ` 4,00,000 there is an
appreciation to the extent of ` 1,15,000.

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© The Institute of Chartered Accountants of India

 2. Acquisition date profits of Krishan Ltd.
Reserves on 1.4.20X1 2,00,000
Profit & Loss Account Balance on 1.4.20X1 60,000
Profit for 20X1-20X2: Total (` 1,64,000 less depreciation ` 20,000) x 6/12
i.e. ` 72,000;
upto 1.10. 20X1 72,000
Total Appreciation (1,15,000 + 2,00,000 + 30,000 – 20,000) 3,25,000
6,57,000
Holding Co. Share (60%) 3,94,200

3. Post-acquisition profits of Krishan Ltd.

Profit after 1.10.20X1 [1,64,000-20,000]x 6/12 72,000
Less: 10% depreciation on ` 4,00,000 for 6 months less
depreciation already charged for 2 nd half of 20X1-20X2 on
` 3,00,000 (20,000-15,000) (5,000)
Total 67,000
Share of holding Co. (60%) 40,200
4. Non-controlling Interest
Par value of 1600 shares 160,000
Add: 2/5 Acquisition date profits (6,57,000 – 40,000) 2,46,800
Add: 2/5 Post-acquisition profits [WN 3] (67,000 x 40%) 26,800
4,33,600
5. Goodwill
Amount paid for 2,400 shares 8,00,000
Par value of shares 2,40,000
Acquisition date profits share of Ram Ltd. 3,94,200 (6,34,200)
Goodwill 1,65,800
6. Value of Plant & Machinery
Ram Ltd. 4,80,000
Krishan Ltd. 2,70,000
Add: Appreciation on 1.10.20X1 1,15,000
3,85,000
Add: Depreciation for 2nd half charged on pre-revalued
value 15,000
Less: Depreciation on ` 4,00,000 for 6 months (20,000) 3,80,000
8,60,000

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 7. Profit & Loss account consolidated
Ram Ltd. (as given) 1,14,400
Less: Dividend (24,000) 90,400
Share of Ram Ltd. in post-acquisition profits (W.N. 3) 40,200
1,30,600

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

At 31st March, 20X2, the cattle is measured at fair value of ` 1,09,000 less the estimated
auctioneer’s fee of ` 2,200). The estimated transportation costs of getting the cattle to the
auction of ` 1,000 are deducted from the sales price in determining fair value.
(b) OR
(a) A Limited is related to C Limited because Mr. X controls A Limited and is a member of KMP
of C Limited.
(b) Still A Limited will be related to C Limited.
(c) No, Still A Limited will be related to C Limited.
(d) Yes, A Ltd. is not controlled by Mr. X. Therefore, despite Mr. X being KMP of C Ltd., A Ltd.,
having significant influence of Mr. X, will not be considered as related party of C Limited.
5. (a) (a) Extracts of Balance Sheet of Nivaan Ltd. as on 31st March, 20X2
` in lakh
Current Assets
Contract Assets- Work-in-progress (Refer W.N. 3) 9.0

Current Liabilities
Contract Liabilities (Advance from customers) (Refer W.N. 2) 4.5

Extracts of Statement of Profit and Loss of Nivaan Ltd. as on 31st March, 20X2
` in lakh
Revenue from contracts (Refer W.N. 1) 18
Cost of Revenue (Refer W.N. 1) (15)
Net Profit on Contracts (Refer W.N. 1) 3

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 Working Notes:
1. Table showing calculation of total revenue, expenses and profit or loss on contract
for the year ` in
lakh
A & Co. B & Co. Total
Revenue from contracts (40 x 30%) = 12 (30 x 20%) = 6 18
Expenses due for the year (34* x 30%) = 10.2 (24 x 20%) = 4.8 15
Profit or loss on contract 1.8 1.2 3

*Note: Additional rectification cost of ` 2 lakh has been treated as normal cost. Hence total
expected cost has been considered as ` 34 lakh. Alternatively, in case this ` 2 lakh is
treated as abnormal cost then expense due for the year would be ` 11.6 lakh (ie 30% of
` 32 lakh plus ` 2 lakh). Accordingly, with respect to A & Co., the profit for the year would
be ` 0.4 lakh and work-in-progress recognised at the end of the year would be ` 4.4 lakh.
2. Calculation of amount due from / (to) customers ` in lakh
A & Co. B & Co. Total
Billing based on revenue recognised in the books 12 6 18
Payments received from the customers (13) (9.5) (22.5)
Advance received from the customers 1 3.5 4.5

3. Work in Progress recognised as part of contract asset at the end of the year
` in lakh
A & Co. B & Co. Total
Total actual cost incurred during the year 16 8 24
Less: Cost recognised in the books for the year 31.3.20X2 (10.2) (4.8) (15)
Work-in-progress recognised at the end of the year 5.8 3.2 9.0

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

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 (iv) Non–adjusting event: Announcing or commencing the implementation of a major
restructuring after reporting period is a non-adjusting event as per Ind AS 10. Though this
is a non-adjusting event occurred after the reporting period, yet it would result in disclosure
of the event in the financial statements,if restructuring is material.
This would not require provision since as per Ind AS 37, decision to restructure was not
taken before or on the reporting date. Hence, it does not give rise to a constructive
obligation at the end of the reporting period to create a provision.
6. (a) 1 April 20X1
A financial guarantee contract is initially recognised at fair value. The fair value of the
guarantee will be the present value of the difference between the net contractual cash flows
required under the loan, and the net contractual cash flows that would have been required
without the guarantee.
Particulars Year 1 Year 2 Year 3 Total
(`) (`) (`) (`)
Cash flows based on interest rate of 11% (A) 1,10,000 1,10,000 1,10,000 3,30,000
Cash flows based on interest rate of 8% (B) 80,000 80,000 80,000 2,40,000
Interest rate differential (A-B) 30,000 30,000 30,000 90,000
Discount factor @ 11% 0.901 0.812 0.731
Interest rate differential discounted at 11% 27,030 24,360 21,930 73,320
Fair value of financial guaranteed contract
(at inception) 73,320

Journal Entry
Particulars Debit (`) Credit (`)
Investment in subsidiary Dr. 73,320
To Financial guarantee (liability) 73,320
(Being financial guarantee initially recorded)

31 March 20X2
Subsequently at the end of the reporting period, financial guarantee is measured at the
higher of:
- the amount of loss allowance; and
- the amount initially recognised less cumulative amortization, where appropriate.
At 31 March 20X2, there is 1% probability that Moon Limited may default on the loan in the
next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover
any amount from Moon Limited. The 12-month expected credit losses are therefore `10,000
(`10,00,000 x 1%).
The initial amount recognised less amortisation is `51,385 (`73,320 + `8,065 (interest
accrued based on EIR)) – `30,000 (benefit of the guarantee in year 1) Refer table below. The

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 unwound amount is recognised as income in the books of Sun Limited, being the benefit derived
by Moon Limited not defaulting on the loan during the period.
Year Opening balance EIR @ 11% Benefits provided Closing balance
` ` `
1 73,320 8,065 (30,000) 51,385
2 51,385 5,652 (30,000) 27,037
3 27,037 2,963* (30,000) -
* Difference is due to approximation
The carrying amount of the financial guarantee liability after amortisation is therefore `
51,385, which is higher than the 12-month expected credit losses of ` 10,000. The liability is
therefore adjusted to ` 51,385 (the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 21,935
To Profit or loss 21,935
(Being financial guarantee subsequently adjusted)
31 March 20X3
At 31 March 20X3, there is 3% probability that Moon Limited will default on the loan in the
next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover
any amount from Moon Limited. The 12-month expected credit losses are therefore ` 30.000 (`
10,00,000 x 3%).
The initial amount recognised less accumulated amortisation is ` 27,037, which is lower
than the 12-month expected credit losses (` 30,000). The liability is therefore adjusted to `
30,000 (the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 21,385*
To Profit or loss (Note) 21,385
(Being financial guarantee subsequently adjusted)

* The carrying amount at the end of 31 March 20X2 = ` 51,385 less 12-month expected credit
losses of ` 30,000.
(b) (1) Goodwill / capital reserve on the date of acquisition
The cost of the investment is higher than the net fair value of the investee’s identifiable
assets and liabilities. Hence there is goodwill. Amount of goodwill is calculated as follows
`
Cost of acquisition of investment 1,25,000
Blue Ltd.’s share in fair value of net assets of Green Ltd. on the date of
acquisition (4,00,000 *25%) (1,00,000)

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 Goodwill 25,000
Above goodwill will be recorded as part of carrying amount of the investment.
(2) Share in profit and other comprehensive income of Gren Ltd.
`
Share in profit of Green Ltd. (40,000 x 25%) 10,000
Adjustment for depreciation based on fair value
(1,250)
(1,00,000 ÷ 20) x 25%
Share in profit after adjustment 8,750
Share in other comprehensive income (10,000 x 25%) 2,500
(3) Closing balance of investment at the end of the year
`
Cost of acquisition of investment (including goodwill of ` 25,000) 1,25,000
Share in profit after adjustments 8,750
Share in other comprehensive income 2,500
Closing balance of investment 1,36,250

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 Test Series: March, 2022
MOCK TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWER
1. (a) Assessment of Preliminary Impact Assessment of Transition to Ind AS on H Limited’s
Financial Statements
Issue 1: Fair value as deemed cost for property plant and equipment:
Accounting Standards Ind AS Impact on Company’s financial
(Erstwhile IGAAP) statements
As per AS 10, Property, Ind AS 101 allows entity The company has decided to adopt
Plant and Equipment is to elect to measure fair value as deemed cost in this
recognised at cost less Property, Plant and case. Since fair value exceeds book
depreciation. Equipment on the value, so the book value should be
transition date at its fair brought up to fair value. The
value or previous GAAP resulting impact of fair valuation of
carrying value (book land ` 3,00,000 should be adjusted
value) as deemed cost. in other equity (revaluation reserve).
Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Property Plant and Equipment (Land) Dr. 3,00,000
To Revaluation Surplus (OCI- Other Equity) 3,00,000
Issue 2: Fair valuation of Financial Assets:
Accounting Standards Ind AS Impact on Company’s financial
(Erstwhile IGAAP) statements
As per Accounting On transition, financial All financial assets (other than
Standard, investments assets including Investment in subsidiaries, associates
are measured at lower investments are and JVs’ which are recorded at cost)
of cost and fair value. measured at fair values
are initially recognized at fair value.
except for investments in
subsidiaries, associates The subsequent measurement of such
and JVs' which are assets are based on its categorization
recorded at cost. either Fair Value through Profit & Loss
(FVTPL) or Fair Value through Other
Comprehensive Income (FVTOCI) or
at Amortised Cost based on business
model assessment and contractual
cash flow characteristics.
Since investment in mutual fund are
designated at FVTPL, increase of
` 1,00,000 in mutual funds fair value
would increase the value of
investments with corresponding
increase to Retained Earnings.

© The Institute of Chartered Accountants of India

 Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Investment in mutual funds Dr. 1,00,000
To Retained earnings 1,00,000
Issue 3: Borrowings - Processing fees/transaction cost:

Accounting Standards Ind AS Impact on Company’s

(Erstwhile IGAAP) financial statements
As per AS, such As per Ind AS, such expenditure is Fair value as on the date
expenditure is charged amortised over the period of the of transition is ` 1,80,000
to Profit and loss loan. as against its book value
account or capitalised as Ind AS 101 states that if it is of ` 2,00,000.
the case may be impracticable for an entity to apply Accordingly, the
retrospectively the effective interest difference of ` 20,000 is
method in Ind AS 109, the fair value adjusted through
of the financial asset or the financial Retained Earnings.
liability at the date of transition to
Ind AS shall be the new gross
carrying amount of that financial
asset or the new amortised cost of
that financial liability.
Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Borrowings / Loan payable Dr. 20,000
To Retained earnings 20,000
Issue 4: Proposed dividend:
Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per AS, provision for As per Ind AS, liability for Since dividend should be
proposed divided is made proposed dividend is deducted from retained
in the year when it has recognised in the year in earnings during the year when
been declared and which it has been declared it has been declared and
approved. and approved. approved. Therefore, the
provision declared for
preceding year should be
reversed (to rectify the wrong
entry). Retained earnings
would increase proportionately
due to such adjustment

Journal Entry on the date of transition

Particulars Debit (`) Credit (`)
Provisions Dr. 30,000
To Retained earnings 30,000
2

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 Issue 5 : Intangible assets:

Accounting Standards Ind AS Impact on Company’s

(Erstwhile IGAAP) financial statements
The useful life of an The useful life of an intangible Consequently, there
intangible asset cannot asset like brand/trademark can be would be no impact as on
be indefinite under indefinite. Not required to be the date of transition
IGAAP principles. The amortised and only tested for since company intends
Company amortised impairment. to use the carrying
brand/trademark on a Company can avail the exemption amount instead of book
straight line basis over given in Ind AS 101 as on the date value at the date of
maximum of 10 years as of transition to use the carrying transition.
per AS 26. value as per previous GAAP.
Issue 6: Deferred tax
Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per AS, deferred taxes As per Ind AS, deferred On date of transition to Ind AS,
are accounted as per income taxes are accounted as per deferred tax liability would be
statement approach. balance sheet approach. increased by ` 25,000.

Journal Entry on the date of transition

Particulars Debit (`) Credit (`)
Retained earnings Dr. 25,000
To Deferred tax liability 25,000
(b) (i) Basic Earnings per share
Year ended
31.3.20X2
Net profit attributable to equity shareholders (A) ` 90,000
Number of equity shares outstanding (B) 16,000
Earnings per share (A/B) ` 5.625
(ii) Diluted earnings per share
Options are most dilutive as their earnings per incremental share is nil. Hence, for the
purpose of computation of diluted earnings per share, options will be considered first. 10%
convertible debentures being second most dilutive will be considered next and thereafter
convertible preference shares will be considered (as per W.N.).
Net profit No. of Net Profit
attributable to equity attributab
equity shares le per
shareholders share
` `
Net profit attributable to equity 90,000 16,000 5.625
shareholders
Options 150
90,000 16,150 5.572 Dilutive
3

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 10% Convertible debentures 75,000 40,000
1,65,000 56,150 2.939 Dilutive
Convertible Preference Shares 67,500 15,000
2,32,500 71,150 3.268 Anti-Dilutive
Since diluted earnings per share is increased when taking the convertible preference shares
into account (` 2.939 to ` 3.268), the convertible preference shares are anti-dilutive and
are ignored in the calculation of diluted earnings per share for the year ended
31st March, 20X2. Therefore, diluted earnings per share for the year ended
31st March, 20X2 is ` 2.939.
Working Note:
Calculation of incremental earnings per share and allocation of rank
Increase in Increase in Earnings per Rank
earnings number of incremental
equity share
(1) shares (3) = (1) ÷ (2)
(2)
` `
Options
Increase in earnings Nil
No. of incremental shares issued
for no consideration 150 Nil 1
[900 x (90-75)/90]
Convertible Preference Shares
Increase in net profit attributable 67,500
to equity shareholders as
adjusted by attributable dividend
tax
[(` 9 x 7,500) + 8% (` 9 x 7,500)]
No. of incremental shares 15,000 4.50 3
(2 x 7,500)
10% Convertible Debentures
Increase in net profit 75,000
[(` 10,00,000 x 10% x (1 – 0.25)]
No. of incremental shares 40,000 1.875 2
(10,000 x 4)

2. (a) (i) (a) Calculation of operating cycle

Month
Period of manufacturing the aircraft 9
Credit period for settlement of delivery amount 7
16

Hence, the length of the operating cycle will be 16 month.

(b) Since the inventory and debtors will be realised within normal operating cycle, i.e.,
16 months, both the inventory as well as debtors should be classified as current.
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 (ii) Charming Ltd must present ` 80,000 accrued interest and ` 1,00,000 current portion of the
non-current bond (i.e. the portion repayable on 1 st April, 20X4) as current liabilities. The
` 9,00,000 due later than 12 months after the end of the reporting period shall be presented
as a non-current liability.
(b) In the instant case, since fire took place after the end of the reporting period, it is a non -adjusting
event. However, in accordance with paragraph 21 of Ind AS 10, disclosures regarding material
non-adjusting event should be made in the financial statements, i.e., the nature of the event and
the expected financial effect of the same.
With regard to going concern basis followed for preparation of financial statements, the company
needs to determine whether it is appropriate to prepare the financial statements on going concern
basis, if there is only one plant which has been damaged due to fire. If the effect of deterioration
in operating results and financial position is so pervasive that management determines after the
reporting period either that it intends to liquidate the entity or to cease trading, or that it has no
realistic alternative but to do so, preparation of financial statements for the financial year 20X0-
20X1 on going concern assumption may not be appropriate. In that case, the financial statements
may have to be prepared on a basis other than going concern.
However, if the going concern assumption is considered to be appropriate even after t he fire, no
adjustment is required in the financial statements for the year ending 31 st March, 20X1.
(c) (i) De-commissioning Obligation of G Ltd. and recognition of decommissioning cost:
Retrospective application of Ind AS 37 requires management to recognise the provision for
decommissioning cost on the opening Ind AS Balance Sheet. The provision should reflect
the net present value of the management’s best estimate of the amount required to settle
the obligation.
Accounting Treatment:
The obligation should be capitalised as a separate component of property, plant and
equipment, together with the accumulated depreciation from the date when the obligation
was incurred to the transition date. The amount to be capitalised as part of the c ost of the
asset is calculated by discounting the liability back to the date when the obligation initially
arose, using the best estimate of historical discount rate. The associated accumulated
depreciation is calculated by applying the current estimate of the asset’s useful life, using
the entity’s depreciation policy for the asset.
Any difference between the provision and the related component of the property, plant and
equipment is adjusted against the retained earnings.
The entity could elect to apply the deemed cost exemption. Property, plant and equipment
would be restated to fair value, with the corresponding adjustment to the retained earnings.
Management would need to ensure that the fair value obtained was the gross fair value and
not net of the decommissioning obligation. Management would recognise the provision for
decommissioning costs in accordance with Ind AS 37. No cost in respect of provision
should be added to property, plant and equipment but such cost should be recognised in
the entity’s opening retained earnings.
(ii) Measurement basis for valuation of PPE:
An entity has the following options with respect to measurement of its property, plant and
equipment (Ind AS 16) in the opening Ind AS Balance Sheet:
 Measurement basis as per the respective standards applied retrospectively. This
measurement option can be applied on an item-by-item basis. For example, Plant A
can be measured applying Ind AS 16 retrospectively and Plant B can be measured
applying the “fair value” or “revaluation” options mentioned below.
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  Fair value at the date of transition to Ind AS. This measurement option can be applied
on an item-by-item basis in similar fashion as explained above.
 Previous GAAP revaluation, if such revaluation was, at the date of revaluation, broadly
comparable to (a) fair value or (b) cost or depreciated cost in accordance with other
Ind AS adjusted to reflect changes in general or specific price index. This
measurement option can be applied on an item-by-item basis in similar fashion as
explained above.
Analysis of given case:

Asset 1 Asset 2 Asset 3 Asset 4

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

3. (a) Allocation of corporate assets

The carrying amount of land is allocated to the carrying amount of each individual cash
generating unit. A weighted allocation basis is used because the estimated remain ing useful life
6

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 of Train’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of
Railway station and Railway tracks’s cash-generating units are 20 years.
(` in crore)
Particulars Train Railway station Railway tracks Total
Carrying amount (a) 1,500 2,250 3,300 7,050
Useful life 10 years 20 years 20 years -
Weight based on 1 2 2 -
useful life
Carrying amount (after 1,500 4,500 6,600 12,600
assigning weight)
Pro-rata allocation of 12% 36% 52% 100%
Land (1,500/12,600) (4,500/12,600) (6,600/12,600)
Allocation of carrying 216 648 936 1,800
amount of Land (b)
Carrying amount (after 1,716 2,898 4,236 8,850
allocation of Land)
(a+b)
Calculation of impairment loss
Step I: Impairment losses for individual cash-generating units and its allocation:
(a) Impairment loss of each cash-generating units
(` in crore)
Particulars Train Railway station Railway
tracks
Carrying amount (after allocation of land) 1,716 2,898 4,236
Recoverable amount 1,800 2,700 4,200
Impairment loss - 198 36
(b) Allocation of the impairment loss
(` in crore)
Allocation to Railway Railway
station tracks
Land 44 [198 x (648 / 2,898)] 8 [36 x (936 /
4,236)]
Other assets in cash- [198 x (2,250 / [36 x (3,300/
generating units 154 2,898)] 28 4,236)]
Impairment loss 198 36
Step II: Impairment losses for the larger cash-generating unit, i.e., Pacific Ocean
Railway Ltd. as a whole
(` in crore)
Particulars Train Railway Railway Land Building Pacific Ocean
station tracks Railway Ltd.
Carrying amount 1,500 2,250 3,300 1,800 600 9,450

© The Institute of Chartered Accountants of India

 Impairment loss - (154) (28) (52) - (234)
(Step I)
Carrying amount 1,500 2,096 3,272 1,748 600 9,216
(after Step I)
Recoverable 9,600
amount
Impairment loss for the ‘larger’ cash-generating unit (company as a
whole Nil
(b) The term ‘contract’ is defined in Ind AS 115 as an agreement between two or more parties that
creates enforceable rights and obligations.
In the given case:
• Gifts are distributed by MIL to doctors as a part of its sales promotion activities without
there being an agreement between MIL and the doctors creating enforceable rights and
obligations.
• The doctors to whom gifts are distributed are not ‘customers’ of MIL as they have not
contracted with it to obtain goods or services in exchange for considera tion.
• The items distributed as gifts are not an output of MIL ordinary activities.
In view of the above, the distribution of gifts to doctors does not fall under the scope of
Ind AS 115.
As per Ind AS 38, sometimes expenditure is incurred to provide future economic benefits to an
entity, but no intangible asset or other asset is acquired or created that can be recognised. In
the case of the supply of goods, the entity recognises such expenditure as an expense when it
has a right to access those goods.
Examples of expenditure that is recognised as an expense when it is incurred include
expenditure on advertising and promotional activities (including mail order catalogues).
Items acquired by MIL to be distributed as gifts as a part of sales promotion acti vities have no
other purpose than to undertake those activities. In other words, the only benefit of those items
for MIL is to develop or create brands or customer relationships, which in turn generate revenue.
Ind AS 38 requires an entity to recognise expenditure on such items as an expense when the
entity has a right to access those goods. Ind AS 38 states that an entity has a right to access
goods when it owns them, or otherwise has a right to access them regardless of when it
distributes the goods.
In view of the above, MIL should recognise the cost of the items to be distributed as gifts as an
expense when it owns those items, or otherwise has a right to access them, regardless of when
it distributes the items to doctors.
(c) EITHER
The carrying amount of the debenture on the date of transition under previous GAAP, assuming
that all interest accrued other than premium on redemption have been paid, will be ` 31,50,000
[(30,000 x 100) + (30,000 x 100 x 10/100 x 2/4)]. The premium payable on redemption is being
recognised as borrowing costs as per para 4(b) of AS 16 ie under previous GAAP on straight-
line basis.
As per para D18 of Ind AS 101, Ind AS 32, Financial Instruments: Presentation, requires an
entity to split a compound financial instrument at inception into separate liability and equity
components. If the liability component is no longer outstanding, retrospective application of
Ind AS 32 would involve separating two portions of equity. The first portion is recognised in
retained earnings and represents the cumulative interest accreted on the liability component.
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 The other portion represents the original equity component. However, in accordance with this
Ind AS, a first-time adopter need not separate these two portions if the liability component is no
longer outstanding at the date of transition to Ind AS.
In the present case, since the liability is outstanding on the date of transition, S Ltd. will need to
split the convertible debentures into debt and equity portion on the date of transition. Accordingly,
we will first measure the liability component by discounting the contractually determined stream
of future cash flows (interest and principal) to present value by using the discount rate of
10% p.a. (being the market interest rate for similar debentures with no conversion option).
(`)
Interest payments p.a. on each debenture 6
Present Value (PV) of interest payment for years 1 to 4 (6  3.17) (Note 1) 19.02
PV of principal repayment (including premium) 110  0.68 (Note 2) 74.80
Total liability component per debenture 93.82
Equity component per debenture (Balancing figure) 6.18
Face value of debentures 100.00
Total equity component for 30,000 debentures 1,85,400
Total debt amount (30,000 x 93.82) 28,14,600
Thus, on the date of initial recognition, the amount of ` 30,00,000 being the amount of
debentures will be split as under:
Debt ` 28,14,600
Equity ` 1,85,400
However, on the date of transition, unwinding of ` 28,14,600 will be done for two years as follows:
Year Opening Finance cost Interest Closing
balance @ 10% paid balance
1 28,14,600 2,81,460 1,80,000 29,16,060
2 29,16,060 2,91,606 1,80,000 30,27,666
Therefore, on transition date, S Ltd. shall –
a. recognise the carrying amount of convertible debentures at ` 30,27,666;
b. recognise equity component of compound financial instrument of ` 1,85,400;
c. debit ` 63,066 to retained earnings being the difference between the previous GAAP
amount of ` 31,50,000 and ` 30,27,666 and the equity component of compound financial
instrument of ` 1,85,400; and
d. derecognise the debenture liability in previous GAAP of ` 31,50,000.
Notes:
1. 3.17 is present value of annuity factor of ` 1 at a discount rate of 10% for 4 years.
2. On maturity, ` 110 will be paid (` 100 as principal payment + ` 10 as premium)

© The Institute of Chartered Accountants of India

 OR
Date Particulars (`) (`)
15/3/20X1 Investment A/c Dr. 20,000
Transaction Cost A/c Dr. 400
To Bank 20,400
31/3/20X1 Investment A/c Dr. 4,000
To Fair Value Gain A/c 4,000
31/3/20X1 P&L A/c Dr. 400
To Transaction Cost A/c 400
31/3/20X1 Fair Value Gain A/c Dr. 4,000
To P&L A/c 4,000
4. (a) Assessment of applicability of Ind AS 38 in the given scenario
As per Ind AS 38, to be an intangible asset the asset should meet following criteria:
• Identifiability;
• Control over a Resource (Asset); and
• Existence of Future Economic Benefits.
Crystal Systems Limited manages and controls the application software available on a cloud
infrastructure and New Age Technology Limited has limited rights to use the same. Merel y right
to access the application of Crystal Systems Limited, does not give New Age Technology Limited
power to obtain future economic benefits flowing from the software itself. Hence, the application
software should not be recognised as an asset under Ind AS 38.
Assessment of applicability of Ind AS 116 in the given scenario
At the inception of a contract, an entity shall assess whether the contract is or contains a lease.
For the purpose, a lease is defined as a contract, or part of a contract that conv eys the right to
control the use of an identified asset for a period of time in exchange for consideration. This
right to control the asset throughout the period of use is emphasized ONLY if the customer has
both (i) right to obtain substantially all the economic benefits from the use of the identified asset,
and (ii) the right to direct the use of the identified asset.
In the given case, the contract gives the New Age Technology Limited only the right to access
the Crystal Systems Limited’s application software over the contract term, and hence the contract
is not a lease contract within the meaning of Ind AS 116.
Conclusion
The right to access the Crystal Systems Limited’s application software for a price over a specified
period is a service contract. If the Crystal Systems Limited pays amounts for which the services
are yet to be received, then the advance payment is a prepayment and an asset for the Crystal
Systems Limited.
(b) As per para 81 of Ind AS 115
- a customer receives a discount for purchasing a bundle of goods or services if the sum of
the stand-alone selling prices of those promised goods or services in the contract exceeds
the promised consideration in a contract.

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 - except when an entity has observable evidence in accordance with paragraph 82 that the
entire discount relates to only one or more, but not all, performance obligations in a contract,
the entity shall allocate a discount proportionately to all performance obligations in the
contract.
- the proportionate allocation of the discount in those circumstances is a consequence of the
entity allocating the transaction price to each performance obligation on the basis of the
relative stand-alone selling prices of the underlying distinct goods or services.
Amount to be recognised:
In this case, there are two separately identifiable performance obligations one being sale of the
equipment and second being maintenance contract for three years.
For recognition of revenue, relative stand-alone selling price of the individual components may
be taken and the consideration allocated in proportion of relative fair values, i.e. 4,85,500:
37,500* (i.e. 12,500 x 3). Hence, the sale of equipment should be recognised at ` 4,64,149
[` 5,00,000 x {4,85,500 / (4,85,500 + 37,500)}] when all other conditions for sale of the equipment
are fulfilled and the revenue from maintenance services of ` 35,851 [` 5,00,000 x {37,500 /
(4,85,500 + 37,500)}] should be the service revenue recognised ove r a period of three years as
per its stage of completion.
(c) Number of SARs = 80 Employees x 500 SARs = 40,000 SARs
1. When the term of the awards is 4 years of service
Period Fair To be Cumulative Expense in Cumulative
value vested proportion to expenses
the award recognized
earned
a b c = 40,000 x a x b d = [{(c / no. of e
total years) x
years
completed} – e
of pvs year]
1 st April, 20X1 100 100% 40,00,000 - -
31st March, 20X2 110 100% 44,00,000 11,00,000 11,00,000
31st March, 20X3 120 100% 48,00,000 13,00,000 24,00,000
31st March, 20X4 115 100% 46,00,000 10,50,000 34,50,000
31st March, 20X5 130 100% 52,00,000 17,50,000 52,00,000
Journal Entries
31st March, 20X2
Employee benefits expenses/Profit and Loss A/c Dr. 11,00,000
To Share based payment liability 11,00,000
(Fair value of SARs has been recognised)
31st March, 20X3
Employee benefits expenses/Profit and Loss A/c Dr. 13,00,000
To Share based payment liability 13,00,000
(Fair value of SARs has been re-measured)

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 31st March, 20X4
Employee benefits expenses/Profit and Loss A/c Dr. 10,50,000
To Share based payment liability 10,50,000
(Fair value of SARs has been recognized)
31st March, 20X5
Employee benefits expenses A/c Dr. 17,50,000
To Share based payment liability 17,50,000
(Fair value of SARs has been recognized)
2. When the term of the awards is modified to 3 years of service instead of 4 years of
service
Period Fair %age of Cumulative Expense in Cumulative
value vesting proportion to the expenses
award earned recognized
a b c = 40,000 x a x b d = [{(c / no. of e
total years) x
years completed}
– e of pvs year]
1 st April, 20X1 100 100% 40,00,000 - -
31st March, 20X2 110 100% 44,00,000 11,00,000 11,00,000
31st March, 20X3 120 100% 48,00,000 21,00,000 32,00,000
31st March, 20X4 115 100% 46,00,000 14,00,000 46,00,000
Journal Entries
31st March, 20X2
Employee benefits expenses Dr. 11,00,000
To Share based payment liability 11,00,000
(Fair value of SARs has been recognised)
31st March, 20X3
Employee benefits expenses Dr. 21,00,000
To Share based payment liability 21,00,000
(Fair value of SARs has been re-measured)
31st March, 20X4
Employee benefits expenses Dr. 14,00,000
To Share based payment liability 14,00,000
(Fair value of SARs has been recognized)

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5. (a) Consolidated Balance Sheet of A Ltd. and its subsidiary, S Ltd.
as at 31 st March, 20X3
Particulars ` in 000s
I. Assets
(1) Non-current assets
(i) Property Plant & Equipment (W.N.4) 7,120.00
(ii) Intangible asset – Goodwill (W.N.3) 1,032.00
(2) Current Assets
(i) Inventories (550 + 100) 650.00
(ii) Financial Assets
(a) Trade Receivables (400 + 200) 600.00
(b) Cash & Cash equivalents (200 + 50) 250.00
Total Assets 9,652.00
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital (2,000 + 200) 2,200.00
(ii) Other Equity
(a) Retained Earnings (W.N.6) 1190.85
(b) Securities Premium 160.00
(2) Non-Controlling Interest (W.N.5) 347.40
(3) Non-Current Liabilities (3,000 + 400) 3,400.00
(4) Current Liabilities (W.N.8) 2,353.75
Total Equity & Liabilities 9,652.00
Working Notes:
1. Calculation of purchase consideration at the acquisition date i.e. 1 st April, 20X1
` in 000s
Payment made by A Ltd. to S Ltd.
Cash 1,000.00
Equity shares (2,00,000 shares x ` 1.80) 360.00
Present value of deferred consideration (` 5,00,000 x 0.75) 375.00
Total consideration 1,735.00
2. Calculation of net assets i.e. net worth at the acquisition date i.e. 1 st April, 20X1
` in 000s
Share capital of S Ltd. 500.00
Reserves of S Ltd. 125.00
Fair value increase on Property, Plant and Equipment 200.00
Net worth on acquisition date 825.00

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 3. Calculation of Goodwill at the acquisition date i.e. 1 st April, 20X1 and 31 st March, 20X3
` in 000s
Purchase consideration (W.N.1) 1,735.00
Non-controlling interest at fair value (as given in the question) 380.00
2,115.00
Less: Net worth (W.N.2) (825.00)
Goodwill as on 1 st April 20X1 1,290.00
Less: Impairment (as given in the question) 258.00
Goodwill as on 31 st March 20X3 1,032.00
4. Calculation of Property, Plant and Equipment as on 31 st March 20X3
` in 000s
A Ltd. 5,500.00
S Ltd. 1,500.00
Add: Net fair value gain not recorded yet 200.00
Less: Depreciation [(200/5) x 2] (80.00) 120.00 1,620.00
7,120.00
5. Calculation of Post-acquisition gain (after adjustment of impairment on goodwill) and
value of NCI as on 31 st March 20X3
` in 000s ` in 000s
NCI A Ltd.
(20%) (80%)
Acquisition date balance 380.00 Nil
Closing balance of Retained Earnings 300.00
Less: Pre-acquisition balance (125.00)
Post-acquisition gain 175.00
Less: Additional Depreciation on PPE [(200/5) x 2] (80.00)
Share in post-acquisition gain 95.00 19.00 76.00
Less: Impairment on goodwill 258.00 (51.60) (206.40)
347.40 (130.40)
6. Consolidated Retained Earnings as on 31 st March 20X3
` in 000s
A Ltd. 1,400.00
Add: Share of post-acquisition loss of S Ltd. (W.N.5) (130.40)
Less: Finance cost on deferred consideration (37.5 + 41.25) (W.N.7) (78.75)
Retained Earnings as on 31 st March 20X3 1,190.85
7. Calculation of value of deferred consideration as on 31 st March 20X3
` in 000s
Value of deferred consideration as on 1 st April 20X1 (W.N.1) 375.00
Add: Finance cost for the year 20X1-20X2 (375 x 10%) 37.50
412.50
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 Add: Finance cost for the year 20X2-20X3 (412.50 x 10%) 41.25
Deferred consideration as on 31 st March 20X3 453.75
8. Calculation of current Liability as on 31 st March, 20X3
` in 000s
A Ltd. 1,250.00
S Ltd. 650.00
Deferred consideration as on 31 st March, 20X3 (W.N.7) 453.75
Current Liability as on 31 st March, 20X3 2,353.75

(b) Accounting treatment for Government Grant:

Government grants, related to assets, including non-monetary grants at fair value should be
presented in the Balance Sheet either by setting up the grant as deferred income or by deducting
the grant in arriving at the asset’s carrying amount. (Para 24 of I nd AS 20)
Government grants should be recognised as income over the periods in which the entity
recognises as expenses the related costs that they are intended to compensate, on a systematic
basis. The outcome should be same in the Profit and Loss account statement regardless of
whether grants are netted or deferred.
In case the grant had been offset against the acquisition cost of the factory and net carrying value
is less than the recoverable amount, there would be no need for an impairment write -down. The
Profit and Loss account would be charged with annual depreciation on the net acquisition cost .
Government grant relating to ‘Innovative Product’:
To match the same result for the grant ‘Innovative Product’ which has been shown as deferred
income and the factory is initially recorded at its cost, it is reasonable to release an amount of
deferred income to the Profit and Loss account to compensate for the impairment write-down.
Treatment in case of further conditions attached:
If there are further conditions attached to the grant beyond construction of the factory, it may not
be appropriate to release an amount of the deferred income to compensate for the impairment
write down. An entity would need to assess those further conditions to determine the amou nt, if
any, of deferred income to release.
6. (a) On the date of initial recognition, the effective interest rate of the loan shall be computed keeping
in view the contractual cash flows and upfront processing fee paid. The following table shows
the amortisation of loan based on effective interest rate:

Date Cash flows Cash flows Amortised cost Interest @

(principal) (interest and (opening + interest – EIR
fee) cash flows) (11.50%)

1 April, 20X1 (500,000,000) 5,870,096 494,129,904

31 Mar 20X2 100,000,000 55,000,000 395,954,843 56,824,939
31 Mar 20X3 100,000,000 44,000,000 297,489,650 45,534,807
31 Mar 20X4 100,000,000 33,000,000 198,700,959 34,211,310
31 Mar 20X5 100,000,000 22,000,000 99,551,570 22,850,610
31 Mar 20X6 100,000,000 11,000,000 (0) 11,448,430

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© The Institute of Chartered Accountants of India

 a. 1 st April, 20X1
Particulars Dr. Amount Cr. Amount
(`) (`)
Bank A/c Dr. 494,129,904
To Loan from bank A/c 494,129,904
(Being loan recorded at its fair value less transaction costs
on the initial recognition date)
b. 31 st March, 20X2
Particulars Dr. Amount Cr. Amount
(`) (`)
Loan from bank A/c Dr. 98,175,061
Interest expense (profit and loss) Dr. 56,824,939
To Bank A/c 155,000,000
(Being first instalment of loan and payment of interest
accounted for as an adjustment to the amortised cost of loan)
c. 31 st March, 20X3 – Before Wheel Co. Limited approached the bank –
Particulars Dr. Amount Cr. Amount
(`) (`)
Interest expense (profit and loss) Dr. 45,534,807
To Loan from bank A/c 1,534,807
To Bank A/c 44,000,000
(Being loan payment of interest recorded by the Company
before it approached the Bank for deferment of principal)
Upon receiving the new terms of the loan, Wheel Co. Limited, re-computed the carrying value of
the loan by discounting the new cash flows with the original effective interest rate and comparing
the same with the current carrying value of the loan. As per requirements of Ind AS 109, any
change of more than 10% shall be considered a substantial modification, resulting in fresh
accounting for the new loan:
Date Cash flows Interest outflow Discount PV of cash
(principal) @15% factor flows
31 Mar 20X3 (400,000,000)
31 Mar 20X4 40,000,000 60,000,000 0.8969 89,686,099
31 Mar 20X5 40,000,000 54,000,000 0.8044 75,609,805
31 Mar 20X6 40,000,000 48,000,000 0.7214 63,483,092
31 Mar 20X7 40,000,000 42,000,000 0.6470 53,053,542
31 Mar 20X8 40,000,000 36,000,000 0.5803 44,100,068
31 Mar 20X9 40,000,000 30,000,000 0.5204 36,429,133
31 Mar 20Y0 40,000,000 24,000,000 0.4667 29,871,422
31 Mar 20Y1 40,000,000 18,000,000 0.4186 24,278,903
31 Mar 20Y2 40,000,000 12,000,000 0.3754 19,522,235
31 Mar 20Y3 40,000,000 6,000,000 0.3367 15,488,493

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© The Institute of Chartered Accountants of India

 Present Value (PV) of new contractual cash flows discounted at 11.50% 451,522,791
Carrying amount of loan 397,489,650
Difference 54,033,141
Percentage of carrying amount 13.59%
Note: Calculation above done on full decimal, though in the table discount factor is limited to 4
decimals.
Considering a more than 10% change in PV of cash flows compared to the carrying value of the
loan, the existing loan shall be considered to have been extinguished and the new loan shall be
accounted for as a separate financial liability. The accounting entries for the same are included
below:
d. 31 st March, 20X3 – Accounting for extinguishment
Particulars Dr. Amount (`) Cr. Amount (`)
Loan from bank (old) A/c Dr. 397,489,650
Finance cost (profit and loss) Dr. 2,510,350
To Loan from bank (new) A/c 400,000,000
(Being new loan accounted for at its principal amount
in absence of any transaction costs directly related
to such loan and correspondingly a de-recognition of
existing loan)
e. 31 st March, 20X4
Particulars Dr. Amount (`) Cr. Amount (`)
Loan from bank A/c Dr. 40,000,000
Interest expense (profit and loss) Dr. 60,000,000
To Bank A/c 100,000,000
(Being first instalment of the new loan and payment
of interest accounted for as an adjustment to the
amortised cost of loan)

(b) (i) Treatment of short term compensating absences: Diamond Pvt. Ltd. will recognise a
liability in its books to the extent of 5 days of PL for 200 employees and 10 days of PL for
remaining 800 employees and 2 days of SL for 200 employees and 5 days of SL for
remaining 800 employees in its books as an unused entitlement that has accumulated in
2X19-2X20 as short-term compensated absences.
(ii) Treatment of defined contribution plan: When an employee has rendered service to an
entity during a period, the entity shall recognise the contribution payable to a defined
contribution plan in exchange for that service.
Under Ind AS 19, the amount of ` 160 crore (200-40) will be recognised as a liability
(accrued expense), after deducting any contribution already paid i.e. ` 40 crore (with
contribution of ` 200 crore to the plan) and an expense in the statement of profit and loss.
It can also be seen that the contributions are payable within 12 months from the end of the
year in which the employees render the related service; hence, they will not be discounted.

17

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 Test Series: April, 2022
MOCK TEST PAPER 2
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWER
1. (a) A Limited
Consolidated Balance Sheet as at 31 st March 20X1
(` in crore)
Particulars Note 31 st March, 20X1 31 st March,
20X0
ASSETS
Non-current assets
(a) Property, plant and equipment 1 3,590 3,460
(b) Investment property 3,100 3,100
Total non-current assets 6,690 6,560
Current assets
(a) Inventory 2 1,680 1,780
(b) Financial assets
(i) Trade and other receivables 3 2,100 1,735
(ii) Cash and cash equivalents 4 320 200
Total current assets 4,100 3,715
Total assets 10,790 10,275
EQUITY & LIABILITIES
Equity attributable to owners of the parent
Share capital 1,130 1,050
Other Equity 5 2,825 2,350
Non-controlling interests 830 540
Total equity 4,785 3,940
LIABILITIES
Non-current liabilities
(a) Financial Liabilities
(i) Borrowings - Long-term debt 6 2,800 3,385
(b) Provisions
(i) Long-term provisions
(environmental restoration) 765 640
Total non-current liabilities 3,565 4,025
Current liabilities
(a) Financial Liabilities 7
(i) Trade and other payables (Other 8 895 820
than micro enterprises and small
enterprises)
(ii) Current portion of long-term debt 500 500

© The Institute of Chartered Accountants of India

 (iii) Interest accrued on long-term debt 260 290
(iv) Dividend payable 150 230
(b) Provisions
(i) Warranty provision 600 445
(ii) Provisions for accrued leave 35 25
Total current liabilities 2,440 2,310
Total liabilities 6,005 6,335
Total equity and liabilities 10,790 10,275
Working Notes:
Notes Particulars Basis Calculation Amount
` in crore ` in
crore
1 Property, plant Property, plant and equipment (PPE) 5,200 – 1,610 3,590
and equipment at cost less Accumulated (4,700 – 1,240) (3,460)
(depreciation on PPE
2 Inventory Inventory at cost add Inventory at fair 1,500 + 180 1,680
value less cost to complete and sell (1,650 + 130) (1,780)
3 Trade and Accounts receivable less Provision 2,300 – 200 2,100
other for doubtful receivables (1,800 – 65) (1,735)
receivables
4 Cash and cash Cash and Cash equivalents 250 + 70 320
equivalents (170 + 30) (200)
5 Other Equity Retained earnings at the beginning 1,875 + 1,200–
of the year add Profit for the year 160 – 90 2,825
less Non-controlling interest’s share (1,740 + 830 –
of profit for the year less Dividend 150 – 70) (2,350)
declared by A Limited
6 Long-term Long-term debt less Due on 3,300 – 500 2,800
debt 1 st January each year (3,885 – 500) (3,385)
7 Trade & other Trade payables add Accrued 880 + 15 895
payables expenses (790 + 30) (820)
8 Current Due on 1 st January each year - 500
portion of long- - (500)
term debt
Note: Figures in brackets represent the figures for the comparative year.
(b) At the effective date of the modification (at the beginning of Year 7), Lessee remeasures the
lease liability based on:
(a) Remaining lease term = 8 years
(b) Annual payments = ` 1,00,000 and
(c) Lessee’s incremental borrowing rate = 7% p.a.
The modified lease liability equals ` 5,97,100 (W.N.1). The lease liability immediately before
the modification (including the recognition of the interest expense until the end of Year 6) is
` 3,46,355 (W.N.3). Lessee recognises the difference between the carrying amount of the

© The Institute of Chartered Accountants of India

 modified lease liability and the carrying amount of the lease liability immediately before the
modification (i.e., ` 2,50,745) (W.N.4) as an adjustment to the ROU Asset.
Journal Entry
` `
ROU Asset A/c Dr. 2,50,745
To Lease Liability A/c 2,50,745
(Being difference in lease liability on account of
modification of lease adjusted through ROU Asset A/c)
Working Notes:
1. Calculation of present value of modified lease liability at the beginning of 7 th year
Year Lease Payment Present value factor @ 7% Present value of lease
(A) (B) payments (A x B = C)
7 1,00,000 0.935 93,500
8 1,00,000 0.873 87,300
9 1,00,000 0.816 81,600
10 1,00,000 0.763 76,300
11 1,00,000 0.713 71,300
12 1,00,000 0.666 66,600
13 1,00,000 0.623 62,300
14 1,00,000 0.582 58,200
PV of the modified lease liability at the beginning of the
7 th year 5,97,100
2. Calculation of present value of lease liability at the commencement date
Year Lease Payment Present value factor @ PV of lease payments
(A) 6% (B) (A x B = C)
1 1,00,000 0.943 94,300
2 1,00,000 0.890 89,000
3 1,00,000 0.840 84,000
4 1,00,000 0.792 79,200
5 1,00,000 0.747 74,700
6 1,00,000 0.705 70,500
7 1,00,000 0.665 66,500
8 1,00,000 0.627 62,700
9 1,00,000 0.592 59,200
10 1,00,000 0.558 55,800
Present value of the lease liability at the commencement
date 7,35,900

© The Institute of Chartered Accountants of India

 3. Calculation of lease liability immediately before the modification date
Year Opening lease Interest @ 6% Lease payments Closing liability
liability (A) (B) = [A x 6%] (C) (D) = [A+B-C]
1 7,35,900 44,154 1,00,000 6,80,054
2 6,80,054 40,803 1,00,000 6,20,857
3 6,20,857 37,251 1,00,000 5,58,108
4 5,58,108 33,486 1,00,000 4,91,594
5 4,91,594 29,496 1,00,000 4,21,090
6 4,21,090 25,265 1,00,000 3,46,355
Lease liability as at modification date 3,46,355
4. Adjustment to ROU asset
Modified Lease liability 5,97,100
Original Lease liability as at modification date (3,46,355)
Adjustment to ROU asset 2,50,745
The ROU asset will be increased by ` 2,50,745 on the date of modification.
2. (a) In accordance with Ind AS 16, all costs required to bring an asset to its present location and
condition for its intended use should be capitalised. Therefore, the initial purchase price of the
building would be:
Particulars (`)
Purchase amount 50,00,000
Non-refundable property tax 2,50,000
Direct legal cost 50,000
53,00,000
Expenditures on redevelopment:
Building plan approval 1,00,000
Construction costs (10,00,000 – 60,000) 9,40,000
Total amount to be capitalised at 1 st October, 20X1 63,40,000
Treatment of abnormal wastage of material and labour:
As per Ind AS 16, the cost of abnormal amounts of wasted material, labour, or other resources
incurred in self-constructing an asset is not included in the cost of the asset. It will be charged
to Profit and Loss in the year it is incurred. Hence, abnormal wastage of ` 40,000 will be
expensed off in Profit & Loss in the financial year 20X1-20X2.
Accounting of property- Building
When the property is used as an administrative centre, it is not an investment property, rather it
is an ‘owner occupied property’. Hence, Ind AS 16 will be applicable.
When the property (land and/or buildings) is held to earn rentals or for capital appreciation (or
both), it is an Investment Property. Ind AS 40 prescribes the cost model for accounting of such
investment property.
Since equal value can be attributed to each floor, Ground Floor of the building will be considered
as Investment Property and accounted for as per Ind AS 40 and First Floor would be considered
as Property, Plant and Equipment and accounted for as per Ind AS 16.
Cost of each floor = ` 63,40,000 / 2 = ` 31,70,000
4

© The Institute of Chartered Accountants of India

 As on 1 st October, 20X1, the carrying value of building vis-à-vis its classification would be
as follows:
(i) In the Separate Financial Statements: The Ground Floor of the building will be classified
as investment property for ` 31,70,000, as it is property held to earn rentals. While First
Floor of the building will be classified as item of property, plant and equipment for
` 31,70,000.
(ii) In the Consolidated Financial Statements: The consolidated financial statements present
the parent and its subsidiary as a single entity. The consolidated entity uses the building
for the supply of goods. Therefore, the leased-out property to a subsidiary does not qualify
as investment property in the consolidated financial statements. Hence, the whole building
will be classified as an item of Property, Plant and Equipment for ` 63,40,000.
(b) (i) The Framework for integrated reporting has been written primarily in the context of private
sector, for-profit companies of any size but it can also be applied, adapted as necessary,
by public sector and not-for-profit organizations.
(ii) An integrated report may be prepared in response to existing com pliance requirements.
For example, an organization may be required by local law to prepare a management
commentary or other report that provides context for its financial statements. If that report
is also prepared in accordance with this Framework, it can be considered as an integrated
report. If the report is required to include specified information beyond that required by th e
Framework, the report can still be considered as an integrated report if that other
information does not obscure the concise information required by the Framework.
(c) Segment information
(A) Information about operating segment
(1) The company’s operating segments comprise:
Coatings: consisting of decorative, automotive, industrial paints and related activities.
Others: consisting of chemicals, polymers and related activities.
(2) Segment revenues, results and other information. (` in Lakh)
Revenue Coating Others Total
1. External Revenue (gross) 2,00,000 70,000 2,70,000
Less: GST (5,000) (3,000) (8,000)
Total Revenue (net) 1,95,000 67,000 2,62,000
Other Operating Income 40,000 15,000 55,000
Total Revenue 2,35,000 82,000 3,17,000
2. Results
Segment results 10,000 4,000 14,000
Unallocated income (net of 3,000
unallocated expenses)
Profit from operation before 17,000
interest, taxation and exceptional
items
Interest and bank charges (2,000)
Profit before exceptional items 15,000
Exceptional items Nil
Profit before taxation 15,000

© The Institute of Chartered Accountants of India

 Income Taxes
-Current taxes (1,950)
-Deferred taxes (50)
Profit after taxation 13,000
3. Other Information
(a) Assets
Segment Assets 50,000 30,000 80,000
Investments 10,000
Unallocated assets 10,000
Total Assets 1,00,000
(b) Liabilities and Shareholder’s
funds
Segment liabilities 30,000 10,000 40,000
Unallocated liabilities 20,000
Share capital 10,000
Reserves and surplus 30,000
Total liabilities and 1,00,000
shareholder’s funds
(c) Others
Capital Expenditure (5,000) (2,000) (7,000)
Depreciation (1,000) (300) (1,300)
Geographical Information (` in lakh)
India Outside India Total
(`) (`) (`)
Revenue 2,55,000 62,000 3,17,000
Segment assets 90,000 10,000 1,00,000
Capital expenditure 7,000 7,000

3. (a) The legal form of Entity A and the terms of the contractual arrangement indicate that the
arrangement is a joint venture. However, the other relevant facts and circumstances mentioned
above indicates that:
• the obligation of the parties to purchase all the output produced by Entity A reflects the
exclusive dependence of Entity A upon the parties for the generation of cash flows and,
thus, the parties have an obligation to fund the settlement of the liabilities of Entity A.
• the fact that the parties have rights to all the output produced by Entity A means that the
parties are consuming, and therefore have rights to, all the economic benefits of the assets
of Entity A.
These facts and circumstances indicate that the arrangement is a joint operation.
The conclusion about the classification of the joint arrangement in these circumstances would
not change if, instead of the parties using their share of the output themselves in a subsequent
manufacturing process, the parties sold their share of the output to th ird parties.
If the parties changed the terms of the contractual arrangement so that the arrangement was
able to sell output to third parties, this would result in Entity A assuming demand, inventory and
credit risks. In that scenario, such a change in the facts and circumstances would require
6

© The Institute of Chartered Accountants of India

 reassessment of the classification of the joint arrangement. Such facts and circumstances would
indicate that the arrangement is a joint venture.
(b) The accounting treatment made by the accountant is not in compliance with Ind AS 109 ‘Financial
Instruments’. As per Ind AS 109, at initial recognition, an entity shall measure a financial asset
or financial liability at its fair value. The fair value of a financial instrument at initial recognition
is normally the transaction price i.e. the fair value of the consideration given or received.
After initial recognition, an entity shall measure a financial asset either at amortised cost or at
fair value through profit and loss or fair value through other comprehensive income.
Here, the loan given to employee is not at market rate. Hence, the fair value of the loan will not
be equal to its initial loan proceeds. As per Ind AS 109, a financial instrument is initially
measured and recorded in the books at its fair value. Further, interest income to be recognised
in the Statement of Profit and Loss will be the finance income recognised at effective rate of
interest i.e. @ 10% and not the rate of interest charged by the company i.e. @ 6%.
The correct accounting treatment as per Ind AS 109 will be as under:
For measuring the fair value or present value of the loan at initial recognition, market rate of
interest of similar loan is considered (level 1 observable input) ie @ 10%, to discount the cash
outflows.
The fair value of the loan shall be as follows:
Date Outstanding Principal Interest Total Discount PV
loan income @ inflow factor @
6% 10%
31 st March 20X2 15,00,000 3,00,000 90,000 3,90,000 0.909 3,54,510
31 st March 20X3 12,00,000 3,00,000 72,000 3,72,000 0.826 3,07,272
31 st March 20X4 9,00,000 3,00,000 54,000 3,54,000 0.751 2,65,854
31 st March 20X5 6,00,000 3,00,000 36,000 3,36,000 0.683 2,29,488
31 st March 20X6 3,00,000 3,00,000 18,000 3,18,000 0.621 1,97,478
Fair value of the loan 13,54,602

As per Ind AS 19, employee benefits are all forms of consideration given by an entity in exchange
for services rendered by employees or for termination of employment. Difference of loan
proceeds and present value of the loan (fair value) will be treated as prepaid employee cost
irrespective of the fact that employee is not required to give any specific performanc e against
this benefit. This is because employee is required to be in service of the company to continue
availing the benefits of concessional rate of interest on housing loan. Practically, once the
employee leaves the organisation, they have to repay the outstanding loan because the company
provides the loan at concessional rate of interest only to its employees.
Hence, it is an employee benefit given by the company to its employees. This deemed employee
cost of ` 1,45,398 (15,00,000 – 13,54,602) will be deferred and amortised over the period of
loan on straight line basis.
Calculation of amortised cost of loan to employees
Financial year Amortised cost Interest to be Repayment Amortised
ending on (opening balance) recognised (including cost (closing
31st March @ 10% interest) balance)
20X2 13,54,602 1,35,460 3,90,000 11,00,062

© The Institute of Chartered Accountants of India

 20X3 11,00,062 1,10,006 3,72,000 8,38,068
20X4 8,38,068 83,807 3,54,000 5,67,875
20X5 5,67,875 56,788 3,36,000 2,88,663
20X6 2,88,663 29,337* 3,18,000 -
* 2,88,663 x 10% = ` 28,866. Difference of ` 471 (29,337 – 28,866) is due to approximation in
computation.
Journal Entries to be recorded at every period end
1. On 1 st April, 20X1
Particulars Dr. Amount (`) Cr. Amount (`)
Loan to employee A/c Dr. 13,54,602
Prepaid employee cost A/c Dr. 1,45,398
To Bank A/c 15,00,000
(Being loan asset recorded at initial fair value)
2. On 31 st March, 20X2
Particulars Dr. Amount Cr. Amount
(`) (`)
Bank A/c Dr. 3,90,000
To Finance income A/c (profit and loss) @10% 1,35,460
To Loan to employee A/c 2,54,540
(Being first instalment of repayment of loan accounted
for using the amortised cost and effective interest rate
@ 10%)
Employee benefit cost (profit and loss) A/c Dr. 29,080
To Prepaid employee cost A/c (1,45,398/5) 29,080
(Being amortization of pre-paid employee cost
charged to profit and loss as employee benefit cost)
The following housing loan balances should appear in the financial statements:
Extracts of Balance Sheet of Star Ltd. as at 31 st March, 20X2
Non-current asset
Financial asset
Loan to employee (11,00,062 – 3,72,000 + 1,10,006) 8,38,068
Other non-current asset
Prepaid employee cost 87,238
Current asset
Financial asset
Loan to employee (3,72,000-1,10,006) 2,61,994
Other current asset
Prepaid employee cost 29,080

© The Institute of Chartered Accountants of India

4. (a) Consolidated Balance Sheet of the Group as at 31 st March, 20X2
Particulars Note No. ` in lakh
ASSETS
Non-current assets
Property, plant and equipment 1 980
Current assets
(a) Inventory 2 338
(b) Financial assets
Trade receivable 3 580
Bills receivable 4 2
Cash and cash equipment 5 308
Total assets 2,208
EQUITY & LIABILITIES
Equity attributable to owners of parent
Share Capital 600
Other Equity
Reserve (W.N.5) 194
Retained Earnings (W.N.5) 179.8
Capital Reserve (W.N.3) 188
Non-controlling interests (W.N.4) 166.2
Total equity 1328
LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
(i) Trade payables 6 880
Total liabilities 880
Total equity and liabilities 2,208
Notes to Accounts ( ` in lakh)
1. Property Plant & Equipment
P Ltd. 320
S Ltd. 360
SS Ltd. 300 980
2. Inventories
P Ltd. 220
S Ltd. (70-2) 68
SS Ltd. 50 338
3. Trade Receivable
P Ltd. 260
S Ltd. 100

© The Institute of Chartered Accountants of India

 SS Ltd. 220 580
4. Bills Receivable
P Ltd. (72-70) 2
S Ltd. (30-30) - 2
5. Cash & Cash equivalents
P Ltd. 228
S Ltd. 40
SS Ltd. 40 308
6. Trade Payables
P Ltd. 470
S Ltd. 230
SS Ltd. 180 880
Working Notes:
1. Analysis of Reserves and Surplus (` in lakh)
S Ltd. SS Ltd.
Reserves as on 31.3.20X1 80 60
Increase during the year 20X1-20X2 20 20
Increase for the half year till 30.9.20X1 10 10
Balance as on 30.9.20X1 (A) 90 70
Total balance as on 31.3.20X2 100 80
Post-acquisition balance 10 10
Retained Earnings as on 31.3.20X1 20 30
Increase during the year 20X1-20X2 30 30
Increase for the half year till 30.9.20X1 15 15
Balance as on 30.0.20X1 (B) 35 45
Total balance as on 31.3.20X2 50 60
Post-acquisition balance 15 15
Less: Unrealised Gain on inventories (10 ÷ 100 x 25) - (2)
Post-acquisition balance for CFS 15 13
Total balance on the acquisition date ie.30.9.20X1 125 115
(A+B)
2. Calculation of Effective Interest of P Ltd. in SS Ltd.
Acquisition by P Ltd. In S Ltd. = 80%
Acquisition by S Ltd. In SS Ltd. = 75%
Acquisition by Group in SS Ltd. (80% x 75%) = 60%
Non-controlling Interest = 40%

10

© The Institute of Chartered Accountants of India

 3. Calculation of Goodwill / Capital Reserve on the acquisition
S Ltd. SS Ltd.
Investment or consideration 340 (280 x 80%) 224
Add: NCI at Fair value
(400 x 20%) 80
(320 x 40%) - 128
420 352
Less: Identifiable net assets (Share Capital (400+125) (525) (320+115) (435)
+ Increase in the Reserves and Surplus till
acquisition date)
Capital Reserve 105 83
Total Capital Reserve (105 + 83) 188
4. Calculation of Non-controlling Interest
S Ltd. SS Ltd.
At Fair Value (See Note 3) 80 128
Add: Post Acquisition Reserves (See Note 1) (10 x 20%) 2 (10 x 40%) 4
Add: Post Acquisition Retained Earnings (15 x 20%) 3 (13 x 40%) 5.2
(See Note 1)
Less: NCI share of investment in SS Ltd. (280 x 20%) (56)* -
29 137.2
Total (29 + 137.2) 166.2
*Note: The Non-controlling interest in S Ltd. Will take its proportion in SS Ltd. So they have
to bear their proportion in the investment by S Ltd. (in SS Ltd.) also.
5. Calculation of Consolidated Other Equity
Reserves Retained Earnings
P Ltd. 180 160
Add: Share in S Ltd. (10 x 80%) 8 (15 x 80%) 12
Add: Share in SS Ltd. (10 x 60%) 6 (13 x 60%) 7.8
194 179.8
(b) The transaction price should include management’s estimate of the amount of consideration to
which the entity will be entitled for the work performed.
Probability-weighted Consideration
` 1,50,000 (fixed fee plus full performance bonus) x 60% ` 90,000
` 1,45,000 (fixed fee plus 90% of performance bonus) x 30% ` 43,500
` 1,40,000 (fixed fee plus 80% of performance bonus) x 10% ` 14,000
Total probability-weighted consideration ` 1,47,500
Based on the probability-weighted estimate, the total transaction price is ` 1,47,500. The
contractor have to update its estimate at each reporting date.

11

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5. (a) The following table shows the amount of income tax expense that is reported in each quarter:
Expected Total Income = 15,000 x 4 = ` 60,000
Expected Tax as per slabs = 20,000 x 20% + 40,000 x 40% = ` 20,000
Average Annual Income tax rate = 20,000/60,000 x 100 = 33.33%
Amount (`)
Q1 Q2 Q3 Q4
Profit before tax 15,000 15,000 15,000 15,000
Tax expense 5,000 5,000 5,000 5,000

(b) T Ltd. concludes that the modem and router are each distinct and that the arrangement includes
three performance obligations (the modem, the router and the internet services) based on the
following evaluation:
Criterion 1: Capable of being distinct
• C can benefit from the modem and router on their own because they can be resold for more
than scrap value.
• C can benefit from the internet services in conjunction with readily available resources –
i.e. either the modem and router are already delivered at the time of contract set- up, they
could be bought from alternative retail vendors or the internet service could be used with
different equipment.
Criterion 2: Distinct within the context of the contract
• T Ltd. does not provide a significant integration service.
• The modem, router and internet services do not modify or customise one another.
• C could benefit from the internet services using routers and modems that are not sold by
T Ltd.
Therefore, the modem, router and internet services are not highly dependent on or highly
inter-related with each other.
(c) Allocated price per unit (year) is calculated as follows:
Total estimated memberships is 175 members (Year 1 = 100; Year 2 = 50; Year 3 = 25) = 175
Total consideration is ` 12,00,000 {(100 x 7,500) + (50 x 6,000) + (25 x 6,000)}
Allocated price per membership is ` 6,857 approx. (12,00,000 / 175)
Basis on above, it is to be noted that although entity has collected ` 7,500 but revenue can be
recognised at ` 6,857 approx. per membership and remaining ` 643 should be recorded as
contract liability against option given to customer for renewing their membership at discount.
(d) (i) If Mr. X controls or jointly controls A Limited, then Mr. X is a related party to A limited.
B Limited will be considered as related to A Limited when Ms. Y also has control, joint
control or significant influence over B Limited because Ms. Y is a domestic partner of
Mr. X.
(ii) If Ms. Y controls or jointly controls B Limited, then Ms. Y is a related party to B limited.
A Limited will be considered as related to B Limited when Mr. X also has control, joint control
or significant influence over A Limited because Mr. X is a domestic partner of Ms. Y.
(iii) No, Significant influence does not lead to direct / indirect control between the A Ltd. and
B Ltd. Hence, they will not be considered as related party.

12

© The Institute of Chartered Accountants of India

6. (a) Either
The amount of borrowing cost to be capitalized requires determination of interest cost on foreign
currency loan and eligible exchange loss difference to be adjusted, if any.
(i) Interest on foreign currency loan for the period:
USD 20,000 x 5% = USD 1,000
Converted in `: USD 1,000 x ` 48/USD = ` 48,000
(ii) Increase in liability due to change in exchange difference:

USD 20,000 x (48 - 45) = ` 60,000

(iii) Interest that would have resulted if the loan was taken in Indian Currency:
USD 20,000 x ` 45/USD x 11% = ` 99,000

(iv) Difference between interest on foreign currency borrowings and interest on local
currency borrowings:
` 99,000 - 48,000 = ` 51,000
Since interest saving of ` 51,000 is less than the exchange loss of Rs. 60,000, exchange loss
to the extent of ` 51,000 will be capitalized as borrowing costs.
Therefore, total borrowing cost to be capitalized will be:
(1) Interest cost on borrowings in foreign currency ` 48,000
(2) Exchange difference to the extent considered to be
an adjustment to interest cost ` 51,000
` 99,000
The remaining exchange loss of ` 9,000 (60,000 – 51,000) will be expensed off in the Statement
of Profit and loss.
(a) OR
Presented as disposal group held for sale
(2) PQR Ltd.’s fleet of vehicles is classified as held for sale because it constitutes a group of
assets to be sold in their present condition and the sale is highly probable at the reporting
date (as a contract has been entered into).
(3) DEF Ltd.’s sale of its retail business will not be completed until the final terms (e.g. of
purchase price) are agreed. However, the business is ready for immediate sale and the
sale is highly probable to be completed by April, 20X1. This implies that the retail business
is a disposal group held for sale, unless other evidence after the reporting date but before
the financial statements are approved for issue, comes to light to indicate the contrary.
Not presented as disposal group held for sale
(1) XYZ Ltd.’s shares in Alpha Ltd. are not available for an immediate sale as shareholders’
approval is required. Also, no specific potential buyer has been identified. Taking these
facts into consideration, it is clear that the sale is not highly probable.
(b) Accounting treatment in the books of M Ltd. (Functional Currency Rupees)
M Ltd. will recognize sales of ` 996 lacs (12 lacs Euro x ` 83)
Profit on sale of inventory = ` 996 lacs – ` 830 lacs = ` 166 lacs.
13

© The Institute of Chartered Accountants of India

 On balance sheet date, receivable from G Ltd. will be translated at closing rate i.e. 1 Euro =
` 85. Therefore, unrealised forex gain will be recorded in standalone profit and loss by
` 24 lacs. (i.e. (` 85 - ` 83) x 12 Lacs)
Journal Entries
` (in Lacs) ` (in Lacs)
G Ltd. Dr. 996
To Sales 996
(Being revenue recorded on initial recognition)
G Ltd. Dr. 24
To Foreign exchange difference (unrealised) 24
(Being foreign exchange difference recorded at year end)
Accounting treatment in the books of G Ltd. (Functional currency EURO)
G Ltd. will recognize inventory on 1 st February, 20X1 of Euro 12 lacs which will also be its closing
stock at year end.
Journal Entry
(in Euros) (in Euros)
Purchase Dr. 12 lakh
To M Ltd. 12 lakh
Accounting treatment in the consolidated financial statements
Receivable and payable in respect of above-mentioned sale / purchase between M Ltd. and G Ltd.
will get eliminated.
The closing stock of G Ltd. will be recorded at lower of cost or NRV.
Euro (in lacs) Rate ` (in lacs)
Cost 12 83 996
NRV (Assumed Same) 12 85 1020
Since cost is less than NRV, no write off in the value of inventory is required.
The amount of closing stock of ` 996 lacs includes two components–
• Cost of inventory for ` 830 lacs; and
• Profit element of ` 166 lacs; and
At the time of consolidation, the second element amounting to ` 166 lacs will be eliminated from
the closing stock.
Journal Entry
` (in Lacs) ` (in Lacs)
Consolidated P&L A/c ‘ Dr. 166
To Inventory 166
(Being profit element of intragroup transaction. eliminated)
(c) Para 9 of Ind AS 36 ‘Impairment of Assets’ states that an entity shall assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of the asset.

14

© The Institute of Chartered Accountants of India

 Further, paragraph 10(b) of Ind AS 36 states that irrespective of whether there is any indication
of impairment, an entity shall also test goodwill acquired in a business combination for
impairment annually.
Sun Ltd. has not tested any CGU on account of not having any indication of impairment is
partially correct i.e. in respect of CGU A and B but not for CGU C. Hence, the treatment made
by the Company is not in accordance with Ind AS 36.
Impairment testing in respect of CGU A and B are not required since there are no indications of
impairment. However, Sun Ltd shall test CGU C irrespective of any indication of impairment
annually as the goodwill acquired on business combination is fully allocated to CGU ‘C’.

15

© The Institute of Chartered Accountants of India

 Test Series: September, 2022
MOCK TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (1) Ind AS 103 defines business as an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing goods or services to customers,
generating investment income (such as dividends or interest) or generating other income from
ordinary activities.
For a transaction to meet the definition of a business combination (and for the acquisition method
of accounting to apply), the entity must gain control of business that is more than a collection of
assets or a combination of assets and liabilities.
To be capable of being conducted and managed for the purpose identified in the definition of a
business, an integrated set of activities and assets requires two essential elements —inputs and
processes applied to those inputs.
Therefore, an integrated set of activities and assets must include, at a minimum, an inp ut and a
substantive process that together significantly contribute to the ability to create output.
In the aforesaid transaction, Company X acquired share of participating rights owned by
Company Z for the producing Block (AWM/01). The output exist in this transaction (Considering
AWM/01) is a producing block. Also all the manpower and requisite facilities / machineries are
owned by Joint venture and thereby all the Joint Operators. Hence, acquiring participating rights
tantamount to acquire inputs (Expertise Manpower & Machinery) and it is critical to the ability to
continue producing outputs. Thus, the said acquisition will fall under ‘Business Acquisition’ and
hence standard Ind AS 103 is to be applied for the same.
(2) As per paragraph 8 of Ind AS 103, acquisition date is the date on which the acquirer obtains
control of the acquiree. Further, paragraph 9 of Ind AS 103 clarifies that the date on which the
acquirer obtains control of the acquiree is generally the date on which the acquirer legally
transfers the consideration, acquires the assets and assumes the liabilities of the acquiree —the
closing date. However, the acquirer might obtain control on a date that is either earlier or later
than the closing date.
An acquirer shall consider all pertinent facts and circumstances in identifying the acquisition date.
Since Government of India (GOI) approval is a substantive approval for Company X to acquire
control of Company Z’s operations, the date of acquisition cannot be earlier than the date on
which approval is obtained from GOI. This is pertinent given that the approval from GOI is
considered to be a substantive process and accordingly, the acquisition is considered to be
completed only on receipt of such approval. Hence, acquisition date in the above scenario is
30.6.20X1.
(3) Journal entry for acquisition
Amount Amount
Particulars (`) (`)
Property Plant & Equipment (W.N.1) Dr. 1,66,650
Right-of-use Asset Dr. 6,666
Development CWIP (W.N.2) Dr. 66,660
Financial Assets - Loan Receivables Dr. 16,665
Inventories Dr. 9,999
1

© The Institute of Chartered Accountants of India

 Trade Receivables Dr. 33,330
Other Current Assets Dr. 16,665
To Provisions 66,660
To Other Liabilities 33,330
To Trade Payables 66,660
To Deferred Tax Liability (W.N.4) 29,997
To Cash & Cash Equivalent (purchase
consideration) 1,00,000
To Gain on bargain purchase (Other
Comprehensive Income) (W.N.3) (Bal. fig.) 19,988
(Being assets acquired and liabilities assumed from Company Z recorded at fair value
along gain on bargain purchase)
(4) Balance Sheet of Company X as at 30.6.20X1
(Pre & Post Acquisition of PI rights pertaining to Company Z)
Pre-Acquisition Adjustments Post-Acquisition
Particulars
30.6.20X1 33.33% Share 30.6.20X1
Assets
Non-Current Assets
Property Plant & Equipment 10,00,000 1,66,650 11,66,650
Right of Use Asset 2,00,000 6,666 2,06,666
Development CWIP 1,00,000 66,660 1,66,660
Financial Assets
Loan receivable 50,000 16,665 66,665
Total Non-Current Assets 13,50,000 2,56,641 16,06,641
Current assets
Inventories 2,00,000 9,999 2,09,999
Financial Assets
Trade receivables 3,00,000 33,330 3,33,330
Cash and cash equivalents 4,00,000 (1,00,000) 3,00,000
Other Current Assets 50,000 16,665 66,665
Total Current Assets 9,50,000 (40,006) 9,09,994
Total Assets 23,00,000 2,16,635 25,16,635
Equity and Liabilities
Equity
Equity share capital 3,00,000 3,00,000
Other equity 3,00,000 3,00,000
Capital Reserve (OCI) 19,988 19,988
Total Equity 6,00,000 19,988 6,19,988

© The Institute of Chartered Accountants of India

 Liabilities
Non-Current Liabilities
Provisions 8,00,000 66,660 8,66,660
Other Liabilities 3,00,000 33,330 3,33,330
Deferred Tax Liability 29,997 29,997
Total Non-Current Liabilities 11,00,000 1,29,987 12,29,987
Current Liabilities
Financial liabilities
Trade Payables 6,00,000 66,660 6,66,660
Total Current Liabilities 6,00,000 66,660 6,66,660
Total Equity and Liabilities 23,00,000 2,16,635 25,16,635

(5) As per Ind AS 103, in case an entity acquires another entity step by step through series of
purchase then the acquisition date will be the date on which the acquirer obtains control. Till the
time the control is obtained the investment will be accounted as per the requiremen ts of other
Ind AS 109, if the investments are covered under that standard or as per Ind AS 28, if the
investments are in Associates or Joint Ventures.
If a business combination is achieved in stages, the acquirer shall remeasure its previously held
equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or
loss, if any, in profit or loss or other comprehensive income, as appropriate.
Since in the above transaction, company X does not hold any prior interest in Company Z and
company holds only 30% PI rights in Block AWM/01 through unincorporated joint venture, this is
not a case of step acquisition.
Working Notes:
1. Fair Value of Property, plant and equipment

Fair Value of PPE in Company Z Books ` 5,00,000

33.33% Share acquired by Company X ` 1,66,650

2. Fair Value of Development CWIP:

Fair Value of PPE in Company Z Books ` 2,00,000

33.33% Share acquired by Company X ` 66,660

3. Computation Goodwill/Bargain Purchase Gain

Particulars As at 30.6.20X1 (`)

Total Non - Current Assets 2,56,641
Total Current Assets (Except Cash & Cash Equivalent of
59,994
` 66,660) (1,26,654 – 66,660)
Total Non-Current Liabilities (99,990)
Total Current Liabilities (66,660)
Total Deferred Tax Liability (Refer Working note 3) (29,997)
3

© The Institute of Chartered Accountants of India

 Net Assets acquired 1,19,988
Less: Consideration Paid (1,00,000)
Gain on Bargain Purchase* (To be transferred to OCI) 19,988

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

2. (a) As per the principles of Ind AS 20 “Accounting for Government Grants and Disclosure of
Government Assistance”, the benefits of a government loan at a below market rate of interest is
treated as a government grant. The loan shall be recognized and measured in accordance with
Ind AS 109 “Financial Instruments”. The benefit of the below market rate of interest shall be
measured as the difference between the initial carrying value of the loan determined in
accordance with Ind AS 109 and the proceeds received. The benefit is accounted for in
accordance with Ind AS 20. As per Ind AS 109, the loan should be initially measured at its fair
value.
Initial recognition of grant as on 1 st April, 20X1
Fair value of loan = ` 25,00,000 x 0.567 (PVF @ 12%, 5 th year) = ` 14,17,500
A Limited will recognize ` 10,82,500 (25,00,000 – 14,17,500) as the government grant and will
make the following entry on receipt of loan:
Date Particulars Dr. (`) Cr. (`)
1.4.20X1 Bank account Dr. 25,00,000
To Deferred Grant Income 10,82,500
To Loan account 14,17,500
(Being grant initially recorded at fair value)

© The Institute of Chartered Accountants of India

 Accounting treatment for year ending 31 st March, 20X2
As per para 3 of Ind AS 20, grants related to assets are government grants whose primary
condition is that an entity qualifying for them should purchase, construct or otherwise acquire
long-term assets.
As per para 24-27 of Ind AS 20, Government grants related to assets, including non-monetary
grants at fair value, shall be presented in the balance sheet either by setting up the grant as
deferred income or by deducting the grant in arriving at the carrying amount of the asset.
One method recognises the grant as deferred income that is recognised in profit or loss on a
systematic basis over the useful life of the asset.
The other method deducts the grant in calculating the carrying amount of the asset. The grant is
recognised in profit or loss over the life of a depreciable asset as a reduced depreciation
expense.
A Ltd. has adopted first method of recognising the grant as deferred income that is recognised in
profit or loss on a systematic basis over the useful life of the asset. Here, deferred income is
recognised in profit or loss in the proportion in which depreciation expense o n the asset is
recognised.
Depreciation for the year (20X1-20X2) = ` 50,00,000 / 5 years = ` 10,00,000
As the loan is to finance a depreciable asset, ` 10,82,500 will be recognized in Profit or Loss on
the same basis as depreciation.
Since the depreciation is provided on straight line basis by A Limited, it will credit ` 2,16,500
(10,82,500 / 5) equally to its statement of profit and loss over the 5 years.
Journal Entries
Date Particulars Dr. (`) Cr. (`)
31.3.20X2 Depreciation (Profit or Loss A/c) Dr. 10,00,000
To Property, Plant & Equipment 10,00,000
(Being depreciation provided for the year)
Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)

Impact on profit or loss due to revocation of government grant as on 31 st March 20X3

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

© The Institute of Chartered Accountants of India

 Journal Entries
Date Particulars Dr. (`) Cr. (`)
31.3.20X3 Deferred grant income Dr. 2,16,500
To Profit or Loss 2,16,500
(Being deferred income adjusted)
Loan account (W.N.1) Dr. 17,78,112
Deferred grant income (W.N.2) Dr. 6,49,500
Profit or Loss Dr. 72,388
To Government grant payable 25,00,000
(Being refund of government grant)
Profit or Loss Dr. 10,00,000
To Government grant payable 10,00,000
(Being penalty payable to government)

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

31st March, 20X3 will be ` 10,72,388 (10,00,000 + 72,388).
Circumstances giving rise to repayment of a grant related to an asset may require consideration
to be given to the possible impairment of the new carrying amount of the asset.
Working Notes:
1. Amortisation Schedule of Loan
Year Opening balance of Loan Interest @ 12% Closing balance of Loan
31.03.20X2 14,17,500 1,70,100 15,87,600
31.03.20X3 15,87,600 1,90,512 17,78,112

2. Deferred Grant Income

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

(b) Statement of Cash Flows from Operating Activities (Direct Method)

of Galaxy Ltd. for the year ended 31 March 20X2
Particulars ` `
Operating Activities:
Cash received from Trade receivables (W.N. 3) 85,33,000
Less: Cash paid to Suppliers (W.N.2) 55,75,000
Payment for Administration and Selling expenses 15,40,000
Payment for Income Tax (W.N.4) 1,12,000 (72,27,000)
13,06,000

© The Institute of Chartered Accountants of India

 Adjustment for exceptional items (fire insurance claim) 1,10,000
Net cash generated from operating activities 14,16,000

Working Notes:
1. Calculation of total purchases
Cost of Sales = Opening stock + Purchases – Closing Stock
` 56,00,000 = ` 1,65,000 + Purchases – ` 1,20,000
Purchases = ` 55,55,000
2. Calculation of cash paid to Suppliers
Trade Payables

` `
To Bank A/c (balancing figure) 55,75,000 By Balance b/d 2,15,000
To Balance c/d 1,95,000 By Purchases (W.N. 1) 55,55,000
57,70,000 57,70,000

3. Calculation of cash received from Customers

Trade Receivables

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

4. Calculation of tax paid during the year in cash

Provision for tax

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

3. (a) (i) As per para 27 of Ind AS 115, a good or service that is promised to a customer is distinct if
both of the following criteria are met:
(a) the customer can benefit from the good or service either on its own or together with
other resources that are readily available to them. A readily available resource is a
good or service that is sold separately (by the entity or another entity) or that the
customer has already obtained from the entity or from other transactions or events;
and
(b) the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
Factors that indicate that two or more promises to transfer goods or services to a
customer are separately identifiable include, but are not limited to, the following:

© The Institute of Chartered Accountants of India

 (a) significant integration services are not provided (i.e. the entity is not using the goods
or services as inputs to produce or deliver the combined output called for in the
contract)
(b) the goods or services does not significantly modify or customize other promised
goods or services in the contract.
(c) the goods or services are not highly inter-dependent or highly interrelated with other
promised goods or services in the contract
Accordingly, on 1 st April, 20X1, entity A entered into a single transaction with three
identifiable separate components:
1. Sale of a good (i.e. engineering machine);
2. Rendering of services (i.e. engineering machine maintenance services on
30th September, 20X1 and 1st April, 20X2); and
3. Providing finance (i.e. sale of engineering machine and rendering of services on
extended period credit).
(ii) Calculation and allocation of revenue to each component of the transaction
Date Opening Finance Goods Services Payment Closing
balance income received balance
1 st April, 20X1 – – 2,51,927 – – 2,51,927
30 th September, 2,51,927 12,596 (Note 1) – 45,000 – 3,09,523
20X1
31 st March 20X2 3,09,523 15,477 (Note 2) – – – 3,25,000
1 st April, 20X2 3,25,000 – – 75,000 (4,00,000)

Notes:
1. Calculation of finance income as on 30 th September, 20X1
= 5% x 2,51,927 = ` 12,596
2. Calculation of finance income as on 31 st March, 20X2
= 5% x 3,09,523 = ` 15,477
(iii) Journal Entries
Date Particulars Dr. (`) Cr. (`)
1 st April, 20X1 Mr. Anik Dr. 2,51,927
To Revenue - sale of goods (Profit or 2,51,927
loss A/c)
(Being revenue recognised from the sale of
the machine on credit)
Cost of goods sold (Profit or loss) Dr. 1,60,000
To Inventories 1,60,000
(Being cost of goods sold recognised)
30th September Mr. Anik Dr. 12,596
20X1 To Finance Income (Profit or loss) 12,596
(Being finance income recognised)

© The Institute of Chartered Accountants of India

 Mr. Anik Dr. 45,000
To Revenue- rendering of services 45,000
(Profit or loss)
(Being revenue from the rendering of
maintenance services recognised)
Cost of services (Profit or loss) Dr. 30,000
To Cash/Bank or payables 30,000
(Being the cost of performing maintenance
services recognised)
31st March Mr. Anik Dr. 15,477
20X2 To Finance Income (Profit or loss) 15,477
(Being finance income recognised)
1 st April, 20X2 Mr. Anik Dr. 75,000
To Revenue - rendering of services 75,000
(Profit or loss)
(Being revenue from the rendering of
maintenance services recognised)
Cost of services (Profit or loss) Dr. 50,000
To Cash/Bank or payables 50,000
(Being the cost of performing maintenance
services recognised)
Cash/Bank Dr. 4,00,000
To Mr. Anik 4,00,000
(Being the receipt of cash from the
customer recognised)
(iv) Extract of Notes to the financial statements for the year ended 31 st March, 20X2 and
31 st March, 20X3
Note on Revenue
20X2-20X3 20X1-20X2
` `
Sale of goods – 2,51,927
Rendering of machine - maintenance services 75,000 45,000
Finance income – 28,073
75,000 3,25,000
(b)
Activity Whether in the Remarks
scope of Ind AS 41?
Managing animal-related No Since the primary purpose is to
recreational activities like Zoo show the animals to public for
recreational purposes, there is no

© The Institute of Chartered Accountants of India

 management of biological
transformation but simply control of
the number of animals. Hence it will
not fall in the purview of agricultural
activity.
Fishing in the ocean No Fishing in ocean is harvesting
biological assets from unmanaged
sources. There is no management
of biological transformation since
fish grow naturally in the ocean.
Hence, it will not fall in the scope of
the definition of agricultural activity.
Fish farming Yes Managing the growth of fish and
then harvest for sale is agricultural
activity within the scope of Ind AS
41 since there is management of
biological transformation of
biological assets for sale or
additional biological assets.
Development of living Analysis required The development of living
organisms such as cells, organisms for research purposes
bacteria viruses does not qualify as agricultural
activity, as those organisms are not
being developed for sale, or for
conversion into agricultural produce
or into additional biological assets.
Hence, development of such
organisms for the said purposes
does not fall under the scope of Ind
AS 41.
However, if the organisms are being
developed for sale or use in dairy
products, the activity will be
considered as agricultural activity
under the scope of Ind AS 41.
Growing of plants to be used Yes If an entity grows plants for using it
in the production of drugs in production of drugs, the activity
will be agricultural activity. Hence it
will come under the scope of
Ind AS 41.
Purchase of 25 dogs for No Ind AS 41 is applied to account for
security purposes of the the biological assets when they
company’s premises relate to agricultural activity.
Guard dogs for security purposes
do not qualify as agricultural
activity, since they are not being
kept for sale, or for conversion into
agricultural produce or into
additional biological assets. Hence,
they are outside the scope of
Ind AS 41.

10

© The Institute of Chartered Accountants of India

4. (a) Assessment of Preliminary Impact Assessment of Transition to Ind AS on Him Limited’s
Financial Statements
Issue 1: Fair value as deemed cost for property plant and equipment:
Accounting Standards Ind AS Impact on Company’s financial
(Erstwhile IGAAP) statements
As per AS 10, Property, Ind AS 101 allows entity to The company has decided to
Plant and Equipment is elect to measure Property, adopt fair value as deemed cost
recognised at cost less Plant and Equipment on the in this case. Since fair value
depreciation. transition date at its fair exceeds book value, so the book
value or previous GAAP value should be brought up to
carrying value (book value) fair value. The resulting impact
as deemed cost. of fair valuation of land
` 3,00,000 should be adjusted in
other equity.
Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Property Plant and Equipment Dr. 3,00,000
To Revaluation Surplus (OCI- Other Equity) 3,00,000

Issue 2: Fair valuation of Financial Assets:

Accounting Standards Ind AS Impact on Company’s financial
(Erstwhile IGAAP) statements
As per Accounting On transition, financial All financial assets (other than
Standard, investments assets including Investment in subsidiaries,
are measured at lower investments are associates and JVs’ which are
of cost and fair value. measured at fair values recorded at cost) are initially
except for investments in
recognized at fair value.
subsidiaries, associates
and JVs' which are The subsequent measurement of
recorded at cost. such assets are based on its
categorization either Fair Value
through Profit & Loss (FVTPL) or
Fair Value through Other
Comprehensive Income (FVTOCI)
or at Amortised Cost based on
business model assessment and
contractual cash flow
characteristics.
Since investment in mutual fund
are designated at FVTPL, increase
of ` 1,00,000 in mutual funds fair
value would increase the value of
investments with corresponding
increase to Retained Earnings.

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 Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Investment in mutual funds Dr. 1,00,000
To Retained earnings 1,00,000

Issue 3: Borrowings - Processing fees/transaction cost:

Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per AS, such As per Ind AS, such Fair value as on the date of
expenditure is charged to expenditure is amortised over transition is ` 1,80,000 as
Profit and loss account or the period of the loan. against its book value of
capitalised as the case ` 2,00,000. Accordingly, the
may be Ind AS 101 states that if it is difference of ` 20,000 is
impracticable for an entity to adjusted through retained
apply retrospectively the earnings.
effective interest method in
Ind AS 109, the fair value of
the financial asset or the
financial liability at the date of
transition to Ind AS shall be
the new gross carrying amount
of that financial asset or the
new amortised cost of that
financial liability.
Journal Entry on the date of transition
Particulars Debit (`) Credit (`)
Borrowings / Loan payable Dr. 20,000
To Retained earnings 20,000

Issue 4: Proposed dividend:

Accounting Standards Ind AS Impact on Company’s financial
(Erstwhile IGAAP) statements
As per AS, provision for As per Ind AS, liability for Since dividend should be
proposed divided is made proposed dividend is deducted from retained earnings
in the year when it has recognised in the year in during the year when it has been
been declared and which it has been declared and approved.
approved. declared and approved. Therefore, the provision declared
for preceding year should be
reversed (to rectify the wrong
entry). Retained earnings would
increase proportionately due to
such adjustment

Journal Entry on the date of transition

Particulars Debit (`) Credit (`)
Provisions Dr. 30,000
To Retained earnings 30,000
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 Issue 5 : Intangible assets:

Accounting Standards Ind AS Impact on Company’s

(Erstwhile IGAAP) financial statements
The useful life of an The useful life of an intangible Consequently, there would
intangible asset cannot be asset like brand/trademark can be no impact as on the date
indefinite under IGAAP be indefinite. Not required to of transition since company
principles. The Company be amortised and only tested intends to use the carrying
amortised brand / for impairment. amount instead of book
trademark on a straight- Company can avail the value at the date of
line basis over maximum exemption given in Ind AS 101 transition.
of 10 years as per AS 26. as on the date of transition to
use the carrying value as per
previous GAAP.

Issue 6: Deferred tax

Accounting Standards Ind AS Impact on Company’s
(Erstwhile IGAAP) financial statements
As per AS, deferred taxes As per Ind AS, deferred On date of transition to
are accounted as per taxes are accounted as per Ind AS, deferred tax liability
income statement approach. balance sheet approach. would be increased by
` 25,000.

Journal Entry on the date of transition

Particulars Debit (`) Credit (`)
Retained earnings Dr. 25,000
To Deferred tax liability 25,000

(b) Statement showing computation of inventory cost

Particulars Amount (`) Remarks

Costs of purchase 5,00,000 Purchase price of raw material [purchase price
(` 5,50,000) less refundable purchase taxes
(` 50,000)]
Loan-raising fee – Included in the measurement of the liability
Costs of purchase 55,000 Purchase price of consumable stores
Costs of conversion 65,000 Direct costs—labour
Production overheads 15,000 Fixed costs—depreciation
Production overheads 10,000 Product design costs and labour cost for
specific customer
Other costs 37,000 Refer working note
Borrowing costs - Recognised as an expense in profit or loss
Total cost of inventories 6,82,000

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 Working Note:
Costs of testing product designed for specific customer:
` 21,000 material (ie net of the ` 3,000 recovered from the sale of the scrapped output) +
` 11,000 labour + ` 5,000 depreciation = ` 37,000
5. (a) 1st April, 20X1
A financial guarantee contract is initially recognised at fair value. The fair value of the
guarantee will be the present value of the difference between the net contractual cash flows
required under the loan, and the net contractual cash flows that would have been required
without the guarantee.
Particulars Year 1 Year 2 Year 3 Total
(`) (`) (`) (`)
Cash flows based on interest rate of 11% (A) 1,10,000 1,10,000 1,10,000 3,30,000
Cash flows based on interest rate of 8% (B) 80,000 80,000 80,000 2,40,000
Interest rate differential (A-B) 30,000 30,000 30,000 90,000
Discount factor @ 11% 0.901 0.812 0.731
Interest rate differential discounted at 11% 27,030 24,360 21,930 73,320
Fair value of financial guarantee contract (at
inception) 73,320
Journal Entry
Particulars Debit (`) Credit (`)
Investment in subsidiary Dr. 73,320
To Financial guarantee (liability) 73,320
(Being financial guarantee initially recorded)
31 st March 20X2
Subsequently at the end of the reporting period, financial guarantee is measured at the higher of:
- the amount of loss allowance; and
- the amount initially recognised less cumulative amortization, where appropriate.
At 31st March 20X2, there is 1% probability that Moon Limited may default on the loan in the next
12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any
amount from Moon Limited. The 12-month expected credit losses are therefore ` 10,000
(` 10,00,000 x 1%).
The initial amount recognised less amortisation is ` 51,385 (` 73,320 + ` 8,065 (interest accrued
based on EIR)) – ` 30,000 (benefit of the guarantee in year 1) Refer table below. The unwound
amount is recognised as income in the books of Sun Limited, being the benefit derived by
Moon Limited not defaulting on the loan during the period.
Year Opening balance EIR @ 11% Benefits provided Closing balance
` ` `
1 73,320 8,065 (30,000) 51,385
2 51,385 5,652 (30,000) 27,037
3 27,037 2,963* (30,000) -
* Difference is due to approximation
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© The Institute of Chartered Accountants of India

 The carrying amount of the financial guarantee liability after amortisation is therefore ` 51,385,
which is higher than the 12-month expected credit losses of ` 10,000. The liability is therefore
adjusted to ` 51,385 (the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 21,935
To Profit or loss 21,935
(Being financial guarantee subsequently adjusted)
31 st March 20X3
At 31st March 20X3, there is 3% probability that Moon Limited will default on the loan in the next
12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any
amount from Moon Limited. The 12-month expected credit losses are therefore ` 30,000
(` 10,00,000 x 3%).
The initial amount recognised less accumulated amortisation is ` 27,037, which is lower than the
12-month expected credit losses (` 30,000). The liability is therefore adjusted to ` 30,000 (the
higher of the two amounts) as follows:

Particulars Debit (`) Credit (`)

Financial guarantee (liability) Dr. 21,385*
To Profit or loss (Note) 21,385
(Being financial guarantee subsequently adjusted)

* The carrying amount at the end of 31 st March 20X2 = ` 51,385 less 12-month expected credit
losses of ` 30,000.
(b)

Period Proportion Fair value To be Cumulative Expenses

vested expenses
a b c d= b x c x a e = d-previous period d
Period 1 1/3 5,00,000 91% 1,51,667 1,51,667
Period 2 2/3 5,00,000 89% 2,96,667 1,45,000
Period 3 3/3 5,00,000 82% 4,10,000 1,13,333
4,10,000
Journal Entries
31st March, 20X1
Employee benefits expenses Dr. 1,51,667
To Share based payment reserve (equity) 1,51,667
(1/3 of expected vested equity instruments value)
31st March, 20X2
Employee benefits expenses Dr. 1,45,000
To Share based payment reserve (equity) 1,45,000
(2/3 of expected vested equity instruments value)

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 31st March, 20X3
Employee benefits expenses Dr. 1,13,333
To Share based payment reserve (equity) 1,13,333
(Final vested equity instruments value)
Share based payment reserve (equity) Dr. 4,10,000
To Equity Share Capital 4,10,000
(re-allocated and issued shares)

(c) (a) As per paragraph 66(a) of Ind AS 1, an entity shall classify an asset as current when it
expects to realise the asset, or intends to sell or consume it, in its normal operating cycle.
Paragraph 68 provides the guidance that current assets include assets (such as inventories
and trade receivables) that are sold, consumed or realised as part of the normal operating
cycle even when they are not expected to be realised within twelve months after the
reporting period.
In accordance with above, the receivables that are considered a part of the normal
operating cycle will be classified as current asset.
If the operating cycle exceeds twelve months, then additional disclosure as required by
paragraph 61 of Ind AS 1 is required to be given in the notes.
(b) As discussed in point (a) above, advances to suppliers for goods and services would be
classified in accordance with normal operating cycle if it is given in relation to the goods or
services in which the entity normally deals. If the advances are considered a part the
normal operating cycle, it would be classified as a current asset. If the operating cycle
exceeds twelve months, then additional disclosure as required by paragraph 61 of Ind AS 1
is required to be given in the notes
(c) Classification of income tax receivables [other than deferred tax] will be driven by
paragraph 66(c) of Ind AS 1, i.e., based on the expectation of the entity to realise the asset.
If the receivable is expected to be realised within twelve months after the reporting period,
then it will be classified as current asset else non-current asset.
(d) Para 8 of Ind AS 16 states that items such as spare parts, stand-by equipment and servicing
equipment are recognised in accordance with this Ind AS when they meet the definition of
property, plant and equipment. Otherwise, such items are classified as inventory.
Accordingly, the insurance spares that are treated as an item of property, plant and
equipment would normally be classified as non-current asset whereas insurance spares that
are treated as inventory will be classified as current asset if the entity expects to consume it
in its normal operating cycle.
6. (a) (i) Super Sounds Limited
Balance Sheet (Extract relating to intangible asset) as at 31 st March 20X2
Note No. `
Assets
(1) Non- current asset
Intangible assets 1 69,45,000

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 (ii) Super Sounds Limited
Statement of Profit and Loss (Extract)
for the year ended 31 st March 20X2
Note No. `
Revenue from Operations 10,00,000
Total Revenue
Expenses:
Amortization expenses 2 16,25,000
Other expenses 3 7,20,000
Total Expenses
Notes to Accounts (Extract)
1. Intangible Assets
Gross Block (Cost) Accumulated amortisation Net block
Opening Additions Closing Opening Additions Closing Opening Closing
balance Balance balance Balance balance Balance
` ` ` ` ` ` ` `
1. Goodwill* - 3,20,000 3,20,000 - - - - 3,20,000
(W.N.1)
2. Franchise** - 80,00,000 80,00,000 - 16,00,000 16,00,000 - 64,00,000
(W.N.2)
3. Copyright
(W.N.3) - 2,50,000 2,50,000 - 25,000 25,000 - 2,25,000
- 85,70,000 85,70,000 - 16,25,000 16,25,000 - 69,45,000

*As per Ind AS 36, irrespective of whether there is any indication of impairment, an entity
shall test goodwill acquired in a business combination for impairment annually. This implies
that goodwill is not amortised annually but is subject to annual impai rment, if any.
**As per the information in the question, the limiting factor in the contract for the use is time
i.e., 5 years and not the fixed total amount of revenue to be generated. Therefore, an
amortisation method that is based on the revenue generated by an activity that includes the
use of an intangible asset is inappropriate and amortisation based on time can only be
applied.
2. Amortization expenses
Franchise (W.N.2) 16,00,000
Copyright (W.N.3) 25,000 16,25,000
3. Other expenses
Legal cost on copyright 7,00,000
Fee for Franchise (10,00,000 x 2%) 20,000 7,20,000

Working Notes:
`
(1) Goodwill on acquisition of business
Cash paid for acquiring the business 13,20,000
Less: Fair value of net assets acquired (10,00,000)
Goodwill 3,20,000
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 (2) Franchise 80,00,000
Less: Amortisation (over 5 years) (16,00,000)
Balance to be shown in the balance sheet 64,00,000
(3) Copyright 2,50,000
Less: Amortisation (over 10 years as per SLM) (25,000)
Balance to be shown in the balance sheet 2,25,000
(b) As per para 27 (b) of Ind AS 116, variable lease payments that depend on an index or a rate, are
initially measured using the index or rate as at the commencement date.
At the beginning of the third year, Lessee remeasures the lease liability at the pres ent value of
eight payments of ` 60,200 discounted at an original discount rate of 9.5% per annum as per
para 43 of Ind AS 116.
Year Revised lease rental Discount factor @ 9.5% Present value
3 [(56,000 / 280) x 301] = 60,200 0.913 54,963
4 60,200 0.834 50,207
5 60,200 0.762 45,872
6 60,200 0.696 41,899
7 60,200 0.635 38,277
8 60,200 0.580 34,916
9 60,200 0.530 31,906
10 60,200 0.484 29,137
3,27,127

Table showing amortised cost of lease liability

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

Difference of ` 22,854 (3,27,127 – 3,04,273) will increase the lease liability with corresponding
increase in ROU Asset as per para 39 of Ind AS 116.
Journal entry at the beginning of year 3 would be:
Right-of-use asset Dr. ` 22,854
To Lease liability ` 22,854
(c) Either
The examples of the items that an entity may need to recognise, derecognise, remeasure,
reclassify on the date of transition are as under:
(a) recognise all assets and liabilities whose recognition is required by Ind AS:
(i) customer related intangible assets if an entity elects to restate business
combinations
(ii) share-based payment transactions with non-employees
(b) reclassify items that it recognised in accordance with previous GAAP as one type of
asset, liability or component of equity, but is a different type of asset, liability or
component of equity in accordance with Ind AS:
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 (i) redeemable preference shares that would have earlier been classified as equity;
(ii) non-controlling interests which would have been earlier classified outside equity; and
(c) apply Ind ASs in measuring all recognised assets and liabilities:
(i) discounting of long-term provisions
(ii) measurement of deferred income taxes for all temporary differences instead of timing
differences.
OR
Rights issue bonus fraction
Shares ` per share `
Cum-rights 5 1 5.0
Rights 1 0.9 0.9
Ex-rights 6 5.9
Theoretical ex-rights price (5.9 / 6) = 0.983
Bonus fraction = Cum-rights price / Theoretical ex-rights price
= 1/0.983
Number of shares
1 January - 31 March (10,00,000 × 3/12 × 1/0.983) 2,54,323
1 April - 31 December (12,00,000 × 9/12) 9,00,000
Number of shares for the purpose of EPS calculation 11,54,323

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© The Institute of Chartered Accountants of India

 Test Series: October, 2022
MOCK TEST PAPER 2
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (a) Identification of the contract (by applying para 9 of Ind AS 116)
(a) Identified asset
Feel Fresh Ltd. (a customer company) enters into a long-term purchase contract with
M/s Radhey (a manufacturer) to purchase a particular type and quality of soaps for 10 year
period.
Since for the purpose of the contract M/s Radhey has to buy a customized machine as per
the directions of Feel Fresh Ltd. and also the machine cannot be used for any other type of
soap, the machine is an identified asset.
(b) Right to obtain substantially all of the economic benefits from use of the asset
throughout the period of use
Since the machine cannot be used for manufacture of soap for any other buyer, Feel Fresh
Ltd. will obtain substantially all the economic benefits from the use of the asset throughout
the period of use.
(c) Right to direct the use
Feel Fresh Ltd. controls the use of machine and directs the terms and conditions of the
contract with respect to recovery of fixed expenses related to machine.
Hence the contract contains a lease.
Lease term
The lease term shall be 10 years assuming reasonable certainty. Though the lessee is not
contractually bound till 10th year, i.e., the lessee can refuse to make payment anytime without
lessor’s permission but, it is assumed that the lessee is reasonably certain that it will not exercise
this option to terminate.
Identification of lease payment
Lease payments are defined as payments made by a lessee to a lessor relating to the right to
use an underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives
(b) variable lease payments that depend on an index or a rate
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that
option
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease
Here in-substance fixed payments in the given lease contract are ` 1,74,015 p.a. The present
value of lease payment which would be recovered in 8 years @ 8% would be ` 10,00,000
(approx.)
Variable lease payments that do not depend on an index or rate and are not, in substance, fixed
are not included as lease payments. Instead, they are recognised in profit or loss in the period in
which the event that triggers the payment occurs (unless they are included in the carrying amount
of another asset in accordance with other Ind AS).
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© The Institute of Chartered Accountants of India

 Hence, lease liability will be recognized by ` 10,00,000 in the books of Feel Fresh Ltd.
Since there are no payments made to lessor before commencement date less lease
incentives received from lessor or initial direct costs incurred by lessee or estimate of costs
for restoration / dismantling of underlying asset, the right of use asset is equal to lease
liability.
Journal Entries

On initial recognition
ROU Asset Dr. 10,00,000
To Lease Liability 10,00,000
To initially recognise the Lease Liability and the corresponding ROU Asset
At the end of the first year
Interest Expense Dr. 80,000
To Lease Liability 80,000
To record interest expense and accrete the lease liability using the effective interest
method ( ` 10,00,000 x 8%)
Depreciation Expense (10,00,000 / 10 years) Dr. 1,00,000
To ROU Asset 1,00,000
To record depreciation on ROU using the straight-line method ( ` 10,00,000 / 10 years)
Lease Liability Dr. 1,74,015
To Bank / M/s. Radhey 1,74,015
To record lease payment
Cost of soap Dr. 24,75,000
To Bank / M/s. Radhey {5,50,000 x (4 + 0.5)} 24,75,000
To record variable expenses paid as cost of the goods purchased

(b) Paragraph 10 of Ind AS 110 ‘Consolidated Financial Statements’, states that an investor has
power over an investee when the investor has existing rights that give it the current ability to
direct the relevant activities, i.e. the activities that significantly affect the investee’s returns.
As per the facts given in the question, High Speed Ltd. has 15 days to exercise the option to
purchase 25% additional stake in Fast Move Ltd. which will give it majority voting rights of 55%
(30% + 25%). This is a substantive potential voting rights which is currently exercisable.
Further, the decisions on relevant activities of Fast Move Ltd. are made in AGM / EGM. An AGM/
EGM can be called by giving atleast 21 days advance notice. A resolution in AGM / EGM is
passed when more than 50% votes are casted in favour of the resolution. Thus, the existing
shareholders of Fast Move Ltd. are unable to change the existing policies over the relevant
activities before the exercise of option by High Speed Ltd.
High Speed Ltd. can exercise the option and get voting rights of more than 50% at the date of
AGM/ EGM. Accordingly, the option contract gives High Speed Ltd. the current ability to direct
the relevant activities even before the option contract is settled. Therefore, High Speed Ltd.
controls Fast Move Ltd. as at 1 st June, 20X1.

© The Institute of Chartered Accountants of India

2. (a) Cheery Limited
Extract from the Statement of Profit and Loss
(Restated)
20X4-20X5 20X3-20X4
` `
Sales 1,04,000 73,500
Cost of goods sold (80,000) (60,000)
Profit before income taxes 24,000 13,500
Income tax @ 30% (7,200) (4,050)
Profit 16,800 9,450
Basic and diluted EPS 3.36 1.89
Cheery Limited
Statement of Changes in Equity
Share Retained Total
capital earnings
Balance at 31 st March, 20X3 50,000 20,000 70,000
Profit for the year ended 31 st March, 20X4 as
restated 9,450 9,450
Balance at 31 st March, 20X4 50,000 29,450 79,450
Profit for the year ended 31 st March, 20X5 16,800 16,800
Balance at 31 st March, 20X5 50,000 46,250 96,250
Extract from the Notes
Some products that had been sold in 20X3-20X4 were incorrectly included in inventory at
31st March, 20X4 at ` 6,500. The financial statements of 20X3-20X4 have been restated to
correct this error. The effect of the restatement on those financial statements is summarized
below:
Effect on 20X3-20X4
(Increase) in cost of goods sold (6,500)
Decrease in income tax expenses (6,000 – 4,050) 1,950
(Decrease) in profit (14,000 – 9,450) (4,550)
(Decrease) in basic and diluted EPS (2.8 – 1.89) (0.91)
(Decrease) in inventory (6,500)
Decrease in income tax payable 1,950
(Decrease) in equity (4,550)
There is no effect on the balance sheet at the beginning of the preceding period i.e.
1st April, 20X3.
(b) Computation of amounts to be recognized in the P&L and OCI:
Particulars USD Exchange rate `
Cost of the bond 1,000 40 40,000
Interest accrued @ 10% p.a. 100 42 4,200
3

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 Interest received (USD 1,250 x 4.7%) (59) 45 (2,655)
Amortized cost at year-end 1,041 45 46,845
Fair value at year end 1,060 45 47,700
Interest income to be recognized in P & L 4,200
Exchange gain on the principal amount [1,000 x (45-40)] 5,000
Exchange gain on interest accrual [100 x (45 - 42)] 300
Total exchange gain/loss to be recognized in P&L 5,300
Fair value gain to be recognized in OCI [45 x (1,060 - 1,041)] 855
Journal entry to recognize gain/loss
Bond (` 47,700 – ` 40,000) Dr. 7,700
Bank (Interest received) Dr. 2,655
To Interest Income (P & L) 4,200
To Exchange gain (P & L) 5,300
To OCI (fair value gain) 855
3. (a) Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity method:
` `
Cost of investment 47,50,000
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net assets (35% of 31,50,000
` 90,00,000)
Share in fair valuation of XYZ Ltd.’s net assets [35% of
(` 1,10,00,000 – ` 90,00,000)] 7,00,000 38,50,000
Goodwill on investment in XYZ Ltd. (balancing figure) 9,00,000

Cost of investment 47,50,000

Profit during the year
Share in the profit reported by XYZ Ltd. (35% of ` 8,00,000) 2,80,000
Adjustment to reflect effect of fair valuation [35% of
(` 20,00,000/10 years)] (70,000)
Share of profit in XYZ Ltd. recognised in income by Investor 2,10,000
Ltd.
Long term equity investment
FVTOCI gain recognised in OCI (35% of ` 2,00,000) 70,000
Dividend received by Investor Ltd. during the year [35% of
` 12,00,000] (4,20,000)
Closing balance of Investor Ltd.’s investment in XYZ Ltd. 46,10,000
(b) Paragraph 27 of Ind AS 102 requires the entity to recognise the effects of repricing that increase
the total fair value of the share-based payment arrangement or are otherwise beneficial to the
employee.

© The Institute of Chartered Accountants of India

 If the repricing increases the fair value of the equity instruments granted paragraph B43(a) of
Appendix B requires the entity to include the incremental fair value granted (ie the difference
between the fair value of the repriced equity instrument and that of the original equity instrument,
both estimated as at the date of the modification) in the measurement of the amount recognised
for services received as consideration for the equity instruments granted.
If the repricing occurs during the vesting period, the incremental fair value granted is includ ed in
the measurement of the amount recognised for services received over the period from the
repricing date until the date when the repriced equity instruments vest, in addition to the amount
based on the grant date fair value of the original equity instruments, which is recognised over the
remainder of the original vesting period.
Accordingly, the amounts recognised in years 1 and 2 are as follows:
Year Calculation Compensation Cumulative
expense for compensation
period expense
` `
1 [1,850 employees× 1,000 options × ` 1.20] × 1/
3 7,40,000 7,40,000
2 (1,840 employees× 1,000 options × [(`1.20× 2/ 3)+ 8,24,000 15,64,000
{(`1.05 - 0.90) ×0.5/1.5}] – 7,40,000
Note: Year 3 calculations have not been provided as it was not required in the question.
(c) (a) Because the unrealised gain on revaluation of the equity investment is not taxable until sold,
there are no current tax consequences. The tax base of the investment is ` 2,00,000. The
revaluation creates a taxable temporary difference of ` 40,000 (` 2,40,000 – ` 2,00,000).
This creates a deferred tax liability of ` 10,000 (` 40,000 x 25%). The liability would be
non-current. The fact that there is no intention to dispose of the investment does not affect
the accounting treatment. Since, the unrealised gain is reported in other comprehensive
income, the related deferred tax expense is also reported in other comprehensive income.
(b) When K Ltd. sold the products to A Ltd., K Ltd. would have generated a taxable profit of
` 16,000 (` 80,000 – ` 64,000). This would have created a current tax liability for K Ltd and
the group of ` 4,000 (` 16,000 x 25%). This liability would be shown as a current liability
and charged as an expense in arriving at profit or loss for the period.
In the consolidated financial statements the carrying value of the unsold inventory would be
` 38,400 (` 64,000 x 60%). The tax base of the unsold inventory would be ` 48,000
(` 80,000 x 60%). In the consolidated financial statements there would be a deductible
temporary difference of ` 9,600 (` 38,400 – ` 48,000) and a potential deferred tax asset of
` 2,400 (` 9,600 x 25%). This would be recognised as a deferred tax asset since A Ltd. is
expected to generate sufficient taxable profits against which to utilise the deductible
temporary difference. The resulting credit would reduce consolidated deferred tax expense
in arriving at profit or loss.
(c) The receipt of revenue in advance on 1 st October 20X1 would create a current tax liability of
` 50,000 (` 2,00,000 x 25%) as at 31 st March 20X2. The carrying value of the revenue
received in advance at 31 st March 20X2 is ` 80,000 (` 2,00,000 – ` 120,000). Its tax base
is nil. The deductible temporary difference of ` 80,000 would create a deferred tax asset of
` 20,000 (` 80,000 x 25%). The asset can be recognised because K Ltd. has sufficient
taxable profits against which to utilise the deductible temporary difference.
4. (a) For the year 20X1-20X2
S Limited accounts for the promised bundle of goods and services as a single performance
obligation satisfied over time in accordance with Ind AS 115. At the inception of the contract,
5

© The Institute of Chartered Accountants of India

 S Limited expects the following:
Transaction price – ` 20,00,000
Expected costs – ` 11,00,000
Expected profit (45%) – ` 9,00,000
At contract inception, S Limited excludes the ` 2,50,000 bonus from the transaction price
because it cannot conclude that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur. Completion of the heavy -duty equipment is highly
susceptible to factors outside the entity’s influence.
By the end of the first year, the entity has satisfied 65% of its performance obligation on the basis
of costs incurred to date. Costs incurred to date are therefore ` 7,15,000 and
S Limited reassesses the variable consideration and concludes that the amount is still
constrained. Therefore at 31 st March, 20X2, the following would be recognised:
Revenue (A) – ` 13,00,000 (` 20,00,000 x 65%)
Costs (B) – ` 7,15,000 (` 11,00,000 x 65%)
Gross profit (C) i.e.(A-B) – ` 5,85,000
For the year 20X2-20X3
On 4th June, 20X2, the contract is modified. As a result, the fixed consideration and expected
costs increase by ` 1,50,000 and ` 80,000, respectively.
The total potential consideration after the modification is ` 24,00,000 which is ` 21,50,000 fixed
consideration + ` 2,50,000 completion bonus. In addition, the allowable time for achieving the
bonus is extended by six months with the result that S Limited concludes that it is highly probable
that including the bonus in the transaction price will not result i n a significant reversal in the
amount of cumulative revenue recognised in accordance with Ind AS 115. Therefore, the bonus
of ` 2,50,000 can be included in the transaction price.
S Limited also concludes that the contract remains a single performance obligation. Thus,
S Limited accounts for the contract modification as if it were part of the original contract.
Therefore, S Limited updates its estimates of costs and revenue as follows:
S Limited has satisfied 60.60% of its performance obligation (` 7,15,000 actual costs incurred
compared to ` 11,80,000 total expected costs). The entity recognises additional revenue of
` 1,54,400 [(60.60% of ` 24,00,000) – ` 13,00,000 revenue recognised to date] at the date of
modification i.e. on 4 th June, 20X2 as a cumulative catch-up adjustment.
(b) The weighted average number of shares for calculation of EPS for the year 20X1 -20X2 will be
as follows:
S. Date Particulars No of No of days Weighted
No. shares shares were average no
outstanding of shares
1 1 st April, 20X1 Opening balance of
outstanding equity
shares 1,00,000 365 1,00,000
2 15th June, Issue of equity shares 75,000 290 59,589
20X1
3 8 th November, Conversion of
20X1 convertible preference
shares in Equity 50,000 144 19,726

© The Institute of Chartered Accountants of India

 4 22 nd February, Buy back of shares (20,000) (38)* (2,082)
20X2
5 31st March, Closing balance of
20X2 outstanding equity
shares 2,05,000 1,77,233

* These shares had already been considered in the shares issued. The same has been
deducted assuming that the bought back shares have been extinguished immediately.
(c) An intangible asset is an identifiable non-monetary asset without physical substance.
For considering an asset as an intangible asset, an entity must be able to demonstrate that the
item satisfies the criteria of identifiability, control over a resource and existence of future
economic benefits.
In the given case, the franchise right meets the identifiability criterion as it is arising from contract
to purchase the franchise right for 10 years. In addition, X Ltd. will have future economic benefits
and control over them from the franchise right. Accordingly, the franchise right meets the
definition of intangible asset. The same can be recognised if the following recognition criteria laid
down in para 21 of Ind AS 38 is met:
An intangible asset shall be recognised if, and only if:
(a) it is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; and
(b) the cost of the asset can be measured reliably.
In the instant case, identifiability criterion is fulfilled, future economic benefits from franchise right
are expected to flow to the entity and cost can also be measured reliably . Therefore, X Ltd.
should recognise the franchise right as an intangible asset.
5. (a) Consolidated Balance Sheet of the Group as at 31 st March, 20X2
Particulars Note No. ` in lakh
ASSETS
Non-current assets
Property, plant and equipment 1 4,500.00
Current assets
(a) Inventories 2 3,140.00
(b) Financial assets
Trade receivables 3 2,305.00
Bills receivables 4 655.00
Cash and cash equivalents 5 1,325.00
Total assets 11,925.00
EQUITY & LIABILITIES
Equity attributable to owners of parent
Share Capital 3,400.00
Other Equity 6 2,893.10
Non-controlling interests (W.N.4) 1,216.90
7

© The Institute of Chartered Accountants of India

 LIABILITIES
Non-current liabilities Nil
Current liabilities
(a) Financial Liabilities
Trade payables 7 4,415.00
Total equity and liabilities 11,925.00
Notes to Accounts (` in lakh)
1. Property Plant & Equipment
LX Ltd. 1,500
MX Ltd. 1,600
NX Ltd. 1,400 4,500
2. Inventories
LX Ltd. 1,230
MX Ltd. 730
NX Ltd. 1,180 3,140
3. Trade Receivables
LX Ltd. 1,415
MX Ltd. 270
NX Ltd. 620 2,305
4. Bills Receivables
LX Ltd. 650
MX Ltd. (60-55) 5 655
5. Cash & Cash equivalents
LX Ltd. 1,085
MX Ltd. 90
NX Ltd. 150 1,325
6. Other Equity
Reserve (W.N.5) 1,207.80
Retained earnings (W.N.5) 1,172.80
Capital Reserve (W.N.3) 512.50 2,893.10
7. Trade Payables
LX Ltd. 2,920
MX Ltd. 690
NX Ltd. 805 4,415

Working Notes:
1. Analysis of Reserves and Surplus (` in lakh)
MX Ltd. NX Ltd.
Reserves as on 1.4.20X1 760 520
Increase during the year 20X1-20X2 (580 - 520) 60

© The Institute of Chartered Accountants of India

 Increase for the half year till 30.9.20X1 30
Balance on acquisition date (A) 760 550
Total balance as on 31.3.20X2 810 580
Post-acquisition balance 50 30
Retained Earnings as on 1.4.20X1 480 150
Increase during the year 20X1-20X2 (310 - 150) 160
Increase for the half year till 30.9.20X1 80
Balance on acquisition date (B) 480 230
Total balance as on 31.3.20X2 600 310
Post-acquisition balance 120 80
Total balance on the acquisition date (A+B) 1,240 780
2. Calculation of Effective Interest of LX Ltd. in NX Ltd.
Acquisition by LX Ltd. in MX Ltd. = 85%
Acquisition by MX Ltd. in NX Ltd. = 60%
Acquisition by Group in NX Ltd. (85% x 60%) = 51%
Non-controlling Interest = 49%
3. Calculation of Goodwill / Capital Reserve on the acquisition
MX Ltd. NX Ltd.
Investment or consideration 2,620.00 (1,350 x 85%) 1,147.50
Add: NCI at Fair value
[(2,000 / 100) x 120 x 15%] 360.00
[(1,600 / 100) x 125 x 49%] - 980.00
2,980.00 2,127.50
Less: Identifiable net assets (Share
Capital + Increase in the Reserves (2,000+760+480) (1,600+550+230)
and Surplus till acquisition date) (3,240.00) (2,380.00)
Capital Reserve 260.00 252.50
Total Capital Reserve (260 + 252.50) 512.50
4. Calculation of Non-controlling Interest
MX Ltd. NX Ltd.
At Fair Value (See Note 3) 360.00 980.00
Add: Post Acquisition Reserves (W.N.1) (50 x 15%) 7.50 (30 x 49%) 14.70
Add: Post Acquisition Retained Earnings
(W.N.1) (120 x 15%) 18.00 (80 x 49%) 39.20
Less: NCI share of investment in NX Ltd. (1,350 x 15%)
(202.50)* -
183.00 1,033.90
Total (183.00 + 1,033.90) 1,216.90
*Note: The non-controlling interest in MX Ltd. will take its proportion in NX Ltd. Therefore,
they have to bear their proportion in the investment by MX Ltd. (in NX Ltd.) also.

© The Institute of Chartered Accountants of India

 5. Calculation of Consolidated Other Equity
Reserves Retained Earnings
LX Ltd. 1,150.00 1,030.00
Add: Share in MX Ltd. (50 x 85%) 42.50 (120 x 85%) 102.00
Add: Share in NX Ltd. (30 x 51%) 15.30 (80 x 51%) 40.80
1,207.80 1,172.80
(b) (i) False. An integrated report may be prepared in response to existing compliance
requirements and may be either a standalone report or be included as a distinguishable,
prominent and accessible part of another report or communication.
(ii) True. The Framework is written primarily in the context of private sector, for-profit
companies of any size but it can also be applied, adapted as necessary, by public sector
and not-for-profit organizations.
(iii) True. If the report is required to include specified information beyond that required by this
Framework, the report can still be considered an integrated report if that other information
does not obscure the concise information required by this Framework.
(iv) False. An integrated report should include all material matters, both positive and negative,
in a balanced way and without material error. Both the increases and reductions in the
value of the important capital should be reflected. Where the information is not perfectly
accurate, estimates should be used and appropriate processes should be in place to insure
that the risk of material misstatement is reduced.
6. (a) As per requirement of Ind AS 109, a financial instrument is initially measured and recorded at its
fair value. Therefore, considering the market rate of interest of similar loan available to Simran is
12%, the fair value of the contractual cash flows shall be as follows: Amount in `
Inflows
Date Principal Interest Interest Total Discount PV
income 8% income 5% inflow factor @ 12%
31.03.20X2 3,00,000 48,000 15,000 3,63,000 0.893 3,24,159
31.03.20X3 3,00,000 24,000 15,000 3,39,000 0.797 2,70,183
31.03.20X4 3,00,000 - 15,000 3,15,000 0.712 2,24,280
Total (fair value) 8,18,622
Benefit to Simran, to be considered as part of employee cost for Lovely Ltd. ` 81,378
(9,00,000 – 8,18,622).
The deemed employee cost is to be amortised over the period of loan i.e. the minimum period
that Simran must remain in service.
The amortization schedule of the ` 8,18,622 loan is shown in the following table: Amount in `
Date Opening Total cash inflows Interest Closing
outstanding Loan (principal repayment + @ 12% outstanding Loan
interest
1.4.20X1 8,18,622 8,18,622
31.3.20X2 8,18,622 3,63,000 98,235 5,53,857
31.3.20X3 5,53,857 3,39,000 66,463 2,81,320
31.3.20X4 2,81,320 3,15,000 33,680* Nil
* Difference is due to approximation of discounting factor and interest amount.

10

© The Institute of Chartered Accountants of India

 Journal Entries to be recorded at every period end:
a. 1 st April, 20X1
Particulars Dr. (`) Cr. (`)
Loan to employee A/c Dr. 8,18,622
Pre-paid employee cost A/c Dr. 81,378
To Bank A/c 9,00,000
(Being loan asset recorded at initial fair value)

b. 31 st March, 20X2
Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 3,63,000
To Interest income A/c 98,235
To Loan to employee A/c 2,64,765
(Being first instalment of repayment of loan accounted for
using the amortised cost and effective interest rate of 12%)
Employee benefit A/c Dr. 27,126
To Pre-paid employee cost A/c 27,126
(Being amortization of pre-paid employee cost charged to
profit and loss as employee benefit cost on straight line
basis)

c. On 31st March, 20X3, due to pre-payment of a part of loan by Simran, the carrying value
of the loan shall be re-computed by discounting the future remaining cash flows by the
original effective interest rate.
There shall be two sets of accounting entries on 31 st March, 20X3, first the realisation of the
contractual cash flow as shown below and then the accounting for the pre-payment of
` 1,00,000 included in (d) below:
31 st March, 20X3
Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 3,39,000
To Interest income A/c 66,463
To Loan to employee A/c 2,72,537
(Being second instalment of repayment of loan accounted for
using the amortised cost and effective interest rate of 12%)
Employee benefit (profit and loss) A/c Dr. 27,126
To Pre-paid employee cost A/c 27,126
(Being amortization of pre-paid employee cost charged to
profit and loss as employee benefit cost)
Computation of new carrying value of loan to employee:
Inflows
Date Principal Interest Interest Discount PV
income 8% income 5% factor @12%
31.3.20X4 200,000 - 10,000 0.893 1,87,530
Total (revised carrying value) 1,87,530

11

© The Institute of Chartered Accountants of India

 Less: Current carrying value (2,81,320)
Adjustment required 93,790
The difference between the amount of pre-payment and adjustment to loan shall be
considered a gain, though will be recorded as an adjustment to pre-paid employee cost,
which shall be amortised over the remaining tenure of the loan.
31 st March, 20X3 prepayment
Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 1,00,000
To Pre-paid employee cost A/c 6,210
To Loan to employee A/c 93,790
(Being gain to Lovely Limited recorded as an adjustment
to pre-paid employee cost)

The amortisation schedule of the new carrying amount of loan shall be as follows:
Date Loan Total cash inflows (principal Interest
outstanding repayment + interest) @ 12%
31.3.20X3 1,87,530
31.3.20X4 - 2,10,000 22,470
Amortisation of employee benefit cost shall be as follows:

Date Opening Amortised to Adjustment Closing balance

Balance P&L
1.4.20X1 81,378 81,378
31.3.20X2 81,378 27,126 54,252
31.3.20X3 54,252 27,126 6,210 20,916
31.3.20X4 20,916 20,916 Nil

d. 31 st March, 20X4 –

Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 2,10,000
To Interest income (profit and loss) @ 12% A/c 22,470
To Loan to employee A/c 1,87,530
(Being last instalment of repayment of loan accounted for
using the amortised cost and effective interest rate of 12%)
Employee benefit (profit and loss) A/c Dr. 20,916
To Pre-paid employee cost A/c 20,916
(Being amortization of pre-paid employee cost charged to
profit and loss as employee benefit cost)

12

© The Institute of Chartered Accountants of India

 (b) Either
Note: Students may answer any 5 points out of the 11 points mentioned below.
S. Particulars Ind AS 24 AS 18
No.
1. Definition of Relative Ind AS 24 uses the term “a close AS 18 uses the term
member of the family of a person”. “relatives of an individual”
Definition of close members of family AS 18 covers the spouse,
as per Ind AS 24 includes those son, daughter, brother,
family members, who may be sister, father and mother
expected to influence, or be who may be expected to
influenced by, that person in their influence, or be influenced
dealings with the entity, including: by, that individual in his/her
(a) that person’s children, spouse dealings with the reporting
or domestic partner, brother, enterprise.
sister, father and mother;
(b) children of that person’s spouse
or domestic partner; and
(c) dependents of that person or
that person’s spouse or
domestic partner.
Hence, the definition as per
Ind AS 24 is much wider.
2. State Controlled Ind AS 24, there is extended AS 18 defines state-
Enterprise: coverage of Government controlled enterprise as “an
Enterprises, as it defines a enterprise which is under
government-related entity as “an the control of the Central
entity that is controlled, jointly Government and/or any
controlled or significantly influenced State Government(s)”.
by a government.” Further,
“Government refers to government,
government agencies and similar
bodies whether local, national or
international.”
3. Key Management Ind AS 24 covers KMP of the parent AS 18 covers key
Personnel as well. Ind AS 24 also covers the management personnel
entity, or any member of a group of (KMP) of the entity only
which it is a part, providing key
management personnel services to
the reporting entity or to the parent
of the reporting entity
4. Related Parties in Under Ind AS 24 there is extended As per AS 18, co-venturers
case of Joint coverage in case of joint ventures. or co-associates are not
Venture Two entities are related to each related to each other.
other in both their financial
statements, if they are either co-

13

© The Institute of Chartered Accountants of India

 venturers or one is a venturer and
the other is an associate.
5. Effect of influences Ind AS 24 does not specifically AS 18 mentions that where
which do not lead to mention this. there is an inherent
transactions difficulty for management to
determine the effect of
influences which do not
lead to transactions,
disclosure of such effects is
not required
6. Post-employment Ind AS 24 specifically includes post- AS 18 does not specifically
Benefits employment benefit plans for the cover entities that are post-
benefit of employees of an entity or employment benefit plans,
its related entity as related parties. as related parties.
7. Next Most Senior Ind AS 24 requires an additional AS 18 has no such
Parent disclosure as to the name of the next requirement.
most senior parent which produces
consolidated financial statements for
public use.
8. Disclosure for Ind AS 24 requires extended AS 18 does not specifically
Compensation disclosures for compensation of KMP require
under different categories.
9. Disclosure of Ind AS 24 requires “the amount of AS 18 gives an option to
‘Amount of the the transactions” need to be disclose the “Volume of the
Transactions’ vs disclosed. transactions either as an
‘Volume of the amount or as an
Transactions appropriate proportion”.
10. Government Related Ind AS 24 requires disclosures of AS 18 presently exempts
Entities: certain information by the the disclosure of such
government related entities. information.
11. Clarification of Ind AS 24 neither defines these AS 18 includes definition
Control, Substantial terms nor it includes such and clarificatory text,
Interest and clarificatory text and allows primarily with regard to
Significant Influence respective standards to deal with the control, substantial interest
same. (including 20% threshold),
significant influence
(including 20% threshold)

(b) OR
Equity: Equity claims are claims on the residual interest in the assets of the entity after
deducting all its liabilities. In other words, they are claims against the entity that do not meet the
definition of a liability.
Income and Expenses: Income is increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from holders of equity claims.

14

© The Institute of Chartered Accountants of India

 Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity,
other than those relating to distributions to holders of equity claims.
Income and expenses are the elements of financial statements that relate to an entity’s financial
performance. Users of financial statements need information about both an entity’s financial
position and its financial performance. Hence, although income and expenses are defined in
terms of changes in assets and liabilities, information about income and expenses is just as
important as information about assets and liabilities.
Different transactions and other events generate income and expenses with different
characteristics. Providing information separately about income and expenses with different
characteristics can help users of financial statements to understand the entity’s financial
performance.

15

© The Institute of Chartered Accountants of India

 Test Series: March, 2023
MOCK TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (a) Before any item can be recognised as an inventory, it should meet the definition of ‘asset’ as
given in the Conceptual Framework for Financial Reporting under Ind AS, issued by the Institute
of Chartered Accountants of India as follows:
“An asset is a present economic resource controlled by the entity as a result of past events and
economic resource is a right that has the potential to produce economic benefits”.
The orders in respect of Buyer Furnished Equipment’s (BFEs) are directly placed by the buyer
and payment in respect of them is made by the buyer. These are then supplied to the company
for installing in the ship and the buyer pays installation charges which are included in the contract
price. Thus, the company has neither incurred any cost on BFEs nor any amount is recoverab le
on account of such equipment except installation charges. Accordingly, such equipment are not
‘assets’ that may be considered as a part of its contract work-in progress.
In fact, after installation in the ship, BFEs are returned to the buyer after co mpletion of the ship.
Thus, these are only held by the company in the capacity of a bailee. Since, it cannot be
considered as an ‘asset’, therefore, it can neither be considered as ‘inventory’ nor as ‘work -in-
progress’.
Further, it can also not be considered as a part of sale value or revenue of the company as no
consideration would be receivable with respect to the cost of such equipment.
On the basis of the above, it can be concluded that:
(i) The BFEs cannot be considered as inventories / Work- in- progress for
Defense Innovators Limited.
(ii) The BFE’s cost cannot be considered as part of sales value / contract revenue to Defense
Innovators Limited.
(b) Step 1 - There is an ‘option’ to convert the loans into equity i.e. the loan note holders do not have
to accept equity shares; they could demand repayment in the form of cash.
Ind AS 32 states that where there is an obligation to transfer economic benefits there sh ould be a
liability recognised. On the other hand, where there is not an obligation to transfer economic
benefits, a financial instrument should be recognised as equity.
In the given case, we have both – ‘equity’ and ‘debt’ features in the instrument. There is an
obligation to pay cash – i.e. interest at 8% per annum and a redemption amount – this is
‘financial liability’ or ‘debt component’. The ‘equity’ part of the transaction is the option to convert.
So it is a compound financial instrument.
Step 2 - Debt element of the financial instrument so as to recognise the liability is the present
value of interest and principal The rate at which the same is to be discounted, is the rate of
equivalent loan note without the conversion option would have carried interest at 10%,
therefore this is the rate to be used for discounting
Step 3 - Calculation of the debt element of the loan note as follows:

© The Institute of Chartered Accountants of India

 8% Interest discounted at a rate of 10% Present Value (6,00,000 x 8%)
S. No Year Interest PVF Amount
amount
Year 1 20X2 48,000 0.91 43,680
Year 2 20X3 48,000 0.83 39,840
Year 3 20X4 48,000 0.75 36,000
1,19,520
Year 4 20X5 648,000 0.68 4,40,640
Amount to be recognised as a liability 5,60,160
Initial proceeds (6,00,000)
Amount to be recognised as equity 39,840
* In year 4, the loan note is redeemed therefore ` 6,00,000 + ` 48,000 = ` 6,48,000.
Step 4 The next step is to recognise the interest component equivalent to the loan that would
carry if there was no option to cover. Therefore, the interest should be recognised at 10%. As on
date ` 48,000 has been recognised in the statement of profit and loss i.e. 6,00,000 x 8% but we
have discounted the present value of future interest payments and redemption amount using
discount factors of 10%, so the finance charge in the statement of profit and loss must also be
recognised at the same rate i.e. for the purpose of consistency.
The additional charge to be recognised in the income statement is calculated as:
Debt component of the financial instrument ` 5,60,160

Interest charge (5,60,160 x 10%) ` 56,016

Already charged to the income statement (` 48,000)
Additional charge required ` 8,016

Journal Entries for recording additional finance cost for year ended 31 March 20X2
Particulars Dr. Amount (`) Cr. Amount (`)
Finance cost A/c Dr. 8,016
To Debt component A/c 8,016
(Being interest recorded for difference
between amount recorded earlier and that
to be recorded per Ind AS 32)
(c) (a) When grant is treated as deferred income
Statement of profit and loss – An extract
`
Depreciation (` 1,00,000 x 20%) (20,000)
Government grant credit (W.N.1) 3,000

Balance Sheet - An extract

`
Non-current assets
Property, plant and equipment 1,00,000
2

© The Institute of Chartered Accountants of India

 Less: Accumulated depreciation (1,00,000 x 20%) (20,000) 80,000
XX
Non-current liabilities
Government grant [12,000 – 3,000 (current 9,000
liability)]
Current liabilities
Government grant (15,000 x 20%) 3,000
XX
Working Note:
1. Government grant deferred income account
` `
To Profit or loss 3,000 By Grant cash received 15,000
(15,000 × 20%)
To Balance c/f 12,000
15,000 15,000
(b) When grant is deducted from cost of the asset
Statement of profit and loss – An extract
`
Depreciation [(` 1,00,000 – 15,000) x 20%] (17,000)
Balance Sheet – An extract
`
Non-current assets
Property, plant and equipment (1,00,000-15,000) 85,000
Less: Accumulated depreciation (17,000) 68,000
2. (a) The following table shows the amortisation of loan based on effective interest rate:
Date Opening Cash flows Cash Total cash Interest Closing
Amortised (Principal) outflows flows @ EIR Amortised
(1) cost (3) (Interest @ (3 + 4 = 5) 10.80% cost
(2) 10% and (2 x 10.80% (2- 5+6= 7)
fee) (4) = 6)
1 st April, 20X1 (95,00,000) 1,80,912 93,19,088
31st March, 20X2 93,19,088 19,00,000 9,50,000 28,50,000 10,06,462 74,75,550
31st March, 20X3 74,75,550 19,00,000 7,60,000 26,60,000 8,07,359 56,22,909
31st March, 20X4 56,22,909 19,00,000 5,70,000 24,70,000 6,07,274 37,60,183
31st March, 20X5 37,60,183 19,00,000 3,80,000 22,80,000 4,06,100 18,86,283
31st March, 20X6 18,86,283 19,00,000 1,90,000 20,90,000 2,03,717*
* Difference of ` 2 (2,03,719 – 2,03,717) is due to approximation.

© The Institute of Chartered Accountants of India

 (i) On 1st April, 20X1

Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 93,19,088
To Loan from bank A/c 93,19,088
(Being loan recorded at its fair value less transaction
costs on the initial recognition date)
(ii) On 31st March, 20X2
Particulars Dr. (`) Cr. (`)
Loan from bank A/c Dr. 18,43,538
Interest expense Dr. 10,06,462
To Bank A/c 28,50,000
(Being first instalment of loan and payment of
interest accounted for as an adjustment to the
amortised cost of loan)

(iii) On 31st March, 20X3– Before KUPA Ltd. approached the bank

Particulars Dr. (`) Cr. (`)

Interest expense Dr. 8,07,359
To Loan from bank A/c 47,359
To Bank A/c 7,60,000
(Being loan payment of interest recorded by the
Company before it approached the Bank for
deferment of principal)

Reason for treating the modification as a fresh loan:

Upon receiving the new terms of the loan, KUPA Ltd., re-computed the carrying value of the loan
by discounting the new cash flows with the original effective interest rate and comparing the
same with the current carrying value of the loan. As per requirements of Ind AS 109, any change
of more than 10% shall be considered a substantial modification, resulting in fresh accounting for
the new loan.
The following table shows the present value (PV) of new contractual cash flows and percentage
of variation:
Date Cash flows Interest Total cash Discounting PV of cash
(principal) outflow @ outflow factor flows
15% @ 10.80%
31st March, 20X3 (76,00,000)
31st March, 20X4 9,50,000 11,40,000 20,90,000 0.903 18,87,270
31st March, 20X5 9,50,000 9,97,500 19,47,500 0.815 15,87,213
31st March, 20X6 9,50,000 8,55,000 18,05,000 0.735 13,26,675
31st March, 20X7 9,50,000 7,12,500 16,62,500 0.664 11,03,900
31st March, 20X8 9,50,000 5,70,000 15,20,000 0.599 9,10,480
31st March, 20X9 9,50,000 4,27,500 13,77,500 0.540 7,43,850
4

© The Institute of Chartered Accountants of India

 31st March, 20Y1 9,50,000 2,85,000 12,35,000 0.488 6,02,680
31st March, 20Y2 9,50,000 1,42,500 10,92,500 0.440 4,80,700
PV of new contractual cash flows discounted @ 10.80% 86,42,768
Carrying amount of loan (93,19,088 - 18,43,538 + 47,359) 75,22,909
Difference 11,19,859
Percentage of carrying amount 14.89%

Decision Making:
Considering a more than 10% change in PV of cash flows compared to the carrying value of the
loan, the existing loan shall be considered to have been extinguished and the new loan shall be
accounted for as a separate financial liability.
The accounting entries for the same are included below:
On 31 st March, 20X3 – Accounting for extinguishment
Particulars Dr. (`) Cr. (`)
Loan from bank (old) A/c Dr. 75,22,909
Finance cost Dr. 77,091
To Loan from bank (new) A/c 76,00,000
(Being new loan accounted for at its principal amount in
absence of any transaction costs directly related to such loan
and corresponding derecognition of existing loan)

(iv) On 31st March, 20X4

Particulars Dr. (`) Cr. (`)
Loan from bank A/c Dr. 9,50,000
Interest expense Dr. 11,40,000
To Bank A/c 20,90,000
(Being first instalment of the new loan and payment of
interest accounted for as an adjustment to the amortised cost
of loan)
(b) Ind AS 102 defines grant date and measurement dates as follows:
(a) Grant date: The date at which the entity and another party (including an employee) agree to a
share-based payment arrangement, being when the entity and the counterparty have a shared
understanding of the terms and conditions of the arrangement. At grant date the en tity confers
on the counterparty the right to cash, other assets, or equity instruments of the entity, provided
the specified vesting conditions, if any, are met. If that agreement is subject to an approval
process (for example, by shareholders), grant date is the date when that approval is obtained.
(b) Measurement date: The date at which the fair value of the equity instruments granted is
measured for the purposes of this Ind AS. For transactions with employees and others providing
similar services, the measurement date is grant date. For transactions with parties other than
employees (and those providing similar services), the measurement date is the date the entity
obtains the goods or the counterparty renders service.
Applying the above definitions in the given scenarios following would be the conclusion based on
the assumption that the approvals have been received prospectively:

© The Institute of Chartered Accountants of India

 Scenario Grant date Measurement Base for grant date Base for
date measurement date
(i) 30th June, 30th June, The date on which the For employees, the
20X1 20X1 scheme was approved by measurement date is
the employees grant date
(ii) 1 st April, 30th July, 20X1 The date when the entity The date when the
20X1 and the counterparty entity obtains the
entered a contract and goods from the
agreed for settlement by counterparty
equity instruments
(iii) 30th 30th The date when the approval For employees, the
September, September, by shareholders was measurement date is
20X1 20X1 obtained grant date
3. (a) 1. Determination of larger entity out of Sun Ltd. and Moon Ltd.
The management of a larger entity (out of Sun Limited and Moon Limited) will take the
control of the Sunmoon Ltd. Since, here Sun Ltd. and Moon Ltd. are not under common
control and hence accounting prescribed under Ind AS 103 for business combination will be
applied. As per the accounting guidance provided in Ind AS 103, sometimes the legal
acquirer may not be the accounting acquirer. In the given scenario although Sunmoon Ltd.
is issuing the shares but management of a larger entity out of Sun Ltd. and Moon Ltd. will
have control of Sunmoon Ltd.
This can be determined by the following table: (`)
Sun Ltd. Moon Ltd.
Fair Value A 2,20,00,000 2,80,00,000
Value per share B 10 10
Number of shares A/B = C 22,00,000 28,00,000
Total number of shares in Sunmoon
Ltd. will be 50,00,000 shares
(22,00,000 + 28,00,000)

Thus, % held by each company in [(C/50,00,000) 44% 56%

Sunmoon Ltd. x 100]
Note: It is a case of Reverse Acquisition. Since post-merger, Moon Ltd. is bigger in size
which is a clear indicator that Moon Ltd. will have control of Sunmoon Ltd. and will be
considered as an accounting acquirer. Accordingly, Moon Ltd.’s assets and liabilities will be
recorded at historical cost in the merged financial statements.
2. Computation of Purchase Consideration and the manner in which it will be
discharged
Number of shares to be issued by Moon Ltd. to Sun Ltd. to maintain the same percentage
i.e. 56%
Since 14,00,000 shares of Moon Ltd. (given in the balance sheet) represent 56%, the total
number of shares would be 25,00,000 shares (14,00,000 shares / 56%).
This implies Moon Ltd. would need to issue 11,00,000 shares (25,00,000 – 14,00,000) to
Sun Ltd.

© The Institute of Chartered Accountants of India

 Purchase Consideration = 11,00,000 shares x ` 20 per share (ie. 2,80,00,000 / 14,00,000
shares) = ` 2,20,00,000.
3. Balance Sheet of Sunmoon Ltd. as on 1.4.20X1 `
ASSETS Note No. Amount
Non-current assets
Property, Plant and Equipment 3,40,00,000
(1,90,00,000 + 1,50,00,000)
Goodwill (Refer Working Note) 18,00,000
Financial assets
Investment (21,00,000 + 11,00,000) 32,00,000
Current assets
Inventory (26,00,000 + 55,00,000) 81,00,000
Financial assets
Trade receivables (36,00,000 + 80,00,000) 1,16,00,000
Cash and Cash equivalent
(9,00,000 + 8,00,000) 17,00,000
6,04,00,000
EQUITY AND LIABILITIES
Equity
Equity share capital (of face value of ` 10 each) 1 2,50,00,000
Other equity 2 1,64,00,000
Liabilities
Non-current liabilities
Financial liabilities
Borrowings (12% Debentures) 1,40,00,000
3
(60,00,000 + 80,00,000)

Current liabilities
Financial liabilities
Trade payables (20,00,000 + 30,00,000) 50,00,000
6,04,00,000
Notes to Accounts
( `) ( `)
1. Share Capital
25,00,000 Equity Shares of ` 10 each (14,00,000 to
Moon Ltd. and 11,00,000 as computed above, to 2,50,00,000
Sun Ltd.)
2. Other Equity
General reserve of Moon Ltd. 40,00,000
7

© The Institute of Chartered Accountants of India

 Profit and loss of Moon Ltd. 10,00,000
Export profit reserve of Moon Ltd. 2,00,000
Investment allowance reserve of Moon Ltd. 2,00,000
Security premium (11,00,000 shares x ` 10) 1,10,00,000 1,64,00,000
3. Long Term Borrowings
12% Debentures 1,40,00,000
Working Note:
Computation of Goodwill
Assets: `
Property, plant and equipment 1,90,00,000
Investment 21,00,000
Inventory 26,00,000
Trade receivables 36,00,000
Cash & cash equivalent 9,00,000
Total assets 2,82,00,000
Less: Liabilities:
Borrowings (12% Debentures) (60,00,000)
Trade payables (20,00,000)
Net assets A 2,02,00,000
Purchase consideration B 2,20,00,000
Goodwill 18,00,000
(B-A)
3. (b)
1 st April, 20X1 31 st March, 20X2 31 st March, 20X3
` ` `
Equity alternative (1,500 x 1,53,000
102)
Cash alternative (1,000 x 1,13,000
113)
Equity option (1,53,000 – 40,000
1,13,000)
Cash option (cumulative) (1,000x120 x ½ ) 1,32,000
(using period end fair value 60,000
Equity option (cumulative) (40,000 x ½) 40,000
20,000
Expense for the period
Equity option 20,000 20,000
Cash Option 60,000 72,000
Total 80,000 92,000

© The Institute of Chartered Accountants of India

 Journal Entries
31st March, 20X2 `
Employee benefits expenses Dr. 80,000
To Share based payment reserve (equity)* 20,000
To Share based payment liability 60,000
(Recognition of Equity option and cash settlement option)
31 st March, 20X3
Employee benefits expenses Dr. 92,000
To Share based payment reserve (equity)* 20,000
To Share based payment liability 72,000
(Recognition of Equity option and cash settlement option)
Share based payment liability Dr. 1,32,000

To Bank/ Cash 1,32,000

(Settlement in cash)

*The equity component recognized (` 40,000) shall remain within equity. By electing to receive
cash on settlement, the employees forfeited the right to receive equity instruments. However,
ABC Limited may transfer the share based payment reserve within equity, i.e. a transfer from one
component of equity to another.
4. (a) The above issue needs to be examined in the umbrella of the provisions given in Ind AS 1
‘Presentation of Financial Statements’, Ind AS 16 ‘Property, Plant and Equipment’ in relation to
property ‘1’ and ‘2’ and Ind AS 40 ‘Investment Property’ in relation to property ‘3’.
Property ‘1’ and ‘2’
Para 6 of Ind AS 16 ‘Property, Plant and Equipment’ defines:
“Property, plant and equipment are tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(b) are expected to be used during more than one period.”
Paragraph 29 of Ind AS 16 states that:
“An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment ”.
Further, paragraph 36 of Ind AS 16 states that:
“If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued”.
Further, paragraph 39 of Ind AS 16 states that:
“If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be
recognised in other comprehensive income and accumulated in equity under the heading of
revaluation surplus. However, the increase shall be recognised in profit or loss to the extent
that it reverses a revaluation decrease of the same asset previously recognised in profit or
loss”.

© The Institute of Chartered Accountants of India

 Further, paragraph 52 of Ind AS 16 states that:
“Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as
long as the asset’s residual value does not exceed its carrying amount”.
Property ‘3’
Ind AS 40 defines ‘Investment property’ as:
“Investment property is property (land or a building—or part of a building—or both) held (by the
owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or
both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business”.
Further, paragraph 30 of Ind AS 40 states that:
“An entity shall adopt as its accounting policy the cost model to all of its investment property”.
Further, paragraph 79 (e) of Ind AS 40 requires that:
“An entity shall disclose the fair value of investment property”.
Further, paragraph 54 (2) of Ind AS 1 ‘Presentation of Financial Statements’ requires that:
“As a minimum, the balance sheet shall include line items that present the following amounts:
(a) property, plant and equipment;
(b) investment property;
As per the facts given in the question, Venus Ltd. has
(a) presented all three properties in balance sheet as ‘property, plant and equipment’;
(b) applied different accounting policies to Property ‘1’ and ‘2’;
(c) revaluation is charged in statement of profit and loss as profit; and
(d) applied revaluation model to Property ‘3’ being classified as Investment Property.
This accounting treatment is neither correct nor in accordance with provision of Ind
AS 1, Ind AS 16 and Ind AS 40.
Accordingly, Venus Ltd. shall apply the same accounting policy (i.e. either revaluation or cost
model) to entire class of property being property ‘1’ and ‘2”. It also required to depreciate these
properties irrespective of that, their fair value exceeds the carrying amount. The revaluation gain
shall be recognised in other comprehensive income and accumulated in equity under the heading
of revaluation surplus.
There is no alternative of revaluation model in respect to property ‘3’ being classified as
Investment Property and only cost model is permitted for subsequent measurement. However,
Venus ltd. is required to disclose the fair value of the property in the Notes to Accounts. Also the
property ‘3’ shall be presented as separate line item as Investment Property.
Therefore, as per the provisions of Ind AS 1, Ind AS 16 and Ind AS 40, the presentation of these
three properties in the balance sheet is as follows:

10

© The Institute of Chartered Accountants of India

 Case 1: Venus Ltd. has applied the Cost Model to an entire class of property, plant and
equipment.
Balance Sheet (extracts) as at 31 st March, 20X2 `
Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 13,500
Property ‘2’ 9,000 22,500
Investment Properties
Property ‘3’ 10,800

Case 2: Venus Ltd. has applied the Revaluation Model to an entire class of property, plant
and equipment.
Balance Sheet (extracts) as at 31 st March, 20X2 `

Assets
Non-Current Assets
Property, Plant and Equipment
Property ‘1’ 16,000
Property ‘2’ 11,000 27,000
Investment Properties
Property ‘3’ 10,800

Equity and Liabilities

Other Equity
Revaluation Reserve
Property ‘1’ [16,000 – (15,000 – 1,500)] 2,500
Property ‘2’ [11,000 – (10,000 – 1,000)] 2,000 4,500

The revaluation reserve should be routed through Other Comprehensive Income (subsequently
not reclassified to Profit and Loss) in Statement of Profit and Loss and shown in a separate
column under Statement of Changes in Equity.
(b) Inventory and debtors need to be classified in accordance with the requirement of Ind AS 1,
which provides that an asset shall be classified as current if an entity expects to realise the
same, or intends to sell or consume it in its normal operating cycle.
(a) In this case, time lag between the purchase of inventory and its realisation into cash is 19
months [11 months + 8 months]. Both inventory and the debtors would be classified as
current if the entity expects to realise these assets in its normal operating cycle.
(b) No, the answer will be the same as the classification of debtors and inventory depends on
the expectation of the entity to realise the same in the normal operating cycle. In this case,
11

© The Institute of Chartered Accountants of India

 time lag between the purchase of inventory and its realisation into cash is 28 months [15
months + 13 months]. Both inventory and debtors would be classified as current if the entity
expects to realise these assets in the normal operating cycle.
(c) As per Ind AS 23, Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset form part of the cost of that asset. Other borrowing costs are
recognised as an expense.
Where, a qualifying asset is an asset that necessarily takes a substantial period of time to ge t
ready for its intended use or sale.
Accordingly, the treatment of Interest of ` 68.20 lacs occurred during the year
20X1-20X2 would be as follows:
(i) When construction of asset completed on 30 th April, 20X2
The treatment for total borrowing cost of ` 68.20 lakh will be as follows:
Purpose Nature Interest to be Interest to be charged to
capitalised profit and loss account
` in lakh ` in lakh
Modernisation and Qualifying [68.20 x (510/620)] =
renovation of plant asset 56.10
and machinery
Advance to suppliers Qualifying [68.20 x (54/620)] =
for additional assets asset 5.94
Working Capital Not a [68.20 x (56/620)] = 6.16
qualifying
asset
62.04 6.16
(ii) When construction of assets is completed by 28 th February, 20X2
When the process of renovation gets completed in less than 12 months, the plant and
machinery and the additional assets will not be considered as qualifying assets (until and
unless the entity specifically considers that the assets took substantial period of time for
completing their construction). Accordingly, the whole of interest will be required to be
charged off / expensed off to Profit and loss account.
5. (a) (i) Determination of how revenue is to be recognised in the books of ABC Ltd. as per expe cted
value method
Calculation of probability weighted sales volume
Sales volume Probability Probability-weighted
(units) sales volume (units)
9,000 15% 1,350
28,000 75% 21,000
36,000 10% 3,600
25,950
Calculation of probability weighted sales value
Sales volume Sales price per Probability Probability-weighted
(units) unit (`) sales value (`)
9,000 90 15% 1,21,500
12

© The Institute of Chartered Accountants of India

 28,000 80 75% 16,80,000
36,000 70 10% 2,52,000
20,53,500

Average unit price = Probability weighted sales value/ Probability weighted sales volume
= 20,53,500 / 25,950 = ` 79.13 per unit
Revenue is recognised at ` 79.13 for each unit sold. First 10,000 units sold will be booked
at ` 90 per unit and liability is accrued for the difference price of ` 10.87 per unit (` 90 – `
79.13), which will be reversed upon subsequent sales of 15,950 units (as the question
states that ABC Ltd. achieved the same number of units of sales to the custom er during the
year as initially estimated under the expected value method for the financial year 20X1-
20X2). For, subsequent sale of 15,950 units, contract liability is accrued at ` 0.87 (80 –
79.13) per unit and revenue will be deferred.
(ii) Determination of how revenue is to be recognised in the books of ABC Ltd. as per
most likely method
Transaction price will be:
28,000 units x ` 80 per unit = ` 22,40,000
Average unit price applicable = ` 80
First 10,000 units sold will be booked at ` 90 per unit and liability of ` 1,00,000 is accrued
for the difference price of ` 10 per unit (` 90 – ` 80), which will be reversed upon
subsequent sales of 18,000 units (as question states that ABC Ltd. achieved the same
number of units of sales to the customer during the year as initially estimated under the
most likely method for the financial year 20X1-20X2).
(iii) Journal Entries in the books of ABC Ltd.
(when revenue is accounted for as per expected value method for
financial year 20X1-20X2)
ft ` `
1. Bank A/c (10,000 x ` 90) Dr. 9,00,000
To Revenue A/c (10,000 x ` 79.13) 7,91,300
To Liability (10,000 x ` 10.87) 1,08,700
(Revenue recognised on sale of first 10,000 units)
2. Bank A/c [(25,950 x ` 80)- 9,00,000] Dr. 11,76,000
Liability Dr. 86,124
To Revenue A/c (15,950 x ` 79.13) 12,62,124
(Revenue recognised on sale of remaining 15,950
units (25,950 - 10,000). Amount paid by the
customer will be the balance amount after adjusting
the excess paid earlier since, the customer falls now
in second slab)
3. Liability (1,08,700 – 86,124) Dr. 22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
(On reversal of liability at the end of the financial year
20X1-20X2 i.e. after completion of stipulated time)

13

© The Institute of Chartered Accountants of India

 Alternatively, in place of first two entries, one consolidated entry may be passed as
follows:
Bank A/c (25,950 x ` 80) Dr. 20,76,000
To Revenue A/c (25,950 x ` 79.13) 20,53,424
To Liability (25,950 x ` 0.87) 22,576
(Revenue recognised on sale of 25,950 units)

Note: In 2nd journal entry, it is assumed that the customer had paid balance amount of `
11,76,000 after adjusting excess ` 1,00,000 paid with first lot of sale of 10,000 unit. However,
one can pass journal entry with total sales value of ` 12,76,000 (15,950 units x ` 80 per unit) and
later on pass third entry for refund. In such a situation, alternatively, 2 nd and 3rd entries would be
as follows:
Bank A/c (15,950 x ` 80) Dr. 12,76,000
To Revenue A/c (15,950 x ` 79.13) 12,62,124
To Liability 13,876
(Revenue recognised on sale of remaining 15,950
units (25,950 - 10,000))
Liability (1,08,700 + 13,876) Dr. 1,22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
To Bank 1,00,000
(On reversal of liability at the end of the financial
year 20X1-20X2 i.e. after completion of stipulated
time and excess amount refunded)
(b) (i) An earnings-based valuation of Entity A’s holding of shares in company XYZ could be
calculated as follows:
Particulars Unit
Entity XYZ’s after-tax maintainable profits (A) ` 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of Company XYZ (A) x (B) x (C) ` 8,40,000

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

The fair value of Entity A’s investment in XYZ’s shares is estimated at ` 42,000 (that is, 250
shares × ` 168 per share).
(ii) Share price = ` 8,50,000 ÷ 5,000 shares = ` 170 per share.
The fair value of Entity A’s investment in XYZ shares is estimated to be ` 42,500 (250
shares × ` 170 per share).
6. (a)
Description Calculation or reason `
Purchase price ` 600,000 purchase price minus ` 50,000 550,000
refundable purchase taxes
Loan raising fee Offset against the measurement of the liability -

14

© The Institute of Chartered Accountants of India

 Transport cost Directly attributable expenditure 20,000
Installation costs Directly attributable expenditure 100,000
Environmental The obligation to dismantle and restore the 100,000
restoration costs environment arose from the installation of the
equipment
Preparation costs ` 55,000 materials + ` 65,000 labour + ` 15,000 135,000
depreciation
Training costs Recognised as expenses in profit and loss -
account. The equipment was capable of operating
in the manner intended by management without
incurring the training costs.
Cost of testing ` 21,000 materials (ie net of the ` 3,000 recovered 37,000
from the sale of the scrapped output) + ` 16,000
labour
Operating loss Recognised as expenses in profit and loss account -
Borrowing costs Recognised as expenses in profit and loss account -
Cost of equipment 9,42,000

(b) As per paragraph 8(b) of Ind AS 40, any land held for currently undetermined future use, should
be classified as an investment property. Hence, in this case, the land would be regarded as held
for capital appreciation. Hence the land property should be classified by X Ltd as investment
property in the financial statements as at 31 March 20X1.
As per Para 57 of the Standard, an entity can change the classification of any property to, and
from, an investment property when and only when evidenced by a change in use. A change
occurs when the property meets or ceases to meet the definition of investment property and there
is evidence of the change in use. Mere management’s intention for use of the property does not
provide evidence of a change in use.
Accordingly, the property in different cases would be classified as under:
(a) Since X Ltd has commenced construction of office building on it for own use, the property
should be reclassified from investment property to owner occupied as at
31 March 20X2.
(b) As per Para 59, transfers between investment property, owner occupied and inve ntories
do not change the carrying amount of the property transferred and they do not change the
cost of the property for measurement or disclosure purposes.
(c) No. The change in classification to, or from, investment properties is due to change in use
of the property. No retrospective application is required and prior period’s financial
statements need not be re-stated.
(d) Mere management intentions for use of the property do not evidence change in use. Since
X Ltd has no plans to commence construction of the office building during 20X1-20X2, the
property should continue to be classified as an investment property by X Ltd. in its
financial statements as at 31 March 20X2.
(c) Either
Ind AS 37 “Provisions, Contingent Liabilities and Contingent Assets” defines an onerous contract
as a contract in which the unavoidable costs of meeting the obligations under the contract exceed
the economic benefits expected to be received under it.
15

© The Institute of Chartered Accountants of India

 Paragraph 68 of Ind AS 37 states that the unavoidable costs under a contr act reflect the least net
cost of exiting from the contract, which is the lower of the cost of fulfilling it and any
compensation or penalties arising from failure to fulfill it.
In the instant case, cost of fulfilling the contract is ` 0.5 million (` 2.5 million – ` 2 million) and
cost of exiting from the contract by paying penalty is ` 0.25 million.
In accordance with the above reproduced paragraph, it is an onerous contract as cost of meeting
the contract exceeds the economic benefits.
Therefore, the provision should be recognised at the best estimate of the unavoidable cost, which
is lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfill it,
i.e., at ` 0.25 million (lower of ` 0.25 million and ` 0.5 million).
(c) OR
A Ltd. will recognise a non-monetary contract liability amounting ` 1,440 million, by translating
USD 20 million at the exchange rate on 1 st January, 20X1 ie ` 72 per USD.
A Ltd. will recognise revenue at 31 st March, 20X1 (that is, the date on which it transfers the goods
to the customer).
A Ltd. determines that the date of the transaction for the revenue relating to the advance
consideration of USD 20 million is 1 st January, 20X1. Applying paragraph 22 of Ind AS 21, A Ltd.
determines that the date of the transaction for the remainder of the revenue as 31 st March, 20X1.
On 31st March, 20X1, A Ltd. will:
• derecognise the non-monetary contract liability of USD 20 million and recognise USD 20
million of revenue using the exchange rate as at 1 st January, 20X1 ie ` 72 per USD; and
• recognise revenue and a receivable for the remaining USD 30 million, using the exchange
rate on 31 st March, 20X1 ie ` 75 per USD.
• the receivable of USD 30 million is a monetary item, so it should be translated using the
closing rate until the receivable is settled.

16

© The Institute of Chartered Accountants of India

 Test Series: April, 2023
MOCK TEST PAPER 2
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (a) Balance Sheet of Master Creator Private Limited as at 31 st March, 20X2
Particulars Working/Note (`)
reference
ASSETS
Non-current assets
Property, plant and equipment 1 49,87,750
Capital work-in-progress 2 20,01,600
Investment Property 3 15,48,150
Financial assets
Other financial assets (Security deposits) 4,62,500
Other non-current assets (capital advances) 4 17,33,480
Current assets
Inventories 5,98,050
Financial assets
Investments (55,000 + 5,000) 5 60,000
Trade receivables 6 7,25,000
Cash and cash equivalents 7 1,16,950
Other financial assets 8 1,27,370
Other current assets (Prepaid expenses) 8 90,000
TOTAL ASSETS 1,24,50,850
EQUITY AND LIABILITIES
Equity
Equity share capital A 10,00,000
Other equity B 28,44,606
Non-current liabilities
Financial liabilities
8% Convertible loan 11 60,60,544
Long term provisions 5,24,436
Deferred tax liability 12 2,20,700
Current liabilities
Financial liabilities
Trade payables 13 6,69,180
Other financial liabilities 14 1,19,299
Other current liabilities (TDS payable) 15 81,265
Current tax liabilities 9,30,820
TOTAL EQUITY AND LIABILITIES 1,24,50,850

© The Institute of Chartered Accountants of India

 Statement of changes in equity
For the year ended 31 st March, 20X2
A. Equity Share Capital
Balance (`)
As at 31st March, 20X1 10,00,000
Changes in equity share capital during the year -
As at 31st March, 20X2 10,00,000
B. Other Equity
Retained Equity component Total (`)
Earnings of Compound
(`) Financial
Instrument (`)
As at 31st March, 20X1 21,25,975 - 21,25,975
Total comprehensive income for
the year (25,00,150 + 5,000 - 2,93,671 - 2,93,671
85,504- 21,25,975)
Issue of compound financial
instrument during the year - 4,24,960 4,24,960
As at 31 st March, 20X2 24,19,646 4,24,960 28,44,606
Disclosure forming part of Financial Statements:
Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance
Sheet date. (Note 9)
Notes/ Workings: (for adjustments/ explanations)
1. Property, plant and equipment are tangible items that: (a) are held for use in the
production or supply of goods or services, for rental to others, or for administrative
purposes; and (b) are expected to be used during more than one period. Therefore,
the items of PPE are Buildings (` 37,50,250) and Vehicles (` 12,37,500), since those
assets are held for administrative purposes.
2. Property, plant and equipment which are not ready for intended use as on the date of
Balance Sheet are disclosed as “Capital work-in-progress”. It would be classified from
PPE to Capital work-in-progress.
3. Investment property is property (land or a building—or part of a building—or both) held
(by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative
purposes; or
(b) sale in the ordinary course of business.
Therefore, Land held for capital appreciation should be classified as Investment
property rather than PPE.
4. Assets for which the future economic benefit is the receipt of goods or services,
rather than the right to receive cash or another financial asset, are not financial
assets.

© The Institute of Chartered Accountants of India

 5. Current investments here are held for the purpose of trading. Hence, it is a financial
asset classified as FVTPL. Any gain in its fair value will be recognised through profit
or loss. Hence, ` 5,000 (60,000 – 55,000) increase in fair value of financial asset
will be recognised in profit and loss.
6. A contractual right to receive cash or another financial asset from another entity is a
financial asset. Trade receivables is a financial asset in this case and hence should
be reclassified.
7. Cash is a financial asset. Hence it should be reclassified.
8. Other current financial assets:
Particulars Amount (`)
Interest accrued on bank deposits 57,720
Royalty receivable from dealers 69,650
Total 1,27,370

Prepaid expenses does not result into receipt of any cash or financial asset.
However, it results into future goods or services. Hence, it is not a financial asset.
9. As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after
the reporting period but before the financial statements are approved for issue, the
dividends are not recognized as a liability at the end of the reporting period because
no obligation exists at that time. Such dividends are disclosed in the notes in
accordance with Ind AS 1, Presentation of Financial Statements.
10. ‘Other Equity’ cannot be shown under ‘Non-current liabilities’. Accordingly, it is
reclassified under ‘Equity’.
11. There are both ‘equity’ and ‘debt’ features in the instrument. An obligation to pay
cash i.e. interest at 8% per annum and a redemption amount will be treated as
‘financial liability’ while option to convert the loan into equity shares is the equity
element in the instrument. Therefore, convertible loan is a compound financial
instrument.
Calculation of debt and equity component and amount to be recognised in the
books:
S. No Year Interest amount Discounting factor Amount
@ 8% @ 10%
Year 1 20X2 5,12,000 0.91 4,65,920
Year 2 20X3 5,12,000 0.83 4,24,960
Year 3 20X4 5,12,000 0.75 3,84,000
Year 4 20X5 69,12,000 0.68 47,00,160
Amount to be recognised as a liability 59,75,040
Initial proceeds (64,00,000)
Amount to be recognised as equity 4,24,960

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

© The Institute of Chartered Accountants of India

 Presentation in the Financial Statements:
In Statement of Profit and Loss for the year ended on 31 March 20X2
Finance cost to be recognised in the Statement of Profit ` 5,97,504
and Loss (59,75,040 x 10%)
Less: Already charged to the Statement of Profit and Loss (` 5,12,000)
Additional finance charge required to be recognised in the
Statement of Profit and Loss ` 85,504

In Balance Sheet as at 31 March 20X2

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

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

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

15. Liabilities for which there is no contractual obligation to deliver cash or other
financial asset to another entity, are not financial liabilities. Hence, TDS payable
should be reclassified from ‘Other current financial liabilities’ to ‘Other current
liabilities’ since it is not a contractual obligation.
(b) Following entries would be passed in the books of A Ltd.:
1) Initial entry to record investment done in associate
Investment in B Ltd. A/c Dr. 1,00,000
To Bank A/c 1,00,000

© The Institute of Chartered Accountants of India

 2) Recording of share in the profit of the associate
Investment in B Ltd. A/c Dr. 2,500
To Share in profit of investee (P&L) 2,500
[A Ltd. share in profit would be ` 2,500 (` 10,000 x 25%)]
3) Recording of share in the other comprehensive income (OCI) of the associate
Investment in B Ltd. A/c Dr. 500
To Share in OCI of investee (OCI) 500
[A Ltd. share in OCI would be ` 500 (` 2,000 x 25%)]
4) Recording of dividend distributed by associate
Dividend Receivable A/c Dr. 1,000
To Investment in B Ltd. A/c 1,000
[A Ltd. share in dividend would be ` 1,000 (` 4,000 x 25%)]
2. (a) Para 36 of Ind AS 7 inter alia states that when it is practicable to identify the tax cash flow with
an individual transaction that gives rise to cash flows that are classified as investing or financing
activities the tax cash flow is classified as an investing or financing activity as appropriate. When
tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is
disclosed.
Accordingly, the transactions are analysed as follows:
Particulars Amount (in crore) Activity
Sale Consideration 100 Investing Activity
Capital Gain Tax (20) Investing Activity
Business profits 30 Operating Activity
Tax on Business profits (3) Operating Activity
Dividend Payment (20) Financing Activity
Dividend Distribution Tax (2) Financing Activity
Income Tax Refund 1.5 Operating Activity
Total Cash flow 86.5

Activity wise Amount (in crore)

Operating Activity 28.5
Investing Activity 80
Financing Activity (22)
Total 86.5
(b) The value of closing inventory in the financial statements:
Item of inventory Cost NRV (Estimated Sales Measurement base Value
price- Selling costs) (lower of cost or NRV)
A1 8,000 (7,800 – 500) 7,300 NRV 7,300
A2 14,000 (18,000 – 200) 17,800 Cost 14,000
B1 16,000 (17,000 – 200) 16,800 Cost 16,000
C1 6,000 (7,500 – 150) 7,350 Cost 6,000
Value of Inventory 43,300
5

© The Institute of Chartered Accountants of India

 (c) (A) Calculation of employee compensation expense
Year 1 Year 2
Expected employees to remain in
the employment during the vesting 180 190
period
Fair value of option 18 18
Number of options 1,000 1,000
Total 32,40,000 34,20,000
Expense weightage 1/3 2/3 Balance 2/3rd in full,
as it is cancelled
Expense for the year 10,80,000 23,40,000 Remaining amount
since cancelled
(B) Cancellation compensation to be charged in the year 2
Cancellation compensation
Number of employees (A) 190
Amount agreed to pay (B) 13.50
Number of options/ employee (C) 1,000
Compensation amount (A x B x C) 25,65,000
Less: Amount to be deducted from Equity
Number of employees (D) 190
Fair value of option (at the date of cancellation) (E) 12
Number of options / employee (F) 1,000
Amount to be deducted from Equity (D x E x F) (22,80,000)
Balance transferred to Profit and Loss 2,85,000

(d) The transaction price is ` 90 per container based on entity J's estimate of total sales volume for
the year, since the estimated cumulative sales volume of 2.8 million containers would result in a
price per container of ` 90. Entity J concludes that based on a transaction price of ` 90 per
container, it is highly probable that a significant reversal in the amount of cumulative revenue
recognised will not occur when the uncertainty is resolved. Revenue is therefore recognised at a
selling price of ` 90 per container as each container is sold. Entity J will recognise a liability for
cash received in excess of the transaction price for the first 1 million containers sold at ` 100 per
container (that is, ` 10 per container) until the cumulative sales volume is reached for the next
pricing tier and the price is retroactively reduced.
For the quarter ended 31 st March, 20X8, entity J recognizes revenue of ` 63 million
(700,000 containers x ` 90) and a liability of ` 7 million [700,000 containers x (` 100 - ` 90)].
Entity J will update its estimate of the total sales volume at each reporting date until the
uncertainty is resolved.
3. (a) On initial measurement, Entity X will measure the lease liability and ROU asset as under:
Year Lease Present Present Value of Conversion INR
Payments Value factor Lease Payment rate (spot rate) value
(USD) @ 5%
1 10,000 0.952 9,520 68 6,47,360
6

© The Institute of Chartered Accountants of India

 2 10,000 0.907 9,070 68 6,16,760
3 10,000 0.864 8,640 68 5,87,520
4 10,000 0.823 8,230 68 5,59,640
5 10,000 0.784 7,840 68 5,33,120
Total 43,300 29,44,400

As per Ind AS 21 The Effects of Changes in Foreign Exchange Rates, monetary assets and
liabilities are restated at each reporting date at the closing rate and the difference due to foreign
exchange movement is recognised in profit and loss whereas non-monetary assets and liabilities
carried measured in terms of historical cost in foreign currency are not restated.
Accordingly, the ROU asset in the given case being a non-monetary asset measured in terms
of historical cost in foreign currency will not be restated but the lease liability being a monetary
liability will be restated at each reporting date with the resultant difference being taken to profit
and loss.
At the end of Year 1, the lease liability will be measured in terms of USD as under:
Lease Liability:
Year Initial Value (USD) Lease Payment Interest @ 5% Closing Value (USD)
(a) (b) (c) = (a x 5%) (d = a + c - b)
1 43,300 10,000 2,165 35,465
Interest at the rate of 5% will be accounted for in profit and loss at average rate of
` 69 (i.e., USD 2,165 x 69) = ` 1,49,385.
Particulars Dr. (`) Cr. (`)
Interest Expense Dr. 1,49,385
To Lease liability 1,49,385
Lease payment would be accounted for at the reporting date exchange rate, i.e. ` 70 at the
end of year 1
Particulars Dr. (`) Cr. (`)
Lease liability Dr. 7,00,000
To Cash 7,00,000
As per the guidance above under Ind AS 21, the lease liability will be restated using the
reporting date exchange rate i.e., ` 70 at the end of Year 1. Accordingly, the lease liability will
be measured at ` 24,82,550 (35,465 x ` 70) with the corresponding impact due to exchange
rate movement of ` 88,765 (24,82,550 – (29,44,400 + 1,49,385 – 700,000) taken to profit and
loss.
At the end of year 1, the ROU asset will be measured as under:
Year Opening Balance (`) Depreciation (`) Closing Balance (`)
1 29,44,400 5,88,880 23,55,520

(b) This is a compound financial instrument with two components – liability representing present
value of future cash outflows and balance represents equity component.

© The Institute of Chartered Accountants of India

 a. Computation of Liability & Equity Component
Date Particulars Cash Discount Net present
Flow Factor Value
01-Apr-20X1 0 1 0.00
31-Mar-20X2 Dividend 150,000 0.870 130,500
31-Mar-20X3 Dividend 150,000 0.756 113,400
31-Mar-20X4 Dividend 150,000 0.658 98,700
31-Mar-20X5 Dividend 150,000 0.572 85,800
31-Mar-20X6 Dividend 150,000 0.497 74,550
Total Liability Component 502,950
Total Proceeds 1,500,000
Total Equity Component (Bal fig) 997,050

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount
Liability Component 502,950 10,059 492,891
Equity Component 997,050 19,941 977,109
Total Proceeds 1,500,000 30,000 1,470,000

c. Accounting for liability at amortised cost:

- Initial accounting = Present value of cash outflows less transaction costs
- Subsequent accounting = At amortised cost, ie, initial fair value adjusted for interest
and repayments of the liability.
Opening Financial Interest Cash Flow Closing Financial
Liability Liability
A B C A+B-C
01-Apr-20X1 492,891 - - 4,92,891
31-Mar-20X2 492,891 78,173 150,000 4,21,064
31-Mar-20X3 421,064 66,781 150,000 3,37,845
31-Mar-20X4 337,845 53,582 150,000 2,41,427
31-Mar-20X5 241,427 38,290 150,000 1,29,717
31-Mar-20X6 129,717 20,283 150,000 -

d. Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit
01-Apr-20X1 Bank A/c Dr. 1,470,000
To Preference Shares A/c 492,891
To Equity Component of Preference 977,109
shares A/c
(Being compulsorily convertible preference
shares issued. The same are divided into equity
component and liability component as per the
calculation)
8

© The Institute of Chartered Accountants of India

 31-Mar-20X2 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid
to the shareholders)
31-Mar-20X2 Finance cost A/c Dr. 78,173
To Preference Shares A/c 78,173
(Being interest as per EIR method recorded)
31-Mar-20X3 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid
to the shareholders)
31-Mar-20X3 Finance cost A/c Dr. 66,781
To Preference Shares A/c 66,781
(Being interest as per EIR method recorded)
31-Mar-20X4 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid
to the shareholders)
31-Mar-20X4 Finance cost A/c Dr. 53,582
To Preference Shares A/c 53,582
(Being interest as per EIR method recorded)
31-Mar-20X5 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid
to the shareholders)
31-Mar-20X5 Finance cost A/c Dr. 38,290
To Preference Shares A/c 38,290
(Being interest as per EIR method recorded)
31-Mar-20X6 Preference shares A/c Dr. 150,000
To Bank A/c 150,000
(Being Dividend at the coupon rate of 10% paid
to the shareholders)
31-Mar-20X6 Finance cost A/c Dr. 20,283
To Preference Shares A/c 20,283
(Being interest as per EIR method recorded)
31-Mar-20X6 Equity Component of Preference shares A/c Dr. 977,109
To Equity Share Capital A/c 50,000
To Securities Premium A/c 927,109
(Being Preference shares converted in equity
shares and remaining equity component is
recognised as securities premium)

© The Institute of Chartered Accountants of India

4. (a)
20X3 20X2
Trading results ` `
A. Profit before interest, fair value movements and tax 17,90,000 16,50,000
B. Interest on 8% convertible loan stock (20X2: 9/12 × (2,00,000) (1,50,000)
` 2,00,000)
C. Change in fair value of embedded option (5,300) (5,000)
Profit before tax 15,84,700 14,95,000
Taxation @ 33% on (A-B) (5,24,700) (4,95,000)
Profit after tax 10,60,000 10,00,000
Calculation of basic EPS
Number of equity shares outstanding 20,00,000 20,00,000
Earnings 10,60,000 10,00,000
Basic EPS 53 paise 50 paise
Calculation of diluted EPS
Test whether convertibles are dilutive:
The saving in after-tax earnings, resulting from the conversion of ` 100 nominal of loan stock,
amounts to (` 100 × 8% × 67%) + (` 5,300 / 25,000) = ` 5.36 + ` 0.21 = ` 5.57.
There will then be 135 extra shares in issue.
Therefore, the incremental EPS is 4 paise (ie. ` 5.57 / 135). As this incremental EPS is less than
the basic EPS at the continuing level, it will have the effect of reducing the basic EPS of 53
paise. Hence the convertibles are dilutive.
20X3 20X2
Adjusted earnings ` `
Profit for basic EPS 10,60,000 10,00,000
Add: Interest and other charges on earnings (2,00,000 + 5,300) (1,50,000 + 5,000)
saved as a result of the conversion 2,05,300 1,55,000
Less: Tax relief on interest portion (66,000) (49,500)
Adjusted earnings for equity 11,99,300 11,05,500

Adjusted number of shares

From the conversion terms, it is clear that the maximum number of shares issuable on conversion
of ` 25,00,000 loan stock after the end of the financial year would be at the rate of 135 shares
per ` 100 nominal (that is, 33,75,000 shares).
20X3 20X2
Number of equity shares for basic EPS 20,00,000 20,00,000
Maximum conversion at date of issue (33,75,000 × 9/12) - 25,31,250
Maximum conversion after balance sheet date 33,75,000 –
Adjusted shares 53,75,000 45,31,250
Adjusted earnings for equity 11,99,300 11,05,500
Diluted EPS (approx.) 22 paise 24 paise

10

© The Institute of Chartered Accountants of India

 (b) (i) In order to fit into the definition of a joint arrangement, the parties to the joint arrangement
should have joint control over the arrangement. In the given case, decisions relating to
relevant activities, ie, marketing and distribution, are solely controlled by X Ltd and such
decisions do not require the consent of Y Ltd. Hence, the joint control test is not satisfied in
this arrangement and the arrangement does not fit into the definition of a joint arrangement
in accordance with the Standard.
(ii) Where X Ltd and Y Ltd both jointly control all the relevant activities of the arrangement and
since no separate entity is formed for the arrangement, the joint arrangement is in the
nature of a joint operation.
(iii) Where under a joint arrangement, a separate vehicle is formed to give effect to the joint
arrangement, then the joint arrangement can either be a joint operation or a joint venture.
Hence in the given case, if:
(a) The contractual terms of the joint arrangement, give both X Ltd and Y Ltd righ ts to the
assets and obligations for the liabilities relating to the arrangement, and the rights to
the corresponding revenues and obligations for the corresponding expenses, then the
joint arrangement will be in the nature of a joint operation.
(b) The contractual terms of the joint arrangement, give both X Ltd and Y Ltd. rights to the
net assets of the arrangement, then the joint arrangement will be in the nature of a
joint venture.
(iv) Where the rights to assets and liabilities to obligations are not c lear from the contractual
arrangement, then other facts and circumstances also need to be considered to determine
whether the joint arrangement is a joint operation or a joint venture.
When the provision of the activities of the joint venture is primarily to produce output and the
output is available / distributed only to the parties to the joint arrangement in some pre -
determined ratio, then this indicates that the parties have substantially all the economic
benefits of the assets of the arrangement. The only source of cash flows to the joint
arrangement is receipts from parties through their purchases of the output and the parties
also have a liability to fund the settlement of liabilities of the separate entity. Such an
arrangement indicates that the joint arrangement is in the nature of a joint operation.
In the given case, the output of the joint arrangement is exclusively used by X Ltd . and Y
Ltd. and the joint arrangement is not allowed to sell the output to outside parties. Hence,
the joint arrangement between X Ltd. and Y Ltd. is in the nature of a joint operation.
(v) It makes no difference whether the output of the joint arrangement is exclusively for use by
the parties to the joint arrangement or the parties to the arrangement sold their share of the
output to third parties.
Hence, even if X Ltd. and Y Ltd. sold their respective share of output to third parties, the
fact still remains that the joint arrangement cannot sell output directly to third parties.
Hence, the joint arrangement will still be deemed to be in the nature of a joint operation.
(vi) Where the terms of the contractual arrangement enable the separate entity to sell the output
to third parties, this would result in the separate entity assuming demand, inventory and
credit risks. Such facts and circumstances would indicate that the arrangement is a joint
venture.
For a joint arrangement to be either a joint operation or joint venture, it depends on whether
the parties to the joint arrangement have rights to the assets and obligations for liabilities
(will be a joint operation) OR whether the parties to the joint arrangement have rights to the
net assets of the arrangement (will be joint venture).

11

© The Institute of Chartered Accountants of India

 (c) An entity has eight segments and the relevant information is as follows:
Criteria 1: Segment revenue is 10% or more of total external + intersegment sales
Segments A B C D E F G H Total
Total sales 100 315 45 15 15 50 25 35 600
% to total sales 16.7 52.5 7.5 2.5 2.5 8.3 4.2 5.8
Reportable segments A B - - - - - -
Criteria 2: 10% or more of segment result
Consider segment profit and loss separately in absolute terms
Segments A B C D E F G H Total
Profit 5 - 15 - 8 - 5 7 40
Segments loss - 90 - 5 - 5 - - 100
Since segment loss is greater, we select 100 as evaluating the segment percentage
Segments A B C D E F G H Total
% to segment loss 5 90 15 5 8 5 5 7
Reportable segments - B C - - - - -
Criteria 3: 10% or more of segment assets
Segments A B C D E F G H Total
Assets 15 47 5 11 3 5 5 9 100
% 15 47 5 11 3 5 5 9 100
Reportable segments A B - D - - - -
Based on the above 3 criteria, the Reportable Segments are A, B, C & D
However, 75% test for external sales should also be checked.
Reportable Segments A B C D TOTAL
External sales 0 255 15 10 280
Total entity’s sales (external) 405
% of reportable segments external sales to entity’s sales 69.14%
Required percentage 75%
Hence, in the above scenario, additional operating segments need to be identified as reportable
segments, till the 75% test is satisfied, even if those segments do not satisfy the quantitative
threshold limits.
5. (a) Calculation of the value in use of the machine owned by E Ltd. includes the projected cash inflow
(i.e. sales income) from the continued use of the machine and projected cash outflows that are
necessarily incurred to generate those cash inflows (i.e cost of goods sold). Additionally,
projected cash inflows include ` 80,000 from the disposal of the asset in March, 20X8. Cash
outflows include routing capital expenditures of ` 50,000 in 20X5-20X6.
As per Ind AS 36, estimates of future cash flows shall not include:
• Cash inflows from receivables
• Cash outflows from payables
• Cash inflows or outflows expected to arise from future restructuring to which an entity is not

12

© The Institute of Chartered Accountants of India

 yet committed
• Cash inflows or outflows expected to arise from improving or enhancing the asset’s
performance
• Cash inflows or outflows from financing activities
• Income tax receipts or payments.
Hence in this case, cash flows do not include financing interest (i.e. 10%), tax (i.e. 30%) and
capital expenditures to which E Ltd. has not yet committed (i.e. ` 1,00,000). They also do not
include any savings in cash outflows from these capital expenditures, as required by Ind AS 36.
The cash flows (inflows and outflows) are presented below in nominal terms. They include an
increase of 3% per annum to the forecast price per unit (B), in line with forecast inflation. Th e
cash flows are discounted by applying a discount rate (8%) that is also adjusted for inflation.
Note: Figures are calculated on full scale and then rounded off to the nearest absolute value.
Year ended 20X3-20X4 20X4-20X5 20X5-20X6 20X6-20X7 20X7-20X8 Value in
use
Quantity (A) 10,000 10,500 11,025 11,576 12,155
Price per unit ` 200 ` 206 ` 212 ` 219 ` 225
(B)
Estimated ` 20,00,000 ` 21,63,000 ` 23,37,300 ` 25,35,144 ` 27,34,875
cash inflows
(C=A x B)
Misc. cash ` 80 000
inflow disposal
proceeds (D)
Total ` 20,00,000 ` 21,63,000 ` 23,37,300 ` 25,35,144 ` 28,14,875
estimated cash
inflows
(E=C+D)
Cost per unit ` 160 ` 162 ` 165 ` 168 ` 171
(F)
Estimated (`16,00,000) (`17,01,000) (`18,19,125) (`19,44,768) (`20,78,505)
cash outflows
(G = A x F)
Misc. cash (` 50,000)
outflow:
maintenance
costs (H)
Total (`16,00,000) (`17,01,000) (`18,69,125) (`19,44,768) (`20,78,505)
estimated cash
outflows
(I=G+H)
Net cash flows ` 4,00,000 ` 4,62,000 ` 4,68,175 ` 5,90,376 ` 7,36,370
(J=E-I)
Discount factor 0.9259 0.8573 0.7938 0.7350 0.6806
8% (K)
Discounted ` 3,70,360 ` 3,96,073 ` 3,71,637 ` 4,33,926 ` 5,01,173 `20,73,169
future cash
flows (L=J x K)

13

© The Institute of Chartered Accountants of India

 (b) For the year 20X1-20X2
S Limited accounts for the promised bundle of goods and services as a single performance
obligation satisfied over time in accordance with Ind AS 115. At the inception of the contract, S
Limited expects the following:
Transaction price – ` 20,00,000
Expected costs – ` 11,00,000
Expected profit (45%) – ` 9,00,000
At contract inception, S Limited excludes the ` 2,50,000 bonus from the transaction price
because it cannot conclude that it is highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur. Completion of the heavy-duty equipment is highly
susceptible to factors outside the entity’s influence.
By the end of the first year, the entity has satisfied 65% of its performance obligation on the basis
of costs incurred to date. Costs incurred to date are therefore ` 7,15,000 and
S Limited reassesses the variable consideration and concludes that the amount is still
constrained. Therefore at 31 st March, 20X2, the following would be recognised:
Revenue (A) – ` 13,00,000 (` 20,00,000 x 65%)
Costs (B) – ` 7,15,000 (` 11,00,000 x 65%)
Gross profit (C) i.e.(A-B) – ` 5,85,000
For the year 20X2-20X3
On 4th June, 20X2, the contract is modified. As a result, the fixed consideration and expected
costs increase by ` 1,50,000 and ` 80,000, respectively.
The total potential consideration after the modification is ` 24,00,000 which is ` 21,50,000 fixed
consideration + ` 2,50,000 completion bonus. In addition, the allowable time for achieving the
bonus is extended by six months with the result that S Limited concludes that it is highly
probable that including the bonus in the transaction price will not result i n a significant reversal
in the amount of cumulative revenue recognised in accordance with Ind AS 115. Therefore, the
bonus of ` 2,50,000 can be included in the transaction price.
S Limited also concludes that the contract remains a single performance ob ligation. Thus, S
Limited accounts for the contract modification as if it were part of the original contract.
Therefore, S Limited updates its estimates of costs and revenue as follows:
S Limited has satisfied 60.60% of its performance obligation (` 7,15,000 actual costs incurred
compared to ` 11,80,000 total expected costs). The entity recognises additional revenue of
` 1,54,400 [(60.60% of ` 24,00,000) – ` 13,00,000 revenue recognised to date] at the date of
modification i.e. on 4 th June, 20X2 as a cumulative catch-up adjustment.
6. (a) Extract of the Balance Sheet of RKA Private Ltd. as at 31 st March, 20X2
` in lacs
Closing net defined liability (1,580 – 1,275) lacs 305
Extract of the Statement of Profit or Loss of RKA Private Ltd. for the year ended
31st March, 20X2
Particulars ` in lacs
Service cost 55
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 Net interest (Refer W.N.1) 21
Profit or loss 76
Other comprehensive income:
Remeasurements (Refer W.N.2) 80
Total 156
(b) Journal entries in the books of RKA Private Ltd.
Particulars ` in lacs ` in lacs
Profit & Loss Dr. 76
Other comprehensive income Dr. 80
To Cash (Contribution) 111
To Net defined benefit liability (Refer WN 3) 45

Working Notes:
1. Computation of Net interest taken to the Statement of Profit or Loss
= Discount rate x Opening net defined benefit liability
= 8% x (1,400 – 1,140) lacs
= 8% x 260 lacs = 21 lacs (Rounded off to nearest lacs)
2. Computation of Remeasurements
Defined Benefit Obligation Account

Particulars ` in lacs Particulars ` in lacs

To balance c/d (given) 1,580 By balance b/d (given) 1,400
(closing balance) (opening balance)
By Current Service Cost (given) 55
By Interest on Opening Liability 112
(1,400 x 8%)
By Actuarial loss (bal. figure) 13
1,580 1,580

OR
Statement to calculate Actuarial gain or loss on defined benefit liability:
Particulars ` in lacs
Opening balance of liability 1,400
Current service cost 55
Interest on opening liability (1,400 x 8%) 112
Actuarial loss (Bal. fig) 13
Closing balance of liability 1,580

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 Plan Assets Account
Particulars ` in lacs Particulars ` in lacs
To balance b/d (given) 1,140 By balance c/d (given) 1,275
(opening balance) (closing balance)
To Bank Account 111
(contribution for the year)
To Surplus / Actual Return
(bal. figure) 24
1,275 1,275

OR
Statement to calculate Actual return on plan assets:
Particulars ` in lacs
Opening balance of asset 1,140
Cash contribution 111
Actual return (Bal. fig) 24
Closing balance of asset 1,275

Net interest on opening balance of plan asset = ` 91 lacs (i.e. ` 1,140 lacs x 8%) (Rounded
off to nearest lacs)
Hence there is a decrease in plan assets due to remeasurement for which computation is as
follows:
Actual Return – Net interest on opening plan asset
= ₹ 24 lacs – ₹ 91 lacs = ₹ 67 lacs.
Net remeasurement would be computed as follows:
Actuarial loss on liability + Loss on return
= ` 13 lacs + ` 67 lacs = ` 80 lacs.
3. Computation of increase/ decrease in net defined benefit liability:
Particulars ` in lacs
Opening net liability (` 1,400 lacs – ` 1,140 lacs) 260
Closing net liability (`1,580 lacs – ` 1,275 lacs) 305
Increase in liability 45
(b) Requirement as per Ind AS:
A first-time adopter shall classify all government loans received as a financial liability or an equity
instrument in accordance with Ind AS 32. A first-time adopter shall apply the requirements in Ind
AS 109 and Ind AS 20, prospectively to government loans existing at the date of transition to Ind
AS and shall not recognise the corresponding benefit of the government loan at a below -market
rate of interest as a government grant.
Treatment to be done:
Consequently, if a first-time adopter did not, under its previous GAAP, recognise and measure a
government loan at a below-market rate of interest on a basis consistent with Ind AS
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 requirements, it shall use its previous GAAP carrying amount of the loan at the date of transition
to Ind AS as the carrying amount of the loan in the opening Ind AS Balance Sheet. An entity
shall apply Ind AS 109 to the measurement of such loans after the date of transition to Ind AS.
In the instant case, the loan meets the definition of a financial liability in accordance with
Ind AS 32. Company therefore reclassifies it from equity to liability. It also uses the previous
GAAP carrying amount of the loan at the date of transition as the carrying amount of the loan in
the opening Ind AS balance sheet.
It calculates the annual effective interest rate (EIR) starting 1 st April 2020 as below:
EIR = Amount / Principal (1/t) i.e. 2.50/2(1/4) i.e. 5.74%. approx.
At this rate, ` 2 crore will accrete to ` 2.50 crore as at 31 st March 2024.
During the next 4 years, the interest expense charged to statement of profit and loss shall be:
Year ended Opening amortised Interest expense for the year Closing amortised
cost (`) (`) @ 5.74% p.a. approx. cost (`)
31st March 2021 2,00,00,000 11,48,000 2,11,48,000
31st March 2022 2,11,48,000 12,13,895 2,23,61,895
31st March 2023 2,23,61,895 12,83,573 2,36,45,468
31st March 2024 2,36,45,468 13,54,532 2,50,00,000
An entity may apply the requirements in Ind AS 109 and Ind AS 20 retrospectively to any
government loan originated before the date of transition to Ind AS, provided that the information
needed to do so had been obtained at the time of initially accounting for that loan.
The accounting treatment is to be done as per above guidance and the advice which the
company has been provided is not in line with the requirements of Ind AS 101.
(c) Either
In the present case, Solar Limited controls Mars Limited (since it holds 80% of its voting
rights). Consequently, it also controls the voting rights associated with 30% equity interest
held by Mars Limited in Venus Limited. Solar Limited also has 25% direct equity interest and
related voting power in Venus Limited. Thus, Solar Limited controls 55% (30% + 25%) voting
power of Venus Limited. As the decisions concerning relevant activities of Venus Limited
require a simple majority of votes. Solar Limited controls Venus Limited and should therefore
consolidate it in accordance with Ind AS 110.
Although, Solar Limited controls Venus Limited, its entitlement to the subsidiary’s economic
benefits is determined on the basis of its actual ownership interest. For the purposes of the
consolidated financial statements, Solar Limited's share in Venus Limited is determined as
49% [25% + (80% × 30%)]. As a result, 51% of profit or loss, other comprehensive income and
net assets of Venus Limited shall be attributed to the non-controlling interests in the
consolidated financial statements (this comprises 6% attributable to holders of non -controlling
interests in Mars Limited [reflecting 20% interest of non-controlling shareholders of Mars
Limited in 30% of Venus Limited] and 45% to holders of non-controlling interests in Venus
Limited).
OR
In assessing whether it has obtained control over Company X, Company P should consider not
only the 40,000 shares it owns but also its option to acquire another 25,000 shares (a so -called
potential voting right). In this assessment, the specific terms and conditions of the option
agreement and other factors are considered as follows:

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 • the options are currently exercisable and there are no other required conditions before such
options can be exercised
• if exercised, these options would increase Company P’s ownership to a controlling interest
of over 50% before considering other shareholders’ potential voting rights (65,000 shares
out of a total of 1,25,000 shares)
• although other shareholders also have potential voting rights, if all options are exercised
Company P will still own a majority (65,000 shares out of 1,29,000 shares)
• the premium included in the exercise price makes the options out-of-the-money. However,
the fact that the premium is small and the options could confer majority ownership indicates
that the potential voting rights have economic substance.
By considering all the above factors, Company P concludes that with the acquisition of the
40,000 shares together with the potential voting rights, it has obtained control of Company X.

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Test Series: September, 2023

MOCK TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (a) If Ind AS is applicable to any company, then Ind AS shall automatically be made applicable to all
the subsidiaries, holding companies, associated companies, and joint ventures of that company,
irrespective of individual qualification of set of standards on such companies.
In the given case it has been mentioned that the financials of Iktara Ltd. are prepared as per
Ind AS. Accordingly, the results of its subsidiary Softbharti Pvt. Ltd. should also have been
prepared as per Ind AS. However, the financials of Softbharti Pvt. Ltd. have been presented as
per accounting standards (AS).
Hence, it is necessary to revise the financial statements of Softbharti Pvt. Ltd. as per Ind AS after
the incorporation of necessary adjustments mentioned in the question.
The revised financial statements of Softbharti Pvt. Ltd. as per Ind AS and Division II to Schedule
III of the Companies Act, 2013 are as follows:
STATEMENT OF PROFIT AND LOSS
for the year ended 31 st March, 20X2
Particulars Amount (`)
Revenue from operations 10,00,000
Other Income (1,00,000 + 20,000) (refer note -1) 1,20,000
Total Revenue (A) 11,20,000
Expenses:
Purchase of stock in trade 5,00,000
(Increase) / Decrease in stock in trade (50,000)
Employee benefits expenses 1,75,000
Depreciation 30,000
Other expenses 90,000
Total Expenses (B) 7,45,000
Profit before tax (C = A - B) 3,75,000
Current tax 1,25,700
Deferred tax (W.N.1) 4,800
Total tax expense (D) 1,30,500
Profit for the year (E = C - D) 2,44,500
OTHER COMPREHENSIVE INCOME
Items that will not be reclassified to Profit or Loss:
Remeasurements of net defined benefit plans 1,000
Tax liabilities relating to items that will not be reclassified to Profit or
Loss
Remeasurements of net defined benefit plans (tax) [1000 x 30%] (300)
Other Comprehensive Income for the period (F) 700
Total Comprehensive Income for the period (E + F) 2,45,200
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BALANCE SHEET
as at 31 st March, 20X2
Particulars (`)
ASSETS
Non-current assets
Property, plant and equipment 1,00,000
Financial assets
Other financial assets (Long-term loans and advances) 40,000
Other non-current assets (capital advances) (refer note-2) 50,000

Current assets
Inventories 80,000
Financial assets
Investments (30,000 + 20,000) (refer note -1) 50,000
Trade receivables 55,000
Cash and cash equivalents/Bank 1,15,000
Other financial assets (Interest receivable from trade receivables) 51,000
TOTAL ASSETS 5,41,000
EQUITY AND LIABILITIES
Equity
Equity share capital 1,00,000
Other equity 2,45,200
Non-current liabilities
Provision (25,000 – 1,000) 24,000
Deferred tax liabilities (4,800 + 300) 5,100
Current liabilities
Financial liabilities
Trade payables 11,000
Other financial liabilities (Refer note 5) 15,000
Other current liabilities (Govt. statuary dues) (Refer note 3) 15,000
Current tax liabilities 1,25,700
TOTAL EQUITY AND LIABILITIES 5,41,000

STATEMENT OF CHANGES IN EQUITY

For the year ended 31 st March, 20X2
A. EQUITY SHARE CAPITAL
Balance (`)
As at 31 st March, 20X1 -
Changes in equity share capital during the year 1,00,000
As at 31 st March, 20X2 1,00,000

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B. OTHER EQUITY
Reserves & Surplus
Retained Earnings (`)
As at 31 st March, 20X1 -
Profit for the year 2,44,500
Other comprehensive income for the year 700
Total comprehensive income for the year 2,45,200
Less: Dividend on equity shares (refer note – 4) -
As at 31 st March, 20X2 2,45,200

DISCLOSURE FORMING PART OF FINANCIAL STATEMENTS:

Proposed dividend on equity shares is subject to the approval of the shareholders of the
company at the annual general meeting and not recognized as liability as at the Balance Sheet
date. (refer note 4)
Notes:
1. Current investment are held for the purpose of trading. Hence, it is a financial asset
classified as FVTPL. Any gain in its fair value will be recognised through profit or loss.
Hence, ` 20,000 (50,000 – 30,000) increase in fair value of financial asset will be
recognised in profit and loss. However, it will attract deferred tax liability on increased value
(Refer W.N).
2. Assets for which the future economic benefit is the receipt of goods or services, rather than
the right to receive cash or another financial asset, are not financial assets.
3. Liabilities for which there is no contractual obligation to deliver cash or other financial asset
to another entity, are not financial liabilities.
4. As per Ind AS 10, ‘Events after the Reporting Period’, If dividends are declared after the
reporting period but before the financial statements are approved for issue, the dividends
are not recognized as a liability at the end of the reporting period because no obligation
exists at that time. Such dividends are disclosed in the notes in accordance with Ind AS 1,
Presentation of Financial Statements.
5. Other current financial liabilities:
(`)
Balance of other current liabilities as per financial statements 45,000
Less: Dividend declared for Financial Year 20X1 – 20X2 (Note – 4) (15,000)
Reclassification of government statuary dues payable to ‘other
current liabilities’ (15,000)
Closing balance 15,000

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Working Note:
Calculation of deferred tax on temporary differences as per Ind AS 12 for financial year
20X1 – 20X2
Item Carrying Tax base Difference DTA / DTL
amount (`) (`) (`) @ 30% (`)
Property, Plant and Equipment 1,00,000 80,000 20,000 6,000-DTL
Pre-incorporation expenses Nil 24,000 24,000 7,200-DTA
Current Investment 50,000 30,000 20,000 6,000-DTL
Net DTL 4,800-DTL
(b) Paragraphs 37 and 38 of Ind AS 34, Interim Financial Reporting state that revenues that are
received seasonally, cyclically, or occasionally within a financial year shall not be anticipated or
deferred as of an interim date if anticipation or deferral would not be appropriate at the end of the
entity’s financial year. Examples include dividend revenue, royalties, and government grants.
Additionally, some entities consistently earn more revenues in certain interim periods of a
financial year than in other interim periods, for example, seasonal revenues of retailers. Such
revenues are recognised when they occur.
Further, for costs incurred unevenly during the financial year, para 39 of Ind AS 34 states that
costs that are incurred unevenly during an entity’s financial year shall be anticipated or deferred
for interim reporting purposes if, and only if, it is also appropriate to anticipate or defer that type
of cost at the end of the financial year.
In view of the above guidance, in the given case, dividend income received by ABC Limited
cannot be anticipated and recognised in financial statements as of 30th June, 20X1.
Further, considering that 60% of advertising cost for the whole year has been incurred by
ABC Ltd during the first quarter and 40% in the second quarter, it is a cost incurred unevenly.
Applying principles of paragraph 39, it is not appropriate to defer the charge of an incurred
advertising expense (60% of whole year cost) at the end of the quarter. Accordingly, all the
advertising costs incurred till 30 th June, 20X1 should be charged to P&L while preparing its
financial statements as of 30th June, 20X1.
2. (a) Calculation of purchase consideration:
Particulars ` in
million
Market value of shares issued (150 million x 4/3 x ` 10) 2,000
Initial estimate of market value of shares to be issued (150 million x 1/5 x ` 10) 300
Total consideration 2,300

Contingent consideration is recognized in full if payment is probable.

As per para 53 of Ind AS 103, acquisition‑related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder’s fees; advisory, legal, accountin g, valuation
and other professional or consulting fees; general administrative costs, including the costs of
maintaining an internal acquisitions department; and costs of registering and issuing debt and
equity securities. The acquirer shall account for acquisition-related costs as expenses in the
periods in which the costs are incurred and the services are received, with one exception. The
costs to issue debt or equity securities shall be recognised in accordance with I nd AS 32 and
Ind AS 109.

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Statement of fair value of identifiable net assets at the date of acquisition

Particulars ` in million
As per Bosman Ltd.’s Balance Sheet 1,200
Fair value of customer relationships 100
Fair value of research and development project 50
Total net assets acquired 1,350

As per Ind AS 38 ‘Intangible assets’, intangible assets can be recognized separately from
goodwill provided they are identifiable, are under the control of the acquiring entity, and their fair
value can be measured reliably.
Customer relationships that are similar in nature to those previously traded, pass these tests but
employee expertise fail the ‘control’ test. Both the research and development phases of in
process project can be capitalised provided their fair value can be measured reliably.
Statement of computation of goodwill
Particulars ` in million
Fair value of consideration given 2,300
Fair value of net assets acquired (1,350)
Goodwill on acquisition 950
Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for contingent
consideration. In general, an equity instrument is any contract that evidences a residual interest in
the assets of an entity after deducting all of its liabilities. Ind AS 32 describes an equity instrument
as one that meets both of the following conditions:
➢ There is no contractual obligation to deliver cash or another financial asset to another party, or
to exchange financial assets or financial liabilities with another party under potentially
unfavourable conditions (for the issuer of the instrument).
➢ If the instrument will or may be settled in the issuer's own equity instruments, then it is:
• a non-derivative that comprises an obligation for the issuer to deliver a fixed number of its
own equity instruments; or
• a derivative that will be settled only by the issuer exchanging a fixed amount of cash or
other financial assets for a fixed number of its own equity instruments.
In the given case, given that the acquirer has an obligation to issue fixed number of shares o n
fulfillment of the contingency, the contingent consideration will be classified as equity as per the
requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should not be
re-measured and its subsequent settlement should be accounted for within equity.
(b) Computation of balance total equity as on 1 st April, 20X1 after transition to Ind AS
` in crore
Share capital- Equity share Capital 80.00
Other Equity
General Reserve 40.00
Capital Reserve 5.00
Retained Earnings (95 – 5 - 40) 50.00

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Add: Increase in value of land (10 - 4.5) 5.50

Add: Derecognition of proposed dividend (0.6 + 0.18) 0.78
Add: Increase in value of Investment 0.75 57.03 102.03
Balance total equity as on 1 st April, 20X1 after transition
to Ind AS 182.03

Reconciliation between Total Equity as per AS and Ind AS

to be presented in the opening balance sheet as on 1 st April, 20X1
` in crore
Equity share capital 80.00
Redeemable Preference share capital 25.00
105.00
Reserves and Surplus 95.00
Total Equity as per AS 200.00
Adjustment due to reclassification
Preference share capital classified as financial liability (25.00)
Adjustment due to derecognition
Proposed Dividend not considered as liability as on 1 st April, 20X1 0.78
Adjustment due to remeasurement
Increase in the value of Land due to remeasurement at fair value 5.50
Increase in the value of investment due to remeasurement at fair value 0.75 6.25
Equity as on 1 April, 20X1 after transition to Ind AS
st 182.03

3. (a) When the exchange rate on 31 st March, 20X2, is $ 1 = ` 50.

The exchange loss in this case is ` 10,000 [$ 1,000 x (` 50 - ` 40)]. The borrowing cost is
` 2,000 ($ 1,000 x 4% x ` 50).
Had the entity borrowed funds in functional currency the borrowing cost would have been ` 4,800
(` 40,000 x 12%).
The entity will treat exchange difference upto ` 2,800 (` 4,800 – ` 2,000) as a borrowing cost
that may be eligible for capitalisation under this Standard.
Thus, the total eligible borrowing cost is ` 4,800 (` 2,000 + ` 2,800) equivalent to the cost of
borrowing cost in functional currency.
When the exchange rate on 31 st March, 20X2, is $ 1 = ` 41.
The exchange loss would be ` 1,000 [$ 1,000 – (` 41 – ` 40)]. The entity will treat the entire
exchange loss as an eligible borrowing cost as total borrowing cost i.e. ` 2,640 [(` 1,000 x 4% x
41) + ` 1,000] since exchange loss in foreign currency does not exceed the cost of borrowings in
functional currency, i.e., ` 4,800.
(b) A discontinued operation is one that is discontinued in the period or classified as held for sale at
the year end. The operations of G Ltd were discontinued on 30 th April, 20X2 and therefore,
would be treated as discontinued operation for the year ending 31 st March, 20X3. It does not
meet the criteria for held for sale since the company is terminating its business and does not hold
these for sale.

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As per para 72 of Ind AS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’,

restructuring includes sale or termination of a line of business. A constructive obligation to
restructure arises when an entity:
(a) has a detailed formal plan for the restructuring
(b) has raised a valid expectation in those affected that it will carry out the restructuring by
starting to implement that plan or announcing its main features to those affected by it.
The Board of directors of U Ltd have decided to terminate the operations of G Ltd. from
30th April, 20X2. They have made a formal announcement on 15 th February, 20X2, thus creating
a valid expectation that the termination will be implemented. This creates a constructive
obligation on the company and requires provisions for restructuring.
A restructuring provision includes only the direct expenditures arising from the restructuring that
are necessarily entailed by the restructuring and are not associated with the ongoing activities of
the entity.
The termination payments fulfil the above condition. As per Ind AS 10 ‘Events after Reporting
Date’, events that provide additional evidence of conditions existing at the reporting date should
be reflected in the financial statements. Therefore, the company should make a provision for
` 520 lakhs in this respect.
The relocation costs relate to the future conduct of the business and are not liabilities for
restructuring at the end of the reporting period. Hence, these would be recognised on the same
basis as if they arose independently of a restructuring.
The lease would be regarded as an onerous contract. A provision would be made at the lower of
the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it. Hence, a
provision shall be made for ` 410 lakhs.
Further operating losses relate to future events and do not form a part o f the closure provision.
Therefore, the total provision required = ` 520 lakhs + ` 410 lakhs = ` 930 lakhs.
(c) Either
Scenario A: At the lease commencement date, the lease term is six years (being the non -
cancellable period). The renewal period of two years is not taken into consideration since
Entity ABC is not reasonably certain to exercise the option because there are no penalties or
other factors which indicate that the entity will opt for renewal of lease.
Scenario B: At the lease commencement, Entity XYZ determines that it is reasonably certain
to exercise the renewal option because it would suffer a significant economic penalty if it
abandoned the leasehold improvements at the end of the initial non-cancellable period of eight
years. Thus, at the lease commencement, Entity XYZ concludes that the lease term is ten
years (being eight years of non-cancellable period plus the renewal period of two years where
the lessee is reasonably certain to exercise the option).
Scenario C: At the lease commencement date, the lease term is 21 months (three months per
year over the seven annual periods as specified in the contract), i.e., the period over which
Entity PQR controls the right to use the underlying asset.
(c) Or
As provided in Ind AS 111 ‘Joint Arrangements’, this is a joint arrangement because two or more
parties have joint control of the property under a contractual arrangement. The arrangement will
be regarded as a joint operation because Alpha Ltd. and Gama Ltd. have rights to the assets and
obligations for the liabilities of this joint arrangement. This means that the company and the

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other investor will each recognise 50% of the cost of constructing the asset in property, plant and
equipment.
The borrowing cost incurred on constructing the property should under the principles of
Ind AS 23 ‘Borrowing Costs’, be included as part of the cost of the asset for the period of
construction.
In this case, the relevant borrowing cost to be included is ` 50,00,000 (` 10,00,00,000 x 10% x
6/12).
The total cost of the asset is ` 40,50,00,000 (` 40,00,00,000 + ` 50,00,000)
` 20,25,00,000 crores is included in the property, plant and equipment of Alpha Ltd. and the
same amount in the property, plant and equipment of Gama Ltd.
The depreciation charge for the year ended 31 st March, 20X2 will therefore be ` 1,01,25,000
(` 40,50,00,000 x 1/20 x 6/12) ` 50,62,500 will be charged in the statement of profit and loss
of the company and the same amount in the statement of profit and loss of Gama Ltd.
The other costs relating to the arrangement in the current year totalling ` 54,00,000 (finance cost
for the second half year of ` 50,00,000 plus maintenance costs of ` 4,00,000) will be charged to
the statement of profit and loss of Alpha Ltd. and Gama Ltd. in equal proportions - ` 27,00,000
each.
4. (a) Contract 1: The following factors indicate that this contract does not meet the 'own use’
exemption:
• The contract permits net settlement, and
• There is a past practice of a significant proportion (i.e. 30%) of similar contracts being settled
on a net basis either in cash or by sale of the oil seeds prior to delivery / shortly after taking
delivery.
Therefore, this contract would fall within the scope of lnd AS 109 and should be recognised as a
derivative instrument as on 1 st October, 20X1. The contract would be in the nature of a forward
contract to buy 100 MT of oil seeds as on 31 st March, 20X2 at USD 400 per MT. Company Z would
have to recognise the fair value changes (based on change in forward purchase rate) on this
contract in the statement of profit and loss at each reporting date.
Contract 2: Contract 2 also permits net settlement in cash. Further, there have been some
instances of similar domestic purchase contracts being settled net in cash in the past. However,
these have been infrequent in nature and insignificant in proportion to the total value of similar
contracts (i.e.1%).
Company Z is in the practice of taking delivery of the oil seeds purchased under similar contracts
and using them for further processing in its plants.
This indicates that the domestic purchase contract meets the criteria for the 'own -use’ exemption
and should be considered as an executory contract.
Therefore, this contract would not fall within the scope of Ind AS 109.
Contract 3: This contract is in the nature of a derivative contract transacted on a commodity
exchange and is required to be net settled in cash on maturity. Therefore, this derivative contract
would be covered by lnd AS 109 and required to be classified and measured at FVTPL.
(b) Paragraph 5(d) of Ind AS 115 excludes non-monetary exchanges between entities in the same
line of business to facilitate sales to customers or potential customers. For example, this
Standard would not apply to a contract between two oil companies that agree to an exchange of
oil to fulfil demand from their customers in different specified locations on a timely basis.

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However, the current scenario will be covered under Ind AS 115 since the same is exchange of
dissimilar goods or services.
As per paragraph 47 of Ind AS 115, an entity shall consider the terms of the contract and its
customary business practices to determine the transaction price. The transaction price is the
amount of consideration to which an entity expects to be entitled in exchange fo r transferring
promised goods or services to a customer, excluding amounts collected on behalf of third parties
(for example, some sales taxes). The consideration promised in a contract with a customer may
include fixed amounts, variable amounts, or both.
Paragraph 66 of Ind AS 115 provides that to determine the transaction price for contracts in
which a customer promises consideration in a form other than cash, an entity shall measure the
non-cash consideration (or promise of non-cash consideration) at fair value.
On the basis of the above, revenue recognised by A Ltd. will be the consideration in the form of
power units that it expects to be entitled for talk time sold, i.e. ` 50,000 (20,000 units x ` 2.5). The
revenue recognised by B Ltd. will be the consideration in the form of talk time that it expects to be
entitled for the power units sold, i.e., ` 50,000 (1,00,000 minutes x ` 0.50).
(c) Number of shares Profit `
Profit 2,00,000
Outstanding shares 10,00,000
New shares on conversion (weighted average)
[(9/12) × (` 25,000 / 100) × 120] 22,500 -
Figures for basic EPS 10,22,500 2,00,000
Basic EPS is (` 2,00,000 / 10,22,500)
= 0.196 per share
Dilution adjustments
Unconverted shares [(` 75,000 / 100) × 120] 90,000
Interest: ` 75,000 × 5% × 0.7 2,625
Converted shares pre-conversion adjustment
[(3/12) × (` 25,000 / 100) × 120] 7,500
Interest: [(3/12) × ` 25,000 × 5% × 0.7] 219
11,20,000 2,02,844
Diluted EPS is (` 2,02,844 / 11,20,000) = 0.181.
5. (a) The entity has made sale of two goods – machine and space parts, whose control is transferred
at a point in time. Additionally, company agrees to hold the spare parts for the customer for a
period of 2 - 4 years, which is a separate performance obligation. Therefore, total transaction
price shall be divided amongst 3 performance obligations:
(i) Sale of machinery
(ii) Sale of spare parts
(iii) Custodial services for storing spare parts.

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Recognition of revenue for each of the three performance obligations shall occur as follows:
- Sale of machinery: Machine has been sold to the customer and physical possession as
well as legal title passed to the customer on 31 st March, 20X3. Accordingly, revenue for
sale of machinery shall be recognised on 31 st March, 20X3.
- Sale of spare parts: The customer has made payment for the spare parts and legal title
has been passed to specifically identified goods, but such spares continue to be physically
held by the entity. In this regard, the company shall evaluate if revenue can be recognized
on bill-and-hold basis if all below criteria are met:
(a) the reason for the bill-and-hold The customer has specifically requested
arrangement must be substantive (for for entity to store goods in their
example, the customer has requested warehouse, owing to close proximity to
the arrangement) customer’s factory
(b) the product must be identified The spare parts have been specifically
separately as belonging to the identified and inspected by the customer
customer
(c) the product currently must be ready The spares are identified and
for physical transfer to the customer segregated, therefore, ready for delivery
(d) the entity cannot have the ability to Spares have been segregated and
use the product or to direct it to cannot be redirected to any other
another customer customer
Therefore, all conditions of bill-and-hold are met and hence, company can recognize
revenue for sale of spare parts on 31st March, 20X3.
- Custodial services: Such services shall be given for a period of 2 to 4 years from
31st March, 20X3. Where services are given uniformly and customer receives and
consumes benefits simultaneously, revenue for such service shall be recognized on a
straight-line basis over a period of time.
(b) The USD contract for purchase of machinery entered into by company A includes an
embedded foreign currency derivative due to the following reasons:
▪ The host contract is a purchase contract (non-financial in nature) that is not classified as,
or measured at FVTPL.
▪ The embedded foreign currency feature (requirement to settle the contract by payment of
USD at a future date) meets the definition of a stand-alone derivative – it is akin to a USD
- ` forward contract maturing on 31 st December, 20X1.
▪ USD is not the functional currency of either of the substantial parties to the contract (i.e.,
neither company A nor company B).
▪ Machinery is not routinely denominated in USD in commercial transactions around the
world. In this context, an item or a commodity may be considered ‘routinely denominated’
in a particular currency only if such currency was used in a large majority of similar
commercial transactions around the world. For example, transactions in crude oil are
generally considered routinely denominated in USD. A transaction for acquiring
machinery would not qualify for this exemption.
▪ USD is not a commonly used currency for domestic commercial transactions in the
economic environment in which either company A or B operate. This exemption generally
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applies when the business practice in a particular economic environment is to use a more
stable or liquid foreign currency (such as the USD), rather than the local currency, for a
majority of internal or cross-border transactions, or both. Here, companies A and B are
companies operating in India and the purchase contract is an internal/domestic
transaction. USD is not a commonly used currency for internal trade within this economic
environment and therefore the contract would not qualify for this exemption.
Accordingly, company A is required to separate the embedded foreign currency derivative from
the host purchase contract and recognise it separately as a derivative.
The separated embedded derivative is a forward contract entered into on 9 th September, 20X1,
to exchange USD 10,00,000 for ` at the USD / ` forward rate of ` 67.8 on
31st December, 20X1. Since the forward exchange rate has been deemed to be the market
rate on the date of the contract, the embedded forward contract has a fair value of zero on
initial recognition.
Subsequently, company A is required to measure this forward contract at its fair value, with
changes in fair value recognised in the statement of profit and loss. The following is the
accounting treatment at quarter-end and on settlement:
Accounting treatment:
Date Particulars Amount (`) Amount (`)
09-Sep-X1 On initial recognition of the forward contract
(No accounting entry recognised since initial
fair value of the forward contract is considered Nil Nil
to be nil)
30-Sep-X1 Fair value change in forward contract
Derivative asset (company B) Dr.
3,00,000
[(67.8-67.5) x10,00,000]
To Profit or loss 3,00,000
31-Dec-X1 Fair value change in forward contract
Forward contract asset (company B) Dr.
5,00,000
[{(67.8-67) x 10,00,000} - 3,00,000]
To Profit or loss 5,00,000
Recognition of machinery acquired and on
31-Dec-X1
settlement
Property, plant and equipment Dr. 6,78,00,000
(at forward rate)
To Forward contract asset (company B) 8,00,000
To Creditor (company B) / Bank 6,70,00,000

(c) As per Ind AS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’.
Further, as per Ind AS 10: ‘Events after Balance Sheet Date’, decline in net realisable value
below cost provides additional evidence of events occurring at the balance sheet date and hence
shall be considered as ‘adjusting events’.
(a) In the given case, for valuation of inventory as on 31 st March, 20X1, cost of inventory would
be ` 10 million and net realisable value would be ` 7.5 million (i.e. Expected selling price
` 8 million – estimated selling expenses ` 0.5 million). Accordingly, inventory shall be

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measured at ` 7.5 million i.e. lower of cost and net realisable value. Therefore, inventory
write down of ` 2.5 million would be recorded in the income statement of that year.
(b) As per para 33 of Ind AS 2, a new assessment is made of net realizable value in each
subsequent period. It inter alia states that if there is increase in net realizable value
because of changed economic circumstances, the amount of write down is reversed so
that new carrying amount is the lower of the cost and the revised net realizable value.
Accordingly, as at 31 st March, 20X2, again inventory would be valued at cost or net
realisable value whichever is lower. In the present case, cost is ` 10 million and net
realisable value would be ` 10.5 million (i.e. expected selling price ` 11 million –
estimated selling expense ` 0.5 million). Hence, inventory would be recorded at
` 10 million and inventory write down carried out in previous year for ` 2.5 million shall be
reversed.
6. (a) (A) Deferred Tax Liability as at 31 st March, 20X2
Investment in L Ltd.:
Carrying Amount = ` 75 Cr
Tax base = ` 45 Cr (Purchase cost)
Temporary Difference = ` 30 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized
as a taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of
` 6 Cr is recognized:
Head office building
Carrying Amount = ` 45 Cr (Revalued amount on 31 st March, 20X2)
Tax base = ` 20.75 Cr (22 Cr – 1.25 Cr)
Temporary Difference = ` 24.25 Cr
Since carrying amount is higher than the tax base, the temporary difference is recognized
as a taxable temporary difference. Using the tax rate of 20%, a deferred tax liability of
` 4.85 Cr is created.
Total Deferred Tax Liability ` 6 Cr + ` 4.85 Cr = ` 10.85 Cr
(B) Charge to Statement of Profit and Loss for the year ended 31 st March 20X2:
Investment in L Ltd.
Particulars Carrying amount Tax Base Temporary Difference
Opening Balance (1 st April, 20X1) ` 70 Cr ` 45 Cr ` 25 Cr
Closing Balance (31 st March, 20X2) ` 75 Cr ` 45 Cr ` 30 Cr
Net Change ` 5 Cr
Increase in Deferred Tax Liability (20% tax rate) ` 1 Cr
Considering the increase in the value of investment arising through Statement of Profit
and Loss, the accounting for the increase in deferred tax liability is made as under:
Tax expense (Profit or Loss Statement) Dr. ` 1 Cr
To Deferred Tax Liability ` 1 Cr
(Being increase in deferred tax liability recognized)

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Head Office Building:

The deferred tax liability at 31 st March, 20X1 is ` 3.6 Cr (20% x {` 40 Cr – ` 22 Cr}).
At 31 st March, 20X2, prior to revaluation, the carrying amount of the property is ` 38 Cr
and its tax base is ` 20.75 Cr (` 22 Cr – ` 1.25 Cr). The deferred tax liability at this point
is ` 3.45 Cr (20% x {` 38 Cr – ` 20.75 Cr}).
The reduction in this liability is ` 0.15 Cr (` 3.6 Cr – ` 3.45 Cr). This would be credited to
income tax expense in arriving at profit or loss.
Post revaluation, the carrying value of the building becomes ` 45 Cr and the tax base
stays the same. Therefore, the new deferred tax liability is ` 4.85 Cr (20% x (` 45 Cr –
` 20.75 Cr)). The increase in the deferred tax liability of ` 1.4 Cr (` 4.85 Cr – ` 3.45 Cr)
is charged to other comprehensive income.
(b) The amount recognized as an expense in each year and as a liability at each year-end) is as
follows:
Year Expense (`) Liability (`) Calculation of Liability
31st December, 20X5 2,16,000 2,16,000 = 36 x 1,000 x 12 x ½
31st December, 20X6 72,000 2,88,000 = 36 x 1,000 x 8
31st December, 20X7 1,62,000* 3,90,000 = 30 x 1,000 x 13
31st December, 20X8 (30,000)** 0 Liability extinguished
* Expense comprises an increase in the liability of ` 1,02,000 and cash paid to those exercising
their SARs of ` 60,000 (6 x 1,000 x 10).
** Difference of opening liability (` 3,90,000) and actual liability paid [` 3,60,000 (30 x 1,000 x
12)] is recognised to Profit and loss ie ` 30,000.
Journal Entries

31st December, 20X5

Employee benefits expenses Dr. 2,16,000
To Share-based payment liability 2,16,000
(Fair value of the SAR recognized)
31st December, 20X6
Employee benefits expenses Dr. 72,000
To Share-based payment liability 72,000
(Fair value of the SAR re-measured)
31st December, 20X7
Employee benefits expenses Dr. 1,62,000
To Share-based payment liability 1,62,000
(Fair value of the SAR recognized)
Share-based payment liability Dr. 60,000
To Cash 60,000
(Settlement of SAR)

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31st December, 20X8

Share-based payment liability Dr. 30,000
To Employee benefits expenses 30,000
(Fair value of the SAR recognized)
Share-based payment liability Dr. 3,60,000
To Cash 3,60,000
(Settlement of SAR)

Note: Last two entries can be combined.

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Test Series: October, 2023

MOCK TEST PAPER 2
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWERS
1. (a) Consolidated Balance Sheet of A Ltd. and its subsidiary, S Ltd.
as at 31 st March, 20X3
Particulars ` in 000s
I. Assets
(1) Non-current assets
(i) Property Plant & Equipment (W.N.4) 7,120.00
(ii) Intangible asset – Goodwill (W.N.3) 1,032.00
(2) Current Assets
(i) Inventories (550 + 100) 650.00
(ii) Financial Assets
(a) Trade Receivables (400 + 200) 600.00
(b) Cash & Cash equivalents (200 + 50) 250.00
Total Assets 9,652.00
II. Equity and Liabilities
(1) Equity
(i) Equity Share Capital (2,000 + 200) 2,200.00
(ii) Other Equity
(a) Retained Earnings (W.N.6) 1190.85
(b) Securities Premium 160.00
(2) Non-Controlling Interest (W.N.5) 347.40
(3) Non-Current Liabilities (3,000 + 400) 3,400.00
(4) Current Liabilities (W.N.8) 2,353.75
Total Equity & Liabilities 9,652.00
Notes:
1. Since the question required not to prepare Notes to Account, the column of Note to
Accounts had not been drawn.
2. It is assumed that shares were issued during the year 20X2-20X3 and entries are yet to be
made.
Working Notes:
1. Calculation of purchase consideration at the acquisition date i.e. 1 st April, 20X1
` in 000s
Payment made by A Ltd. to S Ltd.
Cash 1,000.00

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Equity shares (2,00,000 shares x ` 1.80) 360.00

Present value of deferred consideration (` 5,00,000 x 0.75) 375.00
Total consideration 1,735.00
2. Calculation of net assets i.e. net worth at the acquisition date i.e. 1 st April, 20X1
` in 000s
Share capital of S Ltd. 500.00
Reserves of S Ltd. 125.00
Fair value increase on Property, Plant and Equipment 200.00
Net worth on acquisition date 825.00
3. Calculation of Goodwill at the acquisition date i.e. 1 st April, 20X1 and 31st March, 20X3
` in 000s
Purchase consideration (W.N.1) 1,735.00
Non-controlling interest at fair value (as given in the question) 380.00
2,115.00
Less: Net worth (W.N.2) (825.00)
Goodwill as on 1 st April, 20X1 1,290.00
Less: Impairment (as given in the question) 258.00
Goodwill as on 31 st March, 20X3 1,032.00
4. Calculation of Property, Plant and Equipment as on 31 st March, 20X3
` in 000s
A Ltd. 5,500.00
S Ltd. 1,500.00
Add: Net fair value gain not recorded yet 200.00
Less: Depreciation [(200/5) x 2] (80.00) 120.00 1,620.00
7,120.00
5. Calculation of Post-acquisition gain (after adjustment of impairment on goodwill) and
value of NCI as on 31 st March, 20X3
` in 000s ` in 000s
NCI A Ltd.
(20%) (80%)
Acquisition date balance 380.00 Nil
Closing balance of Retained Earnings 300.00
Less: Pre-acquisition balance (125.00)
Post-acquisition gain 175.00
Less: Additional Depreciation on PPE [(200/5) x 2] (80.00)
Share in post-acquisition gain 95.00 19.00 76.00
Less: Impairment on goodwill 258.00 (51.60) (206.40)
347.40 (130.40)

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6. Consolidated Retained Earnings as on 31 st March, 20X3

` in 000s
A Ltd. 1,400.00
Add: Share of post-acquisition loss of S Ltd. (W.N.5) (130.40)
Less: Finance cost on deferred consideration (37.5 + 41.25) (W.N.7) (78.75)
Retained Earnings as on 31 st March, 20X3 1,190.85
7. Calculation of value of deferred consideration as on 31 st March, 20X3
` in 000s
Value of deferred consideration as on 1 st April, 20X1 (W.N.1) 375.00
Add: Finance cost for the year 20X1-20X2 (375 x 10%) 37.50
412.50
Add: Finance cost for the year 20X2-20X3 (412.50 x 10%) 41.25
Deferred consideration as on 31 st March, 20X3 453.75
8. Calculation of current Liability as on 31 st March, 20X3
` in 000s
A Ltd. 1,250.00
S Ltd. 650.00
Deferred consideration as on 31 st March, 20X3 (W.N.7) 453.75
Current Liability as on 31 st March, 20X3 2,353.75
(b) (i) An earnings-based valuation of A Ltd.’s holding of shares in XYZ Ltd.could be calculated
as follows:
Particulars
XYZ Ltd.’s after-tax maintainable profits (A) ` 70,000
Price/Earnings ratio (B) 15
Adjusted discount factor (C) (1- 0.20) 0.80
Value of XYZ Ltd. (A) x (B) x (C) ` 8,40,000
Value of a share of XYZ Ltd.= ` 8,40,000 ÷ 5,000 shares = ` 168
The fair value of A Ltd.’s investment in XYZ Ltd.’s shares is estimated at ` 42,000 (that is,
250 shares × ` 168 per share).
(ii) Share price = ` 8,50,000 ÷ 5,000 shares = ` 170 per share.
The fair value of A Ltd.’s investment in XYZ Ltd.’s shares is estimated to be ` 42,500
(250 shares × ` 170 per share).
2. (a) (i) Determination of how revenue is to be recognised in the books of ABC Ltd. as per
expected value method
Calculation of probability weighted sales volume
Sales volume (units) Probability Probability-weighted sales volume (units)
9,000 15% 1,350
28,000 75% 21,000
36,000 10% 3,600
25,950

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Calculation of probability weighted sales value

Sales volume (units) Sales price per unit Probability Probability-weighted
(`) sales value (`)
9,000 90 15% 1,21,500
28,000 80 75% 16,80,000
36,000 70 10% 2,52,000
20,53,500

Average unit price = Probability weighted sales value/ Probability weighted sales volume
= 20,53,500 / 25,950 = ` 79.13 per unit
Revenue is recognised at ` 79.13 for each unit sold. First 10,000 units sold will be booked
at ` 90 per unit and liability is accrued for the difference price of ` 10.87 per unit (` 90 –
` 79.13), which will be reversed upon subsequent sales of 15,950 units (as the question
states that ABC Ltd. achieved the same number of units of sales to the customer during the
year as initially estimated under the expected value method for the financial year
20X1-20X2). For, subsequent sale of 15,950 units, contract liability is accrued at ` 0.87
(80 – 79.13) per unit and revenue will be deferred.
(ii) Determination of how revenue is to be recognised in the books of ABC Ltd. as per
most likely method
Transaction price will be:
28,000 units x ` 80 per unit = ` 22,40,000
Average unit price applicable = ` 80
First 10,000 units sold will be booked at ` 90 per unit and liability of ` 1,00,000 is accrued
for the difference price of ` 10 per unit (` 90 – ` 80), which will be reversed upon
subsequent sales of 18,000 units (as question states that ABC Ltd. achieved the same
number of units of sales to the customer during the year as initially estimated under the
most likely method for the financial year 20X1-20X2).
(iii) Journal Entries in the books of ABC Ltd.
(when revenue is accounted for as per expected value method
for financial year 20X1-20X2)

` `
1. Bank A/c (10,000 x ` 90) Dr. 9,00,000
To Revenue A/c (10,000 x ` 79.13) 7,91,300
To Liability (10,000 x ` 10.87) 1,08,700
(Revenue recognized on sale of first 10,000 units)
2. Bank A/c [(25,950 x ` 80)- 9,00,000] Dr. 11,76,000
Liability Dr. 86,124
To Revenue A/c (15,950 x ` 79.13) 12,62,124
(Revenue recognized on sale of remaining 15,950
units (25,950 – 10,000). Amount paid by the

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customer will be the balance amount after adjusting

the excess paid earlier since, the customer falls
now in second slab)
3. Liability (1,08,700 – 86,124) Dr. 22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
(On reversal of liability at the end of the financial
year 20X1-20X2 i.e. after completion of stipulated
time)
Alternatively, in place of first two entries, one consolidated entry may be passed as
follows:
Bank A/c (25,950 x ` 80) Dr. 20,76,000
To Revenue A/c (25,950 x ` 79.13) 20,53,424
To Liability (25,950 x ` 0.87) 22,576
(Revenue recognised on sale of 25,950 units)
Note: In 2nd journal entry, it is assumed that the customer had paid balance amount of
` 11,76,000 after adjusting excess ` 1,00,000 paid with first lot of sale of 10,000 unit.
However, one can pass journal entry with total sales value of ` 12,76,000 (15,950 units x
` 80 per unit) and later on pass third entry for refund. In such a situation, alternatively,
2nd and 3 rd entries would be as follows:
Bank A/c (15,950 x ` 80) Dr. 12,76,000
To Revenue A/c (15,950 x ` 79.13) 12,62,124
To Liability 13,876
(Revenue recognised on sale of remaining 15,950
units (25,950 - 10,000))
Liability (1,08,700 + 13,876) Dr. 1,22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
To Bank 1,00,000
(On reversal of liability at the end of the financial year
20X1-20X2 i.e. after completion of stipulated time and
excess amount refunded)
(b)
Sr. Nature of transaction Operating/Investing/
No. Financing/Not to be
considered
1 Issued preference shares Financing
2 Purchased the shares of 100% subsidiary company Investing
3 Dividend received from shares of subsidiaries Investing
4 Dividend received from other companies Investing
5 Bonus shares issued No cash flow
6 Purchased license for manufacturing of special drugs Investing
7 Royalty received from the goods patented by the company Operating

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8 Rent received from the let-out building (letting out is not main Investing
business)
9 Interest received from loans and advances given Investing
10 Dividend paid Financing
11 Interest paid on security deposits Financing
12 Purchased goodwill Investing
13 Acquired the assets of a company by issue of equity shares Not to be considered
(not parting any cash)
14 Interim dividends paid Financing
15 Dissolved the 100% subsidiary and received the amount in Investing
final settlement

3. (a) (i) Value of property immediately before the classification as held for sale as per Ind AS
16 as on 31 st March, 20X3 `
Purchase price 6,00,000
Less: Accumulated depreciation (80,000) (for two years)
Less: Impairment loss (50,000) (5,20,000-4,70,000)
Carrying Amount 4,70,000
On initial classification as held for sale on 31 st March, 20X3, the value will be lower of:
Carrying amount after impairment ` 4,70,000
Fair value less cost to sell ` 4,60,000
On 31st March, 20X3, Non-current asset classified as held for sale
will be recorded at ` 4,60,000.
Depreciation of ` 40,000 and Impairment Loss of ` 60,000 (50,000 +10,000) is charged in
profit or loss for the year ended 31 st March, 20X3.
(ii) On 31st March, 20X4, held for sale property is reclassified as criteria doesn’t met. The
value will be lower of:
Carrying amount immediately before classification on 31 st March, 20X3 ` 4,70,000
Less: Depreciation based on 13 years balance life (` 36,154)
Carrying amount had the asset not classified as held for sale ` 4,33,846
Recoverable Amount ` 5,00,000
Property will be valued at ` 4,33,846 on 31st March, 20X4
Adjustment to the carrying amount of ` 26,154 (` 4,60,000 - 4,33,846) is charged to the
profit or loss.
(b)
Activity Whether in Remarks
the scope of
Ind AS 41?
Managing animal-related No Since the primary purpose is to show

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recreational activities the animals to public for recreational

like Zoo purposes, there is no management of
biological transformation but simply
control of the number of animals. Hence
it will not be considered in the definition
of agricultural activity.
Fishing in the ocean No Fishing in ocean is harvesting biological
assets from unmanaged sources. There
is no management of biological
transformation since fish grow naturally
in the ocean. Hence, it will not fall in the
scope of the definition of agricultural
activity.
Fish farming Yes Managing the growth of fish and then
harvest for sale is agricultural activity
within the scope of Ind AS 41 since
there is management of biological
transformation of biological assets for
sale or additional biological assets.
Development of living No The development of living organisms for
organisms such as cells, research purposes does not qualify as
bacteria viruses for agricultural activity, as those organisms
research purposes are not being developed for sale, or for
conversion into agricultural produce or
into additional biological assets. Hence,
development of such organisms for the
said purposes does not fall under the
scope of Ind AS 41.
Growing of plants to be Yes If an entity grows plants for using it in
used in the production of production of drugs, the activity will be
drugs agricultural activity. Hence it will come
under the scope of Ind AS 41.
Purchase of 25 dogs for No Ind AS 41 is applied to account for the
security purposes of the biological assets when they relate to
company’s premises agricultural activity.
Guard dogs for security purposes do not
qualify as agricultural activity, since they
are not being kept for sale, or for
conversion into agricultural produce or
into additional biological assets. Hence,
they are outside the scope of Ind AS 41.
(c) (i) False. An integrated report may be prepared in response to existing compliance
requirements and may be either a standalone report or be included as a distinguishable,
prominent and accessible part of another report or communication.
(ii) True. The Framework is written primarily in the context of private sector, for-profit
companies of any size but it can also be applied, adapted as necessary, by public sector
and not-for-profit organizations.
(iii) True. If the report is required to include specified information beyond that required by this
Framework, the report can still be considered an integrated report if that other information
does not obscure the concise information required by this Framework.
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(iv) False. An integrated report should include all material matters, both positive and
negative, in a balanced way and without material error. Both the increases and
reductions in the value of the important capital should be reflected. Where the
information is not perfectly accurate, estimates should be used and appropriate processes
should be in place to insure that the risk of material misstatement is reduced.
4. (a) 1 st April, 20X1
A financial guarantee contract is initially recognised at fair value. The fair value of the
guarantee will be the present value of the difference between the net contractual cash flows
required under the loan, and the net contractual cash flows that would have been required
without the guarantee.
Particulars Year 1 Year 2 Year 3 Total
(`) (`) (`) (`)
Cash flows based on interest rate of 11% (A) 1,10,000 1,10,000 1,10,00 3,30,000
0
Cash flows based on interest rate of 8% (B) 80,000 80,000 80,000 2,40,000
Interest rate differential (A-B) 30,000 30,000 30,000 90,000
Discount factor @ 11% 0.901 0.812 0.731
Interest rate differential discounted at 11% 27,030 24,360 21,930 73,320
Fair value of financial guarantee contract
(at inception) 73,320
Journal Entry
Particulars Debit (`) Credit (`)
Investment in subsidiary Dr. 73,320
To Financial guarantee (liability) 73,320
(Being financial guarantee initially recorded)

31 st March, 20X2
Subsequently at the end of the reporting period, financial guarantee is measured at the higher
of:
- the amount of loss allowance; and
- the amount initially recognised less cumulative amortization, where appropriate.
At 31st March, 20X2, there is 1% probability that Moon Limited may default on the loan in the
next 12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover
any amount from Moon Limited. The 12-month expected credit losses are therefore ` 10,000
(` 10,00,000 x 1%).
The initial amount recognised less amortisation is ` 51,385 (` 73,320 + ` 8,065 (interest
accrued based on EIR)) – ` 30,000 (benefit of the guarantee in year 1) (Refer table below).
The unwound amount is recognised as income in the books of Sun Limited, being the benefit
derived by Moon Limited not defaulting on the loan during the period.

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Year Opening balance EIR @ 11% Benefits provided Closing balance

` ` `
1 73,320 8,065 (30,000) 51,385
2 51,385 5,652 (30,000) 27,037
3 27,037 2,963* (30,000) -
* Difference is due to approximation
The carrying amount of the financial guarantee liability after amortisation is therefore
` 51,385, which is higher than the 12-month expected credit losses of ` 10,000. The liability is
therefore adjusted to ` 51,385 (the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 21,935
To Profit or loss 21,935
(Being financial guarantee subsequently adjusted)

31 March 20X3
At 31 March 20X3, there is 3% probability that Moon Limited will default on the loan in the next
12 months. If Moon Limited defaults on the loan, Sun Limited does not expect to recover any
amount from Moon Limited. The 12-month expected credit losses are therefore ` 30.000
(` 10,00,000 x 3%).
The initial amount recognised less accumulated amortisation is ` 27,037, which is lower than
the 12-month expected credit losses (` 30,000). The liability is therefore adjusted to ` 30,000
(the higher of the two amounts) as follows:
Particulars Debit (`) Credit (`)
Financial guarantee (liability) Dr. 21,385*
To Profit or loss (Note) 21,385
(Being financial guarantee subsequently adjusted)
* The carrying amount at the end of 31 March 20X2 = ` 51,385 less 12-month expected credit
losses of ` 30,000.
(b) The new turbine will produce economic benefits to MS Ltd., and the cost is measurable. Hence,
the item should be recognised as an asset. The original invoice for the machine did not specify
the cost of the turbine; however, the cost of the replacement ` 45,00,000 can be used as an
indication (usually by discounting) of the likely cost, six years previously.
If an appropriate discount rate is 5% per annum, ` 45,00,000 discounted back six years amounts
to ` 33,57,900 [` 45,00,000/(1.05) 6], i.e., the approximate cost of turbine before 6 years.
The current carrying amount of the turbine which is required to be replaced of ` 13,43,160
would be derecognised from the books of account (i.e., Original Cost ` 33,57,900 as reduced by
accumulated depreciation for past 6 years ` 20,14,740, assuming depreciation is charged on
straight-line basis).
The cost of the new turbine ` 45,00,000 would be added to the cost of machine, resulting in a
revision of carrying amount of machine to ` 71,56,840. (i.e., ` 40,00,000* – ` 13,43,160 +
` 45,00,000).
*Original cost of machine ` 1,00,00,000 reduced by accumulated depreciation (till the end of 6
years) ` 60,00,000.
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(c) The above security deposit is an interest free deposit redeemable at the end of lease term for
` 10,00,000. Hence, this involves collection of contractual cash flows and shall be accounted
at amortised cost.
Upon initial measurement
Particulars Details
Security deposit (A) 10,00,000
Total Lease Period (Years) 5
Discount rate 12%
Present value factor of 5 th year end 0.56743
Present value of deposit at beginning (B) 5,67,427
Prepaid lease payment at beginning (A-B) 4,32,573

Journal Entries
Year – 1 beginning
Particulars Amount Amount
Security deposit A/c Dr. 5,67,427
ROU Asset Dr. 4,32,573
To Bank A/c 10,00,000
Subsequently, every annual reporting year, interest income shall be accrued @ 12% per annum
and prepaid expenses shall be amortised on straight line basis over the lease term.
Year 1 end
Particulars Amount Amount
Security deposit A/c (5,67,427 x 12%) Dr. 68,091
To Interest income A/c 68,091

At the end of 5 th year, the security deposit shall accrue ` 10,00,000 and prepaid lease expenses
shall be fully amortised (i.e. depreciated as per Ind AS 116, this prepaid lease rent would be
shown as ROU asset).
Journal entry for realisation of security deposit
Particulars Amount Amount
Security deposit A/c Dr. 1,07,143
To Interest income A/c 1,07,143
Bank A/c Dr. 10,00,000
To Security deposit A/c 10,00,000

5. (a) Extract of the Balance Sheet of RKA Private Ltd as at 31 st March, 20X2 ` in lacs
Closing net defined liability (1,580 – 1,275) lacs 305
Extract of the Statement of Profit or Loss of RKA Private Ltd for the year ended
31st March, 20X2
Particulars ` in lacs
Service cost 55
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Net interest (W.N.1) 21

Profit or loss 76
Other comprehensive income:
Remeasurements (W.N.2) 80
Total 156

Journal entries in the books of RKA Private Ltd.

Particulars ` in lacs ` in lacs
Profit & Loss Dr. 76
Other comprehensive income Dr. 80
To Cash (Contribution) 111
To Net defined benefit liability (W.N.3) 45
Working Notes:
1. Computation of Net interest taken to the Statement of Profit and Loss
= Discount rate x Opening net defined benefit liability
= 8% x (1,400 – 1,140) lacs
= 8% x 260 lacs = 21 lacs (Rounded off to nearest lacs)
2. Computation of Remeasurements
Defined Benefit Obligation Account

Particulars ` in lacs Particulars ` in lacs

To balance c/d (given) 1,580 By balance b/d (given) 1,400
(closing balance) (opening balance)
By Current Service Cost (given) 55
By Interest on Opening Liability 112
(1,400 x 8%)
By Actuarial loss (bal. figure) 13
1,580 1,580

Note: The above computation can also be shown by preparing a Statement instead of
ledger account.
Plan Assets Account
Particulars ` in lacs Particulars ` in lacs
To balance b/d (given) 1,140 By balance c/d (given) 1,275
(opening balance) (closing balance)
To Bank Account 111
(contribution for the year)
To Surplus / Actual Return
(bal. figure) 24
1,275 1,275

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Note: The above computation can also be shown by preparing a Statement instead of
ledger account.
Net interest on opening balance of plan asset = ` 91 lacs (i.e. ` 1,140 lacs x 8%) (Rounded
off to nearest lacs)
Hence, there is a decrease in plan assets due to remeasurement for which computation is
as follows:
Actual Return – Net interest on opening plan asset
= ₹ 24 lacs – ₹ 91 lacs = ₹ 67 lacs.
Net remeasurement would be computed as follows:
Actuarial loss on liability + Loss on return
= ` 13 lacs + ` 67 lacs = ` 80 lacs.
3. Computation of increase/ decrease in net defined benefit liability:
Particulars ` in lacs
Opening net liability (` 1,400 lacs – ` 1,140 lacs) 260
Closing net liability ` 1,580 lacs – ` 1,275 lacs) 305
Increase in liability 45

(b) Journal Entries

Purchase of Machinery on credit basis on 30 th January, 20X1:
` `
Machinery A/c ($ 5,000 x ` 60) Dr. 3,00,000
To Creditors-Machinery A/c 3,00,000
(Initial transaction will be recorded at exchange rate on the date
of transaction)

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

` `
Profit & Loss A/c [( $ 5,000 x ` 65) – ($ 5,000 x ` 60)] Dr. 25,000
To Creditors-Machinery A/c 25,000
Machinery A/c Dr. 30,000
To Revaluation Surplus (OCI) 30,000
[Being Machinery revalued to $ 5,500; (` 60 x ($ 5,500 - $ 5,000)]
Machinery A/c Dr. 27,500
To Revaluation Surplus (OCI) 27,500
(Being Machinery measured at the exchange rate on
31.3.20X1 [$ 5,500 x (` 65 - ` 60)]
Revaluation Surplus (OCI) Dr. 17,250
To Deferred Tax Liability 17,250
(DTL created @ of 30% of the total OCI amount)

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Exchange difference arising on translating monetary item and settlement of creditors on

31st March, 20X2:
` `
Creditors-Machinery A/c ($ 5,000 x ` 65) Dr. 3,25,000
Profit & loss A/c [($ 5,000 x (` 67 - ` 65)] Dr. 10,000
To Bank A/c 3,35,000
Machinery A/c [$ 5,500 x (` 67 - ` 65)] Dr. 11,000
To Revaluation Surplus (OCI) 11,000
Revaluation Surplus (OCI) Dr. 3,300
To Deferred Tax Liability 3,300
(DTL created @ of 30% of the total OCI amount)

6. (a) (i) Calculation of Carrying amount of machine at the end of Year 2 `

Cost of machine 2,40,000
Accumulated depreciation for 2 years [2 years × (2,40,000 ÷ 20)] (24,000)
Carrying amount of the machine at the end of Year 2 2,16,000
(ii) Calculation of carrying amount of the machine on 31 December Year 3 `
Carrying amount at the beginning of Year 3 2,16,000
Revaluation done at the beginning of Year 3 2,50,000
Revaluation surplus 34,000
(iii) Calculation of Impairment loss at the end of Year 4
When machine is revalued on 1 January Year 3, depreciation is charged on the revalued
amount over its remaining expected useful life.
Valuation at 1 January (re-valued amount) 2,50,000
Accumulated depreciation in Year 3 (2,50,000 / 18) (13,889)
Carrying amount of the asset at the end of Year 3 2,36,111
On 1 January Year 4, recoverable amount of the machine 1,00,000
Impairment loss (2,36,111 – 1,00,000) 1,36,111
An impairment loss of ` 34,000 will be taken to other comprehensive income (reducing the
revaluation surplus for the asset to zero)
The remaining impairment loss of ` 1,02,111 (1,36,111 – 34,000) is recognised in the
Statement of Profit and Loss for the Year 4.
(iv) Calculation of depreciation charge in the Year 4
Carrying value of the machine at the beginning of Year 4 ` 1,00,000
Estimated remaining useful life 10 years
Depreciation charge is (` 1,00,000 / 10 years) ` 10,000

13

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(b)
S. Particulars Whether FA or Remarks
No. not
1 Investment in bonds FA Contractual right to receive cash.
debentures
2 Loans and receivables FA Contractual right to receive cash.
3 Deposits given FA Contractual right to receive cash.
4 Trade & other receivables FA Contractual right to receive cash.
5 Cash and cash equivalents FA Specifically covered in the definition.
6 Bank balance FA Contractual right to receive cash.
7 Investments in equity shares FA Equity instrument of another entity.
8 Perpetual debt instruments FA Such instruments provide the
like perpetual bonds, contractual right to receive interest for
debentures and capital indefinite future or a right to return of
notes. principal under terms that make it
very unlikely or very far in the future.
9 Physical assets like No Control of such assets does not
inventories, property, plant create a present right to receive cash
and equipment etc. or another financial asset.
10 Right to use assets like No Control of such assets does not
lease vehicle etc. create a present right to receive cash
or another financial asset.
11 Intangibles like patents, No Control of such assets does not
trademark etc. create a present right to receive cash
or another financial asset.
12 Prepaid expenses like No These instruments provide future
prepaid insurance, prepaid economic benefit in the form of goods
rent etc. or services, rather than the right to
receive cash.
13 Advance given for goods No These instruments provide future
and services economic benefit in the form of goods
or services, rather than the right to
receive cash.
(c) Scenario A
X Ltd. should record full loss of ` 2,00,000 (10,00,000 – 8,00,000) in its books as that would
represent the impairment loss because the market value has actually declined. This loss would
have been recorded even if X Ltd. would have first impaired the asset and then sold to Y Ltd. at
zero profit / loss. Following entry should be passed in the books of X Ltd.
Bank A/c Dr. 8,00,000
Loss on sale of asset Dr. 2,00,000
To Asset 10,00,000
Scenario B
X Ltd. should record loss to the extent of its share in Y Ltd. Hence, X Ltd.’s share in loss i.e.
` 1,00,000 [(10,00,000 – 8,00,000) x 50%] should be recorded by X Ltd. in its books. The loss
14

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should be recorded since the market value of the asset has actually declined and this would
represent impairment. This loss would have been recorded even if Y Ltd. would have first
recorded an impairment loss of ` 2,00,000 and then sold to X Ltd. at zero profit / loss. Following
entry should be passed in the books of X Ltd.
Asset Dr. 8,00,000
Share in loss of Y Ltd. Dr. 1,00,000
To Bank 8,00,000
To Investment in Y Ltd. 1,00,000

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 Mock Test Paper - Series I: March, 2024
Date of Paper: 4 March, 2024
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1 Option (d) Provision for ` 50 crores
2. Option (a) : ` 70,000
3 Option (b) ` 1.75 crores
4. Option (c) ` 0.03 crores
5. Option (c) ` 20,00,000 goodwill
6. Option (d) The first Ind AS financial statements shall distinguish the correction of errors from
changes in accounting policies and reported as part of the reconciliations as at 1 st April, 20X2.
7. Option (a) : 4 performance obligations
8. Option (d) : ` 40 lakhs
9. Option (d) Issuance of equity shares ` 40 lakhs; dividends paid ` 10 lakhs
10. Option (d) Advertising costs ` 40 lakhs; staff bonuses ` 60 lakhs
11. Option (c) Annual depreciation charge will be ` 13,000 and an annual transfer of ` 3,000 may
be made from revaluation surplus to retained earnings.
12. Option (d) : ` 0
13. Option (b) Interest expense ` 12,000
14. Option (d) ` 36 lakhs
15. Option (d) All of the above

ANSWERS OF PART – II DESCRIPTIVE QUESTIONS

1. Calculation of purchase consideration:
Particulars ` in
million
Market value of shares issued (150 million x 4/3 x ` 10) 2,000
Initial estimate of market value of shares to be issued (150 million x 1/5 x ` 10) 300
Total consideration 2,300

Contingent consideration is recognized in full if payment is probable.

As per para 53 of Ind AS 103, acquisition‑related costs are costs the acquirer incurs to effect a business
combination. Those costs include finder’s fees; advisory, legal, accounting, valuation and other
professional or consulting fees; general administrative costs, including the costs of maintai ning an
internal acquisitions department; and costs of registering and issuing debt and equity securities. The
acquirer shall account for acquisition-related costs as expenses in the periods in which the costs are

1
 incurred and the services are received, with one exception. The costs to issue debt or equity securities
shall be recognised in accordance with Ind AS 32 and Ind AS 109.
Statement of fair value of identifiable net assets at the date of acquisition
Particulars ` in million
As per B Ltd.’s Balance Sheet 1,200
Fair value of customer relationships 100
Fair value of research and development project 50
Total net assets acquired 1,350

As per Ind AS 38 ‘Intangible assets’, intangible assets can be recognized separately from goodwill
provided they are identifiable, are under the control of the acquiring entity, and their fair value can be
measured reliably.
Customer relationships that are similar in nature to those previously traded, pass these tests but
employee expertise fail the ‘control’ test. Both the research and development phases of in process
project can be capitalised provided their fair value can be measured reliably.
Statement of computation of goodwill
Particulars ` in million
Fair value of consideration given 2,300
Fair value of net assets acquired (1,350)
Goodwill on acquisition 950
Paragraph 58 of Ind AS 103 provides guidance on the subsequent accounting for contingent consideration.
In general, an equity instrument is any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities. Ind AS 32 describes an equity instrument as one that meets both of the
following conditions:
➢ There is no contractual obligation to deliver cash or another financial asset to another party, or to
exchange financial assets or financial liabilities with another party under potentially unfavourable
conditions (for the issuer of the instrument).
➢ If the instrument will or may be settled in the issuer's own equity instruments, then it is:
• a non-derivative that comprises an obligation for the issuer to deliver a fixed number of its own
equity instruments; or
• a derivative that will be settled only by the issuer exchanging a fixed amount of cash or other
financial assets for a fixed number of its own equity instruments.
In the given case, given that the acquirer has an obligation to issue fixed number of shares on
fulfillment of the contingency, the contingent consideration will be classified as equity as per the
requirements of Ind AS 32.
As per paragraph 58 of Ind AS 103, contingent consideration classified as equity should not be
re-measured and its subsequent settlement should be accounted for within equity.
2. (a) The USD contract for purchase of machinery entered into by company A includes an embedded
foreign currency derivative due to the following reasons:
▪ The host contract is a purchase contract (non-financial in nature) that is not classified as,
or measured at FVTPL.
▪ The embedded foreign currency feature (requirement to settle the contract by payment of
USD at a future date) meets the definition of a stand-alone derivative – it is akin to a USD-
` forward contract maturing on 31 December 20X1.
2
▪ USD is not the functional currency of either of the substantial parties to the contract (i.e.,
neither company A nor company B).
▪ Machinery is not routinely denominated in USD in commercial transactions around the
world. In this context, an item or a commodity may be considered ‘routinely denominated’
in a particular currency only if such currency was used in a large majority of sim ilar
commercial transactions around the world. For example, transactions in crude oil are
generally considered routinely denominated in USD. A transaction for acquiring machinery
in this illustration would generally not qualify for this exemption.
▪ USD is not a commonly used currency for domestic commercial transactions in the
economic environment in which either company A or B operate. This exemption generally
applies when the business practice in a particular economic environment is to use a more
stable or liquid foreign currency (such as the USD), rather than the local currency, for a
majority of internal or cross-border transactions, or both. In the illustration above,
companies A and B are companies operating in India and the purchase contract is an
internal/domestic transaction. USD is not a commonly used currency for internal trade within
this economic environment and therefore the contract would not qualify for this exemption.
Accordingly, company A is required to separate the embedded foreign currency derivative
from the host purchase contract and recognise it separately as a derivative.
The separated embedded derivative is a forward contract entered into on
9 th September 20X1, to exchange USD 10,00,000 for ` at the USD/` forward rate of 67.8
on 31st December 20X1. Since the forward exchange rate has been deemed to be the
market rate on the date of the contract, the embedded forward contract has a fair value of
zero on initial recognition.
Subsequently, company A is required to measure this forward contract at its fair value, with
changes in fair value recognised in the statement of profit and loss. The following is the
accounting treatment at quarter-end and on settlement:
Accounting treatment:
Date Particulars Amount Amount
(`) (`)
09-Sep-X1 On initial recognition of the forward contract
(No accounting entry recognised since initial fair
value of the forward contract is considered to be Nil Nil
nil)
30-Sep-X1 Fair value change in forward contract
Derivative asset (company B) Dr.
3,00,000
[(67.8-67.5) x10,00,000]
To Profit or loss 3,00,000
31-Dec-X1 Fair value change in forward contract
Forward contract asset (company B) Dr.
5,00,000
[{(67.8-67) x 10,00,000} - 3,00,000]
To Profit or loss 5,00,000
Recognition of machinery acquired and on
31-Dec-X1
settlement
Property, plant and equipment Dr. 6,78,00,000
(at forward rate)
To Forward contract asset (company B) 8,00,000
To Creditor (company B) / Bank 6,70,00,000

3
 (b) (i) Ind AS 1, inter alia, provides, “An entity classifies the liability as non -current if the lender
agreed by the end of the reporting period to provide a period of grace ending at least twelve
months after the reporting period, within which the entity can rectify the breach and during which
the lender cannot demand immediate repayment.” In the present case, following the default,
grace period within which an entity can rectify the breach is less than twelve months after the
reporting period. Hence as on 31 st March, 20X2, the loan will be classified as current.
(ii) Ind AS 1 deals with classification of liability as current or non -current in case of breach of
a loan covenant and does not deal with the classification in case of expectation of breach. In this
case, whether actual breach has taken place or not is to be assessed on 30 th June, 20X2, i.e.,
after the reporting date. Consequently, in the absence of actual breach of the loan covenant as
on 31st March, 20X2, the loan will retain its classification as non-current.
3. (a) Applying paragraph 17 of Ind AS 23 to the fact pattern, the entity would not begin capitalising
borrowing costs until it incurs borrowing costs (i.e. from 1 st July, 20X1)
In determining the expenditures on a qualifying asset to which an entity applies the capitalisation
rate (paragraph 14 of Ind AS 23), the entity does not disregard expenditures on the qualifying
asset incurred before the entity obtains the general borrowings. Once the entity incurs borrowing
costs and therefore satisfies all three conditions in para 17 of Ind AS 23, it then applies paragraph
14 of Ind AS 23 to determine the expenditures on the qualifying asset to which it applies the
capitalisation rate.
Calculation of borrowing cost for financial year 20X0-20X1

Expenditure Capitalization Period Weighted average Accumulated

(current year) Expenditure
Date Amount
1 st January 20X1 ` 5 crore 0/3 Nil

Borrowing Costs eligible for capitalisation = NIL. LT Ltd. cannot capitalise borrowing costs before
1 st July, 20X1 (the day it starts to incur borrowing costs).
Calculation of borrowing cost for financial year 20X1-20X2
Expenditure Capitalization Period Weighted average
(current year) Accumulated Expenditure
Date Amount
1 st January, 20X1 ` 5 crore 9/12* ` 3.75 crore
30 th June, 20X1 ` 20 crore 9/12 ` 15 crore
31st March, 20X2 ` 20 crore 0/12 Nil
Total ` 18.75 crore

Borrowing Costs eligible for capitalisation = 18.75 cr. x 10% = ` 1.875 cr.
*LT Ltd. cannot capitalise borrowing costs before 1st July, 20X1 (the day it starts to incur
borrowing costs). Accordingly, this calculation uses a capitalization period from 1st July, 20X1
to 31st March, 20X2 for this expenditure.

4
 Calculation of borrowing cost for financial year 20X2-20X3
Expenditure Capitalization Weighted average
Period (current Accumulated Expenditure
year)
Date Amount
1 st January, 20X1 ` 5 crore 3/12 ` 1.25 crore
30 th June, 20X1 ` 20 crore 3/12 ` 5 crore
31st March, 20X2 ` 20 crore 3/12 ` 5 crore
30 th June, 20X2 ` 5 crore 0/12 Nil
Total ` 11.25 crore

Borrowing costs eligible for capitalisation = ` 11.25 cr. x 10% = ` 1.125 cr.
(b) Computation of amounts to be recognized in the P&L and OCI:
Particulars USD Exchange rate `
Cost of the bond 1,000 40 40,000
Interest accrued @ 10% p.a. 100 42 4,200
Interest received (USD 1,250 x 4.7%) (59) 45 (2,655)
Amortized cost at year-end 1,041 45 46,845
Fair value at year end 1,060 45 47,700
Interest income to be recognized in P & L 4,200
Exchange gain on the principal amount [1,000 x (45-40)] 5,000
Exchange gain on interest accrual [100 x (45 - 42)] 300
Total exchange gain/loss to be recognized in P&L 5,300
Fair value gain to be recognized in OCI [45 x (1,060 - 1,041)] 855
Journal entry to recognize gain/loss
Bond (` 47,700 – ` 40,000) Dr. 7,700
Bank (Interest received) Dr. 2,655
To Interest Income (P & L) 4,200
To Exchange gain (P & L) 5,300
To OCI (fair value gain) 855

4. (a) (i) Computation of benefit attributed to prior years and current year:
Amount in `

Year 1 2 3 4 5
Benefit attributed to:
- Prior years - 131 262 393 524
- Current year (Refer W.N.1) 131 131 131 131 131
Total (i.e. current and prior years) 131 262 393 524 655

5
a. Computation of the obligation for an employee who is expected to leave at the end of year
5 (taking discount rate of 10% p.a.) Amount in `

Year 1 2 3 4 5
Opening obligation (A) - 89 196 324 475
Interest at 10% (B = A X 10%) - 9 20 32 47
Current service cost (C) (Refer WN 2) 89 98 108 119 131
Closing obligation D = (A+B+C) 89 196 324 475 653

Figures have been rounded off in the above table.

Working Notes:
1. A lump sum benefit is payable on termination of service and equal to 1 per cent of final salary
for each year of service. The salary in year 1 is ` 10,000 and is assumed to increase at 7%
(compound) each year.
The year on year salary would be as follows: Amount in `

Year 1 2 3 4 5
Salary 10,000 10,700 11,449 12,250 13,108
(10,000 x (10,700 x (11,449 x (12,250 x
107%) 107%) 107%) 107%)

Accordingly, for the purpose of above-mentioned employee benefit, 1% of final salary to be

considered for each year of service would be ` 131.
2. Computation of current service cost: Amount in `
Year 1 2 3 4 5
1% salary at the end of year 5 - - - - 131
PV factor at the end of each year 0.683 0.751 0.826 0.909 1.000
to be considered at 10% p.a. (E)
PV at the end of each year 89 98 108 119 131
(131 x E) (131 x E) (131 x E) (131 x E) (131 x E)

Accordingly, for the purpose of above-mentioned employee benefit, 1% of final salary to be

considered for each year of service would be ` 131.
(b) Journal entries in the books of P Ltd (without modification of service period of stock
appreciation rights) (` in lakhs)

Date Particulars Debit Credit

31.03.20X2 Profit and Loss account Dr. 15.75
To Liability against SARs 15.75
(Being expenses liability for stock appreciation rights
recognised)
31.03.20X3 Profit and Loss account Dr. 17.25
To Liability for SARs 17.25
(Being expenses liability for stock appreciation rights
recognised)
6
 31.03.20X4 Profit and Loss account Dr. 15.38
To Liability for SARs 15.38
(Being expenses liability for stock appreciation rights
recognised)
31.03.20X5 Profit and Loss account Dr. 17.02
To Liability for SARs 17.02
(Being expenses liability for stock appreciation rights
recognised)

Journal entries in the books of P Ltd (with modification of service period of stock
appreciation rights) (` in lakhs)

Date Particulars Debit Credit

31.03.20X2 Profit and Loss account Dr. 15.75
To Liability for SARs 15.75
(Being expenses liability for stock appreciation rights
recognised)
31.03.20X3 Profit and Loss account Dr. 28.25
To Liability for SARs 28.25
(Being expenses liability for stock appreciation rights
recognised)
31.03.20X4 Profit and Loss account Dr. 20.50
To Liability for SARs 20.50
(Being expenses liability for stock appreciation rights
recognised)

Working Notes:
Calculation of expenses for issue of stock appreciation rights without modification of
service period
For the year ended 31 st March 20X2
= ` 210 x 400 awards x 75 employees x 1 year /4 years of service
= ` 15,75,000
For the year ended 31 st March 20X3
= ` 220 x 400 awards x 75 employees x 2 years /4 years of service - ` 15,75,000 previous
recognised
= ` 33,00,000 - ` 15,75,000 = ` 17,25,000
For the year ended 31 st March 20X4
=` 215 x 400 awards x 75 employees x 3 years/4 years of service -
` 33,00,000 previously recognised
=` 48,37,500 - ` 33,00,000 = ` 15,37,500

7
 For the year ended 31 st March, 20X5
= ` 218 x 400 awards x 75 employees x 4 years / 4 years of service – ` 48,37,500 previously
recognised
= ` 65,40,000 – ` 48,37,500 = ` 17,02,500
Calculation of expenses for issue of stock appreciation rights with modification of
service period
For the year ended 31 st March 20X2
= ` 210 x 400 awards x 75 employees x 1 year / 4 years of service = ` 15,75,000
For the year ended 31 st March 20X3
= ` 220 x 400 awards x 75 employees x 2 years / 3 years of service - ` 15,75,000 previous
recognised
= ` 44,00,000 - ` 15,75,000 = ` 28,25,000
For the year ended 31 st March 20X4
= ` 215 x 400 awards x 75 employees x 3 years/ 3 years of service - ` 44,00,000 previous
recognised
= ` 64,50,000 - ` 44,00,000 = ` 20,50,000.
5. (a) (i) Determination of how revenue is to be recognised in the books of ABC Ltd. as per
expected value method
Calculation of probability weighted sales volume

Sales volume (units) Probability Probability-weighted sales volume (units)

9,000 15% 1,350
28,000 75% 21,000
36,000 10% 3,600
25,950

Calculation of probability weighted sales value

Sales volume Sales price per unit Probability Probability-weighted sales

(units) (`) value (`)
9,000 90 15% 1,21,500
28,000 80 75% 16,80,000
36,000 70 10% 2,52,000
20,53,500

Average unit price = Probability weighted sales value/ Probability weighted sales volume
= 20,53,500 / 25,950 = ` 79.13 per unit
Revenue is recognised at ` 79.13 for each unit sold. First 10,000 units sold will be booked
at ` 90 per unit and liability is accrued for the difference price of ` 10.87 per unit
(` 90 – ` 79.13), which will be reversed upon subsequent sales of 15,950 units (as the
question states that ABC Ltd. achieved the same number of units of sales to the customer
8
 during the year as initially estimated under the expected value method for the financial year
20X1-20X2). For, subsequent sale of 15,950 units, contract liability is accrued at
` 0.87 (80 – 79.13) per unit and revenue will be deferred.
(ii) Journal Entries in the books of ABC Ltd.

` `
1. Bank A/c (25,950 x ` 80) Dr. 20,76,000
To Revenue A/c (25,950 x ` 79.13) 20,53,424
To Liability (25,950 x ` 0.87) 22,576
(Revenue recognised on sale of 25,950 units)
2. Liability (1,08,700 – 86,124) Dr. 22,576
To Revenue A/c [25,950 x (80-79.13)] 22,576
(On reversal of liability at the end of the
financial year 20X1-20X2 i.e. after completion
of stipulated time)

(b) The revenue from sale of goods shall be recognised at the fair value of the consideration received
or receivable. The fair value of the consideration is determined by discounting all future receipts
using an imputed rate of interest where the receipt is deferred beyond normal credit terms. The
difference between the fair value and the nominal amount of the considerati on is recognised as
interest revenue.
The fair value of consideration (cash price equivalent) of the sale of goods is calculated as
follows: `
Year Consideration Present value Present value of
(Installment) factor consideration
Time of sale 3,33,333 - 3,33,333
End of 1 st year 3,33,333 0.949 3,16,333
End of 2 nd year 3,33,334 0.901 3,00,334
10,00,000 9,50,000
The Company that agrees for deferring the cash inflow from sale of goods will recognise the
revenue from sale of goods and finance income as follows:
Initial recognition of sale of goods ` `
Cash Dr. 3,33,333
Trade Receivable Dr. 6,16,667
To Sale 9,50,000
Recognition of interest expense and receipt of second
installment
Cash Dr. 3,33,333
To Interest Income 33,053
To Trade Receivable 3,00,280

9
 Recognition of interest expense and payment of final
installment
Cash Dr. 3,33,334
To Interest Income (Balancing figure) 16,947
To Trade Receivable 3,16,387

Statement of Profit and Loss (extracts)

for the year ended 31 st March, 20X2 and 31 st March, 20X3 `
As at 31 st March, 20X2 As at 31 st March, 20X3
Income
Sale of Goods 9,50,000 -
Other Income (Finance income) 33,053 16,947

Balance Sheet (extracts) as at 31 st March, 20X2 and 31 st March, 20X3 `

As at 31 st March, 20X2 As at 31 st March, 20X3

Assets
Current Assets
Financial Assets
Trade Receivables 3,16,387 XXX

(c) Either
The usefulness of financial information can be enhanced by applying four enhancing qualitative
characteristics as follows:
 Comparability: Users’ decisions involve choosing between alternatives. Information about
a reporting entity is more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another period or another
date. Comparability refers to the use of the same methods for the same items, and
uniformity implies that like things must look alike and different things must look different.
 Verifiability: Verifiability means that different knowledgeable and independent observers
could reach consensus, although not necessarily complete agreement, that a particular
depiction is a faithful representation. Verification can be direct or indirect.
 Timeliness: Timeliness means having information available to decision-makers in time to
be capable of influencing their decisions. Generally, the older the information is the less
useful it is. However, some information may continue to be timely long after the end of a
reporting period because, for example, some users may need to identify and assess trends.
 Understandability: Classifying, characterising and presenting information clearly and
concisely makes it understandable. Some phenomena are inherently complex and cannot
be made easy to understand. Financial reports are prepared for users who have a
reasonable knowledge of business and economic activities and who review and analyse the
information diligently. At times, even well-informed and diligent users may need to seek
the aid of an adviser to understand information about complex economic phenomena.

10
 (c) Or
Following entities are mandatorily required to prepare their financial statements based on
Indian Accounting Standards
• All Listed Corporate Entities
• Unlisted Corporate Entities having net worth of rupees five hundred crore or more
• All holding, subsidiary, joint venture or associate companies of the above mentioned listed
and unlisted corporate entities
• All NBFCs
• MF schemes
6. (a) Lease agreement substance presentation
Stakeholders make informed and accurate decisions based on the information presented in the
financial statements and as such, ensuring the financial statements are reliable and of utmost
importance. The directors of Sunshine Ltd. are ethically responsible to produce financial
statements that comply with Ind AS and are transparent and free from material error. Lenders
often attach covenants to the terms of the agreement in order to protect their interests in an
entity. They would also be of crucial importance to potential debt and equity investors when
assessing the risks and returns from any future investment in the entity.
The proposed action by Sunshine Ltd. appears to be a deliberate attempt to circumvent the terms
of the covenants. The legal form would require treatment as a series of short -term leases which
would be recorded in the profit or loss, without any right-of-use asset and lease liability being
recognized as required by Ind AS 116, Leases. This would be a form of ‘off-balance sheet
finance’ and would not report the true assets and obligations of Sunshine Ltd. As a result of this
proposed action, the liquidity ratios would be adversely misrepresented. Further, the operating
profit margins would also be adversely affected, as the expenses associated with the lease are
likely to be higher than the deprecation charge if a leased asset was recognized, hence the
proposal may actually be detrimental to the operating profit covenant.
Sunshine Ltd. is aware that the proposed treatment may be contrary to Ind AS. Such
manipulation would be a clear breach of the fundamental principles of objectivity and integrity as
outlined in the Code of Ethics. It is important for a chartered accountants to exercise professional
behaviour and due care all the time. The proposals by Sunshine Ltd. are likely to mislead the
stakeholders in the entity. This could discredit the profession by creating a lack of confidence
within the profession. The directors of Sunshine Ltd. must be reminded of their ethical
responsibilities and persuaded that the accounting treatment must fully comply with the Ind AS
and principles outlined within the framework should they proceed with the financing agreement.
However, if the CFO fails to comply with his professional duties, he will be subject to professional
misconduct under Clause 1 of Part II of Second Schedule of the Chartered Accountants Act,
1949. The Clause 1 states that a member of the Institute, whether in practice or not, shall be
deemed to be guilty of professional misconduct, if he contravenes any of the provisions of this
Act or the regulations made there under or any guidelines issued by the Council. As per the
Guidelines issued by the Council, a member of the Institute who is an employee shall exercise
due diligence and shall not be grossly negligent in the conduct of his duties.
(b) X Pharmaceutical Ltd. is advised as under:
1. It should recognize the drug license as an intangible asset because it is a separate external
purchase, separately identifiable asset and considered successful in respect of feasibility
and probable future cash inflows.
The drug license should be recorded at ` 1,00,00,000.
11
 2. It should recognize the brand as an intangible asset because it is purchased as part of
acquisition and it is separately identifiable. The brand should be amortised over a period
of 15 years.
The brand will be recorded at ` 3,00,00,000.
3. The advertisement expenses of ` 1,00,00,000 should be expensed off.
4. The development cost incurred during the financial year 20X1-20X2 should be capitalised.
Cost of intangible asset (Drug A) as on 31 st March, 20X2
Opening cost ` 5,00,00,000
Development cost ` 5,00,00,000
Total cost ` 10,00,00,000
5. Research expenses of ` 50,00,000 incurred for developing ‘Drug B’ should be expensed
off since technological feasibility has not yet established.
(c) Equity Valuation of KK Ltd.
Particulars Weights (` in
crore)
As per Market Approach 50 5268.2
As per Income Approach 50 3235.2
Enterprise Valuation based on weights (5268.2 x 50%) + (3235.2 4,251.7
x 50%)
Less: Debt obligation as on measurement date (1465.9)
Add: Surplus cash & cash equivalent 106.14
Add: Fair value of surplus assets and liabilities 312.40
Enterprise value of KK Ltd. 3204.33
No. of shares 85,284,223
Value per share 375.72

12
 Mock Test Paper - Series II: April, 2024
Date of Paper: 1 April, 2024
Time of Paper: 2 P.M. to 5 P.M.
FINAL COURSE: GROUP – I
PAPER – 1: FINANCIAL REPORTING
ANSWER TO PART – I CASE SCENARIO BASED MCQS
1. Option (b) Current financial Liability
2. Option (b) Current financial Liability
3. Option (c) ` 1,000 thousand
4. Option (d) ` 810 thousand is to be recognised in the year of sale and
` 90 thousand to be spread over next three years.
5. Option (c) : ` Nil
6. Option (d) : ` 15 million
7. Option (b) Deduct the grant received from the cost of the asset and
depreciate the net carrying value over its useful economic life
8. Option (a) Grant relating to an inducement to begin developing the
factory can be recognized immediately in the Statement of Profit or
Loss
9. Option (d) ` 36 million
10. Option (c) ` 37.782 million
11. Option (b) : Agreement is in the nature of Joint Operations
12. Option (c) : ` 20,25,00,000
13. Option (a) : ` 50,62,500
14. Option (a) : F Ltd. can continue following the existing accounting
policy of amortising the exchange differences in respect of loan over
the balance period of such long-term liability routed through
statement of profit and loss for the period
15. Option (c) : Scanned documents of several years will acquire
unnecessary office space.

ANSWERS OF PART – II DESCRIPTIVE QUESTIONS

1. A Ltd. and B Ltd. will account for the transaction as a sale and leaseback.
Step 1
Since the consideration for the sale of the building is not at fair value, A Ltd.
and B Ltd. make adjustments to measure the sale proceeds at fair value.
Thus, the amount of the excess sale price of ` 6,00,000 (as calculated
below) is recognised as additional financing provided by B Ltd. to A Ltd.

1
 Sale Price: 60,00,000
Less: Fair Value (at the date of sale): (54,00,000)
Additional financing provided by B Ltd. to A Ltd. 6,00,000

Step 2
Calculation of the present value of the annual payments which amounts to `
29,88,000 (calculated considering 20 payments of ` 4,00,000 each,
discounted at 12% p.a.) of which ` 6,00,000 relates to the additional
financing (as calculated above) and balance ` 23,88,000 relates to the lease
— corresponding to 20 annual payments of ` 80,320 and ` 3,19,680,
respectively (refer calculations below).
Proportion of annual lease payments:
Present value of lease payments (as calculated above) (A) 29,88,000
Additional financing provided (as calculated above) (B) 6,00,000
Relating to the Additional financing provided (C) = (E x B / A) 80,320
Relating to the Lease (D) = (E – C) 3,19,680
Annual payments (at the end of each year) (E) 4,00,000
A Ltd.:
At the commencement date, A Ltd. measures the ROU asset arising from
the leaseback of the building at the proportion of the previous carrying
amount of the building that relates to the right-of-use retained by A Ltd.,
calculated as follows:
Carrying Amount (A) 30,00,000
Fair Value (at the date of sale) (B) 54,00,000
Discounted lease payments for the 20-year ROU asset 23,88,000
(C)
ROU Asset [(A / B) x C] 13,26,667
A Ltd. recognises only the amount of the gain that relates to the rights
transferred to B Ltd., calculated as follows:
Fair Value (at the date of sale) (A) 54,00,000
Carrying Amount (B) 30,00,000
Discounted lease payments for the 20-year ROU asset (C) 23,88,000
Gain on sale of building (D) = (A - B) 24,00,000
Relating to the right to use the building retained by A Ltd. 10,61,333
(E) = [(D/A) x C]
Relating to the rights transferred to B Ltd. (D - E) 13,38,667
At the commencement date, A Ltd. accounts for the transaction, as follows:
Cash Dr. 60,00,000
ROU Asset Dr. 13,26,667
2
 To Building 30,00,000
To Financial Liability 29,88,000
To Gain on rights transferred 13,38,667
B Ltd.:
At the commencement date, B Ltd. accounts for the transaction, as follows:
Building Dr. 54,00,00
0
Financial Asset Dr. 6,00,000
(20 payments of ` 80,320 discounted @ 12%
p.a.) (approx.)
To Cash 60,00,000
After the commencement date, B Ltd. accounts for the lease by treating `
3,19,680 of the annual payments of ` 4,00,000 as lease payments. The
remaining ` 80,320 of annual payments received from A Ltd. are accounted
for as:
(a) payments received to settle the financial asset of ` 6,00,000 and
(b) interest revenue.
2. (a) Journal Entry
Date Particulars Dr. Cr.
` `
1/4/20X1 Loan to Mr. Y A/c Dr. 10,43,638
Pre-paid employee cost A/c Dr. 1,56,362
To Bank A/c 12,00,000
(Being loan to employee recorded at
fair value)
31/3/20X2 Loan to Mr. Y A/c Dr. 93,927
To Finance Income A/c 93,927
(Being finance income @ 9%
recorded in the books)
31/3/20X2 Bank A/c Dr. 3,00,000
To Loan to Mr. Y A/c 3,00,000
(Being installment received at the
end of the year)

3
Working Notes:
1. Calculation of initial recognition amount of loan to employee
Year Estimated Cash PV Factor Present
Flows @9% Value
` `
31/3/20X2 3,00,000 0.9174 2,75,220
31/3/20X3 3,00,000 0.8417 2,52,510
31/3/20X4 3,00,000 0.7722 2,31,660
31/3/20X5 3,00,000 0.7084 2,12,520
31/3/20X6 40,000 (W.N.2) 0.6499 25,996
31/3/20X7 40,000 (W.N.2) 0.5963 23,852
31/3/20X8 40,000 (W.N.2) 0.5470 21,880
Fair Value of Loan 10,43,638
2. Computation of Interest to be paid
Year Opening Cash Flows Principal Interes Cumulativ
outstandin outstandin t @ 4% e Interest
g balance b g at year on a
a end d e
c
` ` ` `
31/3/20X2 12,00,000 3,00,000 9,00,000 48,000 48,000
31/3/20X3 9,00,000 3,00,000 6,00,000 36,000 84,000
31/3/20X4 6,00,000 3,00,000 3,00,000 24,000 1,08,000
31/3/20X5 3,00,000 3,00,000 Nil 12,000 1,20,000
31/3/20X6 1,20,000 40,000
(1,20,000/3)
31/3/20X7 40,000
(1,20,000/3)
31/3/20X8 40,000
(1,20,000/3)

3. Computation of finance cost as per amortization table

Year Opening Interest Repayment Closing
Balance @ 9% Balance
(1) (2) (3) (1+2-3)
` ` ` `
1/4/20X1 10,43,638
31/3/20X2 10,43,638 93,927 3,00,000 8,37,565
4
 31/3/20X3 8,37,565 75,381 3,00,000 6,12,946
31/3/20X4 6,12,946 55,165 3,00,000 3,68,111
31/3/20X5 3,68,111 33,130 3,00,000 1,01,241
31/3/20X6 1,01,241 9,112 40,000 70,353
31/3/20X7 70,353 6,332 40,000 36,685
31/3/20X8 36,685 3,315* 40,000 Nil
*Difference of ` 13 (` 3,315 – ` 3,302) is due to approximation.
(b) Table showing computation of tax charge:
Quarter Quarter Quarter Quarter Year
ending ending ending30th ending 31 st ending 31 st
31 st March, 30 th June, September, December, December,
20X1 20X1 20X1 20X1 20X1
` ` ` ` `
Profit before tax 50,000 50,000 50,000 50,000 2,00,000
Tax charge (12,500) (15,000) (15,000) (15,000) (57,500)
37,500 35,000 35,000 35,000 1,42,500

Since an entity’s accounting year is not same as the tax year, more
than one tax rate might apply during the accounting year. Accordingly,
the entity should apply the effective tax rate for each interim period to
the pre-tax result for that period.
3. (a) Computation of goodwill impairment
NCI at fair NCI at of
value net assets
` in ‘000 ` in ‘000
Cost of investment
Share exchange (6,000 x 75% x 2/3 x ` 19,500 19,500
6.50)
Deferred consideration (3,575 / 1.10) 3,250 3,250
Contingent consideration 12,500 12,500
Non-controlling interest at date of
acquisition:
Fair value – 1,500 x ` 6 9,000
% of net assets – 34,000 (Refer W.N.) x 8,500
25%
Net assets on the acquisition date (34,000) (34,000)
(Refer W.N.)
Goodwill on acquisition 10,250 9,750
Impairment @ 10% 1,025 975

5
 Working Note:
Net assets on the acquisition date ` ’000
Fair value at acquisition date 35,000
Deferred tax on fair value adjustments [20% x (35,000 –
30,000)] (1,000)
34,000
(b) (i) The gas will be used to generate electricity, which will be sold at a
profit. The economic benefits from the contract include the
benefits to the entity of using the gas in its business and, because
the electricity will be sold at a profit, the contract is not onerous.
(ii) The electricity is sold to a wide range of customers. The entity
first considers whether the assets used to generate electricity are
impaired. To the extent that there is still a loss after the assets
have been written down, a provision for an onerous contract
should be recorded.
(iii) The only economic benefit from the purchase contract costing
` 2,30,000 are the proceeds from the sales contract, which are
` 1,80,000. Therefore, a provision should be made for the
onerous element of ` 50,000, being the lower of the cost of
fulfilling the contract and the penalty cost of cancellation
(` 55,000).
4. (a) Calculation of Investor Ltd.’s investment in XYZ Ltd. under equity
method:
` `
Acquisition of investment in XYZ Ltd.
Share in book value of XYZ Ltd.’s net
assets (35% of ` 90,00,000) 31,50,000
Share in fair valuation of XYZ Ltd.’s net
assets [35% of (` 1,10,00,000 – ` 7,00,000
90,00,000)]
Goodwill on investment in XYZ Ltd. 9,00,000
(balancing figure)
Cost of investment 47,50,000
Profit during the year
Share in the profit reported by XYZ Ltd.
(35% of ` 9,00,000) 3,15,000
Adjustment to reflect effect of fair
valuation [35% of (` 20,00,000/10 years)] (70,000)
Share of profit in XYZ Ltd. recognised
in income by Investor Ltd. 2,45,000
Long term equity investment
FVTOCI gain recognised in OCI (35% of ` 70,000
6
 2,00,000)
Dividend received by Investor Ltd. during
the year [35% of ` 10,00,000]
(3,50,000)
Closing balance of Investor Ltd.’s
investment in XYZ Ltd. 47,15,000
(b) (i) Calculation of Basic EPS:
Basic EPS = Profit for the year / Weighted average Number of
shares outstanding
Basic EPS (Continued Operations) = Profit from continued
operations / Weighted
average Number of
shares outstanding
= ` 90,00,000/ 10,00,000
= ` 9.00
Basic Loss per share
(Discontinued operations) = Loss from discontinued
operations /Weighted
average Number of
shares outstanding
= ` (1,08,00,000)/10,00,000
= (` 10.80)
Overall Basic Loss per share = (` 18,00,000) / 10,00,000
= ` (1.80) (i)
Calculation of Diluted EPS
Diluted EPS = Profit for the year / Adjusted Weighted average
Number of shares outstanding
EPS (Continued Operations) = Profit from continued operations /
Adjusted Weighted average
Number of shares outstanding
= ` 90,00,000 / 12,00,000 = ` 7.50
Loss per share
(Discontinued operations) = Loss from discontinued operations/
Adjusted weighted average number
of shares outstanding
= ` (1,08,00,000) / 12,00,000 = (` 9.00)
Overall Diluted Loss per share = ` 18,00,000 / 12,00,000
= ` (1.50) (ii)
The income from continuing operations is the control number,
there is a dilution in basic EPS for income from continuing
operations (reduction of EPS from ` 9.00 to ` 7.50). Therefore,
7
 even though there is an anti-dilution [Loss per share reduced from
` 1.80 (i) to ` 1.50 (ii) above], diluted loss per share of ` 1.50 is
reported.
(ii) In case of loss from continuing operations, the potential shares
are excluded since including those shares would result into anti-
dilution effect on the control number (loss from continuing
operations). Therefore, the diluted EPS will be calculated as
under:
Diluted EPS = Profit for the year / Adjusted weighted average
number of shares outstanding
Overall Profit = Loss from continuing operations + Gain from
discontinued operations
= ` (30,00,000) + ` 1,08,00,000
= ` 78,00,000
Weighted average number of shares outstanding = 10,00,000
Diluted EPS = ` 7.80
The dilutive effect of the potential common shares on EPS for
income from discontinued operations and net income would not
be reported because of the loss from continuing operations.
5. (a) (i) On 1st April, 20X1, entity A entered into a single transaction with
three identifiable separate components:
1. Sale of a good (i.e. engineering machine);
2. Rendering of services (i.e. engineering machine
maintenance services on 30 th September, 20X1 and
1st April, 20X2); and
3. Providing finance (i.e. sale of engineering machine and
rendering of services on extended period credit).
(ii) Calculation and allocation of revenue to each component of
the transaction
Date Opening Finance Goods Services Payment Closing
balance income received balance
1 st April, 20X1 – – 2,51,92 – – 2,51,927
7
30 th September, 2,51,927 12,596 – 45,000 – 3,09,523
20X1 (Note 1)
31 st March 20X2 3,09,523 15,477 – – – 3,25,000
(Note 2)
1 st April, 20X2 3,25,000 – – 75,000 (4,00,000)

Notes:
1. Calculation of finance income as on 30 th September, 20X1
8
 = 5% x 2,51,927
= ` 12,596
2. Calculation of finance income as on 31 st March, 20X2
= 5% x 3,09,523
= ` 15,477
(iii) Journal Entries
Date Particulars Dr. (`) Cr. (`)
1 st April, 20X1 Mr. Anik Dr. 2,51,927
To Revenue - sale of 2,51,927
goods (Profit or loss A/c)
(Being revenue recognised
from the sale of the machine
on credit)
Cost of goods sold (Profit or 1,60,000
loss) Dr.
To Inventories 1,60,000
(Being cost of goods sold
recognised)
30 th September Mr. Anik Dr. 12,596
20X1
To Finance Income 12,596
(Profit or loss)
(Being finance income
recognised)
Mr. Anik Dr. 45,000
To Revenue- rendering 45,000
of services (Profit or loss)
(Being revenue from the
rendering of maintenance
services recognised)
Cost of services (Profit or 30,000
loss) Dr.
To Cash/Bank or 30,000
payables
(Being the cost of performing
maintenance services
recognised)
31 st March Mr. Anik Dr. 15,477
20X2 To Finance Income 15,477
(Profit or loss)
(Being finance income
recognised)
1 st April, 20X2 Mr. Anik Dr. 75,000

9
 To Revenue - rendering 75,000
of services (Profit or loss)
(Being revenue from the
rendering of maintenance
services recognised)
Cost of services (Profit or 50,000
loss) Dr.
To Cash/Bank or 50,000
payables
(Being the cost of performing
maintenance services
recognised)
Cash/Bank Dr. 4,00,000
To Mr. Anik 4,00,000
(Being the receipt of cash
from the customer
recognised)

(b) Ind AS 101 provides that a first-time adopter is encouraged, but not
required, to apply Ind AS 102 on ‘Share-based Payment’ to equity
instruments that vested before the date of transition to Ind AS.
However, if a first-time adopter elects to apply Ind AS 102 to such
equity instruments, it may do so only if the entity has disclosed publicly
the fair value of those equity instruments, determined at the
measurement date, as defined in Ind AS 102.
Having regard to the above, X Ltd. has the following options:
• For 100 options that vested before the date of transition:
(a) To apply Ind AS 102 and account for the same accordingly,
provided it has disclosed publicly the fair value of those
equity instruments, determined at the measurement date,
as defined in Ind AS 102.
(b) Not to apply Ind AS 102.
However, for all grants of equity instruments to which Ind AS 102
has not been applied, i.e., equity instruments vested but not
settled before date of transition to Ind AS, X Ltd. would still need
to disclose the information.
• For 200 options that will vest after the date of transition: X Ltd.
will need to account for the same as per Ind AS 102.
6. (a) (i) In terms of Ind AS 105, Non-current Assets Held for Sale and
Discontinued Operations, an entity shall classify a non-current
asset (or disposal group) as held for sale if its carrying amount
will be recovered principally through a sale transaction rather
than through continuing use.
For this to be the case, the asset (or disposal group) must be
available for immediate sale in its present condition subject only
10
to terms that are usual and customary for sales of such assets (or
disposal groups) and its sale must be highly probable.
For the sale to be highly probable, the appropriate level of
management must be committed to a plan to sell the asset (or
disposal group), and an active programme to locate a buyer and
complete the plan must have been initiated. Further, the asset
(or disposal group) must be actively marketed for sale at a price
that is reasonable in relation to its current fair value. In addition,
the sale should be expected to qualify for recognition as a
completed sale within one year from the date of
classification, except in specific cases as permitted by the
Standard, and actions required to complete the plan should
indicate that it is unlikely that significant changes to the plan will
be made or that the plan will be withdrawn. The probability of
required approvals (as per the jurisdiction) should be considered
as part of the assessment of whether the sale is highly probable.
An entity that is committed to a sale plan involving loss of control
of a subsidiary shall classify all the assets and liabilities of that
subsidiary as held for sale when the criteria set out above are
met, regardless of whether the entity will retain a non-controlling
interest in its former subsidiary after the sale.
Based on the provisions highlighted above, the disposal of D Ltd.
appears to meet the criteria of held for sale. J Ltd. is the
probable acquirer, and the sale is highly probable, expected to
be completed seven months after the year end, well within the
12-months criteria highlighted above. Accordingly, D Ltd. should
be treated as a disposal group, since a single equity transaction
is the most likely form of disposal. In case D Ltd. is deemed to
be a separate major component of business or geographical
area of the group, the losses of the group should be presented
separately as a discontinued operation within the Financial
Statements of M Ltd.
In terms of Ind AS 105, Non-current Assets Held for Sale and
Discontinued Operations, an entity shall measure a non-current
asset (or disposal group) classified as held for sale at the lower
of its carrying amount and fair value less costs to sell. The
carrying amount of D Ltd. (i.e., the subsidiary of M Ltd.)
comprises of the net assets and goodwill less the non-controlling
interest. The impairment loss recognised to reduce D Ltd. to fair
value less costs to sell should be allocated first to goodwill and
then on a pro-rata basis across the other non-current assets of
the Company.
The Chief Operating Officer (COO) is incorrect to exclude any
form of restructuring provision in the Financial Statements.
Since the disposal is communicated to the media as well as the
Stock Exchange, a constructive obligation exists. However,
ongoing costs of business should not be provided for, only

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 directly attributable costs of restructuring should be
provided. Future operating losses should be excluded as no
obligating event has arisen, and no provision is required for
impairment losses of Property, Plant and Equipment as it is
already considered in the remeasurement to fair value less costs
to sell. Thus, a provision is required for ₹ 13.75 crores (₹ 3.75
crores + ₹ 10 crores).
(ii) Ethics
Accountants have a duty to ensure that the financial statements
are fair, transparent and comply with the accounting
standards. Mr. X have committed several mistakes. In
particular, he was unaware of which costs should be included
within a restructuring provision and has failed to recognise that
there is no obligating event in relation to future operating losses.
A chartered accountant is expected to carry his work with due
care and attention for lending credibility to the financial
statements. Accordingly, he must update his knowledge and
ensure that work is carried out in accordance with relevant
ethical and professional standards. Failure to do so would be a
breach of professional competence. Accordingly, Mr. X must
ensure that this issue is addressed, for example by attending
regular training and professional development courses.
It appears that the chief operating officer is looking for means to
manipulate the financial statements for meeting the bonus
targets. Neither is he willing to reduce the profits of the group by
applying held for sale criteria in respect of D Ltd. nor is he willing
to create appropriate restructuring provisions. Both the
adjustment which comply with the requirements of Ind AS will
result in reduction of profits. His argument that the management
has a duty to maximize the returns for the shareholders is true,
but such maximization must not be achieved at the cost of
objective and faithful representation of the performance of the
Company. In the given case, it appears that the chief operating
officer is motivated by bonus targets under the garb of
maximizing returns for the shareholders, thereby resulting in
misrepresentation of the results of the group.
Further, by threatening to dismiss Mr. X, the COO has acted
unethically. Threatening and intimidating behaviour is
unacceptable and against all ethical principles. This has given
rise to an ethical dilemma for Mr. X. He has a duty to produce
financial statements but doing so in a fair manner could result in
a loss of job for him. The chartered accountant should approach
the chief operating officer and remind him the basic ethical
principles and communicate him to do the necessary
adjustments in the accounts so that they are fair and objective.
In case Mr. X, falls under undue influence of COO and applies
the incorrect accounting treatment, he will be subject to

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 professional misconduct under Clause 1 of Part II of Second
Schedule of the Chartered Accountants Act, 1949. The Clause 1
states that a member of the Institute, whether in practice or not,
shall be deemed to be guilty of professional misconduct, for
contravening the provisions of this Act or the regulations made
thereunder or any guidelines issued by the Council. As per the
Guidelines issued by the Council, a member of the Institute who
is an employee shall exercise due diligence and shall not be
grossly negligent in the conduct of his duties.
(b) Impact on consolidated balance sheet of P Ltd. group at
31 st March, 20X2
• The tax loss creates a potential deferred tax asset for the P Ltd.
group since its carrying value is nil and its tax base is
` 10,00,000. However, no deferred tax asset can be recognised
because there is no prospect of being able to reduce tax
liabilities in the foreseeable future as no taxable profits are
anticipated.
• The development costs have a carrying value of ` 19,00,000
(` 20,00,000 – (` 20,00,000 x 1/5 x 3/12)). The tax base of the
development costs is nil since the relevant tax deduction has
already been claimed. The deferred tax liability will be
` 5,70,000 (` 19,00,000 x 30%). All deferred tax liabilities are
shown as non-current.
• The carrying value of the loan at 31 st March, 20X2 is
` 1,07,80,000 (` 1,00,00,000 – ` 200,000 + (` 98,00,000 x
10%)). The tax base of the loan is 1,00,00,000. This creates a
deductible temporary difference of ` 7,80,000 and a potential
deferred tax asset of ` 2,34,000 (` 7,80,000 x 30%).
(c) Either
Paragraph 16(a) of Ind AS 8 provides that the application of an
accounting policy for transactions, other events or conditions that
differ in substance from those previously occurring are not changes in
accounting policies.
As per Ind AS 16, ‘property, plant and equipment’ are tangible items
that:
(a) are held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes;
and
(b) are expected to be used during more than one period.”
As per Ind AS 40, ‘investment property’ is property (land or a
building—or part of a building—or both) held (by the owner or by the
lessee as a right-of-use asset) to earn rentals or for capital
appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for
administrative purposes; or
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 (b) sale in the ordinary course of business.”
As per the above definitions, whether a building is an item of
property, plant and equipment (PPE) or an investment property for
an entity depends on the purpose for which it is held by the entity. It
is thus possible that due to a change in the purpose for which it is
held, a building that was previously classified as an item of property,
plant and equipment may warrant reclassification as an investment
property, or vice versa. Whether a building is in the nature of PPE
or investment property is determined by applying the definitions of
these terms from the perspective of that entity. Thus, the
classification of a building as an item of property, plant and
equipment or as an investment property is not a matter of an
accounting policy choice. Accordingly, a change in classification of
a building from property, plant and equipment to investment property
due to change in the purpose for which it is held by the entity is not
a change in an accounting policy.
Or
As per Ind AS 10, even if partial information has already been
published, the reporting period will be considered as the period
between the end of the reporting period and the date of approval of
financial statements. In the above case, the financial statements for
the year 20X1-20X2 were approved on 15 th May, 20X2. Therefore, for
the purposes of Ind AS 10, ‘after the reporting period’ would be the
period between 31 st March, 20X2 and 15 th May, 20X2.

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